Stephani W. Humrickhouse, United States Bankruptcy Judge
This matter is before the court on motions to dismiss the complaint filed by the debtor-defendant, Bissett Produce, Inc. ("Bissett"), and defendant AgCarolina Farm Credit, ACA ("AgCarolina"). A hearing took place in Raleigh, North Carolina, on November 5, 2013, at the close of which the court took the matter under advisement. Pursuant to the court's request in an order entered on March 26, 2014, the parties submitted supplemental memoranda expanding on their analyses of the relevant provisions under the Perishable Agricultural Commodities Act ("PACA"). For the reasons that follow, both motions to dismiss will be allowed.
The court has jurisdiction over these matters pursuant to 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (K), which this court may hear and determine, and the proceedings arise in and are related to defendant/debtor Bissett's chapter 11 bankruptcy case.
Pursuant to Rule 12(b)(6), defendants seek dismissal of the complaint for failure to state a claim upon which relief may be granted. Fed. R. 12(b)(6). To survive a 12(b)(6) motion, the factual allegations of a complaint must "be enough to raise a right to relief above the speculative level." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility
Plaintiffs set out four claims in their complaint, each of which is based upon defendant Bissett's alleged preservation of, and failure to act in accordance with, plaintiffs' PACA trust rights. As previously reviewed in the court's order of March 26, 2014, the defendants' motions to dismiss originally asserted three bases upon which they believe the plaintiff produce growers failed to allege a prima facie claim under the PACA statutes. Specifically, defendants argued that plaintiffs failed to allege 1) that the sweet potatoes were received by Bissett acting in the capacity of a commission merchant, dealer or broker; 2) that plaintiffs were unpaid suppliers or sellers of the sweet potatoes; and 3) that plaintiffs gave the PACA notice required to preserve their trust benefits. The parties agree that to the extent the complaint may fall short regarding those first two factors, any deficiencies could be cured in an amended complaint.
Plaintiffs acknowledge that they gave no PACA notice of any kind, at any time, to any party. Defendants contend that this conceded fact is fatal to plaintiffs' PACA claims, reasoning that both the applicable statutes and a comprehensive body of case law establish quite clearly that a "supplier" seeking to claim entitlement to PACA trust monies must be able to establish that it preserved its rights by giving the required notice. In response, plaintiffs insist that they were neither able nor required to give the notice required of the suppliers and sellers referenced in the statutes, by reason of their special status as "growers."
In their complaint, plaintiffs allege that they are "growers" as that term is used in PACA, which defines growers as "any person who raises produce for marketing." Complaint ¶ 5; 7 U.S.C. § 46.2(p). In their view, this term is of great significance to courts' interpretation of the notice requirements applicable to them. The defendant debtor, Bissett, is a "growers' agent," which includes "a person operating at shipping point who sells or distributes produce in commerce for or on behalf of growers or others or whose operations may include the planting, harvesting, grading,
In 2010 and 2011, the plaintiffs allege, they delivered sweet potatoes to Bissett, which Bissett then "stored, cured, packed, marketed, and sold ... as the growers' agent for the Growers." Compl. ¶¶ 9-13. Plaintiffs do not provide the specific dates on which they provided the sweet potatoes to Bissett, beyond simply stating the years in which they did so, nor do they allege specific details with respect to Bissett's provision of the sweet potatoes and accompanying invoices to buyers; the subsequent failures, if any, of those buyers to remit funds due to Bissett; the demands made, if any, by Bissett to those buyers for payment of any amounts due and owing; and the demands made, if any, by the plaintiffs as against Bissett for failure to remit to the plaintiffs the funds plaintiffs now claim are due to them. Thus, there are as yet no proffered facts upon which the court could presume that defendant Bissett successfully established a PACA trust on its own behalf (which would in turn depend on the buyers failing to pay Bissett within a very specific and very short time period), much less facts sufficient to support the conclusion that Bissett established a PACA trust on behalf of itself and on behalf of plaintiffs, which is the gravamen of plaintiffs' action.
As plaintiffs point out, the commercial realities that prompted Congress to enact the PACA legislation derive from the fact that the "process of growing, harvesting, packing and shipping perishables is a real gamble; costs are high, capital is tied up in farm land and machinery, and returns are delayed until the crop is sold." H. Brooks & Co., LLC v. Yerges, 2013 WL 6665729 (Bankr. W.D.Wis.2013) (quoting H.R.Rep. No. 98-543 (Nov. 12, 1983) at 3, reprinted in 1984 U.S.C.C.A.N. 405, 506). Because "sellers of perishable commodities had a need to move their inventories quickly, they were often required to become unsecured creditors of their purchasers, whose credit they were often unable to verify." Nickey Gregory Co., LLC v. AgriCap, LLC, 597 F.3d 591, 594 (4th Cir. 2010). To "remedy this burden on commerce in perishable commodities, Congress added the provisions in § 499e, which create, immediately upon delivery, a nonsegregated `floating' trust in favor of sellers of the perishable commodities sold and the products and proceeds derived from the commodities. If the seller is not paid promptly, the trust assets must be preserved and the seller's claims prime those of other secured and unsecured creditors for the full amount of the claim." Produce Alliance v. Let-Us Produce, 776 F.Supp.2d 197, 201 (E.D.Va.2011) (quoting Reaves Brokerage Co., Inc. v. Sunbelt Fruit & Veg. Co., 336 F.3d 410, 413 (5th Cir.2003)).
Section § 499e articulates both the purpose of the PACA trust and the means by which it is created and preserved. In its entirety, it provides:
7 U.S.C. § 499(e) (emphasis added).
Thus, to become a "valid PACA trust beneficiary," a claimant (i.e., an unpaid supplier or seller of such commodities, or an agent involved in the transaction) must establish that:
Carter v. Michael Cutler Co., 2013 WL 4788283 *5 (M.D.N.C.2013) (quoting C & G Farms, 2011 WL 677487 at *5).
Again, the court's focus in these proceedings is on a single, narrow slice of the large and complicated PACA pie: That is, whether plaintiffs, as "growers" who are unpaid suppliers of sweet potatoes, were required to give notice to preserve their rights to a PACA trust just like any other unpaid supplier; or whether they are, purely by virtue of their status as "growers," exempt from having to provide any kind of PACA notice on their own behalf, and can rely on the conduct of their agent in preserving the trust for their own (the agent's) benefit, for the preservation of their (the growers') benefit.
To be an eligible claimant under PACA, each plaintiff must, at a minimum, qualify as an unpaid "supplier, seller or an agent." Obviously, if plaintiffs are not among the beneficiaries named in the statute, then there would be no basis upon which to argue that the statute applied. In recognition of this, plaintiffs have clarified that they are, in fact, unpaid suppliers of produce
Specifically, plaintiffs argue that while they are "suppliers" within the category of PACA beneficiaries, their favored status as "growers" excepts them from the notice requirements applicable to other claimants. The basis for this, they explain, is that PACA's primary purpose is to "assure that proceeds from the sale of produce are paid to produce growers ahead of secured creditors." Pl's. Opp. to Defs.' Mot. to Dismiss at 7 (emphasis added). Based on their interpretation of PACA's legislative history, "growers were intended to be the chief beneficiaries of the PACA trust." Id. (emphasis added). As plaintiffs note: "If the grower-shipper cannot realize any returns on the sale of the crop when due, he may not be able to survive. Thus, where business failures or reorganizations occur on the part of buyers of their crop, the growers are usually the parties least able to withstand the losses and inevitable delays which result from such actions." Id. (quoting H.R.Rep. No. 98-543 at 3 (emphasis added)).
A grower relying on a growers' agent like Bissett, plaintiffs argue, "is not required to, and cannot, give notice to preserve its trust rights," which is "why the regulations require the growers' agent [to] preserve the growers' PACA trust rights." Id. at 12. Their reasoning, and plaintiffs' interpretation of the notice provisions, is as follows:
Id. at 12-13. Instead, plaintiffs contend, growers are expected and permitted by Congress to rely entirely on their growers' agents to give notice. Plaintiffs point to this language in the legislative history:
Pl's. Supp. Mem. at 5 (quoting H.R. Report No. 98-543, p. 6, 1984 U.S.C.C.A.N. 409-410 (emphasis added by plaintiff)). Plaintiffs insist that neither the operative statutes and regulations nor their legislative history give any indication that growers must give notices to their growers' agents. Id. at 2. From this, plaintiffs conclude that "only those in the class of `supplier, seller, or agent' are required to give a trust notice to those in the class of `commission merchant, dealer, or broker,' not growers." Id. at 5 (emphasis added). They conclude:
Id. at 6. While plaintiffs cite multiple cases establishing that Congress intended to benefit growers, that angle of its argument is not in dispute, and plaintiffs do not offer (nor did the court's research locate) a single case supportive of the conclusion plaintiffs ultimately draw, which in these proceedings boils down to 1) growers are not required to give notice to protect their PACA rights, and 2) must instead rely on their growers' agents to give notice to third parties on the growers' behalf, which enables growers to 3) assert those trust rights preserved by the growers' agent between itself and third parties, for the growers' benefit and against their growers' agent.
In response, defendants argue that plaintiffs are attempting to pick and choose from various aspects of the PACA scheme without a plausible basis for doing so beyond their need to have it both ways: to be a "supplier" in order to qualify for benefits, and to be something other than a supplier in order to justify their failure to give the required notice. Defendants
First, it is abundantly clear that growers—put another way, farmers—are included among the "suppliers, sellers, and agents" that PACA trusts are intended to protect. The considerable body of case law pertaining to PACA is replete with examples of cases in which growers, in their capacity as unpaid suppliers or sellers, filed PACA notices giving notice of their intent to claim benefits under the trust. Significantly, these cases do not discuss whether the grower should have given notice at all; rather, the issue is whether the growers gave notice correctly. See In re W.L. Bradley Co., Inc., 75 B.R. 505, 511 (Bankr.E.D.Pa.1987) (rejecting debtor's argument that PACA's "only intended beneficiaries are growers of perishable agricultural commodities," and citing the same legislative history upon which plaintiffs rely, which clarifies that the amount "claimable against the trust by a seller supplier, including a grower will be the net amount due him after allowable deductions for expenses or advances"); see also, e.g., C & G Farms, 2011 WL 677487 *9 (not reaching issue of whether family farm grower gave timely PACA notice to its buyer because motions for summary judgment resolved on other grounds); AFCM, Inc. v. Elite Global Farming & Logistics, Inc., 2012 WL 1309168 *4 (N.D.Cal.2012) (growers engaged in joint venture, for which one grower did not pay the other; unpaid grower gave written PACA notice, thus satisfying pleading requirements and surviving motion to dismiss); Andrew Smith Co. v. Paul's Pak, Inc., 2009 WL 765687 *5 (N.D.Cal.2009) (grower provided invoice notice to the suppliers to whom it sold lettuce; court allowed motion to dismiss, with leave for grower to amend its complaint to attach invoices and allege sufficient facts to show that its notices contained the proper terms); Kingsburg Apple Packers Inc. v. Ballantine Produce Co., Inc., 2010 WL 653549 (E.D.Cal.2010) (grower gave PACA notice but did so too late); Kingsburg Apple Packers Inc. v. Ballantine Produce Co., Inc., 2010 WL 529486 (E.D.Cal.2010) (grower gave PACA notice too early; cannot "preserve" a not-yet-existent trust).
While plaintiffs make much of the fact that the term "growers" is defined, the court finds this to be of little import. So, too, are the terms "growers' agent," "dealer," and "shipper," but plaintiffs do not argue that inclusion of those definitions should be viewed as significant with respect to the PACA trust provisions. 7 C.F.R. §§ 46.2(q),(m), (o). And, if growers—i.e., farmers, in layman's terms—are not among the suppliers and sellers specifically named as beneficiaries under the 499e, then who are these suppliers and sellers?
The court finds no indication that Congress both intended to exempt suppliers and sellers who are growers from the PACA notice requirement and failed to say so in the operative language of the statutes. Other courts don't think so either, as evidenced by the body of case law reflecting the widespread understanding among growers that they must file PACA notices, and among courts that their role is to assess the sufficiency of those notices, when challenged. See cases cited supra.
As one court explained on the heels of PACA's enactment, in an adversary proceeding concerning the existence of a PACA trust on proceeds from the defendant-growers' 1984 crops:
St. Joseph Bank & Trust Co. v. DeBruyn Produce Co. (In re Prange Foods Corp.), 63 B.R. 211, 214 (Bankr.W.D.Mi.1986) (emphasis added). Construing that early version of § 499e, which does not differ from the current version in any way material to this discussion, that court held that the statute "provides that in order to preserve his PACA trust benefits an unpaid grower must file a notice of intent." Id. at 219 (emphasis added). Significantly, that court, like others, simply used the term "grower" as shorthand for the particular sort of supplier or seller before it, without discussion, which usage is entirely consistent with the cases cited above and, this court believes, with Congress' intentions. The court determines that "growers," as defined in 7 C.F.R. § 46.2(p), are among the class of "suppliers, sellers, and agents" referenced in 7 U.S.C. § 499e, and further that growers such as plaintiffs are not, simply by reason of that status, exempted from the PACA notice requirements.
Plaintiffs contend that Bissett, as their growers' agent, was required to give notice to Bissett's buyers, on plaintiffs' behalf. Assuming for present purposes that Bissett did, through use of the invoice method, preserve its own trust rights with respect to transactions it undertook with those buyers, the question plaintiffs raise is whether Bissett also was required to, capable of, and in fact did preserve plaintiffs' trust rights; and, further, whether plaintiffs may now assert those rights as against Bissett. Under any of the several scenarios and theories advanced by plaintiffs, it is apparent that their claims must be dismissed due to their failure to provide PACA notice on their own behalf.
Defendant Bissett aptly summarizes the three different scenarios in which a grower who uses an agent may preserve its PACA trust rights, as follows:
Debtor's Resp. to Order regarding Mot. to Dismiss at 7.
§ 46.46(c)(2). Plaintiffs filed no such notice, and thus cannot rely on this section. The third option appears to not apply, because those few facts before the court establish that Bissett did invoice its customers; in addition, such an arrangement contemplates a grower's direct invoicing of its customers.
For the second option, § 46.46(d)(2) provides: "Agents who sell perishable agricultural commodities on behalf of a principal are required to preserve the principal's rights as a trust beneficiary as set forth in 46.2(z), (aa), and paragraphs (d), (f), and (g) of this section. Any act or omission which is inconsistent with this responsibility, including failure to give timely notice of intent to preserve trust benefits, is unlawful, and in violation section 2 of the Act." Id.; see Onions Etc., 2010 WL 2598392 at *4 ("Section 46.46(d)(2) imposes a duty on an agent to maintain the principal's rights as a PACA trust beneficiary.").
This section, however, has been interpreted to work in conjunction with 7 U.S.C. § 499e, and not as an alternative to it. In In re Enoch Packing Co., Inc., 386 Fed.Appx. 611, 2010 WL 2780984 (9th Cir.2010), the Court of Appeals for the Ninth Circuit concluded that while the plaintiff growers, the Flores, were "correct that regulations state that an agent has the duty to preserve its principal's right to trust benefits.... However, the principal must first preserve its rights to trust benefits under § 499e." Id. at 614 (internal quotations and citations omitted). The court found that the plaintiffs' agent's compliance with 7 U.S.C. § 499e(c)(4), which is the invoice method of notice used by Bissett, was
Id. In that case, as in this one, the plaintiffs did not do so.
Unfortunately for the plaintiffs, there is substantial authority in accord with the Enoch court's adherence to this bottom line: An unpaid supplier, seller, or agent involved in those early-stage transactions must give notice of their intent to preserve the benefits on their own behalf. See § 499e(c)(3) ("supplier, seller or agent shall lose the benefits of such trust unless such person has given written notice"). The court finds this view persuasive, and plaintiffs offer no authority to contradict it.
Because the uncontested facts establish that plaintiffs did not at any time provide notice of their intent to preserve the benefits of a PACA trust to Bissett or to any other party, and such notice was a required
