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.

The Best of Intentions Meet the Federal Perishable Agricultural Commodities Act (PACA)

It is not uncommon for produce merchants to conduct business with each other. One company might buy produce from another one day, and sell produce to it the following day.  While on the surface such an arrangement is not a cause for concern, unforeseen circumstances – for example, a bankruptcy filing by one of the merchants – could present problems for companies with which it has this type of relationship.  

Earlier this year a federal appellate court in New York reviewed a case involving two produce merchants that regularly conducted business with each other.  The companies, which operated out of the same terminal in Buffalo, New York, each bought produce from the other for resale to its respective customers.  Both merchants issued invoices with appropriate trust preservation language, but intended for the dollar amounts of such produce sales to be about the same.  They intended that each would purchase about the same dollar amount of produce form the other, resulting in their payables offsetting each other, with no actual payments being necessary.    

Unfortunately for both merchants, that isn’t how things played out.  One of them (LPP) later filed for bankruptcy court protection.  The other (GP) found itself as both a creditor and debtor of LPP, never having been paid for the produce it sold to LPP.

The Second Circuit, affirming decisions below, ruled that the debts between LPP and GP could not be off set against each other.  The federal Perishable Agricultural Commodities Act (PACA), and cases construing it, direct that GP’s entire indebtedness to LPP ($204,774.88) was a PACA trust asset.  Such asset never become a part of the bankruptcy estate, and could not be offset by the amounts owed to GP by LPP. 

But it wasn’t all bad news for GP.  The other PACA trust creditors argued that because GP apparently did not file a proof claim in accordance with the claims procedure order entered by the district court, it had given up any rights it may have had to participate in the distribution of PACA trust assets to creditors with valid PACA trust claims. The panel concluded that GP’s (i) pre-bankruptcy PACA notices to LPP, (ii) proof of claim filed in the bankruptcy matter, and (iii) reasonable (but mistaken) expectation that it was entitled to a bankruptcy offset, was sufficient to preserve its right to a pro rata distribution from the PACA trust assets.

Paca Tr. Creditors of Lenny Perry’s Produce, Inc. v. Genecco Produce Inc., 913 F.3d 268 (2nd Cir. 2019).