JAMES O. BROWNING, District Judge.
This lawsuit arises from Defendant Tan-O-On Marketing's failure to pay Plaintiff Skyline Potato Company, Inc. ("Skyline Potato"), and Intervening Plaintiffs Folson Farm Corporation, Mart Produce Corporation, Billingsley Produce Sales, Inc., Alsum Produce, Inc., and Peterson Bros. River Valley Farms, Inc. (together "Folson Farm Group") for sales of potatoes they made to Tan-O-On Marketing between October and December 2009. During that time period, Tan-O-On Marketing paid Hi-Land for potatoes that Hi-Land shipped to customers between October and December 2009.
This dispute arises out of Tan-O-On Marketing, a produce broker and sales agent, ceasing its business operations without paying fully the produce suppliers for whom it acted as a produce broker. See Deposition of Gerald Anderson at 57:11-25 (taken May 7-8, 2012), filed August 8, 2012 (Doc. 252-1)("Anderson Depo."). At all times material to this case, Skyline Potato and the Folson Farm Group were produce-sellers operating under valid PACA licenses issued by the United States Department of Agriculture (U.S.D.A.). See Affidavit of Bryan R. Folson, President and Treasurer of Folson Farm Corporation in Support of Plaintiff and Intervening Plaintiffs' Motion for Summary Judgment ¶ 6, at 2, (executed July 24, 2012), filed August 8, 2012 (Doc. 253-5); Affidavit of Chod Sill, Sales Agent of Billingsley Produce Sales, Inc. in Support of Plaintiff and Intervening Plaintiffs' Motion for Summary Judgment ¶ 6, at 2, (not executed), filed August 8, 2012 (Doc. 253-6); Affidavit of Jim McBride, Sales Manager of Mart Produce Corp. in Support
Tan-O-On Marketing was involved in carrying on the business of buying wholesale quantities of perishable agricultural commodities — "produce" — from produce suppliers and reselling the produce to its customers. See Anderson Depo. at 57:11-25; Hi-Land Potato MSJ ¶ 1, at 5 (setting forth this fact); Response to Hi-Land Potato's MSJ at 5 (not disputing this fact); Skyline and FFG's MSJ ¶ 2, at 5 (setting forth this fact); Response to Skyline and FFG's MSJ at 8 (not disputing this fact). Gerald Anderson organized Tan-O-On Marketing in the 1990s, with the company's principal place of business located in Hi-Land Potato's packing shed in Monte Vista, Colorado. See Anderson Depo. at 7:13-8:5; 8:22-11:3; Carla Worley Decl. ¶ 5, at 2-3; Hi-Land Potato's MSJ ¶ 5, at 6 (setting forth this fact).
Between 2006 and 2010, Tan-O-On Marketing's President Shannon Casey managed and controlled Tan-O-On Marketing's accounts payable and receivable, including payments from its checking accounts. See In re: Shannon P. Casey, Petitioner, No. 11-0131, 2011 WL 3645678, at **5-6 (USDA Jul. 6 2011) (findings of fact 4-7); Deposition of Shannon Casey 66:10-18 (taken May 15, 2012), filed August 8, 2012 (Doc. 253-13)("2012 Shannon Casey Depo.")(admitting to signing Kroger Co. vendor number in 2007); 2010 Shannon Casey Depo. at 18:10-19:4, 24:1-11, 50:25-51:6, 125:2-9, 133:21-24, 137:22-138:1, 160:3-5; Skyline and FFG's MSJ ¶ 3, at 6 (setting forth this fact); Response to Skyline and FFG's MSJ at 6 (not disputing this fact). By the end of 2008, conflict had developed between Shannon Casey and the Andersons regarding the "salary" and promissory note payments Shannon Casey had to pay to the Andersons, because of Tan-O-On Marketing's level of profitability and the minimal duties that the Andersons had in Tan-O-On Marketing's business. See 2012 Shannon Casey Depo. at 16:10-17:3 (Doc. 252-5); Hi-Land Potato's MSJ ¶ 9 at 6 (setting forth this fact); Response to Hi-Land Potato's MSJ at 4 (not disputing this fact). In May of 2009, Shannon Casey "fired" the Andersons from their positions, stopped paying their salaries, and actively began trying to find a way to buy out their rights in the promissory note, leaving Shannon Casey as the President and CEO of Tan-O-On Marketing and the Andersons with no continuing involvement. See Anderson Depo. at 83:22-84:21; 84:4-9; 85:18-87:2; 120:7-14; Hi-Land Potato's MSJ ¶¶ 10-11, at 6-7 (setting forth this fact); Response to Hi-Land Potato's MSJ at 4 (not disputing this fact). In early 2009, Bank of Albuquerque, the bank at which Tan-O-On Marketing had historically maintained its bank accounts, did not renew Tan-O-On Marketing's line of credit, leaving Tan-O-On Marketing to rely exclusively on its receivables to pay its bills. See 2012 Anderson Depo. at 26:3-27:15; 46:19-47:9; 91:2-18; 2012 Shannon Casey Depo. at 8:8-9:6; 10:19-11:10; 45:3-6; 2010 Shannon Casey Depo. at 94:7-96:7; 132:18-21; 192:14-193:5; 218:17-219:12; 219:23-221:1; Skyline and FFG's MSJ ¶ 5, at 6 (setting forth this fact); Response to Skyline and FFG's MSJ at 6.
Tan-O-On Marketing acted as a sales agent for Hi-Land Potato from the 1990s to the end of 2009. In this sales agency relationship, Tan-O-On Marketing arranged sales to customers, but Hi-Land Potato shipped the potatoes directly from its shed to the customers. Because of these direct shipments, Hi-Land Potato has known the names of the end customers of its potatoes, and had direct contact and relationships with the customers. See Anderson Depo. at 64:23-66:17; Carla Worley Decl. ¶¶ 6-7; Purchase Order (Printed December 31, 2008), filed August 8, 2012 (Doc. 252-3)("Dec. 31, 2008 Purchase Order"); Hi-Land Potato MSJ ¶ 3, at 6 (setting forth this fact).
In mid-October 2009, Shannon Casey traveled to Monte Vista to meet with Hi-Land Potato's principals to ask if Tan-O-On
Skyline Potato filed its First Amended Petition and Complaint, Prayer for Declaratory Relief and Piercing the Corporate Veil, on July 23, 2010. See Doc 2 ("Skyline Complaint"). The Folson Farm Group filed their Complaint in Intervention on July 8, 2011. See Doc. 60 ("FFG Complaint"). Skyline Potato and the Folson Farm Group allege that Tan-O-On Marketing and Hi-Land Potato were engaged in a scheme by which Hi-Land Potato knew it was receiving payment to the detriment of Tan-O-On Marketing's other PACA trust creditors. Skyline Potato and the Folson Farm Group assert that Tan-O-On's obligations under PACA extend to Hi-Land Potato. Skyline Potato and the Folson Farm Group demand that Hi-Land Potato disgorge sufficient funds to pay the entire amount of Skyline Potato's and the Folson Farm Group's claims against Tan-O-On Marketing. Skyline Potato and the Folson Farm Group allege that Tan-O-On Marketing transferred PACA trust assets to Hi-Land and that any such transfers are a breach of the PACA trust. See Skyline Complaint ¶ 87, at 13; FFG Complaint ¶¶ 41-42, at 10. Skyline Potato qualifies this assertion by noting that the transfers were "made to Hi-Land in preference of other PACA trust creditors,"
Hi-Land Potato and Worley move the Court, pursuant to rule 56 of the Federal Rules of Civil Procedure, for an order granting summary judgment in their favor on all of the claims asserted against them in Skyline Potato's First Amended Complaint and Folson Farm's Complaint. See Hi-Land Potato MSJ at 1. Skyline Potato and the Folson Farm Group move the Court, pursuant to rule 56, for an order granting partial summary judgment in their favor on whether Hi-Land Potato unlawfully received PACA trust assets. See Skyline and FFG's MSJ at 3.
The Court held a hearing on September 27, 2012. The parties began by agreeing that Skyline Potato and the Folson Farm Group have abandoned all of their claims except for the PACA claims. See Transcript of Hearing at 4:21-5:14 (September 27, 2012)(Bohnhoff, Court, Jaramillo, Esquivel) ("Tr.").
Hi-Land Potato contended that the following undisputed facts make it a trust beneficiary under PACA as a matter of law: Hi-Land Potato shipped $1.66 million worth of potatoes, Tan-O-On Marketing was paid $1.66 million for that shipment, and then Tan-O-On Marketing paid $1.66 million to Hi-Land Potato for those shipments. See Tr. at 8:20-9:11 (Bohnhoff). With regard to Skyline Potato and the Folson Farm Group's argument that Hi-Land Potato was not a trust beneficiary because it failed to invoice Tan-O-On Marketing or otherwise provide statutory notice of its intent to preserve PACA benefits, Hi-Land Potato argued that, because Hi-Land Potato was a paid seller rather than an unpaid seller, under PACA it did not have to do anything to preserve its right as a beneficiary. See Tr. at 9:22-10:18 (Bohnhoff). A paid seller, Hi-Land Potato argued, does not need to do anything to preserve its benefits under PACA,
Congress enacted PACA
7 U.S.C. § 499e(c)(2). "Congress explained that `the purpose of the trust is to increase the legal protection for unpaid sellers and suppliers of perishable agricultural commodities until full payment of sums due have been received by them.'" H.C. Schmieding Produce v. Alfa Quality Produce, 597 F.Supp.2d 313, 315-16
"Statutory construction must begin with the language employed by Congress and the assumption that the ordinary meaning of that language accurately expresses the legislative purpose." Park `N Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S. 189, 194, 105 S.Ct. 658, 83 L.Ed.2d 582 (1985) (citing American Tobacco Co. v. Patterson, 456 U.S. 63, 68, 102 S.Ct. 1534, 71 L.Ed.2d 748 (1982)). In construing § 944e to determine the scope of the statutory trust, the Court must read the statute as a whole, rather than reading only § 944e(c)(2). See United States v. Atl. Research Corp., 551 U.S. 128, 135, 127 S.Ct. 2331, 168 L.Ed.2d 28 (2007) ("Statutes must be read as a whole.")(quoting King v. St. Vincent's Hospital, 502 U.S. 215, 221, 112 S.Ct. 570, 116 L.Ed.2d 578 (1991)). Section 499e(c), paragraphs 2-4, of Title 7 of the United States Code provides:
7 U.S.C. § 499e(c)(2)-(4).
The first step in construing a statute requires the court to "determine whether the language at issue has a plain and unambiguous meaning with regard to the particular dispute in the case." Robinson v. Shell Oil Co., 519 U.S. 337, 340, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997). The inquiry stops there "if the statutory language is unambiguous and `the statutory scheme is coherent and consistent.'" Robinson v. Shell Oil Co., 519 U.S. at 340, 117 S.Ct. 843 (citing United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 240, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)). Whether the statutory language is plain on its face or ambiguous "is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole." Robinson v. Shell Oil Co., 519 U.S. at 341, 117 S.Ct. 843 (citing Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 477, 112 S.Ct. 2589, 120 L.Ed.2d 379 (1992)).
Read in the context of the statute as a whole, the required notice provisions of § 499e(c)(3) and § 499e(c)(4) support the interpretation that the PACA trust arises automatically and a produce supplier becomes a PACA beneficiary upon transfer of title to the produce. This conclusion follows from the language that, if an unpaid supplier does not abide by the notice provisions within the statutory time period — if it does not "preserve" its benefits — it "lose[s]" the benefits of the trust with regard to that particular shipment:
7 U.S.C. § 499e(c)(3) (emphasis added). The PACA statute as a whole, however, is silent as to anything a supplier needs to do beyond being a supplier to become a PACA beneficiary. Because the PACA notice provisions in § 499e(c)(3) and § 499e(c)(4) operate to strip the PACA beneficiary of the PACA trust benefits unless the beneficiary acts to retain the benefits, the supplier had to have been a PACA beneficiary to lose the benefits. Section 499e(c)(4) provides an additional method to "preserve" the PACA benefits. See § 499e(c)(4) ("In addition to the method of preserving the benefits of the trust specified in paragraph (3), a licensee may use ordinary and usual billing or invoice statements to provide notice of the licensee's intent to preserve the trust benefits....")(emphasis added). The required notice provisions of § 499e(c)(3) and § 499e(c)(4), therefore, support the interpretation that a supplier automatically
The United States Courts of Appeal have also found that suppliers become PACA trustees automatically upon sale of the produce. The United States Court of Appeals for the Ninth Circuit has stated:
In re Milton Poulos, Inc., 947 F.2d 1351, 1352 (9th Cir.1991) (citing 7 U.S.C. § 499e(c)(2)). See Patterson Frozen Foods, Inc. v. Crown Foods Intern., Inc., 307 F.3d 666, 669 (7th Cir.2002) ("This floating trust is automatically created when the dealer accepts the goods so long as the supplier complies with the specific notice requirements set out in 7 U.S.C. § 499e(c) and 7 C.F.R. § 46.46(f).")(citing Greg Orchards & Produce, Inc. v. Roncone, 180 F.3d 888, 890-91 (7th Cir.1999)). D.M. Rothman & Co., Inc. v. Korea Commercial Bank of New York, 411 F.3d 90, 96 (2d Cir.2005) ("[A] PACA trust is automatically established each time a broker or merchant purchases perishable commodities upon credit...."); Skone & Connors Produce, Inc. v. Panattoni, 37 F.3d 1506, *1 (9th Cir.1994) (unpublished table opinion)("When Skone & Connors Produce, Inc. delivered potatoes to FreshPict's client a nonsegregated trust was automatically created under the Perishable Agricultural Commodities Act (PACA).").
Section § 499e(c)(2) covers "commodities received ... in all transactions," but also states that the proceeds and receivables "shall be held ... in trust for the benefit of all unpaid suppliers or sellers... involved in the transaction until full payment of the sums owing in connection with such transactions." 7 U.S.C. § 499e(c)(2) (emphasis added). Throughout § 499e(c)(3) and § 499e(c)(4), Congress refers only to "such trust" or "the trust." On the other hand, it might be possible to interpret § 499e(c)(4) as providing for multiple PACA trusts, reading the language that "[t]he seller of these commodities retains a trust claim over these commodities" to provide for separate trusts for each individual contract or shipment. 7 U.S.C. § 499e(c)(4). The language "[t]he seller of these commodities retains a trust claim over these commodities" may also be construed, however, as a means of including each shipment in the trust's res and preserving the extension of the PACA trusts benefits to each shipment. 7 U.S.C. § 499e(c)(4). Thus, rather than creating a separate PACA trust for each shipment, failing to provide the seller with the notice required by § 499e(c)(3) or § 499e(c)(4) results in the particular shipment not being covered under the PACA trust, and thus not counting toward the supplier's pro rata share. If, on the other hand, the statute were to provide multiple individual PACA trusts for each shipment, tracing would become a necessary and a principle part of recovering PACA trust assets. With multiple individual PACA trusts, the proceeds of each produce shipment would become trust assets of a distinct PACA trust. For a PACA beneficiary to enforce its PACA trust benefits when the trustee misses payments for a shipment, the supplier would necessarily have to trace the PACA trustee's assets to prove that such assets are the proceeds of its individual PACA trust. Such tracing would be necessary so that the assets of one PACA trust could be distinguished from the assets of other beneficiaries' PACA trusts, or even the beneficiary's separate PACA trusts for which the PACA trustee has not missed payments. More likely, by including
The Court's conclusion that there is one singular PACA trust comports with the United States Department of Agriculture's regulations interpreting the statutory trust in § 499e(2). The Department of Agriculture has interpreted the statute to create a single PACA trust, stating that "[t]rust assets are to be preserved as a nonsegregated `floating' trust." 7 C.F.R. § 46.46(b). This nonsegregated floating trust permits the commingling of trust assets. The Department of Agriculture notes that its regulations interpreting the statutory trust and identifying it specifically as a floating trust "clarifies the intent of Congress." Regulations Under the Perishable Agricultural Commodities Act; Addition of Provisions To Effect a Statutory Trust, 49 Fed.Reg. 45,735, 45,738 (Nov. 20, 1984). Thus, the Department of Agriculture designed the statutory trust regulations to effect what it saw as Congress' intent in its 1984 amendments to PACA that created the trust:
H.R.Rep. No. 98-543, at 5 (emphasis added). Because the regulations interpreting the statutory trust in § 499e(2) comport with the Court's construction of the statute's plain language and with the intent expressed in the House Report, the Department of Agriculture's definition of the trust in 7 C.F.R. § 46.46(b) is a reasonable statutory interpretation. The Supreme Court has directed federal courts to accept a government agency's reasonable interpretation of a statute where Congress has intentionally left the interpretation to the agency. See Chevron, U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 845, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984) ("If this choice represents a reasonable accommodation of conflicting policies that were committed to the agency's care by the statute, we should not disturb it unless it appears from the statute or its legislative history that the accommodation is not one that Congress would have sanctioned.")(quoting United States v. Shimer, 367 U.S. 374, 382, 81 S.Ct. 1554, 6 L.Ed.2d 908 (1961)). The Court therefore concludes that the Department of Agriculture's definition of the PACA trust in 7 C.F.R. § 46.46(b) as a single ongoing floating trust is entitled to the Court's deference.
The House Report's stated intent that a supplier automatically becomes a participant in the trust suggests the construction
H.R.Rep. No. 98-543, at 5 (1983) reprinted in 1983 U.S.C.C.A.N. 405, 408 (emphasis added). Congress stated that a supplier automatically "becomes a participant in the trust," rather than stating that a PACA trust is automatically created. The Court believes that Congress did so purposefully and intentionally, concluding that Congress' purpose was to provide a single ongoing trust rather than individual separate trusts created each time a supplier ships its produce.
The United States Court of Appeals for the Second Circuit's conclusion that "a single PACA trust exists for the benefit of all of the sellers to a Produce Debtor, and continues in existence until all of the outstanding beneficiaries have been paid in full," supports the Court's conclusion. In re Kornblum & Co., Inc., 81 F.3d 280, 286 (2d Cir.1996). The Second Circuit, tasked with interpreting whether § 499e(c)(2) created a single trust or multiple trusts, noted that all of the language in the statutory provision counsels in favor of a single trust, except the phrase "involved in the transaction." 81 F.3d at 286 (quoting 7 U.S.C. § 499e(c)(2)). The Second Circuit construed this phrase "as having the meaning, in context, of `involved in any such transaction,' thereby harmonizing with the balance of the language in § 499e(c)(2)." In re Kornblum & Co., Inc., 81 F.3d at 286. The Second Circuit concluded that this construction is reasonable based on the fact that the rest of the language in § 499e(c)(2) refers to "all transactions":
81 F.3d at 286. The Second Circuit's construction is reasonable, because by providing that "commodities ... [of] all transactions... and any receivables or proceeds from the sale of such commodities" shall be held in trust, it is reasonable to conclude that Congress intended to make one trust with the res consisting of the proceeds of all transactions. The Second Circuit also noted that its interpretation was proper under Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., because "the regulation ... implement[ing] the statutory trust, 7 C.F.R. § 46.46, clearly delineates a single, undifferentiated trust for the benefit of all sellers and suppliers." In re Kornblum & Co., Inc., 81 F.3d at 286.
Although a supplier becomes a PACA trust beneficiary automatically upon the merchant's, dealer's, or broker's acceptance of the goods, the supplier's protection as a PACA trust beneficiary for the commodities shipped in the particular transaction requires that the supplier provide the PACA trustee the notice required in § 499e(c)(3) or § 499e(c)(4). See 7 U.S.C. § 499e(c)(3-4). The Ninth Circuit has held: "The unpaid supplier loses the benefits of the trust unless [it] gives written notice of ... intent to preserve the benefits of the trust to the produce dealer and files the notice with the United States Department of Agriculture ("USDA") within the statutorily prescribed time period." In re Milton Poulos, Inc., 947 F.2d at 1352-53 (citing 7 U.S.C. § 499e(c)(3)). See In re Lombardo Fruit and Produce Co., 12 F.3d 110, 112 (8th Cir.1993) ("[T]he unpaid supplier or seller loses the benefits of the trust protection unless it `has given written notice of intent to preserve the benefits of the trust....'"). See also 49 Fed.Reg. at 45,738 ("The legislation is clear that an absolute precondition to pursuing trust assets held by a defaulting buyer or receiver is the filing of a written notice by the seller, supplier or agent after a failure to pay within the prescribed time periods has elapsed."). To remain entitled to PACA benefits and the privilege of being escalated to a priority creditor, a PACA beneficiary must adhere to the statutory requirements. See Idahoan Fresh v. Advantage Produce, Inc., 157 F.3d 197, 203 (3d Cir.1998) ("The plain language of section 499e(c)(3), in particular Congress's use of the term `shall,' unambiguously requires that an agreement to extend the payment term be in writing in order for the seller to preserve its PACA trust benefits.").
If a PACA beneficiary does not adhere to the statutory requirements, the PACA beneficiary loses its trust benefits and becomes an unsecured creditor of the PACA trustee. See In re Lombardo Fruit and Produce Co., 12 F.3d at 114. In In re Lombardo Fruit and Produce Co., the United States Court of Appeals for the Eighth Circuit held that a shipper who could not prove that it strictly adhered to the statutory notice requirements in § 499e(c)(3) or § 499e(c)(4) had lost "its entitlement to PACA trust protection," and could not collect payments from trust assets in front of the secured creditors of the trustee. 12 F.3d at 114. The supplier submitted a letter from the supplier as evidence of a written agreement to extend the payment period from ten days to thirty days. See 12 F.3d at 113. Because the letter was undated, however, the Eighth Circuit found this insufficient proof that the parties "`expressly agreed to [extend the deadline] in writing before entering into' the underlying transaction for produce." In re Lombardo Fruit and Produce Co., 12 F.3d at 113 (quoting 7 U.S.C. § 499e(c)(3)(ii))(emphasis in original). The Eighth Circuit held that the supplier's failure to strictly adhere to the statute in preserving its PACA beneficiary status resulted in loss of its ability to enforce the trust benefits and to enjoin the PACA trustee's secured creditor from exercising its priority interest in the PACA trustee's accounts receivable. See In re Lombardo Fruit and Produce Co., 12 F.3d at 112.
The United States Circuit Courts of Appeal, in construing PACA, have uniformly held that "[t]he interpretation of PACA trust interests is guided by general trust principles to the extent there is no conflict with the statute." In re Arctic Exp. Inc., 636 F.3d 781, 798 (6th Cir.2011)
The United States Circuit Courts of Appeal have consistently looked to the Restatement of the Law of Trusts to provide the general principles of trust law. "[A] trust involves three elements: (1) a trustee, who holds the trust property and is subject to duties to deal with it for the benefit of one or more others; (2) one or more beneficiaries, to whom and for whose benefit the trustee owes the duties with respect to the trust property; and (3) trust property, which is held by the trustee for the beneficiaries." In re Arctic Exp. Inc., 636 F.3d at 794 (quoting Restatement (Third) of Trusts § 2, cmt. f). Thus, in Consumers Produce Co. v. Volante Wholesale Produce, Inc., the United States Court of Appeals for the Third Circuit held that, because the transferee met the requirements in Restatements (Second) of Trusts § 284, which exempts a third-party transferee from liability where the third-party is a bona fide purchaser for value without notice that the transfer was in breach of the trust, the transferee was not required to disgorge the payments made in breach of the PACA trust. See 16 F.3d at 1385. Similarly, in C.H. Robinson Co. v. Trust Co. Bank, N.A., the United States Court of Appeals for the Eleventh Circuit concluded that the district court erred in determining that a third-party transferee with knowledge of the existence of the PACA trust was required to disgorge payments made in breach of the trust, because the court did not faithfully apply general trust law principles:
C.H. Robinson Co. v. Trust Co. Bank, N.A., 952 F.2d 1311, 1314 (11th Cir.1992) (emphasis in original).
Under general trust principles, because the merchant's, dealer's, or broker's proceeds from the sales of produce commodities under PACA are held in trust for the suppliers as PACA trust beneficiaries, the merchant, dealer, or broker becomes a PACA trustee subject to a trustee's fiduciary duties. "An individual who is in a position to control the assets of the PACA trust and fails to preserve them, may be held personally liable to the trust beneficiaries for breach of fiduciary duty." See Coosemans Specialties, Inc. v. Gargiulo, 485 F.3d 701, 705 (2d Cir.2007). See Weis-Buy Servs., Inc. v. Paglia, 411 F.3d 415, 422 (3d Cir.2005) (analyzing whether the plaintiff's claim against the PACA trustee failed, because the statute of limitations for a trustee's breach of fiduciary duty claim had run). "PACA trust rights may be enforced ... through a court action for breach of fiduciary trust... permit[ting] recovery against both the corporation and its controlling officers." Patterson Frozen Foods, Inc. v. Crown Foods Intern., Inc., 307 F.3d 666, 669 (7th Cir.2002) (citing Golman-Hayden Co. v. Fresh Source Produce, Inc., 217 F.3d 348, 351 (5th Cir.2000)). See Farm-Wey Produce, Inc. v. Wayne Bowman Co., Inc., 973 F.Supp. 778, 785 (E.D.Tenn.1997) (concluding that PACA trustee did not violate its fiduciary duty as a trustee, because it did not violate its duty under Restatement (Second) of Trusts § 174, "to exercise the skill and care of a person of ordinary prudence ... in dealing with his own property").
The PACA trust was created to protect a supplier and PACA beneficiary by ensuring that the assets of the trust, the proceeds from the shipment of produce, are not dissipated before the suppliers are paid. The first protection for suppliers from a merchant's, dealer's, or broker's dissipation of PACA trust funds is to seek an injunction. Section 499e(5) provides the equitable remedies available to suppliers under PACA: "The several district courts of the United States are vested with jurisdiction specifically to entertain (i) actions by trust beneficiaries to enforce payment from the trust, and (ii) actions by the Secretary to prevent and restrain dissipation of the trust." 7 U.S.C. § 499e(c)(5). Dissipation is defined as "any act or failure to act which could result in the diversion of trust assets or which could prejudice or impair the ability of unpaid suppliers, sellers, or agents to recover money owed in connection with produce transactions." 7 C.F.R. § 46.46. Courts have construed § 499e(5) to mean that both the Secretary of Agriculture and district courts can enjoin a merchant, dealer, or broker, to prevent the dissipation of trust assets. See Tanimura & Antle, Inc. v. Packed Fresh Produce, 222 F.3d 132, 137 (3d Cir.2000) ("§ 499e(c)(5)(ii) ... authorizes the district court to entertain ... injunctive relief on behalf of trust beneficiaries, thereby adding to, instead of detracting from, available common law remedies.")(reversing the district court for failing to enjoin dissipation of PACA trust funds); Frio Ice, S.A. v. Sunfruit, Inc., 918 F.2d 154, 158 (11th Cir.1990) ("[W]e find the district court's interpretation of Section 499e(c)(4), as limiting injunctive relief to suits brought by the Secretary, to be incorrect."). See also JSG Trading Corp. v. Tray-Wrap Inc., 917 F.2d 75, 79 (2d Cir.1990) (noting that
The second protection to PACA beneficiaries is their priority interest in the PACA trust's assets. Congress designed the 1984 amendment to PACA to provide PACA trust beneficiaries with a superior interest in the PACA trust assets over creditors with security interests in those same assets, allowing the suppliers to recover first in the merchant's, dealer's, or broker's, — the PACA trustee's — bankruptcy. Thus, "a PACA trustee holds legal title to PACA trust assets but the seller retains an equitable interest in the assets pending full payment, so that the Bankruptcy Code excludes PACA trust assets from the PACA trustee's bankruptcy estate." C.H. Robinson Co. v. Alanco Corp., 239 F.3d 483, 487 (citing In re Kornblum, 81 F.3d at 284; In re San Joaquin Food Serv., Inc., 958 F.2d 938, 939 (9th Cir.1992)). As amongst beneficiaries, when a PACA trustee becomes insolvent, the legislative intent suggests, and courts have enforced PACA to require, the trust's assets are distributed first to the PACA beneficiaries pro rata. See In re Milton Poulos, Inc., 947 F.2d 1351, 1353 (9th Cir.1991)(holding that all suppliers who had "properly perfected their PACA trust rights [] are entitled to their pro rata share of the trust assets"); H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d at 316 ("Included in the trust protection provided by PACA is not only an elevated priority over other creditors but also the right to a pro rata distribution of trust assets in the event of insolvency."). See also 49 Fed.Reg. at 45,735-36 ("Where a court is involved, USDA would recommend to the court that the available trust assets be distributed on a pro-rata basis to all beneficiaries who have protected their right to trust benefits."). Two United States District Courts have analyzed whether one supplier/beneficiary is liable to another when one beneficiary receives a priority payment before the PACA trustee becomes insolvent, each reaching a different conclusion. Compare Fresh Kist Produce, LLC v. Choi Corp., Inc., 223 F.Supp.2d 1 (D.D.C.2002) (concluding that the defendant produce supplier was required to disgorge payments made to it by the seller), with H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d 313 (concluding that the supplier did not have to disgorge payments it received from the buyer).
It is a general proposition in debtor/creditor law, and the Supreme Court has held, that "except as forbidden by the bankrupt law, a debtor has the right to prefer one creditor over another, and that the vigilant creditor is entitled to the advantage secured by his watchfulness and attention to his own interests." Blennerhassett v. Sherman, 105 U.S. 100, 117, 26 L.Ed. 1080 (1881). Under trust law, however, because of the nature of a co-beneficiary relationship, creditors who are also co-beneficiaries of a trust additionally owe their co-beneficiaries duties that contain a fiduciary element. See G. Bogert & G. Bogert, The Law of Trusts and Trustees § 191 (Rev.2d ed. 1979)("Co-beneficiaries... are in a fiduciary relation to each other....")(cited in the Reporter's Notes on Restatement (Third) Trusts § 104).
The duties owed to co-beneficiaries under general trust principles govern
Restatement (Third) of Trusts § 104, cmt. f. The Reporter's Notes on § 104, comment f, direct the reader to A. Scott & M. Ascher, Scott and Ascher on Trusts § 25.2.6.3 (5th ed., 2007), for more information "[o]n a beneficiary's duty to other beneficiaries not to participate in a breach of trust." Restatement (Third) of Trusts § 104, Reporter's Notes on cmt. f. Professors Austin W. Scott and Mark L. Ascher suggest that co-beneficiaries have duties to one another beyond the duty not to participate in a breach of the trust: "Although there is not the same fiduciary relationship between trust beneficiaries as there is between them and the trustee, there is enough of a fiduciary element in their relationship to make it inequitable for one to seek to obtain an advantage over another." Scott and Ascher on Trusts § 25.2.6.3, at 1866. Similarly, the late Professor George G. Bogert, and George T. Bogart, which the Reporter's Notes on § 104 also cite, state that beneficiaries have duties to each other, at least to a certain extent, as fiduciaries. See G.G. Bogert & G.T. Bogert, The Law of Trusts and Trustees § 191 ("Co-beneficiaries ... are in a fiduciary relation to each other in the sense that one beneficiary may not secretly secure for himself a special advantage in the trust — 31-administration."). Thus, the Court concludes that PACA beneficiaries, as co-owners of the equitable interest in the PACA trust, have some limited fiduciary duties to the other beneficiaries of the PACA trust, including at least the duty not to affirmatively seek an unfair advantage over their co-beneficiaries.
While no authority is precisely on point with the unique facts and issues in this case, two cases present contrasting conclusions regarding the trust responsibilities of PACA beneficiaries. In the end, the Court believes that Fresh Kist Produce, LLC v. Choi Corp., Inc. may come closest to reflecting Congress' intent to protect PACA beneficiaries. What that means, procedurally, is that general trust principles
A plaintiff supplier, Fresh Kist, and defendant suppliers, J.C. Watson ("JCW"), Norfolk Banana ("Norfolk"), and Berkley Tomato ("Berkley"), in Fresh Kist Produce, LLC v. Choi Corp., Inc. all sold perishable agricultural commodities to a common produce dealer, Washington Wholesale Produce Company ("WWP"). See 223 F.Supp.2d at 4. On June 5, 2001, JCW filed a complaint against WWP for breach of contract, alleging that WWP owed JCW $75,946.20 for produce sold and also alleging that WWP was insolvent. See 223 F.Supp.2d at 5. WWP and JCW reached an agreement out of court in which WWP would pay a sum certain monthly to JCW until the balance was paid. See 223 F.Supp.2d at 5. After several payments over two months, WWP failed to make the payments, and JCW filed an amended complaint to obtain the balance owed. See 223 F.Supp.2d at 5. Fresh Kist then contacted JCW and asked if it would waive the potential conflict of interest in having a common attorney represent both Fresh Kist and JCW; JCW would not waive the conflict. See Fresh Kist Produce, LLC v. Choi Corp., Inc., 223 F.Supp.2d at 5. On August 28, 2001, Fresh Kist initiated an action against JCW and WWP requesting a temporary restraining order to enjoin the dealer from paying the rest of the amount owed to JCW, and establishing a non-party PACA claim procedure. See 223 F.Supp.2d at 5. Fresh Kist alleged that JCW, Norfolk, and Berkley "must disgorge the PACA benefits received from WWP after they learned that WWP was insolvent." 223 F.Supp.2d at 5-6.
The Honorable Ricardo M. Urbina, United States District Judge for the District of Columbia, framed the issue in front of it as "whether PACA requires a beneficiary with knowledge of a PACA trust's insolvency to set up a mechanism for all beneficiaries to submit claims for the remaining funds." Fresh Kist Produce, LLC v. Choi Corp., Inc., 223 F.Supp.2d at 8. Recognizing that PACA trusts are governed by general trust principles, the court answered in the affirmative, noting: "Under trust law, co-beneficiaries are in a fiduciary relationship with each other so that one beneficiary may not secretly secure for himself a special advantage in the trust administration." Fresh Kist Produce, LLC v. Choi Corp., Inc., 223 F.Supp.2d at 8 (citing G. Bogert & G. Bogert, The Law Of Trusts And Trustees § 191, at 478 (2d ed.1979)). The court found that, under PACA, "the law compels a beneficiary with knowledge of a trust's insolvency to refrain from securing for itself a greater advantage than its co-beneficiaries." 223 F.Supp.2d at 8. Thus, the court concluded that PACA requires beneficiaries to "employ pro rata distribution when one of them has belief or knowledge of the trust's insolvency," rather than waiting until the PACA trustee becomes fully insolvent or bankrupt. 223 F.Supp.2d at 9. The court based this conclusion on three considerations: (i) that it is a breach of a fiduciary duty to co-beneficiaries where a trustee who is also a creditor "secure[s] itself by the depletion of assets which, in the event of the debtor's insolvency it would be obliged to share ratably with all of the debtor's creditors," 223 F.Supp.2d at 8 (quoting Dabney v. Chase Nat'l Bank of City of New York, 196 F.2d 668, 672-73 (2d Cir.1952) (Learned Hand, J.)); (ii) that "when a trustee pays one beneficiary and becomes bankrupt, a court may set aside this preference," 223 F.Supp.2d at 8 (citing G. Bogert & G. Bogert, The Law of Trusts and Trustees § 191, at 478-79); and (iii) that an insolvent PACA trust's "assets are distributed among beneficiaries pro rata,"
In H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., the intervening supplier plaintiff, Amco Produce, Inc. ("Amco Produce"), amended its complaint to add a claim against the original supplier plaintiffs, Wm. Rosenstein & Sons, Co. and Eagle Fruit Traders, LLC (together, "Rosenstein & Sons"), seeking disgorgement of payments made to Rosenstein & Sons for participation in the dissipation of the PACA trust's assets. 597 F.Supp.2d at 315. "Specifically, Amco has alleged that Rosenstein, despite either knowing or having information that would have led it to reasonably know of defendants' financial instability or insolvency, received PACA trust assets from defendants in payment of Rosenstein's pre-existing claims." 597 F.Supp.2d at 315.
The Honorable Brian M. Cogan, United States District Judge for the Eastern District of New York, distilled the issues to two questions the court had to resolve:
H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d at 316 (quoting D.M. Rothman & Co., Inc. v. Korea Commercial Bank of New York, 411 F.3d at 94) (internal citations and alterations omitted).
In answering the first question, Judge Cogan first posited that under the common law that any insolvent business, not just a PACA trustee, holds its assets in trusts for its creditors, resulting in the directors of the insolvent corporation serving as trustees, imposing upon them a fiduciary duty to the corporation's creditors. See 597 F.Supp.2d at 316 (citing In re Poseidon Pool & Spa Recreational, Inc., 391 B.R. 234, 241 (Bankr.E.D.N.Y.2008)). "This is no different than the duty that exists under PACA, except that PACA arguably expands, or at least clarifies that, this obligation additionally includes "controlling persons," not just directors." 597 F.Supp.2d at 316. Judge Cogan also stated that payment of bona fide debts of an insolvent corporation to outsiders is not improper under common law, "despite the fact that these payments deplete the remaining assets available for creditors." 597 F.Supp.2d at 316-17 (citing In re Sharp Int'l Corp., 403 F.3d 43, 54 (2d Cir.2005) ("[A] mere preference between creditors does not constitute bad faith.... Nor does it matter that the preferred creditor knows that the debtor is insolvent.")). Judge Cogan pointed out: "By allowing preferential payments, the common law recognizes the business reality that distressed debtors must make hard decisions about who to pay and who not to pay." H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d at 317.
Judge Cogan concludes that there is nothing in PACA suggesting a change to the common law's allowance of bona fide preference payments to creditors:
H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d at 318. Judge Cogan did not accept Amco Produce's argument that the distribution of the assets of an insolvent PACA trustee pro rata to the PACA beneficiaries implies that Congress intended that a PACA beneficiary/creditor should be required to disgorge any preference payments made just before insolvency:
597 F.Supp.2d at 318.
In response to Amco Produce's argument that Judge Cogan should apply the Fresh Kist Produce, LLC v. Choi Corp., Inc., "knew or should have known" standard, Judge Cogan noted that the cases from which the "knew or should have known standard" developed were "cases dealing either with the obligation of an interested trustee, i.e., a [bank] who is both holding funds on behalf of creditors and who [it]self has an interest in those funds, or [in Fresh Kist Produce, LLC v. Choi Corp., Inc.,] an insider with special access to the debtor." H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d at 318-19. Judge Cogan agreed with a narrow reading of the standard: "To be sure, a co-beneficiary who is an insider may owe a fiduciary duty to his co-beneficiaries. But it is his status as an insider, not as a co-beneficiary, that creates this duty." 597 F.Supp.2d at 319. Judge Cogan distinguished his case from Fresh Kist Produce, LLC v. Choi Corp.,
Congress acted intentionally in creating a trust to benefit all the produce suppliers, and part of that intent was to create rights for produce suppliers beyond merely extending liability to "controlling persons, not just directors." Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d at 316. If, as Judge Cogan suggests in H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., that was Congress' intention, Congress could have done so more short-handedly than by establishing the PACA trust; it could have just tweaked the common law, which already prevents preference payments to insiders, by also making those insiders or controlling persons personally liable. If, as some courts have found, Congress' intention in creating the PACA trust was only to give produce suppliers, as a class, priority in their claim to the produce sellers' assets over financial creditors, as a class, Congress could have also done so without the need to create a trust; it could have drafted a provision like that in the bankruptcy code, that gives preference to secured creditors over general creditors. See 11 U.S.C. § 507 (setting forth the order of priority for expenses and claims in bankruptcy). Congress' intention in creating the PACA trust, however, was to impose general trust principles on all parties to the trust-including creating fiduciary relationships, or relationships that have a fiduciary element, between beneficiary suppliers. Under general trust principles, a beneficiary is liable to its co-beneficiaries for its participation in a breach of the trust. See Restatement (Third) of Trusts § 104(1)(c). Just as PACA beneficiaries are entitled to a pro rata share of the PACA trustee's assets when insolvent,
The Court cannot fairly impose a rule that says any payment to one PACA beneficiary in preference over payments to
The Court concludes that Hi-Land Potato became a PACA trust beneficiary of Tan-O-On Marketing's single PACA trust, which exists for the benefit of all of its PACA beneficiaries, automatically upon transfer of Hi-Land Potato's produce's title. To preserve the benefits of the PACA trust with regard to a particular shipment, the Court concludes that, if Hi-Land Potato remained an unpaid supplier to any shipments beyond forty days, Hi-Land Potato was required to have given proper statutory notice as provided in 7 U.S.C. § 499e(c)(3-4). Hi-Land Potato did not adhere to the statute in providing the required notice for at least some produce shipments, and Hi-Land Potato thus lost the benefits of the PACA trust for which the proceeds were a trust asset, and became a general creditor as to the proceeds of that particular shipment. Because there is a material dispute whether Hi-Land Potato participated in Tan-O-On Marketing's breach of its PACA trust, the
Hi-Land Potato's MSJ argues that the PACA trust should not extend to the funds in Tan-O-On Marketing's Sunflower Bank Account — a bank account in Colorado that Tan-O-On Marketing used exclusively for Hi-Land Potato's shipments — contending that, because they were not co-mingled with the Bank of Albuquerque account that Tan-O-On Marketing used for the other suppliers'/PACA beneficiaries' funds, they are part of separate PACA fund to which Skyline Potato and the Folson Farm Group are not beneficiaries and therefore have no claim. See Hi-Land Potato's MSJ at 19. In its Response to Skyline and FFG's MSJ, however, Hi-Land Potato seems to abandon this argument. Skyline Potato and the Folson Farm Group argue that the Court should find that the law compels Hi-Land Potato to disgorge its payments, because Hi-Land Potato is not a PACA beneficiary, as it failed to comply with statutory requirements to retain its PACA benefits. See Skyline and FFG's MSJ at 10. Hi-Land Potato argues that there is nothing in the plain language of PACA, nor its underlying legislative intent, to support that Hi-Land Potato "is not a trust beneficiary," and throughout its argument refers to "Hi-Land's beneficiary interest in the PACA trust." Response to Skyline and FFG's MSJ at 12 (emphasis added). Hi-Land Potato became a PACA beneficiary of Tan-O-On Marketing's single PACA trust upon the customers' receipt of the produce.
The PACA trust provision, read in the context of the statute as a whole, supports the interpretation that the PACA trust arises automatically. A produce supplier becomes a PACA beneficiary upon transfer of title to the produce. Hi-Land Potato automatically became a PACA beneficiary upon transfer of the produce's title.
Read in the context of the statute as a whole, the required notice provisions of § 499e(c)(3) and § 499e(c)(4) support the interpretation that the PACA trust arises automatically and that a produce supplier becomes a PACA beneficiary upon transfer of title to the produce. This conclusion follows from the language that, if an unpaid supplier does not abide by the notice provisions within the statutory time period — if it does not "preserve" its benefits — it "lose[s]" the benefits of the trust with regard to that particular shipment:
7 U.S.C. § 499e(c)(3) (emphasis added). The PACA statute as a whole, however, is silent as to anything a supplier needs to do beyond being a supplier to become a PACA beneficiary. Because the PACA notice provisions in § 499e(c)(3) and § 499e(c)(4) operate to strip the PACA beneficiary of the PACA trust benefits unless the beneficiary acts to retain the benefits, the supplier had to have been a PACA beneficiary to lose the benefits. Section 499e(c)(4) provides an additional method to "preserve" the PACA benefits. 7 U.S.C. § 499e(c)(4) ("In addition to the method of preserving the benefits of the trust specified in paragraph (3), a licensee may use ordinary and usual billing or invoice statements to provide notice of the licensee's intent to preserve the trust benefits....")(emphasis added). The required notice provisions of § 499e(c)(3) and § 499e(c)(4), therefore, support the interpretation that a supplier automatically granted PACA beneficiary status upon sale of the produce. The United States Courts of Appeal have also found that suppliers become PACA trustees automatically upon sale of the produce. The United States Court of Appeals for the Ninth Circuit has stated: "The trust automatically arises in favor of a produce seller upon delivery of produce and is for the benefit of all unpaid suppliers or sellers involved in the transaction until full payment of the sums owing has been received." In re Milton Poulos, Inc., 947 F.2d at 1352 (citing 7 U.S.C. § 499e(c)(2)).
As with any of Tan-O-On Marketing's suppliers for which Tan-O-On Marketing acts as a "commission merchant, dealer, or broker," once title of Hi-Land Potato's potatoes was transferred, Hi-Land Potato became a beneficiary of Hi-Land Potato's trust automatically.
Section § 499e(c)(2) covers "commodities received ... in all transactions," but also states that the proceeds and receivables "shall be held ... in trust for the benefit of all unpaid suppliers or sellers ... involved in the transaction until full payment of the sums owing in connection with such transactions." 7 U.S.C. § 499e(c)(2) (emphasis added). Throughout § 499e(c)(3) and § 499e(c)(4), Congress refers only to "such trust" or "the trust." On the other hand, it might be possible to interpret § 499e(c)(4) as providing for multiple PACA trusts, reading the language that "[t]he seller of these commodities retains a trust claim over these commodities" to provide for separate trusts for each individual contract or shipment. 7 U.S.C. § 499e(c)(4). The language "[t]he seller of these commodities retains a trust claim over these commodities" may also be construed, however, as a means of including each shipment in the trust's res and preserving the extension of the PACA trusts benefits to each shipment. 7 U.S.C. § 499e(c)(4). Thus, rather than creating a separate PACA trust for each shipment, failing to provide the seller with the notice required by § 499e(c)(3) or § 499e(c)(4) results in the particular shipment not being covered under the PACA trust, and thus not counting toward the supplier's pro rata share. If, on the other hand, the statute were to provide multiple individual PACA trusts for each shipment, tracing would become a necessary and a principal part of recovering PACA trust assets. With multiple individual PACA trusts, the
The Court's conclusion that there is one singular PACA trust comports with the United States Department of Agriculture's regulations interpreting the statutory trust in § 499e(2). The Department of Agriculture has interpreted the statute to create a single PACA trust, stating that "[t]rust assets are to be preserved as a nonsegregated `floating' trust." 7 C.F.R. § 46.46(b). The Department of Agriculture designed the statutory trust regulations to effect what it saw as Congress' intent in its 1984 amendments to PACA that created the trust. See H.R.Rep. No. 98-543, at 5 ("The trust impressed by section 5(c)(2) is a nonsegregated `floating trust' made up of all a firm's commodity related liquid assets, under which there may be a commingling of trust assets."). The House Report's stated intent that a supplier automatically becomes a participant in the trust suggests the construction of the statute to create a single ongoing PACA trust.
H.R.Rep. No. 98-543, at 5 (1983) reprinted in 1983 U.S.C.C.A.N. 405, 408 (emphasis added). Congress stated that a supplier automatically "becomes a participant in the trust," rather than stating that a PACA trust is automatically created. The Court believes that Congress did so purposefully and intentionally, concluding that Congress' purpose was to provide a single ongoing trust rather than individual separate trusts created each time a supplier ships its produce.
The Second Circuit's conclusion that "a single PACA trust exists for the benefit of all of the sellers to a Produce Debtor, and continues in existence until all of the outstanding beneficiaries have been paid in full," supports the Court's conclusion. In re Kornblum & Co., Inc., 81 F.3d at 286. The Second Circuit, tasked with interpreting whether § 499e(c)(2) created a single trust or multiple trusts, noted that all of the language in the statutory provision counsels in favor of a single trust, except
81 F.3d at 286. The Second Circuit's construction is reasonable, because by providing that "commodities ... [of] all transactions... and any receivables or proceeds from the sale of such commodities" shall be held in trust, it is reasonable to conclude that Congress intended to make one trust with the res consisting of the proceeds of all transactions.
Each time title to Hi-Land Potato's potatoes was transferred, with each separate shipment of potatoes, once the title transferred, that particular shipment became part of Tan-O-On Marketing's single PACA trust. It is not the case that each individual shipment of Hi-Land Potatoes became its own separate PACA trust. Were the Court to construe PACA otherwise, as creating multiple and separate PACA trusts for each produce shipment, beyond being contrary to the interpretation as creating one PACA trust to protect all PACA beneficiaries and produce shipments, such an interpretation could not easily be squared with distribution of PACA trust's assets pro rata to beneficiaries. To have one PACA trust for the benefit of all of the PACA trustee's suppliers which provides equal protection to all PACA beneficiaries and all shipments covered by the PACA trust — as opposed to multiple PACA trusts for each shipment — is more in line with the idea of equal protection of PACA beneficiaries upon bankruptcy via the pro rata distribution of the PACA trustee's assets. Thus, the Tan-O-On Marketing PACA trust, of which Hi-Land Potato automatically became a beneficiary, is one single, perpetual trust that included all of Tan-O-On Marketing's other produce suppliers, and the benefit of which extended to all shipments that the PACA trust covered.
Although Hi-Land Potato became a beneficiary of Tan-O-On Marketing's PACA trust automatically, the benefits of which automatically covered the shipment
If a PACA beneficiary does not adhere to the statutory requirements, the PACA beneficiary loses its trust benefits and becomes an unsecured creditor of the PACA trustee. See In re Lombardo Fruit and Produce Co., 12 F.3d at 114. In In re Lombardo Fruit and Produce Co., the United States Court of Appeals for the Eighth Circuit held that a shipper who could not prove that it strictly adhered to the statutory notice requirements in § 499e(c)(3) or § 499e(c)(4) had lost "its entitlement to PACA trust protection," and could not collect payments from trust assets in front of the secured creditors of the trustee. 12 F.3d at 114. The supplier submitted a letter from the supplier as evidence of a written agreement to extend the payment period from ten days to thirty days. See 12 F.3d at 113. Because the letter was undated, however, the Eighth Circuit found this insufficient proof that the parties "`expressly agreed to [extend the deadline] in writing before entering into' the underlying transaction for produce." 12 F.3d at 113 (quoting 7 U.S.C. § 499e(c)(3)(ii))(emphasis in original). The Eighth Circuit held that the supplier's failure to strictly adhere to the statute in preserving its PACA beneficiary status resulted in loss of its ability to enforce the trust benefits and to enjoin the PACA trustee's secured creditor from exercising its priority interest in the PACA trustee's accounts receivable. See 12 F.3d at 112.
Where Hi-Land Potato received payment for shipment of its potatoes from Tan-O-On Marketing within forty days, it was not an unpaid seller. Thus, while the payments Hi-Land Potato received within the forty day window were assets of Tan-O-On Marketing's PACA trust from the time that title of the produce was transferred until the time that they money was
The Court cannot soundly conclude that, because Hi-Land Potato did not provide written notice before the forty day-period required under PACA, where notice is required only to preserve benefits if full payment takes more than forty days,
On the other hand, because Hi-Land Potato did not timely provide notice of its intent to preserve PACA trust benefits over its shipments, it is not entitled to the PACA trust benefits of Tan-O-On Marketing's PACA trust on any shipments, the proceeds of which became assets of Tan-O-On Marketing's PACA trust, and for which Tan-O-On Marketing did not pay those PACA trust assets to Hi-Land Potato within the forty-day time period. Any such shipments for which Hi-Land Potato was not paid within the forty-day period would have not been subject to the PACA trust benefits, meaning that these payments would effectively not be included in Hi-Land Potato's interest in Tan-O-On Marketing's PACA trust. Additionally, any payments made to Hi-Land Potato more than forty days after transfer of title to the shipments are paid to Hi-Land Potato as a general creditor out of the particular PACA trust, and these PACA trust assets are received by Hi-Land Potato as a general creditor, rather than as a PACA trust beneficiary.
Skyline Potato and the Folson Farm Group allege that Hi-Land Potato participated in Tan-O-On Marketing's breach of the PACA trust:
Response to Hi-Land Potato's MSJ at 15.
The dissipation of PACA trust funds equates to a common law breach of the trust. See Boulder Fruit Exp. & Heger Organic Farm Sales v. Transp. Factoring, Inc., 251 F.3d at 1272 (noting that the defendants "are liable only if they had some role in causing the breach or dissipation of the trust"). The PACA regulations define dissipation as an act "which could result in the diversion of trust assets or which could prejudice or impair the ability of unpaid suppliers, sellers, or agents to recover money owed in connection with produce transactions." 7 C.F.R. § 46.46. The statute's plain language shows that Tan-O-On Marketing's segregation of the receivables from the sale of Hi-Land Potato's potatoes dissipated the PACA trust, because it prejudiced and impaired the ability of Skyline Potato and the Folson Farm Group, unpaid suppliers and sellers, to recover money owed to them.
Comment f to Restatement (Third) of Trusts § 104 describes conduct which constitutes a beneficiary's participation in a breach of the trust:
Restatement (Third) of Trusts § 104, cmt f. Just as PACA beneficiaries are entitled to a pro rata share of the PACA trustee's assets when insolvent, an equitable outcome, even where the PACA beneficiaries do not know that a PACA trustee is insolvent, there is enough of a fiduciary element in their relationship as co-PACA beneficiaries to make it inequitable for one to seek to obtain an advantage over another.
The Court cannot fairly impose a rule that says any payment to one PACA beneficiary in preference over payments to the other PACA beneficiaries would be a breach of the PACA trust because it dissipates the PACA trust assets. To impose such a rule would, in effect, amount to a finding that Congress did not allow for any preference payments to co-beneficiaries and in fact all payments should be pro rata. No intent or knowledge would be necessary to impose liability. Such a rule would effectively impose strict liability
Thus, as beneficiaries of Tan-O-On Marketing's PACA trust, Hi-Land Potato had the same co-beneficiary duties imposed upon it as those imposed upon Skyline Potato and the Folson Farm Group: the duty not to participate in the breach of the trust by affirmatively securing an inequitable or unfair benefit over co-beneficiaries. Because the Restatement (Third) of Trusts § 104, cmt. f, states that participating in the breach requires something more than just knowledge of the breach, in light of the definition of dissipation of a PACA trust in 7 C.F.R. § 46.46, if Hi-Land Potato only knew that Tan-O-On Marketing was having difficulty paying its bills, that knowledge and receipt of trust assets, even to the exclusion of the other co-beneficiaries, might be necessary, but would not be sufficient, to constitute a breach of its duty as a PACA trust co-beneficiary. Hi-Land Potato handling the "billing, bookkeeping, and collection" for shipments of Hi-Land Potato's and Metz Potato's potatoes which Tan-O-On Marketing arranged, places Hi-Land Potato in a different situation than other producer co-beneficiaries who are merely receiving checks from Tan-O-On Marketing for their shipments. Hi-Land Potato's special relationship with Tan-O-On Marketing, handling the billing, bookkeeping, and collection for its potatoes allowed Hi-Land Potato to know exactly when and how much Tan-O-On Marketing was receiving in payment for Hi-Land's
Hi-Land Potato asserts as fact that
Hi-Land Potato's MSJ ¶ 32, at 11 (internal citations omitted). As support for this fact, Hi-Land Potato cites to Carla Worley's Declaration. See Carla Worley Decl. Carla Worley states: "Neither Shannon Casey nor Shawna Casey ever told us that TMI was insolvent or struggling financially.... We never discussed with them whether they had missed payments to other producers...." Carla Worley Decl. ¶ 16, at 7. Shannon Casey, in his May 15, 2012, deposition, however, stated that Hi-Land Potato and Carl Worley knew, in 2009, that Tan-O-On Marketing was "under pressure" and that Shannon Casey was "frantically searching for a solution... to getting people paid." 2012 Shannon Casey Depo. at 177:10-22. While this statement by Shannon Casey does not clearly state that Hi-Land Potato knew that Tan-O-On Marketing's PACA beneficiaries were not getting paid, it comes close. In light of the totality of the evidence, including Tan-O-On Marketing asking to move its offices into Hi-Land Potato's packing shed, and Hi-Land Potato taking over the billing, bookkeeping, and collecting of its shipments to eliminate the "payment delay" it had experienced with Tan-O-On Marketing, Carla Worley Decl. ¶ 7, at 4, a reasonable factfinder might infer that Hi-Land Potato had this knowledge, and that inference is enough to allow the case to go to trial. Although it is undisputed that Hi-Land Potato did not know that Tan-O-On Marketing was insolvent, knowledge of insolvency is not required. With regard to the knowledge that may be required in light of Hi-Land
This determination comports with both Fresh Kist Produce, LLC v. Choi Corp., Inc., 223 F.Supp.2d at 1, and H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d 313, the only two opinions that have dealt with the issue of co-beneficiary liability. The supplier/beneficiary who was held liable to the other co-beneficiaries for breach of the PACA trust in Fresh Kist Produce, LLC v. Choi Corp., Inc. had already taken the PACA trustee to court for the trustee's missed payments and alleged that the trustee was insolvent. Judge Urbina concluded that "the law compels a beneficiary with knowledge of a trust's insolvency to refrain from securing for itself a greater advantage than its co-beneficiaries." 223 F.Supp.2d at 8. The court in Fresh Kist Produce, LLC v. Choi Corp., Inc. noted that "the court's narrow ruling ... is limited to the circumstance in which a PACA beneficiary knows the debtor is insolvent, not where the beneficiary merely suspects some vague financial trouble." 223 F.Supp.2d at 11 (emphasis in original). Judge Urbina's opinion effectively made sure that the substance of a PACA's policy to distribute assets pro rata prevailed over form — by requiring pro rata distribution where the PACA trustee is insolvent, rather than where the PACA trustee has formally declared bankruptcy. The requirement that a co-beneficiary have knowledge of insolvency, and what constitutes insolvency, does not provide an easy criterion on which the Court may determine whether a co-beneficiary has adequate knowledge so as to impose liability. Rather than imposing this bright line rule which may not easily be met, the Court believes that knowledge that a PACA trustee cannot fully pay all of its PACA trust beneficiaries is the yard stick by which PACA co-beneficiary knowledge of financial difficulty should be measured. While it is an undisputed fact that Hi-Land Potato did not know Tan-O-On Marketing was insolvent, the material issue is whether Hi-Land Potato knew that Tan-O-On Marketing was under so much financial pressure that it could not pay its PACA trust beneficiaries; that may be knowledge that violates Fresh Kist Produce, LLC v. Choi Corp., Inc.'s finding. Regardless whether that knowledge of inability to pay other co-beneficiaries is sufficient to satisfy the standard set forth in Fresh Kist Produce, LLC v. Choi Corp., Inc., this knowledge alone, as in Restatement (Third) of Trusts § 104, cmt. f., is necessary, but not sufficient for liability; there must be more than knowledge.
The Court's conclusion that, in addition to Hi-Land Potato's and Carl Worley's potentially sufficient knowledge, Hi-Land Potato's relationship with Tan-O-On Marketing may have allowed Hi-Land Potato and Carl Worley to have participates in the breach finds support in reading Judge Urbina's conclusion in Fresh Kist Produce, LLC v. Choi Corp., Inc., in conjunction with H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d 313. Although Judge Cogan does not distinguish, in H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., between
In this case, Hi-Land Potato's relationship with Tan-O-On Marketing during the breach period, may be a which H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc. defines as an "insider." Judge Cogan gives an analogy of what it considers to be an insider relationship when it discusses an exception to the general rule that a debtor can prefer one creditor over another: "Statutes like section 719 of the New York Business Corporation Law provide that payments made to shareholders, directors or officers of an insolvent corporation must be set aside even if they would otherwise be bonafide. In effect, this bars insolvent corporations from preferring their insiders over outside creditors." H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d at 317. That Tan-O-On Marketing's office was within Hi-Land Potato's packing warehouse, which it rented from Tan-O-On Marketing by discounting its fee, and that Hi-Land Potato arranged to take care of its bookkeeping on shipments of its potatoes arranged by Tan-O-On Marketing appears to place Hi-Land Potato in such an insider relationship, where Tan-O-On Marketing making payments only to Hi-Land Potato is analogous to making payments to its shareholders, officers, or directors. That Shawna Casey, one of Tan-O-On Marketing's only two employees, and wife of the soon-to-be-owner, went to work for Hi-Land Potato and arranged sales of its potatoes to Kroger Co., the same job she had been doing at Tan-O-On Marketing before her new job, supports this conclusion. Shawna Casey's change in position seems only a change in title, and may evince that Hi-Land Potato held some insider status before Tan-O-On Marketing wrapped up the business. In light of Tan-O-On Marketing's office was in Hi-Land Potato's packing shed, and in light of Hi-Land Potato's and Tan-O-On Marketing's bookkeeping arrangement during the breach period, because there is a material issue as to the extent of Hi-Land Potato's and Carl Worley's knowledge regarding Tan-O-On Marketing's and Shannon Casey's "financial pressure" and searching for a solution to "getting people paid," H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., read in conjunction with the Restatement (Third) of Trusts § 104 counsels the Court
The Court therefore concludes that there is a genuine issue whether Hi-Land Potatoes participated in Tan-O-On Marketing's breach of its PACA trust and, as a matter of law, is required to disgorge the preference payments made to it by Tan-O-On Marketing.
D.N.M.LR-Civ. 56.1(b). The local rules regarding summary judgment thus require the responding party to "specifically controvert[]" the movant's fact, or else the fact is deemed admitted. D.N.M.LR-Civ. 56.1(b). Because Hi-Land Potato's statement of fact is that Hi-Land Potato is a producer of potatoes, not a grower of potatoes, Skyline Potato and the Folson Farm Group do not specifically controvert this fact. Because the words "producer" and "grower" may be different, the Court will deem Hi-Land Potato's fact admitted.
Trevizo v. Adams, 455 F.3d 1155, 1160 (10th Cir.2006). Thus, although Shannon Casey's and Anderson's 2010 depositions may not be admissible at trial in this case, because Shannon Casey and Anderson will be available to testify at trial, the Court concludes that it is able rely on the factual assertions in this evidence because the assertions may be admissible at trial when Shannon Casey and Anderson testify.
D.N.M.LR-Civ. 56.1(b). These additional facts that Hi-Land Potato adds do not "specifically controvert[]," D.N.M.LR-Civ. 56.1(b), Hi-Land Potato's statement of fact, but rather are additional facts. The Court will therefore deem this fact admitted. Additionally, because Hi-Land Potato does not letter these additional facts, nor refer the court with particularity to the portion of the record upon which Hi-Land Potato relies, the Court will not add these additional facts as findings of fact.
Response to Hi-Land Potato's MSJ at 4. Skyline Potato and the Folson Farm Group assert that Carla Worley's Declaration conflicts with her deposition testimony, because, in her deposition, she "testified that she could only speculate that Casey sought this change in TMI's arrangement with Hi-Land in order to reduce TMI's costs." Response to Hi-Land Potato's MSJ at 5. Local rule 56.1(b) requires that "[e]ach fact in dispute ... must refer with particularity to those portions of the record upon which the non-movant relies" or they will be deemed waived. D.N.M.LR-Civ. 56.1(b). With regard to Skyline Potato and the Folson Farm Group's first two arguments, that there was no evidence of past confusion or mistakes, and that the accounting arrangement was a scheme, Skyline Potato and the Folson Farm Group fail to direct the Court with particularity to the portion of the record on which they rely. Thus, because Skyline Potato and the Folson Farm Group have not referred the Court to portions of the record which specifically controvert this fact, the Court deems it admitted. See D.N.M.LR-Civ. 56.1(b). With regard to the third argument — that Carla Worley has changed her testimony — Skyline Potato and the Folson Farm Group refer the Court to Carla Worley's deposition testimony, where she testified that she could only speculate that Shannon Casey sought this change to reduce Tan-O-On Marketing's costs. Carla Worley's testimony specifically controverts that Tan-O-On Marketing entered into this agreement in fact to reduce costs. Because Skyline Potato and the Folson Farm Group have referred the Court to the portion of the record with particularity on which they rely to specifically controvert this fact, the Court will deem this fact in dispute. Thus, the Court will omit from the facts that Shannon Casey requested that Hi-Land Potato keep the accounting and bookkeeping to reduce Tan-O-On Marketing's costs.
