Summary of a Recent
Judicial Development in
Perishable Agricultural
Commodities

PACA Reparation Award Affirmed

E. John Edwards III
National AgLaw Center Graduate Fellow

In an action brought under the Perishable Agricultural Commodities Act, 7 U.S.C. § 499a - 499t ("PACA"), the United States District Court for the Southern District of New York has affirmed a reparations award of $4,800.00 entered by the United States Department of Agriculture ("USDA") in favor of a tomato seller. Koam Produce, Inc. v. Dimare Homestead, Inc., 213 F.Supp.2d 314 (S.D.N.Y. 2002). The court ruled that the seller was entitled to recover the expenses it incurred for price adjustments in the cost of its produce because those adjustments resulted from falsified USDA inspection certificates. See id. at 326.

This case arose out of a criminal investigation that involved acts of bribery at a wholesale produce market known as the Hunts Point Wholesale Produce Market ("Hunts Point"). See id. at 317. As a result of this investigation, several USDA inspectors were charged "'with accepting cash bribes in exchange for reducing the grade of the produce they inspected, which then allowed the Hunts Point companies to pay some amount less than the invoice price to their suppliers.'" Id. (citation omitted). A number of owners and employees of Hunts Point were charged with paying the bribes. See id. One of the charged employees, Marvin Friedman, worked for a Hunts Point produce buying company named Koam Produce, Inc. ("Koam"). See id. Friedman eventually pled guilty to the charges against him. See id. at 323.

As a result of the Hunts Point bribery scandal, the USDA sent letters to "members of the produce industry informing them of indictments in connection with the scandal, the department's plans to improve inspections, and a process by which injured parties could file PACA reparations claims for damages." Id. at 318. DiMare Homestead, Inc. ("DiMare"), which had sold tomatoes to Koam, filed such a claim with the USDA seeking recovery of $4,800.00 in "unjustified price reductions based on fraudulent certificates issued by bribed inspectors." Id.

The hearing officer ruled in Dimare's favor, holding that "as a matter of law . . . Koam's negotiation of the adjustments, without disclosure of its involvement of the bribery of the federal inspectors, constituted a misrepresentation basic to the adjustment process, rendering the adjustments voidable because of misrepresentation and mistake." Id. The hearing officer further ruled that "because Koam could not rely on the tainted inspection certificates, or affidavits of its employees, it could not carry its burden of showing that the quality of the tomatoes DiMare had shipped to it was inferior." Id. The hearing officer determined that Koam was required to pay the full contract price. See id. The $4,800.00 price adjustments were set aside. See id.

Koam filed a request for reconsideration of the award with the Secretary of Agriculture. See id. That request was denied. See id. Koam then filed an appeal in the United States District Court for the Southern District of New York. See id. at 316. The court stated that under § 499g(c) of the PACA, "such an appeal is tried de novo in the federal district court, in the same manner as other civil damage suits, except that the factual findings in the reparation order are prima facie evidence of the facts found." Id. at 317 (italics in original).

As the starting point of its analysis, the court declared that "under the Uniform Commercial Code, . . . when a buyer accepts the goods but claims adjustments for defects, the buyer has the burden of establishing the defects." Id. at 322. In its first attempt to carry such burden, Koam pointed to seven earlier sales transactions between Koam and DiMare, none of which were at issue in this litigation, on which DiMare had granted discounts. See id. at 323. As a result of the previous discounts, "Koam argue[d] that one should infer that there were pervasive defects in DiMare's shipments of tomatoes." Id. Koam, however, offered no evidence to support the suggested inference, and thus the court rejected this argument. See id. at 326.

Koam also attempted to carry its burden by relying on affidavits from two of its employees that stated that the tomatoes in question actually were defective. See id. The affidavits stated that, "[a]t no time did I or any other employee of Koam pay any money or take an action for the purpose of creating a fraudulent inspection." Id. The court determined that the affidavits were unreliable because they directly contradicted the testimony offered by Friedman when he entered his guilty plea. See id.

In his plea Friedman stated that

[o]n approximately the dates stated in the indictment, I paid cash to an inspector of the United States Department of Agriculture. The purpose of the payments was to influence the outcome of the inspection of fresh fruit and produce conducted at [Koam] . . . . I was an employee of [Koam] at the time. I acted knowingly and intentionally and I knew that the payments were unlawful.

Id.

The district court reasoned that the employees' statements were not deserving of credit in light of the employees' "willingness to make that broad statement under oath, when at the very least they were unaware whether it was true or false . . . [because it] bespeaks a willingness to testify to whatever they see as their employer's interest." Id. at 323-24.

Koam's next argument was that the "particular inspections [for the transactions in question] (although performed by bribed inspectors) [were] not shown to be corrupt." Id. at 324. Koam contended that "'there was no showing that the inspections in question were falsified' and point[ed] to the Judicial Officer's statement that '[t]here is no showing on this record that falsified inspections were issued as to the specific lots of tomatoes listed[.]'" Id. (citations omitted).

The court rejected this argument based on the evidence as a whole. See id. Among other things, the court pointed out that during the hearing on his guilty plea, Friedman had stated that the '"purpose of the payments was to influence the outcome of the inspection of fresh fruit and produce conducted at [Koam] . . . .'" Id. The court also relied upon a letter to DiMare from the USDA which enclosed copies of inspection certificates which the Office of Inspector General had identified as "directly correspond[ing] to bribes that were offered and accepted." Id.

Koam's final argument was that "it was Friedman, not his employer Koam, who bribed the inspectors, and that [it was] without responsibility for his actions." Id. at 325. According to the court, "[a]cceptance of that proposition would fly in the face of the evidence, of statute and common law, and of common sense." Id. Among other things, the court cited PACA § 499p, which imposes liability on licensees for acts and omissions of agents. See id. The court also relied on the common law rule that a master is liable for tortious acts of his servant committed within the scope of the servant's employment. See id.

Having rejected all of Koam's arguments as to why it should be entitled to keep the adjustments, the court ruled that "DiMare can recover the adjustments it granted to Koam in reliance on official certificates, not knowing that Koam had bribed the inspectors to falsify them." Id. at 326. According to the court, "[a] mutual mistake of the parties, or (as here) a mistake on plaintiff's part and a fraud by defendant 'are the classic grounds for reformation of an instrument in equity.'" Id. (citation omitted).

The court explained that

[w]here a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in § 154, and (a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or (b) the other party had reason to know of the mistake or his fault caused the mistake.

Id. (quoting Restatement (Second) of Contracts § 153).

The court determined that all these requirements were satisfied. See id. The court stated that DiMare did not bear the risk of mistake under § 154 "because the risk was not allocated to it by agreement of the parties, there was no occasion to contemplate the risk of bribery, and it would be unreasonable to allocate that risk to DiMare[.]" Id. The court also stated that it was "obvious that Koam's fault caused the mistake, and enforcement of the discounts would be unconscionable." Id. The court therefore entered judgment in favor of DiMare for the $4800.00 in price adjustments, together with costs, interest and attorney's fees pursuant to PACA § 499g(c). Id.

The case was decided on July 26, 2002; this summary was posted January, 2003