Opinion
Case No. 1:06-cv-425.
July 7, 2006
REPORT AND RECOMMENDATION
This is a civil action brought pursuant to the Perishable Agricultural Commodities Act (PACA), 7 U.S.C. § 499a, et seq. Plaintiff, J.A. Besteman Company, is a dealer in perishable agricultural commodities. Defendant, Carter's, Inc., runs a chain of retail grocery stores and has purchased perishable agricultural commodities from plaintiff for a period exceeding 22 years. Plaintiff brought this action to recover $940,916.73 for perishable commodities purchased by defendants but not paid for and to enforce its PACA trust on the assets of Carter's, Inc.
On June 19, 2006, the same day that the complaint was filed, Chief Judge Robert Holmes Bell entered a temporary restraining order (docket # 6) preventing alienation of the assets of Carter's, Inc. except in the ordinary course of business and ordering defendant to show cause why a preliminary injunction should not be issued. On June 28, 2006, the parties submitted a proposed consent decree (docket # 9) pursuant to which (1) judgment would be entered against Carter's, Inc. in the amount of $940,916.73, (2) the June 19, 2006 temporary restraining order was continued, (3) the individual defendants were dismissed and (4) an evidentiary hearing would be held to determine the scope of plaintiff's PACA trust over defendant's assets. On June 29, 2006, Chief Judge Bell entered an order (docket # 10) granting the consent decree and setting an evidentiary hearing before me on July 5, 2006, at 2:00 p.m., concerning the scope of the PACA trust.
I conducted the evidentiary hearing as scheduled on July 5, 2006. Plaintiff appeared and presented the testimony of Dennis Defrang, Comptroller of J.A. Besteman Company, and David Besteman, its President. Defendant did not appear at the hearing. On the basis of the evidence presented at the hearing, I recommend that a PACA trust be recognized on all assets of Carter's, Inc. and that an order be entered requiring Carter's, Inc. to pay into the treasury of this court all proceeds from the sale of inventory or any other asset.
Discussion
I. Scope of PACA Trust
PACA creates a statutory trust for unpaid sellers of perishable agricultural commodities. The statute provides in relevant part as follows:
Perishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents.7 U.S.C. § 499e(c)(2). The trust created by section 499e protects sellers of perishable agricultural commodities against financing arrangements made by merchants who encumber commodities or the proceeds thereof, thus giving sellers precedence over the claims of secured creditors. See Overton Distrib. v. Heritage Bank, 340 F.3d 361, 365 (6th Cir. 2003). The Sixth Circuit thus holds that the obligation of a buyer of perishable commodities becomes a trust obligation under the statute "prior to and superior to any lien or security interest in inventory held by the [buyer's] secured lender." Sanzone-Palmisano Co. v. M. Seaman Enter., 986 F.2d 1010, 1012 (6th Cir. 1993) (quoting In re Prange Foods Corp., 63 B.R. 211, 214 (Bankr. W.D. Mich. 1986)). The Sanzone court further held that the PACA trust is a "floating" trust, in that it applies to all of the buyer's produce and inventory and all proceeds from the sale of produce. The trust beneficiary is therefore not obligated to trace assets. Rather, when trust and non-trust assets are commingled, the burden is on the debtor to show that disputed assets were not acquired with proceeds from the sale of produce or produce-related assets. Id. at 1013-14. Writing for the Sanzone court, Judge Boggs recognized the "harsh effect" that such a rule would inevitably have on other unsecured creditors who were not protected by a PACA trust. The court determined, however, that Congress considered sellers of perishable commodities to be especially vulnerable and therefore intended that they take priority over other unsecured creditors. Id.
In the present case, plaintiff's claim under PACA arises from unpaid invoices dating back to the year 2003. Under the narrowest view of the statute, a PACA trust attaches to all assets of Carter's, Inc. acquired in the year 2003 and thereafter. See Six L's Packing Co. v. West Des Moines State Bank, 967 F.2d 256, 259 (8th Cir. 1992) (indicating that a PACA trust does not include property acquired before the PACA beneficiary first entered into a PACA-qualified transaction with the debtor). A broader view was espoused by the Second Circuit in the case of In re Kornblum Co., Inc., 81 F.3d 280 (2d Cir. 1996). Relying on regulations of the Secretary of Agriculture promulgated to implement the statutory trust, 7 C.F.R. § 46.46, the Second Circuit held that PACA creates a "single, undifferentiated trust for the benefit of all sellers and suppliers." 81 F.3d at 286. Under this view, the PACA trust arises for the benefit of all sellers at the time that a PACA debt is first incurred, "and continues in existence until all of the outstanding beneficiaries have been paid in full." Id. at 286. The Second Circuit determined that the PACA debtor (or other competing creditors) would bear the burden to establish that (1) no PACA trust existed when the disputed assets were purchased; or (2) even though a PACA trust existed at that time, the assets were not purchased with trust funds; or (3) although a PACA trust existed when the property was purchased and the units were purchased with trust funds, the debtor thereafter paid all unpaid sellers in full prior to the transaction involving competing creditors, thereby terminating the trust. Id. at 287. In reaching this conclusion, the Second Circuit relied on the Sixth Circuit's decision in Sanzone. On this basis, I conclude that the Sixth Circuit would follow the Second Circuit and hold that a PACA trust arises when the first PACA debt is incurred and continues thereafter until all sellers are paid in full. See also In re Bear Kodiak Produce, Inc., 283 B.R. 577 (Bankr. D. Ariz. 2002) (rejecting the Six L's rule and following Kornblum).
Application of the foregoing principles to this case results in a conclusion that the res of the PACA trust in favor of plaintiff extends to all of the assets of Carter's, Inc. The testimony at the evidentiary hearing established that plaintiff began selling perishable commodities to Carter's, Inc. in 1985 and that Carter's, Inc. has always had an unpaid balance since that time. Ninety-five percent of the goods sold to Carter's, Inc. over that period were perishable commodities. Furthermore, since the time the PACA trust first attached, Carter's, Inc. has made payments on debts secured by its equipment and other personalty, as disclosed in plaintiff's Exhibit 1. A PACA trust therefore attaches to all assets held or acquired by Carter's, Inc. since 1985, when a PACA trust first arose. See Tony Vitrano Co. v. Nat'l Produce Co., 815 F. Supp. 23 (D.D.C. 1993). The burden was on Carter's, Inc. to show otherwise. As Carter's, Inc. did not appear at the evidentiary hearing, it failed to discharge its burden of proof.
I therefore recommend that the court declare that the PACA trust in favor of plaintiff extends to all real and personal property of Carter's, Inc.
II. Injunction Preventing Dissipation of Trust Assets
Plaintiff has sought an injunction requiring Carter's, Inc. to pay into the treasury of this court all proceeds from the sale of any assets, except for funds necessary to meet payroll obligations and taxes. In support of this request, plaintiff has established that Carter's has failed to pay its debts when due, has dishonored checks, and has begun to sell real property outside the ordinary course of business in order to pay its bills. Additionally, another creditor, Nash Finch, Inc., has apparently taken control of the debtor's bank accounts pursuant to a security interest.
The federal courts have held that dissipation of the assets of a PACA trust constitutes irreparable harm sufficient to justify injunctive relief. See Tanimura Antle, Inc. v. Packed Fresh Produce, 222 F.3d 132, 140-41 (3d Cir. 2000). The courts have approved the grant of injunctive relief in the form of a segregated trust where the evidence shows that the debtor is in financial distress and that, in the absence of injunctive relief, the PACA beneficiary would be unable to collect on the debt. See, e.g., DeBruyn Produce Co. v. Olympia Produce Co., 734 F. Supp. 483, 485-86 (N.D. Ga. 1989).
The federal appellate courts have recognized that preventing the dissipation of trust assets is the key purpose of PACA. See Tanimura Antle, Inc., 223 F.2d at 139; Frio Ice S.A. v. Sunfruit, Inc., 918 F.2d 154, 159 (11th Cir. 1990). The factual record before the court satisfies the prerequisites established in the cases cited above for the issuance of an order of segregation to prevent dissipation of trust fund assets.
Recommended Disposition
For the foregoing reasons, I recommend as follows:
A. That the court declare that plaintiff's trust under the Perishable Agricultural Commodities Act extends to all assets, real and personal, of defendant Carter's, Inc.; and
B. That the court enter an order requiring Carter's, Inc. to immediately pay into the treasury of this court, for the benefit of plaintiff J.A. Besteman Company, any and all proceeds from any sale or other disposition of any of its real or personal property, including but not limited to inventory, until this court's previous judgment is paid in full, provided that Carter's, Inc. shall be allowed to meet its payroll and tax obligations before depositing such proceeds into the treasury of this court.
NOTICE TO PARTIES
Any objections to this Report and Recommendation must be filed and served within ten days of service of this notice on you. 28 U.S.C. § 636(b)(1)(C); FED. R. CIV. P. 72(b). All objections and responses to objections are governed by W.D. MICH. LCIVR 72.3(b). Failure to file timely objections may constitute a waiver of any further right of appeal. See Thomas v. Arn, 474 U.S. 140 (1985); Neuman v. Rivers, 125 F.3d 315, 322-23 (6th Cir.), cert. denied, 522 U.S. 1030 (1997); United States v. Walters, 638 F.2d 947 (6th Cir. 1981).