PACA Licensure and Filing a PACA Claim

In Great Lakes Packers v. P.K. Produce, Case No. 1:18-cv-2849, (N.D. Ohio Oct. 6, 2020), plaintiff Great Lakes filed a PACA case against defendant P.K. Produce, alleging that it sold produce to the defendant which then failed to pay for the same.  The case was later consolidated with other cases, including one brought by C.H. Robinson Worldwide, Inc., against the same defendant plus some additional individual defendants (the purported owners and principals of P.K. Produce) for non-payment of produce supplied, delivered and accepted.

As to certain of the claims, the parties agreed to the entry of a preliminary injunction prohibiting the defendants from transferring, selling, or otherwise encumbering any of their real or personal assets derived or related to the PACA trust until further order of court, or unless all proceeds from the transfer or sale are immediately deposited, upon sale or transfer, to P.K. Produce’s operating account at its bank.

After the addition of additional parties and claims to the case, it was transferred to a Magistrate Judge for mediation.  This attempt to settle the case, was, however, unsuccessful, and it was returned to the original judge for consideration of the defendants’ factual and legal defenses to various of the plaintiffs’ claims.

With respect to factual defenses, defendants contended that they had made certain payments of some of the plaintiffs’ invoices, but that these payments had not been properly credited.  After examining the documents, including plaintiffs’ invoices and defendants’ cancelled checks and other evidence of payment, the Court concluded that such factual claims were without merit.  The next legal defense, that plaintiffs failed to provide inspection reports relating to adjustments made as to certain invoices, was similarly rejected by the court.       

Turning to the legal defenses, the first one was that the plaintiffs’ claims were invalid for “failure to submit a valid PACA license.”  In response to this contention, the plaintiffs claimed that their PACA license had been submitted in the case, in one instance by attaching copies to a Reply Brief, and in others by producing documents in discovery.  The plaintiffs also noted that PACA licenses are publicly available through and from the United States Department of Agriculture.

Perhaps more important, the Court observed that defendants cited no authority to the effect that plaintiffs in a PACA case are required to attach copies of their PACA licenses to, in this case, their Joint Motion for Entry of Order Determining Validity and Extent of PACA Trust Claims.

In this regard, it should be noted that there is no specific requirement in PACA itself that, in order to have standing to sue under the statute, an aggrieved party must have obtained a PACA license.  In fact, section 499e of statute provides that, “if any commission merchant, dealer, or broker violates any provision of section 499b of this title, he shall liable to the person or persons injured,” etc., and that “[s]uch liability may be enforced … by … suit in any court of competent jurisdiction…”.   There appears to be no requirement in PACA that the person suing be licensed.  However, section 499c(a) directs that “no person shall at any time carry on the business of a commission merchant, dealer, or broker without a license valid and effective at such time.”

For practitioners bringing a PACA claim on behalf of a PACA licensee, it’s generally good practice to allege same in the complaint, and attach a copy of the license as an exhibit. For unlicensed market participants, confer with competent counsel regarding the benefits of obtaining a PACA license and, more importantly, whether your business may require a PACA license. Best to do this before you have a potential claim, and to avoid potential penalties!

The final section of the Great Lakes Packers opinion deals with the issue of the payment terms set forth on the aggrieved parties’ invoices.  Because of the extreme importance of this section to farmers, growers, and suppliers of produce, with respect to preserving their rights to sue under the PACA statute, this part of the opinion will be discussed in a forthcoming separate blog entry.   

Plugging Leaks with a Release Instrument

In Watson v. Moger, No.20-5433 (W.D. Wash. Aug. 10, 2021), plaintiffs – owners of a boat they desired to ship over land from California to Oregon – filed suit under the Carmack Amendment, claiming defendants – owners of a transportation company – damaged their boat during transit.

Of interest here is a release instrument executed by one of the plaintiffs in favor of the defendants, entitled a “Wood Boat/Hull Release.” (“Release”). The Release, executed on his behalf by Mr. Watson’s wife, co-plaintiff Sarah Watson, provided

I, Eric Watson, understand that my boat is used and may have latent or obvious defects. These defects may cause damage to my boat a 1962 Chris Craft originally 45 foot with add on boat anchor and swim deck that makes it 50 ft.

I therefore hold Moger Yacht Transport and its assigns harmless from damages attributable to these latent or obvious defects. I relieve Moger Yacht Transport of any liability or responsibility for damages that may result from the transport of my boat from time of loading to time of unloading on April 4, 2019.

A carrier, under the Carmack Amendment, “may establish rates for the transportation of property . . . under which the liability of the carrier for such property is limited to a value established by written or electronic declaration of the shipper or by written agreement between the carrier and shipper if that value would be reasonable under the circumstances surrounding the transportation.” 49 U.S.C. § 14706(c)(1)(A).

Citing OneBeacon Ins. Co. v. Haas Indus., Inc., 634 F.3d 1092, 1099 (9th Cir. 2011), the Court ruled that the Defendants complied with the requirements to limit their liability to the Watsons under the Carmack Amendment. Defendants “have shown that they indicated to the Plaintiffs that they would not ship the boat absent execution of the release, and so gave the Plaintiffs ‘a reasonable opportunity to choose between two or more levels of liability.’ The Plaintiffs do not dispute that the release was executed . . ., obtaining their ‘agreement as to their choice of carrier liability limit.”

Responding to Plaintiffs argument that the release was limited to latent or obvious defects, and did not extent to ordinary or gross negligence, the Court, referring to the “any liability or responsibility for damages” language contained in the release, stated that “[t]he plain language of the release encompasses the asserted ‘negligence or gross negligence’ and damages here.”

Shippers should always carefully review contracts, bills of lading, and other instruments presented for their signature by transportation companies and brokers. This is especially important when considering a document designated as a release, waiver, or other potential limitation of liability. If in doubt, confer with competent counsel.

Thorough Invoice Language Can Give Added Teeth to PACA Judgment Favoring Produce Seller

In Iscavo Avocados v. Pryor, 953 F.3d 916 (5th Cir. 2020), Iscavo Avocados and Villita Avocados sold produce (avocados) totaling over $70,000 in value, to Coram Deo Farms, Inc.  According to defendant Adrian Pryor, an agent of Coram Deo, his sole business partner absconded with most of Coram Deo’s liquid assets, leaving the invoices for the purchase price of the aforementioned avocados unpaid.  Iscavo and Villita then filed suit against Pryor, claiming that he was personally liable under PACA for the amounts that Coram Deo owed, plus interest.  They argued that Pryor was personally liable because he “was in a position to control the PACA trust assets at issue and breached his fiduciary duty to preserve them.”  Pryor did not contest that Coram Deo (now defunct) was liable for the invoices for the avocado sales.  He only maintained that he was not personally liable for such debts.

The court noted that Pryor was an officer and the owner of 80% of Coram Deo.  He was listed as the principal on Coram Deo’s PACA license, and had access to Coram Deo’s assets including its bank account. The Court then found that “[i]t is undisputed that…Pryor had the ability to control Coram Deo’s assets but failed to do so.”  Therefore, the Fifth Circuit panel concluded, “[t]he district court did not…err in holding Pryor personally liable.”

The Court rejected Pryor’s argument that he was not personally liable because he was not involved in the day-to-day business operations and that his partner handled everything.  The Court noted that, “[a]ctual involvement is not the standard,” that Pryor was personally liable precisely because he refused to exercise the authority that he possessed, i.e., to preserve the PACA trust assets for the benefit of the beneficiaries of the trust. 

An unremarkable result, perhaps.  But it may be that it is the Court’s ruling on the recovery of attorneys’ fees that is the most important part of the case.

In arguing that Iscavo and Villita were not entitled to their attorneys’ fees under PACA, or otherwise, Pryor noted that the claimants were relying on isolated, non-binding authorities, as precedent.  The Court observed that while PACA does not expressly require an award of attorneys’ fees, it does state that PACA trust assets “must be held for the benefit of all unpaid sellers ‘until full payment of the sums owing in connection with such transactions has been received by the sellers.’”   Citing cases from other jurisdictions (2nd, 3rd, 9th, and 11th Circuits), the Court stated that the phrase “sums owing in connection with” is broad, and that it “unambiguously encompasses not just the contract price …but also all the sums the buyer owes in connection with the transaction memorialized by the invoice.”  Therefore, when the buyer [note:  the opinion says, “seller,” but this may be a typographical error, perhaps it should be “buyer”) agrees to pay those fees in the same invoice, the fees are sums “‘owed in connection with’ the transaction.”

In its decision, the Court then awarded attorneys’ fees to plaintiff Villita because Villita’s sales invoice stated that, “Buyer also agrees to pay all costs of collection, including attorneys’ fees.”   The Court therefore concluded that “[u]nder the PACA trust provision, Coram Deo was thus required to maintain trust assets sufficient to cover Villita’s attorneys fees incurred in its collection efforts.  And because Pryor failed to exercise control over Coram Deo’s PACA assets to preserve them for Villita as a trust beneficiary, Pryor is personally liable for Villita’s attorneys’ fees.”

As for plaintiff Iscavo, the Court found that the record was unclear as to whether its invoices encompassed attorneys’ fees.  Therefore, the Court remanded this issue back to the district court to explain its reasons for awarding fees to Iscavo, with further proceedings to follow.

The case is a good one for PACA sellers.  As to personal liability, it emphasizes that it is the ability to control PACA trust assets, not the actual controlling, or non-controlling, of such assets, that counts.  As to attorneys’ fees, the case serves as a reminder that sellers of perishable agricultural commodities (produce) should always, always, include on the invoices, in addition to PACA’s “magic words” requiring the preservation of PACA trust assets, some further magic words such as, “Buyer also agrees to pay all costs of collection, including attorneys’ fees.”  Although not all of the federal appellate courts, and certainly not the Supreme Court, have spoken to this issue, those that have have ruled in favor of the claimants, so long as the right language appears on the invoices.  The wording on the invoices is, quite simply, critical. Don’t ever overlook it.             

No Private Right of Action: A Fire That Only Congress Can Extinguish

In Nexus Alarm & Suppression, Inc. v. MG Logistics, Inc., Case No. 20-cv-6043 (N.D. Ill. May 27, 2021), Nexus – apparently the intended consignee and/or bailee of specialized fire extinguishers – filed suit against the carrier MG Logistics for damages that occurred to the extinguishers while in transit.

After rejecting the extinguishers, Nexus submitted a claim to MG Logistics and to Nexus’ insurer, Hartford. The claim was denied, and without providing Nexus advance notice, MG Logistics or Hartford sold the extinguishers for salvage, yielding $78,000.

Nexus filed a two count complaint against MG Logistics under the Carmack Amendment, and a regulation promulgated thereunder (49 C.F.R. § 370.11). The regulation sets forth a carrier’s responsibility to salvage goods that are rejected after suffering damage in transit.

Defendant MG Logistics moved the Court to dismiss Count II of the complaint which was based upon the regulation, arguing that the rule did not provide for a private cause of action.

Judge Seeger noted that only Congress can create a private cause of action to enforce statutory or regulatory provisions. “[R]aising up causes of action where a statute has not created them may be a proper function for common-law courts, but not for federal tribunals. . . . courts cannot create private rights of action based on their policy preferences. That’s the job of Congress.”

The Court explained that the same can be said for the Executive Branch, which “can’t create a private right of action.”

And while Congress did create a private right of action under the Carmack Amendment, that does not mean that regulations promulgated thereunder offer the same right to a plaintiff. “[T]he Supreme Court has rejected the idea that a right to sue under a statute means that Congress intended a right to sue under a regulation, too.” Thus the Court granted MG Logistics’ motion to dismiss Count II, leaving the Carmack Amendment claim intact.

While creative legal arguments that comport with FRCP 11 can some times, when accompanied by the “right” facts, yield a remedy for an otherwise out-of-luck plaintiff, they come with no guarantees. As a practical matter, it seemingly would have been prudent for MG Logistics and/or the insurer to contact the harmed party here (Nexus) in advance to confer about a salvage sale. Perhaps a greater recovery could have been realized. But the apparent lack of prior notice to Nexus isn’t enough to create a private right of action under the regulation. Only Congress has that power. Hopefully Nexus was more successful with its Carmack Amendment claim.

Possibility of Money Damages Doesn’t Preclude Injunctive Relief Against Produce Buyers

This is the second of two posts concerning the 2020 case of Yang Wu International, et. al.  v. LS & CX, LLC, et. al., Case No. 4:20-CV-312 (E.D. Tex. May 12, 2020).  An extensive review of this case is warranted, because it shows how an unpaid seller of perishable agricultural commodities (produce) should proceed in pursuing its defaulting buyers.   As mentioned in this author’s previous entry discussing this case, a more complete victory to an aggrieved PACA plaintiff could hardly be imagined.

Initially, of interest to unpaid produce sellers is the Court’s brief discussion of the second of the four requirements (enumerated in the author’s preceding post on this case) that a plaintiff must show in order to be entitled to a temporary restraining order or a preliminary injunction, i.e., that such plaintiff must show that there is a substantial threat of irreparable harm to the plaintiff if the injunction is not granted.  Presumably, an alert defense lawyer attorney could argue that the simple fact of non-payment would not constitute “irreparable harm” because a plaintiff has available to it the remedy of procuring a money judgment; that such plaintiff has an adequate remedy at law.  Therefore, the argument would go, an injunction would not be appropriate.

Addressing this argument, the Court in Yang Wu noted that “the mere fact that economic damages may be available does not always mean that a remedy at law is “adequate.”  (Citing Janvey v. Alguire, 647 F.3d 585, 600 (5th Cir. 2011).  As the Court observed, “Plaintiffs are likely to suffer irreparable harm without a preliminary injunction.  Several federal courts have held that [PACA] trust dissipation can satisfy this [irreparable harm] factor, if, absent such relief, ultimate recovery is rendered unlikely.” (Citing four cases in support.) 

This analysis should be helpful in the situation where a defendant in a PACA case argues, incorrectly, that the availability of a money judgment automatically renders injunctive relief unavailable. 

In addition, the plaintiffs in Yang Wu sought to hold two companies related to the defendants, Ztao Marketplace and Ztao Group, liable, although, apparently, they were not named as buyers on the invoices.  Plaintiffs argued for such extended liability using the “alter ego” theory.  That doctrine, said the Court, “allows the imposition of liability of a corporation for the acts of another corporation when the subject corporation is organized or operated as a mere tool or business conduit. . . . The doctrine applies when there is such unity between corporations that the separateness of the … corporations has ceased, and holding just one corporation liable would result in injustice.”

The Court noted that courts will apply a laundry list of factors, none of which is, in and of itself, determinative, to be used in determining whether a company is an alter ego of another.  These factors include, among others: (1) that one company pays the salaries and expenses of the other; (2) that one company uses the other companies’ property as its own; and (3) that the daily operations of the corporations are not kept separate. 

Therefore, assuming that at least some of the above factors can be established, a plaintiff in a PACA case should consider the possibility that there may be corporations related to the defendants that can also be held liable for payment of plaintiff’s claims.  Obviously, such potential expanded liability under the “alter ego” theory can be a boon to a plaintiff in cases where the defendants named on the invoices may be, or may claim to be, insolvent.

TRO, Evidentiary Hearing and Preliminary Injunction in PACA Case

The 2020 case of Yang Wu International, et. al.  v. LS & CX, LLC, et. al., Case No. 4:20-CV-312 (E.D. Tex. May 12, 2020), is especially informative and instructive to sellers of perishable agricultural commodities because it illustrates and explains the law with respect to some of the options and remedies available to sellers of produce where buyers fail to pay for same.  Because this case touches on a number of issues of use and interest to such unpaid sellers, it will be discussed in several posts.

Of course, the seller’s statutory rights and remedies derive from the Perishable Agricultural Commodities Act (“PACA”), 7 U.S.C. § 499a, et. seq.  As observed by the Court, citing Golman-Hayden Co., v. Fresh Source Produce, Inc., 217 F.3d 348, 351 (5th Cir. 2000), from the standpoint of the deadbeat buyer, “PACA is a tough law.”  Left unsaid, but obvious to readers, is the consideration that Congress, in enacting PACA, surely had in mind the national interest that favors the availability of fresh produce to the general population, and the protection of suppliers of such produce given their vulnerability due in no small part to the reality that, unlike durable good destined for consumers, their product is quickly and permanently perishable.  Among the “toughest” provisions of PACA is the requirement that, if the conditions of the statute are satisfied by the seller, the buyer must hold the inventories of such produce, and any proceeds for the sale of same, in trust for the benefit of the seller.  

In Yang Wu, the plaintiff sold perishable agricultural commodities to defendants who failed to pay plaintiff’s invoices in the total amount of $370,407.65.  (The amount claimed in the case later increased to $475,225.36.)  Initially, on application of the plaintiffs, the Court entered a temporary restraining order (TRO) without notice enjoining the defendants, for a period of fourteen days, from dissipating any trust assets.  That fourteen day period was then extended for another fourteen days.  In entering the TRO, the Court applied a common legal standard, holding that in order for a plaintiff to receive such relief, it must show: (1) a likelihood of success on the merits; (2) a substantial threat of irreparable harm; (3) that the threatened injury outweighs any harm to the defendant; and (4) that the entry of the injunction will not offend the public interest.

On an evidentiary hearing on the plaintiff’s motion for a full preliminary injunction, the Court also had little trouble finding in favor of the plaintiff on all four of the above elements.  The defendants really had no defense to the claim of non-payment.  The defendants admitted that they had the funds to cover the PACA trust, but would need access to such amounts to pay other creditors.  The payment to other creditors from the PACA trust assets would in and of itself constitute a dissipation of such trust assets, and therefore, the entry of an injunction freezing such assets was warranted.

Following the hearing, based on the facts and the law, the Court entered an injunction: (1) prohibiting the defendants and their agents from “transferring, withdrawing or in any other manner removing” PACA trust assets; (2) in the event that defendants were unable to fund the PACA trust, that defendants account to the Court for all PACA trust assets, and deposit all cash and other payment receipts with the Court until full payments of the $475,225.36 could be made; (3) granting plaintiff access to the defendants’ books and records; (4) allowing the plaintiff the right to depose the defendants’ officers and agents; (5) requiring defendants’ bank to release to plaintiff’s counsel, in confidence, its records regarding defendants’ accounts; and (6) all without requiring the plaintiff to post a bond.

A more complete victory for an unpaid seller of perishable agricultural commodities could hardly be imagined.  

In our next post regarding this case, we will take a look at, among other things, the Court’s interesting imposition of liability on certain non-buyer corporations that were related to buyer corporations.              

Shipper Claims Against Freight Broker Not Entitled to Carmack Amendment Preemption

 In Quality King Distributors, Inc. v. Celtic International, LLC (N.D. Ill. Dec. 10, 2020), the plaintiff shipper, Quality King, sued Celtic in state court for the alleged non-delivery of two shipments.  Unknown to Quality King at the time it contracted with Celtic, third party GSN Trucking, Inc. was hired by Celtic to haul the shipments.  Celtic removed the case to federal court, arguing that Quality King’s breach of contract claim was preempted by the Carmack Amendment, and, furthermore, that the complaint does not state a cause of action under the Carmack Amendment.

Citing a 2008 Seventh Circuit case that in turn quotes the 1987 decision in Hughes v. United Van Lines, Inc., 829 F.2d 1407, 1414 (7th Cir. 1987), Judge Gottschall explains that “[t]the preemptive sweep of the Carmack Amendment extends to state causes of action against carriers where good are damaged or lost in interstate commerce.” (internal quotations omitted). 

But not so fast.  The court also notes that Celtic was a freight broker – not a carrier – for the shipments at issue.  Thus the question becomes whether the Carmack Amendment preempts plaintiff’s breach of contract claims against a freight broker.  Citing U.S. Supreme Court and Seventh Circuit case law, the Court here instructs that under the Carmack Amendment a common carrier is liable for all losses which occurred while the goods were being transported by it, unless the carrier can demonstrate it is free from fault.  The Carmack Amendment also preempts all state law claims based upon the contract of carriage, in which the harm arises out of the loss of or damage to goods.

Thus it appears straightforward that breach of contract (state law) claims against a carrier for loss or damage to shipped freight are preempted by the Carmack Amendment, which also assigns liability.  But not where a shipper is pursuing a freight broker.  “Claims involving separate and independently actionable harm to the shipper distinct from such damage are not preempted.”  (Seventh Circuit citations omitted).  Thus the Court, like other courts in the district, held the Carmack Amendment does not preempt state law/common law claims against a party acting solely as a broker (i.e. “breach of a duty to place a shipment with a reliable and adequately insured carrier.”).  The case thus was remanded to the Circuit Court of Cook County.    

This case should remind freight brokers, and other non-carriers who could be called to account for lost or damaged freight, the Carmack Amendment will not necessarily entitle you to a day in federal court to resolve the matter.

Special Considerations When Pursuing What May Be An Unlicensed Produce Dealer

In an interesting recent case, Abraham Produce Corp. v. MBS Brothers, Inc., et al., (March 20, 2020, United States District Court for the Northern District of New York, Case No. 19-CV-2638), the Court, by Judge Nicholas G. Garaufis, reminded parties litigating under the Perishable Agricultural Commodities Act (“PACA”), 7 U.S.C. § 499a, et. al., that even in default situations, where the defendants do nothing to contest the litigation in court, recovery of a judgment for the plaintiff is not automatic or a mere formality. The plaintiff still has the obligation to prove to the court that PACA is applicable and that the defendants do not fall within the statutory exception for establishing PACA liability.

In this case, Abraham alleged that it sold perishable agricultural commodities to defendants MBS Brothers, Inc., trading as Big Tree Market, and Young Chul Ahn. Abraham alleged that from June to November, 2018, it sold produce to the defendants in the amount of $180,000. Defendants failed to make full payment, and ended up owing Abraham $26,104.02. Plaintiff further alleged that the defendants failed to hold the produce, and the proceeds from the sale thereof, in trust for the benefit of the seller (Abraham), as required by section 499e(e)(2) of PACA, and therefore were liable to plaintiff for such amount.

The court noted that after summons had been served on both defendants, they did nothing with respect to defending themselves in the lawsuit. Accordingly, the court entered an order of default against them. Observing that an order of default is not the same thing as a default judgment, the court, on its own, examined the pleadings and supporting declarations and documents to see if the PACA requirements for a judgment were fully met.

The court noted that under PACA, a party, in order to be held liable as a “dealer” (the court determined that the defendants were not “brokers” under PACA), must have engaged in the business of buying or selling perishable agricultural produce in “wholesale jobbing quantities,” defined as aggregate quantities of all types of produce totaling more than one ton in any single day.

Assuming that the “wholesale jobbing quantities” qualification had been must, a court must then consider whether the statutory exception for unlicensed dealers, i.e., that a dealer must have had total purchases in an amount equal to or in excess of $230,000 for a single year, applies.

In both instances, said the court, the plaintiff Abraham failed to make the required showings. Therefore, the court dismissed plaintiff’s PACA claims, and, because the rest of plaintiff’s claims were state law claims over which the court did not have independent jurisdiction, it dismissed those claims as well, but without prejudice to the plaintiff re-filing such claims in state court. So, despite failing in its PACA claims, the plaintiff in Abraham was not left entirely without a remedy.

This leads one to consider how the “wholesale jobbing quantities” requirement, and the “under $230,000 exception” of PACA can be satisfied by a plaintiff. First, the prospective plaintiff should be sure that the one-ton a day requirement is met. If so, then second, the prospective plaintiff should check with the United States Department of Agriculture to see if the proposed defendants, or any of them, are licensed under PACA. If so, no problem. PACA apples to such licensed persons even if the $230,000 annual threshold is not met, as long as the “wholesale jobbing quantities” requirement has been satisfied.

If, however, the proposed defendants are unlicensed, then both such requirements must be met. With respect to the one ton a day requirement, in most cases meeting it should be pretty easy. If, as in Abraham, the plaintiff is a seller of produce, it presumably should be able to state, under oath of its own knowledge, whether the sum of any one day’s sale of its produce exceeded one ton. Furthermore, in the wholesale produce industry, one ton of produce in any one day is not an enormous or exceptional amount.

The second requirement, the $230,000 exception for unlicensed dealers, is more problematic. Of course, if the course of dealing between the parties themselves includes an amount equal to or in excess of $230,000 for one year, the burden is met. On the other hand, if, as in Abraham, the amount of one year’s dealing is less than $230,000 (in Abraham it was $180,000), then the prospective plaintiff must be able to show proof that the defendant’s dealings in any one year exceeded $230,000.

This can present a daunting challenge. Presumably, it would not be sufficient for a plaintiff to state in his pleadings that the defendant is a big company that operates nation-wide, therefore its produce dealings must be more than $230,000 for one year. Something more, for example, industry research based on the defendant’s fact-specific situation, will likely be required to satisfy the court that the under $230,000 exception does not apply because the requisite amount has been shown to exist.

Therefore, it behooves a prospective plaintiff in a PACA case to make sure that it can prove, to a court’s satisfaction, that the above tonnage and dollar amount (as to unlicensed dealers) requirements have been fully satisfied, and that the plaintiff can prove such satisfaction in a court of law under oath.

Bankruptcy, Defaults and Personal Liability, Oh My!

The recent case of Grimmway Enterprises v. B & B Organics, 3:19-CV-261-JD (N.D. Ind. Mar. 25, 2020) contains some interesting rulings and discussions of issues involving bankruptcy, defaults, and individual liability under the PACA (Perishable Agricultural Commodities Act, 7 U.S.C. 499a, et al.). These are well worth attention and review.

Grimmway is a buyer and seller of produce located in California. B & B was an Indiana corporation. Cynthia Boynton was the sole officer and shareholder of B & B, while her husband, Brad Boynton was named on Blue Book Services’ Business Report as the Vice President/General Manager of B & B. For a number of years, Grimmway sold produce to B & B, on contract. The invoices attendant to each sale of produce contained the requisite language under PACA to preserve the seller’s rights under the PACA trust, whereby the purchaser and its controlling officers became trustees of PACA trust assets, and Grimmway, as seller, became a beneficiary of such trust. The “PACA trust assets” included the buyer’s proceeds from the sales of the produce.

After a while, B & B, apparently experiencing financial difficulties, stopped paying Grimmway’s invoices. Grimmway then filed suit under PACA against the corporation B & B, as well as against Cynthia and Brad Boynton as its controlling officers. After filing suit, both summons and an ex parte temporary restraining order preventing dissipation of PACA trust assets, that had been obtained when the suit was filed, were served on Brad Boynton, both individually and as an agent of the corporation. Thirteen days after the entry of the TRO, Grimmway filed a motion for civil contempt against B & B charging that B & B had failed to comply with the TRO’s document production provisions.

On the day that all defendants were required to respond to plaintiff’s Complaint, B & B filed a petition in bankruptcy. Thereafter, plaintiff Grimmway obtained an order of default against the individual defendants, who, unlike the corporation, did not file bankruptcy. This case arose on plaintiff’s motions for default judgment against both defendants, and on its motion for contempt against the corporation.

As to individual liability, the court found that Cynthia Boynton was a controlling officer of B & B. She was listed on the company’s PACA license as B & B’s “Principal,” was identified on the Blue Book Services report as the sole officer and shareholder, was the signee on the company’s bankruptcy petition, and, according to plaintiff’s accounts receivable manager’s declaration, was the primary person with whom plaintiff communicated with regarding contacts with the plaintiff. In response to Ms. Boynton’s argument that she was not subject to personal liability because “bankruptcy trumps all,” the court noted that while her position was correct as to the corporation, B & B’s corporate bankruptcy did not apply to or negate her personal or individual liability.

The court then entered a default judgment against Ms. Boynton in the full amount of the debt, subject to a reduction in the amount of any recovery made by the plaintiff in the corporate bankruptcy proceeding.

As to Brad Boynton, the court found that there was insufficient evidence to support a finding that he was a controlling officer of B & B. In effect, the court found that the only substantive evidence that plaintiff presented on this question was the fact that Blue Book listed Mr. Boynton as “Vice President/General Manager.” This was not enough. The court held that titles, in and of themselves, cannot support a finding of personal liability under PACA. Something more in terms of actual facts is necessary in order to establish that an individual is or was a “controlling officer” so as to make him individually liable under PACA.

With respect to the plaintiff’s motion for civil contempt against the corporation, the court mentioned, but did not rule on, the fact that B & B had filed bankruptcy thereby triggering an automatic stay of proceedings against it. Instead, the court noted that B & B was subject to production and disclosure requirements in the bankruptcy case itself, under Rule 2004 of the Bankruptcy Rules, that were broader than the production order that was a part of the TRO. Finding that B & B was not in violation of the Rule 2004 production requirements, the court denied plaintiff’s request that B & B be held in contempt for violating the TRO.

Finally, the court considered the question of Grimmway’s entitlement to attorneys’ fees. Noting that the 7th Circuit Court of Appeals had not ruled on this issue, the court looked to a line of cases which held that attorneys’ fees can be recoverable in PACA cases, as “sums owing in connection with” PACA trust transactions. (7 U.S.C. 499c(2). The court found these cases reasonable and persuasive, and therefore awarded Grimmway its reasonable attorneys’ fees against Ms. Boynton, subject to the qualifier that plaintiff could not double-charge her for whatever fees had been or would be awarded to it in the corporate bankruptcy case.

Authorizing Third Party to Make Purchases on Your Behalf May Result in Ruling that Such Party Was Authorized to Make Purchases on Your Behalf

In Santis Produce LLC v. Elite Farms, Inc., 18-CV-4018 (E.D.N.Y. Mar. 31, 2020), the respondent Elite Produce was the loser in a formal reparations action filed by Santis before the U.S. Department of Agriculture. On appeal to the U.S. District Court, the administrative ruling was upheld, and Santis lost again.

The issue before the court was a narrow one: did Elite authorize Stay Fresh Distributors to act as its agent in procuring mangoes from Santis, in view of two conflicting findings on the issue, one from a court and the other from the USDA?

The facts are simple and straightforward. At some point Stay Fresh received an email from Mike Green, an employee of Elite, authorizing Stay Fresh to procure mangoes for Elite. When the two truckloads of mangoes, valued at a total price of $29,993 (including brokerage fees) arrived at Elite’s place of business in New York, Elite refused to pay the invoices, arguing that Stay Fresh was not its agent and was not authorized to purchase mangoes on its behalf. Elite did, however, offer to pay Stay Fresh’s brokerage fees totaling $11,036.00. (Why Elite agreed to pay the brokerage fees while at the same time denying that Stay Fresh was its agent, is not explained.)

Elite then went to New York state court and filed a lawsuit seeking a declaratory judgment that Stay Fresh was not Elite’s agent and was never authorized to purchase mangoes on Elite’s behalf. Stay Fresh did not appear in that case, so Elite obtained a default judgment finding that there was no agency. This judgment was entered while the formal reparation proceeding was still pending before the USDA. About six months later the USDA ruled that Stay Fresh was Elite’s agent and that Elite was bound to pay Santis for the mangoes.

On appeal to the U.S. District Court, Elite presented only one argument: that the state court judgment was binding, under the law of collateral estoppel, and that therefore Santis could not contend that Stay Fresh was Elite’s agent.

[For readers unfamiliar with the concept of collateral estoppel, it is often confused with the related doctrine of res judicata. Res judicata arises when the parties engage in a lawsuit, a judgment is issued, and one or both of the parties then files another lawsuit involving the same claim, or other claims or issues that could have been made in the first case but were not. In that case, the prior judgment will defeat a subsequent attempt to re-litigate the same claims decided upon, or that could have been decided upon, in the earlier case.

Collateral estoppel is the cousin of res judicata. There, generally, the issues and the parties are the same in both lawsuits but there may not be a final judgment as to all claims. Also, the causes of action in the two cases might be different, but the issues are the same. If the issues have been addressed on the merits in the first case, and decided incident to a judgment, collateral estoppel will prevent them from being re-litigated in a subsequent case. As one might surmise, applying collateral estoppel to a case is generally trickier and more complicated than applying res judicata which is usually more cut-and-dried and straightforward. Some courts, over-simplifying, describe res judicata as “claims preclusion,” while collateral estoppel involves “issue preclusion.”]

The federal Court also opined on the quality of the “evidence” submitted by Elite on its appeal, which evidence (affidavits) was mostly self-serving and conclusory. Finally, in answer to Elite’s argument that there were no emails, texts, letters, contracts, etc. establishing that Stay Fresh was ever Elite’s agent, the Court pointed to Mr. Green’s email authorizing Stay Fresh to go out and procure some mangoes for Elite. The Court pointedly observed that this email was ignored by Elite in its presentations and arguments.