Summary of a Recent
Judicial Development in
Perishable Agricultural
Commodities

Second Circuit Affirms PACA
Reparations Award

Harrison M. Pittman
Staff Attorney

In an appeal brought by a produce buyer challenging a decision of the United States District Court for the Southern District of New York to approve a $4,800.00 reparations award issued by the USDA in favor of a produce seller and challenging the district court's decision to award the seller $73,250.00 in attorneys' fees, the United States Court of Appeals for the Second Circuit has affirmed both of the district court's determinations. Koam Produce, Inc. v. DiMare Homestead, Inc., No. 02-9023, 2003 WL 21040284 (2d Cir. May 9, 2003).

Koam Produce, Inc. ("Koam") was a produce wholesaler that sold produce at the Hunts Point Wholesale Produce Market in the Bronx, New York. See id. at *1. DiMare Homestead, Inc. ("DiMare"), was a produce supplier that supplied tomatoes to Koam. See id. When Koam received tomato shipments from DiMare, "it claimed that they did not conform to the parties' contracts, and requested that the USDA inspect each shipment." Id. The USDA inspectors determined that each shipment of tomatoes was substandard. See id. Consequently, Koam and DiMare agreed to adjust the price for each shipment, totaling $4,800.00. See id.

In October, 1999, several inspectors, including those that inspected DiMare's tomato shipments, "were arrested and later pleaded guilty to accepting bribes from wholesalers' employees in exchange for reducing the grade of produce that they inspected, thereby permitting wholesalers to pay lower prices for acceptable goods." Id. Marvin Friedman, an employee of Koam, was also arrested and pleaded guilty to charges of bribing the USDA inspectors. See id. The USDA notified 17,000 members of the produce industry, including DiMare, of the bribery scandal at Hunts Point and informed them that they could file reparations claims pursuant to the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. §§ 499a-499t. See id.

DiMare filed a reparations claim against Koam seeking reimbursement of the $4,800.00 it lost as a result of price adjustments with Koam. See id. The Secretary determined that "(1) all five of the parties' price adjustment agreements were voidable because of DiMare's unilateral mistake and Koam's misrepresentations regarding the integrity of the process; and [because] (2) Koam failed to prove that DiMare had breached the parties' sales contracts by shipping substandard tomatoes." Id.

Koam appealed the Secretary's determination to the United States District Court for the Southern District of New York. See id. See also Koam Produce, Inc. v. DiMare Homestead, Inc., 213 F.Supp.2d 314 (S.D.N.Y. 2002). The district court affirmed the Secretary's determination. See Koam, 2003 WL 21040284, at *2 (citing Koam, 213 F.Supp.2d at 322-26). In a subsequent action, Koam Produce, Inc. v. DiMare Homestead, Inc., 222 F.Supp.2d 399 (S.D.N.Y. 2002), the district court granted DiMare's request for $73,250.00 in attorneys' fees. See id. Koam appealed each of the district court's rulings to the Second Circuit. See id.

The Second Circuit first considered Koam's argument that the district court erred "in voiding the five price adjustments because DiMare failed to show that falsified inspection reports were issued with respect to the five shipments." Id. The court stated that "[w]e agree with the Secretary and the District Court that the five-price adjustment agreements are voidable under the doctrine of mistake." Id. It explained that mistake is "'a belief that is not in accord with the facts.'" Id. (citation omitted). It also 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. at *3 (quoting Restatement (Second) of Contracts § 153).

The court stated, "[i]t is clear that, when the parties agreed to the price adjustments, DiMare was mistaken as to both whether Koam had paid bribes to USDA inspectors to influence the outcome of inspections and whether the USDA inspectors who examined the tomatoes had accepted the bribes." Id. It added that "[i]t is equally clear that these mistakes impacted the basic assumptions on which DiMare made the price adjustments and that the effect of the mistakes was both material and adverse to DiMare." Id.

The court also determined that DiMare did not bear the risk of mistake in accordance with § 154 of the Restatement (Second) of Contracts. See id. Under § 154, a party bears the risk of mistake when "'the risk is allocated to him by agreement of the parties'," the party "'is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient,'" or "'the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.'" Id. (quoting Restatement (Second) of Contracts § 154).

The court explained that none of the parties' agreements provided that DiMare would bear the risk of mistake, that DiMare was not aware that Koam had compromised the integrity of the inspections process when the parties agreed to the price adjustments, and that it would be unfair to shift to the risk of mistake to DiMare in light of the fact that Koam had bribed federal officials without DiMare's knowledge. See id. It also explained that the final requirement of § 153 was satisfied, stating that

Koam's fault obviously caused DiMare's mistake, as Koam knew that its employee had bribed USDA inspectors, yet Koam neglected to inform DiMare of this fact. In addition, in light of Koam's involvement in bribery (as demonstrated by Friedman's guilty plea), it would be unconscionable to enforce the price-adjustment agreements, which resulted from the work of inspectors who had accepted bribes. As all of the requirements of § 153 have been satisfied, we agree with the District Court and the Secretary that the five price-adjustment agreements are voidable.

Id.

The court also rejected Koam's argument that DiMare "breached the underlying contracts- which are unaffected by the voiding of the price-adjustment agreements- by supplying nonconforming tomatoes." Id. at *4. Based upon the Secretary's finding that "'[t]here is no showing on this record that falsified inspections were issued as to the specific lots of tomatoes [in question],'" Koam asserted that DiMare could not prove that the tomatoes conformed to the parties' specification. See id. The court rejected this argument, stating that "DiMare need not prove that it delivered conforming tomatoes; rather, because Koam accepted the tomatoes, its burden is to prove that DiMare delivered non-conforming tomatoes." Id. (citations omitted). The court added, "[i]n summary, we agree with the District Court that the parties' five price-adjustment agreements are voidable under the doctrine of mistake and that Koam has failed to prove that DiMare breached the parties' supply agreements by shipping substandard tomatoes. Id. at *6.

Finally, the court rejected Koam's argument that the district court's award of attorneys fees to DiMare was unreasonable. See id. It noted that "'[o]ur review of an award of attorneys' fees is highly deferential to the district court; we will reverse on appeal only for an abuse of discretion.'" Id. (citation omitted). It concluded that "[b]ecause Koam has made no showing that the fees awarded to DiMare are unreasonable, we see no abuse of discretion. Accordingly, we affirm the District Court's fee award." Id.

The case was decided on May 9, 2003; this summary was posted May, 2003