Opinion
Bankruptcy Case No. 01-00134, Adversary Case No. 02-00006
September 25, 2002
ORDER
This case is before the Court on a Motion for Immediate Turnover of PACA Trust Assets not Part of the Bankruptcy Estate (the "Motion"), filed by creditor-plaintiff Paramount Export Company ("Paramount") on May 30, 2002. The Motion was scheduled to be heard by the Court on June 17, 2002. Prior to the hearing, however, the parties agreed to hold the motion in abeyance as they were working to reach a settlement of the case. . Thus, the Court did not rule on the Motion.
PACA is an acronym for the Perishable Agricultural Commodities Act, 1930 28 ("PACA"), a federal statute codified at 7 U.S.C. § 499a-t.
On August 23, 2002, the Trustee filed a Motion for Approval of Settlement Agreement ("Motion for Approval"). On September 16, 2002, the Court denied the Motion for Approval. This Order memorializes the Court's September 16, 2002 order and sets forth in greater detail the basis for the Court's ruling.
FACTS
Paramount is a corporation engaged in the business of selling and shipping perishable agricultural commodities. On or about May 25, 2001 through July 13, 2001, Paramount sold and shipped perishable agricultural commodities to the Debtor at Debtor's request, for which Paramount alleges Debtor agreed to pay $115,042.36 total.
Only these pre-petition deliveries are at issue here since Debtor has paid for all post-petition produce ordered from Paramount on a cash basis.
On July 18, 2001, the Debtor filed a Chapter 11 bankruptcy petition. On May 23, 2002, Paramount filed the above-captioned adversary proceeding against the Defendants. On May 30, 2002, Paramount filed the Motion seeking to enforce its PACA Trust rights against the Debtor by compelling immediate turnover of the PACA trust assets and requiring that Debtor provide a full and complete accounting of those assets, pursuant to Section 499e. Paramount asserts that all requirements for establishing a PACA trust have been satisfied and that it will suffer irreparable injury absent immediate turnover of these assets. The Defendants, however, refute these allegations and contend that Paramount has failed to preserve its eligibility for trust benefits under PACA.
All statutory references are to Title 7 of the United States Code, unless otherwise noted.
ANALYSIS
The parties raise several issues with regard to the Motion. Since Paramount seeks "immediate turnover" of the PACA assets, its Motion can be likened to a motion for injunctive relief. The Defendants assert that Paramount cannot bring such an action for injunctive relief because such actions may only be brought by the Secretary of Agriculture under PACA. Additionally, the parties differ on whether Paramount has preserved its PACA trust benefits under the statute. These issues are addressed in further detail below.
Defendants also raise an additional issue with regard to whether Paramount is barred from asserting its claim under PACA since such claim was brought beyond the nine month limitations period established by Section 499f. Section 499f in pertinent part states that "[a]ny person complaining of any violation of any provision of section 499b. . . may, at any time within nine months after the cause of action accrues, apply to the Secretary [of Agriculture] by petition. . . ." Defendant's argument, however, is flawed since the nine month limitations period under Section 499f applies to administrative actions brought before the Secretary of Agriculture and not to actions such as Paramount's present legal action. Thus, the Court will not further discuss this irrelevant issue.
1. PACA Background
In 1930, Congress passed the Perishable Agricultural Commodities Act ("PACA") to protect unpaid produce sellers from buyers who delayed or failed to pay them. When PACA remedies became increasingly insufficient to protect produce sellers, Congress amended PACA in 1984 to create a statutory trust for the benefit of unpaid produce suppliers and sellers. The 1984 amendment created a statutory trust whereby buyers of perishable produce must hold the purchased produce, or proceeds therefrom, in trust for the benefit of the seller, until the buyer makes full payment for the produce. The PACA trust interests are superior to all the buyer's secured and perfected creditors' interests and supersedes the distribution of assets under the Bankruptcy Code.
In creating this trust, Congress stated:
It is hereby found that a burden on commerce in perishable agricultural commodities is caused by financing arrangements under which commission merchants, dealers, or brokers, who have not made payment for perishable agricultural commodities purchased, contracted to be purchased, or otherwise handled by them on behalf of another person, encumber or give lenders a security interest in, such commodities, or on inventories of food or other products derived from such commodities or products, and that such arrangements are contrary to the public interest. This subsection is intended to remedy such burden on commerce in perishable agricultural commodities and to protect the public interest. 7 U.S.C. § 499e(c)(1).
The trust arises upon the grower's sale and delivery of the perishable agricultural commodities and continues until the claim is satisfied, or until the trust beneficiary fails to take steps to preserve the trust benefits. 7 U.S.C. § 499e(c)(2) and (3). Once the unpaid seller has properly preserved the trust and obtained PACA trust beneficiary status, it has no obligation to trace the assets to which its trust applies. See Duane M. Geek, The Perishable Agricultural Commodities Act Trust that Trumps Creditor Claims and Interests, 21 Cal. Bankr. J. 231, 233 (1993). The "floating trust" extends to all produce-related inventory and proceeds of the debtor. If a dispute arises between the buyer and the PACA claimant as to which assets are part of the trust, the buyer carries the burden of showing which, if any, of the arrests are not subject to the trust. Id. When trust funds are commingled with other funds, the entire commingled fund is available for the benefit of the trust claimants. Id. Thus, the only burden on the PACA trust claimant is to prove the amount of the claim and the existence of a floating pool of assets into which the produce-related assets have been commingled. Id. The PACA trust is not only imposed on the buyer's assets but may be impressed against PACA proceeds paid to third parties. Money paid by the buyer to its secured creditor may still be impressed with the PACA trust and is subject to disgorgement. Id.
Furthermore, when the buyer of PACA goods files bankruptcy, the perishable inventory and proceeds are held in trust for the unpaid seller and are thus not property of the buyer's bankruptcy estate. In re Milton Poulos, Inc., 94 B.R. 648, 653 (Bankr. C.D. Ca. 1988), aff'd., 107 B.R. 715 (9th Cir. B.A.P. 1989), aff'd. in part and rev'd. in part, 947 F.2d 1351 (9th Cir. 1991). Although the PACA trust funds are not part of the bankruptcy estate, they remain subject to control of the bankruptcy court. Id. at 651-52.
With this background, the first issue is whether Paramount is entitled to the injunctive relief it seeks in the present Motion.
2. Whether Injunctive Relief is Available to Private Litigants Under PACA
Paramount requests immediate turnover of PACA trust assets and a complete and accurate accounting. Paramount alleges that it will suffer immediate irreparable injury in the form of loss of trust assets since these assets will not be preserved and will "surely dissipate to the extent that they will be used to pay non-PACA claims." See Paramount's Motion for Immediate Turnover of PACA Trust Assets at p. 3, lines 1-2 (May 30, 2002). Thus, Paramount requests the Court to order immediate turnover of these assets and to require the Debtor to provide a full and accurate accounting of all PACA trust assets.
The Defendants, on the other hand, contend that such an action for injunctive relief may only be brought by the Secretary of Agriculture. The Defendants maintain that the proper remedy for Paramount is an action at law for money damages. The Defendants claim that an action for injunctive relief is not available under PACA since there is an adequate remedy at law, such as an action to enforce payment to trust beneficiaries. Thus, Defendants assert that the motion to compel should be denied since Paramount can commence — and indeed has commenced — an action to recover the price of the produce supplied to Debtor.
The remedy for PACA violations may be addressed administratively through the Secretary of Agriculture or legally by "by suit in any court of competent jurisdiction." 7 U.S.C. § 499e(b). Additionally, PACA further provides that "[t]he 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).
The question of whether injunctive relief is available to private produce suppliers under PACA is still un-resolved. However, the majority of courts considering the issue have concluded that this relief is appropriate under PACA. See Patricia J. Rynn, Injunctive Relief Under the 1984 Trust Amendments to the Perishable Agricultural Commodities Act: a Necessary Means of Trust Enforcement, 23 U.C. Davis L. Rev. 625, 631 and 638 at n. 13. (1990). This issue has not been directly addressed by the Ninth Circuit Court of Appeals, but district courts in this circuit have allowed injunctive relief to protect PACA creditors. See JC Produce. Inc. v. Paragon Steakhouse Restaurants. Inc., 70 F. Supp.2d 1119 (E.D. Ca. 1999) (finding that supplier of perishable agricultural products satisfied requirement for obtaining preliminary injunction against restaurant's depletion of produce related assets or compelling posting of bond to ensure equivalent protection) and My Fruit. S.A. v. Pacific Sun Marketing. Inc, 1989 WL 97917 (D. Or.) (seller of perishable agricultural produce given TRO prohibiting transfer of assets, books or funds and prohibiting dissipation of PACA trust assets, but district court denied preliminary injunction since seller failed to meet its burden of proof on the issue of irreparable harm).
Based on the foregoing, this Court will permit Paramount to proceed on its motion for injunctive relief. Injunctive orders may well be the only meaningful relief available to PACA creditors who are faced with delinquent buyers on the verge of bankruptcy. See Rynn, Injunctive Relief Under PACA, 23 U.C. Davis L. Rev, at 630. Thus, in evaluating Paramount's request, the Court will apply the traditional requirements for injunctive relief. In this circuit, Paramount meets its burden by showing either (1) a combination of probable success on the merits and irreparable injury, or (2) the existence of serious questions going to the merits and that the balance of hardships tips sharply in its favor.See University of Hawaii Professional Assembly v. Cayetano, 183 F.3d 1096, 1101 (9th Cir. 1999).
This law review article states that the PACA amendment's legislative history suggests a clear Congressional intent to create a speedy solution to the unpaid produce shipper's dilemma:
When a business is in financial difficulty, security interest holders move quickly to collect on their money because they are aware of the plight of the borrower. Suppliers of produce cannot protect their interests because they may lack the necessary information and are usually many miles away. Once funds are dissipated, it is all but impossible to effect recovery.
Rynn, Injunctive Relief Under PACA, 23 U.C. Davis L. Rev, at 630 (quoting H.R. REP. NO. 98-543, 98th Cong., 2d Sess. 7, reprinted in 1984 U.S.C.C.A.N. 405, 410-11).
Here, Paramount contends that it falls under the first situation — that is, it has satisfied all the requirements for establishing a PACA trust, and that it will suffer irreparable injury absent immediate turnover of the PACA trust assets since the Debtor's financial stability is rapidly decreasing. Accordingly, in order to determine whether Paramount will likely succeed on the merits, the next issue to be addressed is whether Paramount has in fact met all requirements to establish and preserve the PACA trust.
3. Whether the Requirements for Preserving the PACA Trust Rave Been Met
A PACA claimant may show likelihood of success on the merits by demonstrating eligibility for trust protection. Because of the "super priority" enjoyed by PACA trust beneficiaries, courts strictly enforce the PACA requirements for preserving the trust.
To establish a trust, produce sellers must take certain steps to preserve their right to benefit from the trust. The relevant PACA provision provides:
The unpaid supplier, seller, or agent shall lose the benefits of such trust unless such person has given written notice of intent to preserve the benefits of the trust to the commission merchant, dealer, or broker within thirty calendar days (i) after expiration of the time prescribed by which payment must be made, as set forth in regulations issued by the Secretary, [or] (ii) after expiration of such other time agreed to in writing before entering into the transaction. . . . When the parties expressly agree to a payment time period different from that established by the Secretary, a copy of any such agreement shall be filed in the records of each party to the transaction and the terms of payment shall be disclosed on invoices, accountings, and other documents relating to the transaction. 11 U.S.C. § 499e(c)(3) (emphases added).
Payment time periods established by the Secretary are set out at 7 C.F.R. § 46.2 (aa). The regulations provide that payment for produce purchased by a buyer must be made within 10 days after the day on which the produce is accepted. 7 C.F.R. § 46.2 (aa)((5). Alternatively, "[w]hen contracts are based on terms other than those described in these regulations [ 7 C.F.R. § 46.2], payment is due the supplier-seller within 20 days from the date of acceptance." 7 C.F.R. § 46.2 (aa)(10). If the parties elect to use different times of payment other than those set forth in the regulations (10 days after the day of acceptance under 7 C.F.R. § 46.2 (aa)(5) or 20 days after acceptance under 7 C.F.R. § 46.2 (aa)(10)), the parties must reduce their agreement to writing before entering into the transaction, 7 C.F.R. § 46.2 (aa) (1 1) and 46.46(e)(1), and the maximum time for payment under which the seller can qualify for PACA trust benefits is 30 days. 7 C.F.R. § 46.46 (e)(2).
In this case, the affidavit of William Howard in support of Paramount's motion states that the payment terms between Paramount and the Debtor were 30 days from receipt of the produce. See Howard Affidavit at ¶ 9. This 30-day term of payment is also evidenced in the exhibits attached to the affidavit of Terrence M. Brooks, which was filed with the Court on June 3, 2002. Since the Debtor and Paramount had obviously elected to use payment terms other than those set forth in the regulations, in order to qualify for trust benefits, their agreement had to have been reduced to writing before entering into the transaction and the parties must also maintain a copy of the agreement in their records.See 7 C.F.R. § 46.46 (e)(1) and 7 U.S.C. § 499e(c)(3). However, Trustee Slater can find no evidence of a prior written agreement between the Debtor and Paramount for payment terms exceeding the 10 or 20 days under the regulations. More tellingly, Paramount, as the movant, has not produced such an agreement entered into by the parties prior to the transaction.
William Howard has been an Account Executive with Paramount for the past 12 years. He is personally responsible for monitoring and assisting with the collection of Paramount's accounts receivables resulting from the sales of perishable agricultural commodities, including the subject sales transactions between Paramount and the Debtor.
While Paramount cites numerous eases in its reply brief wherein courts have recognized that failure to reduce an agreement in writing did not disqualify a seller from receiving trust benefits, these cases are not binding on the Court as they come from the Third Circuit. The Ninth Circuit has not addressed this exact issue of whether agreements for payment deviating from the prescribed payment time period must be in writing, however, it has addressed a very similar issue raised by the same statute (Section 499e) from which this Court draws guidance.
In In re San Joaquin Food Service. Inc., 958 F.2d 938 (9th Cir. 1992), the produce supplier sought relief from the automatic stay in order to recover PACA trust funds from the debtor buyer. The parties had agreed that payment would be due within 30 days of each invoice as opposed to the payment period established under the applicable regulations. The parties had entered a separate, written agreement evidencing the 30-day payment period, however, the terms of the payment were not disclosed on the invoices as required by Section 499e(c)(3). In interpreting Section 499e(c)(3), the Ninth Circuit held that the seller's failure to include the terms of payment on its invoices voided its rights in the PACA trust. The Ninth Circuit also held that "substantial compliance" with the statutory requirements does not excuse the omission in light of the clear congressional mandate in the statute itself.
Just as in San Joaquin Food Service, the clear command of the language of Section 499e(c)(3) in this case is evident — failure to reduce the payment terms into a separate, written agreement entered into before the transaction and failure to maintain such an agreement in each party's records divests the seller of trust benefits. Here, the absence of a written agreement between the Debtor and Paramount prior to the transaction which evidences the 30-day payment period is fatal to Paramount's argument that it has complied with the requirement of PACA. This failure precludes Paramount from qualifying for PACA trust benefits. As the Defendants note:
While this may seem to be a harsh result, on the contrary, PACA affords qualified trust beneficiaries with super-priority over secured lenders and arguably, even over administrative claims in some cases. As such, strict compliance with the conditions under PACA by Paramount is a minimal inconvenience in light of the substantial preferential treatment given to PACA trust beneficiaries over all other creditors. See Trustee's Opposition to Paramount Export Company's Motion to Compel at 11 (June 10, 2002).
The language of the statute is clear and unambiguous. The unpaid supplier or seller loses the benefits of the PACA trust if the terms of the statute are not met. Here, Paramount failed to reduce its agreement of payment terms with the Debtor in a separate written form prior to the transaction. It is also noted that Paramount is in the business of selling and shipping perishable agricultural commodities. Paramount also has competent and aggressive lawyers who are familiar with the clear provisions of PACA. Accordingly, the Court finds that Paramount has not preserved its right to benefit from the trust created by PACA.
CONCLUSION
While Paramount asserts that it will suffer immediate and irreparable injury if the Motion is not granted, the Court notes that Paramount continues to conduct business even though it has not received the money it alleges it is owed in over one year. Thus, any injury Paramount has suffered or will suffer certainly is not irreparable. Having concluded that Paramount has failed to meet its burden of showing probable success on the merits or irreparable injury, the Court hereby DENIES Paramount's motion for injunctive relief.
SO ORDERED