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).