Summary of a Recent
Judicial
Development in
Perishable Agricultural Commodities
Statutory Trust Beneficiaries Attain
Priority Over Transportation Provider
Emilie H. LeibovitchNational AgLaw Center Graduate Assistant
In Pacific International Marketing, Inc. v. A & B Produce, Inc., No. 04-3399, 2006 WL 2493494, at *1 (3d Cir. Aug. 30, 2006), the United States Court of Appeals for the Third Circuit held that appellant Exel Transportation Services, Inc. (Exel), which provided transportation services to A & B Produce, Inc. (A & B) but was not paid for the services, could not recover its unpaid expenses from the funds of a statutory trust created by the Perishable Agricultural Commodities Act, (PACA), 7 U.S.C. § 499e(c), before the funds were distributed to the trust beneficiaries.
A & B, a company that bought produce from suppliers and sellers for resale, contracted with Exel for transportation of the produce. Pac. Int'l Mktg., 2006 WL 2493494, at *1. After A & B received some produce, it refused to pay Exel for the freight charges. See id. In a separate transaction, when A & B failed to pay produce wholesaler Pacific International Marketing, Inc. (Pacific) for produce, Pacific sued A & B in the United States District Court for the Eastern District of Pennsylvania, and the parties agreed that A & B would liquidate its assets and transfer the proceeds into a statutory trust created by the Perishable Agricultural Commodities Act (PACA), 7 U.S.C. § 499e(c), for the benefit of Pacific and other qualifying beneficiaries. See id. Exel intervened in Pacific's action and, admitting it was not a PACA trust beneficiary, requested instead that its services be treated as administrative expenses to be charged to the trust before any of the trust property was distributed to the trust beneficiaries. See id. The district court denied Exel's request, holding that treating Exel's expenses in such a way "would defeat the purpose of the PACA [trust] . . . and expand the term 'administrative expense' too far." Id. at *2 (citation omitted). Exel appealed. See id. at *1.
The Third Circuit stated that PACA's statutory trust provision was created to ensure that, in the event produce buyers do not pay for the produce on time, produce sellers and suppliers who meet the statutory requirements set by PACA and qualify as trust beneficiaries have priority and recover their unpaid expenses before any of the buyers' other creditors, including perfected secured ones. See id. at *2. The Third Circuit noted that despite the fact that PACA did not expressly allow for "the payment of trust administrative expenses," some courts have followed common law trust principles to allow distribution for certain administrative expenses before the trust funds are distributed to the trust beneficiaries. Id. at *3. The court, however, distinguished Exel's case from those previous cases, explaining that even though Exel's services may have contributed to the trust assets, the services it provided were not originally performed for the specific purpose of benefiting the trust itself but instead were merely the performance of contractual duties. See id. at *4. The court further stated that if Exel's expenses had priority over the trust beneficiaries, other creditors would assert similar claims successfully, which would in turn defeat PACA's purpose of securing payment for the trust beneficiaries. See id. at *4.Therefore, the Third Circuit refused to apply the aforementioned common law principles as they conflicted with Congress' intent of protecting certain qualifying produce sellers and suppliers. See id. at *5.
The case was decided on August 30, 2006; this summary was posted Octobe 24, 2006.