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holding that "[w]here the parties' contracts include [interest rate] terms, they can be awarded (and are subject to the PACA trust) as sums owing in connection with perishable commodities transactions under PACA"
Summary of this case from C.H. Robinson Worldwide, Inc. v. CKF Produce Corp.Opinion
04 Civ. 2666 (GBD) (AJP).
May 16, 2005
REPORT AND RECOMMENDATION
To the Honorable George B. Daniels, United States District Judge:
Two issues are before the Court on plaintiffs' summary judgment motion in this case pursuant to the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. § 499a et seq.: (1) can plaintiff PACA Claimants get a judgment against the individual owner of the fruit and vegetable wholesaler before exhausting all of the company's assets, which are tied up in litigation, and (2) does the PACA trust cover attorneys' fees and interest, as provided for in the PACA Claimants' invoices? For the reasons set forth below, the Court answers both questions in the affirmative. Accordingly, the Court should grant the plaintiff PACA Claimants' summary judgment motion (Dkt. Nos. 155-56) against both defendant Dom's Wholesale Retail Center, Inc. ("Dom's") and its president Alan J. Gargiulo Sr. ("Gargiulo"), in the amount of $1,299,018.71 plus interest and attorneys' fees in amounts to be determined.
FACTS
The issues before the Court on plaintiffs' summary judgment motion are ones of law, and the facts are not in dispute.
The Parties and Dom's Debt to Plainiffs
The plaintiff "PACA Claimants are entities engaged in the business of buying and selling wholesale quantities of perishable agricultural commodities in interstate commerce, . . . and were licensed as dealers under PACA." (Dkt. No. 155-56: Plfs. Rule 56.1 Stmt. ¶ 1; Dkt. No. 179: Defs. Rule 56.1 Stmt. ¶ 1; see also Dkt. No. 167: Defs. Br. at 1.)
Dom's was a wholesaler of fruits and vegetables that purchased produce from the plaintiff PACA Claimants. (Plfs. Defs. Rule 56.1 Stmts. ¶¶ 3-4; Defs. Br. at 2.) Dom's ceased operations in March 2004. (Defs. Br. at 2; Dkt. No. 169: Gargiulo Aff. ¶ 7.)
Defendant Gargiulo is the President and C.E.O., sole shareholder and sole director of Dom's, a signatory on Dom's bank accounts, and "was in a position to control the PACA trust assets belonging to PACA Claimants." (Plfs. Defs. Rule 56.1 Stmts. ¶ 5; Gargiulo Aff. ¶ 1; Defs. Br. at 2; see also Plfs. Rule 56.1 Stmt. Ex. 1: Dom's PACA license; id. Ex. 2: Dom's check signed by Gargiulo.)
It is stipulated that Dom's owes the plaintiff PACA Claimants $1,299,018.71. (Plfs. Defs. 56.1 Stmts. ¶ 2; Dkt. Nos. 151-52: Stip. re PACA Claims Amounts; Gargiulo Aff. ¶ 7 ("After a claims procedure, it was determined that Dom's owed the Plaintiffs the sum of $1,299,018.71. I do not dispute this amount.").) Indeed, defendants do not oppose entry of summary judgment for the principal amount claimed as against Dom's — only against Gargiulo. (See Gargiulo Aff. ¶¶ 2, 7, 17(a) ("I respectfully request that this Court issue an order: (a) Granting judgment to Plaintiffs against Dom's in the amount of $1,299,018.71.").)
The Dom's-Platinum Dispute
In October 2002, Dom's entered into a factoring agreement with intervenor Platinum Funding Corp. ("Platinum"). (See Gargiulo Aff. ¶¶ 2, 6.)
As an intervenor in this case, Platinum claims that Dom's owes Platinum over $1 million, which Dom's disputes; Dom's claims that Platinum owes Dom's $1,773,031 — if true, more than enough to pay the PACA Claimants' claims. (Gargiulo Aff. ¶ 5 ("Dom's has sufficient assets, in the form of amounts due to Dom's from Platinum . . . to pay Plaintiffs' in full . . ."), ¶¶ 8-9; see also Dkt. No. 168: Defs. Rule 56.1 Stmt. ¶¶ 7-9; Defs. Br. at 2.)
Attorneys' Fees and Interest
Finally, as to attorneys' fees and interest, the PACA Claimants' "invoices sets out that a purchaser of produce is liable for the pre-judgment interest, attorneys' fees and costs accumulated in connection with collecting payment." (Plfs. Br. at 12-13, citing "Declarations in Support of PACA Trust Claims and the Exhibits attached thereto.") Gargiulo does not contest the contents of the invoices; rather, he asserts that those terms were not discussed with or agreed to by Dom's:
At no time have I, or anyone on behalf of Dom's, negotiated, agreed or discussed the payment of attorney's fees or interest in connection with any transaction that is the subject matter of this case.
(Gargiulo Aff. ¶ 16; see also Defs. Rule 56.1 Stmt. ¶ 11; Defs. Br. at 8 ("The facts are undisputed that the transactions between the Plaintiffs and Dom's were oral contracts that were followed up by the issuance of invoices. The Plaintiffs do not allege that the oral contracts involved discussion concerning attorneys' fees and/or interest because, in fact, no such discussions occurred.").)
ANALYSIS
I. DOM'S LIABILITY A. The Principal Amount
As noted above, defendants consent to PACA Claimants summary judgment motion for judgment against Dom's for the principal amount of $1,299,018.71. (See pages 2-3 above.) Accordingly, on consent, the Court should enter summary judgment for the plaintiff PACA Claimants against Dom's in the principal amount of $1,299,018.71.
B. Attorneys' Fees and Interest
The plaintiff PACA Claimants also seek summary judgment against Dom's for contractual prejudgment interest and attorneys' fees, in an amount to be determined through subsequent submissions. (See Dkt. No. 160: Plfs. Br. at 11-13.) Defendants concede that prejudgment interest and attorneys' fees are included in the PACA trust, but only if the parties' contract calls for such recovery, and defendants assert that they never agreed to such terms (Dkt. No. 167: Defs. Br. at 8-9; see also pages 3-4 above.)
The law in this area is clear — PACA itself does not create a right to attorneys' fees or interest, but where the parties' contracts include such terms, they can be awarded (and are subject to the PACA trust) as "sums owing in connection with" perishable commodities transactions under PACA. 7 U.S.C. § 499e(c)(2); see, e.g., Country Best v. Christopher Ranch LLC, 361 F.3d 629, 631 (11th Cir. 2004) ("We hold that attorney fee and interest provisions can be enforceable as additional contract terms under the Uniform Commercial Code, and that such fees and interest can be awarded as 'sums owing in connection with' perishable commodities transactions under the PACA statute."); Middle Mountain Land Produce Inc. v. Sound Commodities Inc., 307 F.3d 1220, 1222-26 (9th Cir. 2002) (Attorneys' fees and prejudgment interest recoverable if provided for by contract, and even without contractual provision, court has discretion to award prejudgment interest. "The plain meaning of the PACA statute's words 'in connection with' encompasses not only the price of the perishable agricultural commodities but also additional related expenses, including contractual rights to attorney's fees and interest, in a PACA claim."); Movsovitz Sons of Florida, Inc. v. Axel Gonzalez, Inc., No. 02-1634, ___ F. Supp. 2d ___, 2005 WL 928596 at *6 (D.P.R. Apr. 20, 2005) ("Attorney's fees included on invoices gives a PACA trust beneficiary a contractual right to such an award."); J.C. Produce, Inc. v. Paragon Steakhouse Rest., Inc., 70 F. Supp. 2d 1119, 1123 (E.D. Cal. 1999) ("Courts generally have held that an award of prejudgment interest on PACA trust amounts is appropriate with or without a contract, and that attorneys' fees also may be considered 'sums owing in connection with' a sale where the produce sales contract calls for them."); Fishgold v.OnBank Trust Co., 43 F. Supp. 2d 346, 352 (W.D.N.Y. 1999) ("Attorney's fees may be recoverable under PACA when the parties have so contracted . . ."); E. Aramata, Inc. v. Platinum Funding Corp., 887 F. Supp. 590, 594-95 (S.D.N.Y. 1995) ("Attorneys fees are not available under the PACA statute where a contractual basis for the fees is lacking," but are available if the parties' contract calls for attorneys' fees. Prejudgment interest is in the court's discretion and should be awarded to protect agricultural suppliers.); Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F. Supp. 346, 351 (S.D.N.Y. 1993) (awards prejudgment interest and attorneys' fees to plaintiff whose contract included such terms, but for second plaintiff whose contract did not include such terms, awards only statutory prejudgment interest, but "state[s] [the court's] intent to make a full award of [attorneys' fees] in future PACA cases if the circumstances of such cases make such awards appropriate.").
Gargiulo claims that there was no agreement on attorneys' fees or interest because it was never discussed. (See pages 3-4 above.) He does not dispute, however, that plaintiffs' invoices called for attorneys' fees and interest in the event of non-payment. (See pages 3-4 above.)
It does not matter that attorneys' fees and interest were not specifically discussed. As between merchants, inclusion of terms in the seller's invoice, without protest from the buyer on receipt, makes the invoice terms the terms of the contract. N.Y.U.C.C. § 2-201(2); "R" Best Produce, Inc. v. Eastside Food Plaza, Inc., 02 Civ. 6925, 2003 WL 22231577 at *1 n. 1 (S.D.N.Y. Sept. 30, 2003) (PACA case. "The right to attorney's fees wasunmistakably clear' in the contract. Each invoice states thatit is mutually agreed that should the seller refer the customer's past due account to an attorney for collection the customer shall pay reasonable attorney's fees of 25% of the amount due.") (citations omitted); Premier Mountings, Inc. v.Clyde Duneier, Inc., 02 Civ. 4897, 2003 WL 21800082 at *3 (S.D.N.Y. Aug. 6, 2003) (granting partial summary judgment to plaintiff to enforce terms included in invoice because of the rule that "[i]nvoices that are sent to the seller and that are retained without objection may fall within the merchants exception"); Polygram, S.A. v. 32-03 Enter., Inc., 697 F. Supp. 132, 134 (E.D.N.Y. 1988) ("The defendant received the invoice with the terms of sale' expressly stated thereon. There was no written objection made by defendant to these terms to date. Therefore, the Statute of Frauds is satisfied and the contract is enforceable."); Bazak Int'l Corp., v. Mast Indus., Inc., 73 N.Y.2d 113, 116, 538 N.Y.S.2d 503-04 (1989) ("[A]nnotated purchase order forms signed by the buyer, sent to the seller and retained without objection, fall within the merchant's exception [U.C.C. § 2-201(2)], satisfying the statutory requirement of a writing. . . ."); Multitex USA, Inc. v. Marvin Knitting Mills, Inc., 12 A.D.3d 169, 169, 784 N.Y.S.2d 506, 507 (1st Dep't 2004) (affirming trial court's finding that invoices constituted confirmatory writings under UCC 2-201(2) and since defendant never made a timely objection, it could not assert statute of frauds defense).
To the extent that attorneys' fees are viewed as additional terms to an existing contract between the parties, U.C.C. § 2-207(2) governs, providing:
(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
Since no objection was made nor a claim that the terms materially altered any existing contract, the attorneys' fees would be part of the contract under this provision as well.
Accordingly, the plaintiff PACA Claimants are entitled to summary judgment against Dom's for attorneys' fees and prejudgment interest. Plaintiffs are to present to Dom's their contemporary time records as to their attorneys' fees, and their interest calculations, by May 23, 2005; Dom's is to respond to plaintiffs with their position by May 31, 2005; and the parties are to submit to the Court either a stipulation or, if they cannot agree, simultaneous submissions (affidavits with exhibits and briefs), by June 6, 2005.
II. GARGIULO'S INDIVIDUAL LIABILITY
In a prior decision (holding that the PACA trust is superior to the produce buyer's attorney's lien), I described the PACA statute and its purpose, as follows:
"Congress enacted PACA in 1930 to regulate commerce in perishable agricultural commodities, which are defined by the Act as '[f]resh fruits and fresh vegetables of every kind and character,' 'whether or not frozen or packed in ice.' 7 U.S.C. § 499a(b)(4)(A). The Act established a mandatory licensing scheme, under the supervision of the Secretary of Agriculture, for dealers, brokers, and commission merchants of perishable agricultural commodities, id. § 499c, and prohibits certain unfair practices in the trading of such commodities, id. § 499b." "Congress amended PACA in 1984 to broaden the protections afforded to produce suppliers," through PACA's trust provisions.
PACA establishes a trust on the perishable agricultural commodities and their proceeds:
(c) Trust on commodities and sales proceeds for benefit of unpaid suppliers, sellers, or agents; preservation of trust; jurisdiction of courts
(1) 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, and any receivables or proceeds from the sale of 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.
(2) 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 supplier, sellers, or agents. . . .
PACA, 7 U.S.C. § 499e(c)(1)-(2).
As the Second Circuit has explained, PACA "establishes a scheme in which a purchaser of Produce on credit (a 'Produce Debtor') is required to hold the Produce and its derivatives or proceeds in trust for the unpaid seller. . . . A PACA trust beneficiary is thereby entitled to claim trust property ahead of even creditors holding security interests in the property."
. . . .
Judge Sand has described the nature of the relationship arising under a PACA trust as follows:
PACA establishes a statutory trust for the benefit of sellers and suppliers. This trust arises from the moment perishable goods are delivered by the seller. An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for that tortious act. . . .
We recognize . . . that a PACA trust in effect imposes liability on a trustee, whether a corporation or a controlling person of that corporation, who uses the trust assets for any purpose other than repayment of the supplier. This includes use of the proceeds from the sale of perishables for legitimate business expenses, such as the payment of rent, payroll, or utilities. Proceeds from the sales of perishables subject to PACA receive special treatment in other respects as well. Thus, a PACA beneficiary has priority over any secured creditor on the purchaser's commodity-related assets to the extent of the amount of his claim. . . . These consequences are attributable to the [PACA] statute, and it is the responsibility of Congress to revise the statute if these are not the intended results.
Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F. Supp. 346, 348-49 (S.D.N.Y. 1993). A produce buyer is obligated to "maintain trust assets in a manner that such assets are freely available" to pay the seller's bills. 7 C.F.R. § 46.46(d).C.H. Robinson Co. v. Alanco Corp., 97 Civ. 6018, 2000 WL 101238 at *2-3, 5-6 (S.D.N.Y. Jan. 28, 2000) (Peck, M.J.) (citations omitted), aff'd, 239 F.3d 483 (2d Cir. 2001).
The case law is clear, and defendants do not dispute (Defs. Br. at 5) that individual shareholders, officers and/or directors of a corporation that is subject to PACA can face individual liability for breach of their fiduciary duty to PACA Claimants.See, e.g., Goldman-Hayden Co. v. First Source Produce, Inc., 217 F.3d 348, 351 (5th Cir. 2000) ("PACA liability attaches first to the licensed commission merchant, dealer, or broker of perishable agricultural commodities. If, however, the assets of the licensed commission merchant, dealer, or broker are insufficient to satisfy the PACA liability, then others may be held secondarily liable if they had some role in causing the corporate trustee to commit the breach of trust. Thus, we join our colleagues in the Ninth Circuit and hold that individual shareholders, officers, or directors of a corporation who are in a position to control trust assets, and who breach their fiduciary duty to preserve those assets, may be held personally liable under PACA. We view this conclusion as consistent with the intent of Congress in establishing the statutory trust provisions of PACA.") (fns. omitted); Hiller Cranberry Prods., Inc. v. Koplovsky, 165 F.3d 1, 8-9 (1st Cir. 1999) ("An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for that tortious act."); Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 283 (9th Cir. 1997) ("The unanimous conclusion of the cases is that 'PACA liability attaches first to the licensed seller of perishable agricultural commodities. If the seller's assets are insufficient to satisfy the liability, others may be found secondarily liable if they had some role in causing the corporate trustee to commit the breach of trust.' We agree that individual shareholders, officers, or directors of a corporation who are in a position to control PACA trust assets, and who breach their fiduciary duty to preserve those assets, may be held personally liable under the [PACA] Act.") (citations omitted); "R" Best Produce, Inc. v. Eastside Food Plaza, Inc., 02 Civ. 6925, 2003 WL 22231577 at *6 (S.D.N.Y. Sept. 30, 2003) ("An individual who is in a position to control assets of the statutory trust established under PACA, and who breaches his fiduciary duty to preserve those assets, may be held personally liable to the trust beneficiaries."); Horizon Mktg. v. Kingdom Int'l Ltd., 244 F. Supp. 2d 131, 145 (E.D.N.Y. 2003) ("The court notes that several courts in this circuit and others, have held that in PACA cases, individuals who are principals in corporations which bought produce, but failed to pay, are individually liable for breach of their fiduciary duties."); Red's Market v. Cape Canaveral Cruise Line, Inc., 181 F. Supp. 2d 1339, 1343-44 (M.D. Fla.) ("The extension of liability to those in control of the trust assets is reasonable and necessary in order to enforce the goals of Congress in establishing the statutory [PACA] trust."), aff'd, No. 02-16781, 48 Fed. Appx. 328 (table), 2002 WL 2001204 (11th Cir. Aug. 21, 2002); Bronia, Inc. v. Ho, 873 F. Supp. 854, 861 (S.D.N.Y. 1995) ("While the Second Circuit has yet to address this issue, several courts in this and other districts have imposed personal liability in analogous situations. Seo was the sole shareholder, director, and president of Tradefield Corporation. He was the 'primary actor responsible for [Tradefield's] failure to live up to its fiduciary responsibilities under PACA,' and is thus personally responsible for Tradefield's breach of the trust.") (citation omitted);Shepard v. K.B. Fruit Vegetable, Inc., 868 F. Supp. 703, 705-06 (E.D. Pa. 1994) ("If the [corporation's] assets are insufficient to satisfy the [PACA] liability, others may be found secondarily liable if they had some role in causing the corporate trustee to commit the breach of trust."); Mid-Valley Produce Corp. v. 4-XXX Produce Corp., 819 F. Supp. 209, 212 (E.D.N.Y. 1993) (summary judgment for plaintiff finding president of corporation personally liable for PACA trust amounts); Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F. Supp. 346, 348, 350 (S.D.N.Y. 1993) (Sand, D.J.) ("PACA establishes a statutory trust for the benefit of sellers and suppliers. . . . An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for that tortious act." Court finds corporation "is liable in the first instance to [plaintiff], and defendant Zimmerman [sole shareholder of corporate defendant] is liable secondarily for whatever shortfall may exist.") (leading case); In re Harper (Nuchief Sales, Inc. v. Harper), 150 B.R. 416, 419 (Bankr. E.D. Tenn. 1993) (corporate officer liable under PACA for corporation's violation of PACA trust); see also C.H. Robinson Co. v. Alanco Corp.,
97 Civ. 6018, 2000 WL 101238 at *5-6 (S.D.N.Y. Jan. 28, 2000) (Peck, M.J.) (quoting Morris Okun), aff' d, 239 F. 3d 483 (2d Cir. 2001).
While recognizing these principles, Gargiulo argues that he is not personally liable, at this time, for two reasons. (Dkt. No. 167: Defs. Br. at 3-7.)
A. Gargiulo's Defense That He Did Not "Dissipate" Trust Assets Is Without Merit
First, Gargiulo argues that since it is not per se improper to utilize a factor, there is no proof that Gargiulo "dissipated" trust assets. (Dkt. No. 167: Defs. Br. at 3-4, 6.) Gargiulo's argument is contrary to precedent, which imposes strict liability on a PACA trustee if there is insufficient liquid assets to pay the PACA creditors, even if the money was used for other legitimate business expenses. As Judge Sand explained in the leading case of Morris Okun, Inc. v. Harry Zimmerman, Inc.:
An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for that tortious act. . . .
We recognize at the outset that a PACA trust in effect imposes liability on a trustee, whether a corporation or a controlling person of that corporation, who uses the trust assets for any purpose other than repayment of the supplier. This includes use of the proceeds from the sale of perishables for legitimate business expenditures, such as the payment of rent, payroll, or utilities.Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F. Supp. 346, 348 (S.D.N.Y. 1993).
Similarly, in Bronia, Inc. v. Ho, Judge Conner explained that the individual corporate officer/director/shareholder is liable for the corporation's failure to pay PACA creditors regardless of his personal fault. Bronia, Inc. v. Ho, 873 F. Supp. 854, 860-61 (S.D.N.Y. 1995). It is worth quoting Judge Conner's explanation at length:
Defendant next argues that . . . he cannot be liable for breaching a fiduciary duty to the plaintiffs absent evidence that he personally participated in violating the trust requirements. Seo asserts that the mere fact that plaintiffs remain unpaid is an insufficient basis to bring charges against him for breaching a fiduciary duty. We do not agree.
Under USDA regulations, the trust corpus consists of all perishable agricultural commodities received in the transactions, products derived from those commodities, and proceeds from their sale. 7 C.F.R. § 46.46(c). The regulations further require Tradefield, and hence Seo, to maintain the trust assets "in a manner that such assets are freely available to satisfy the outstanding obligations to sellers of perishable agricultural commodities. 7 C.F.R. § 46.46(d). Any act inconsistent with this duty, including dissipation of the trust assets, is actionable. Id.
Defendant argues that since Tradefield did not "dissipate" the trust assets, but instead attempted to collect the proceeds from the resale of the commodities, he should not be liable. Defendant apparently misunderstands the duties of a trustee. The fact that Tradefield attempted but failed to collect this money does not satisfy its duty to the plaintiffs. The trust corpus extends to both the produce and the proceeds from its sale. Relinquishing control of the commodities without securing payment is "dissipation of the trust assets." Similarly, failing to turn over the trust assets when payment is due to the produce sellers breaches Tradefield's fiduciary duty to make the trust assets "freely available" to the plaintiffs.
Moreover, because of his status in Tradefield, Seo is personally liable for any breach of trust by Tradefield. While the Second Circuit has yet to address this issue, several courts in this and other districts have imposed personal liability in analogous situations. Seo was the sole shareholder, director, and president of Tradefield Corporation. He was the "primary actor responsible for [Tradefield's] failure to live up to its fiduciary responsibilities under PACA," In re Nix, No. 91-4040-COL, 1992 WL 119143 at *5 (M.D. Ga. April 10, 1992), and is thus personally responsible for Tradefield's breach of the trust. Id.; Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F. Supp. 346, 349 (S.D.N.Y. 1993); A J Produce Corp. v. CIT Group/Factoring Inc., 829 F. Supp. 651, 655-56 (S.D.N.Y. 1993). As explained in Morris Okun:
PACA establishes a statutory trust for the benefit of sellers and suppliers. This trust arises from the moment perishable goods are delivered by the seller. An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for that tortious act. This legal framework is to be distinguished from the piercing the veil doctrine, where the corporate form is disregarded because the individual has either committed a fraud, or because the corporation is a "shell" being used by the individual shareholders to advance their own purely personal rather than corporate ends.814 F. Supp. at 348.
Defendant argues that he should not be liable because, unlike Nix, where the corporate controlling person made no effort to identify trust monies or preserve proceeds for the commodities sellers, Seo did not personally misappropriate the trust assets. Defendant does not deny, however, that as the controlling person of Tradefield, he owes a fiduciary duty to the plaintiffs. Therefore, Tradefield's failure to preserve the trust assets is also his failure. Whether or not Tradefield has surrendered the trust assets by filing a petition for bankruptcy and placing any trust assets that may still exist in control of the bankruptcy trustee, Seo has breached his obligation to keep those assets freely available for satisfying Tradefield's obligations to plaintiffs and is personally liable to plaintiffs therefor.Bronia, Inc. v. Ho, 873 F. Supp. at 860-61; accord, e.g., Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 283 (9th Cir. 1997) (quoting Morris Okun); Red's Market v. Cape Canaveral Cruise Line, Inc., 181 F. Supp. 2d 1339, 1344 (M.D. Fla.) ("The defendants are correct in asserting that there is no evidence that as corporate officers they did not effectively execute their responsibilities to Cape. However, that is not the test to determine whether they breached their responsibilities as PACA trustees. . . . [C]ase law generally holds that an individual in control of PACA trust assets may be liable for failure to preserve the res of the trust without regard to whether the failure was intentional. . . . [U]se of trust assets for any purpose other than to pay Red's was a violation of the individual defendants' fiduciary duty to Red's. Findings of misappropriation or bad faith are not essential to an imposition of individual liability upon these defendants who were in total control of the PACA trust assets. A simple finding that they failed to account for the trust assets is sufficient."), aff'd, No. 02-16781, 48 Fed. Appx. 328 (table), 2002 WL 2001204 (11th Cir. Aug. 21, 2002).
Here, too, as in the above cases, Gargiulo is liable, regardless of "fault," for Dom's PACA debts because he is Dom's sole shareholder, officer and director.
B. Garguilo's "Secondary Liability" Defense Lacks Merit In This Situation
Gargiulo's second defense is that even if he has personal liability, it is only "secondary" to Dom's liability, and because Dom's may have assets — money Dom's claims that Platinum owes Dom's (which Platinum disputes) — the plaintiff PACA Claimants cannot go against Gargiulo's assets until Dom's assets are exhausted. (See, e.g., Dkt. No. 169: Gargiulo Aff. ¶¶ 5, 9, 12, 17(b); Dkt. No. 167: Defs. Br. at 2, 6-7.) The Court disagrees.
This specific issue appears to be one of first impression.
The Court notes that in the leading case of Morris Okun, Inc. v. Harry Zimmerman, Inc., Judge Sand held the corporation "primarily" liable and the individual owner "secondarily" liable: "[W]e hold the corporation liable in the first instance for the debt owed [the PACA beneficiary], and [the individual] liable secondarily, as the corporate fiduciary, for whatever amount of money is not recoverable from the corporation." 814 F. Supp. 346, 349-50 (S.D.N.Y. 1993). That primary-secondary language has been repeated in subsequent cases. See, e.g., Goldman-Hayden Co. v. Fresh Source Produce, Inc., 217 F.3d 348, 351 (5th Cir. 2000); Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 283 (9th Cir. 1997) (quoting Shepard v. K.B. Fruit Vegetable, Inc., 868 F. Supp. 703, 706 (E.D. Pa. 1994)). In most if not all of these cases, however, the corporation had no assets or was in bankruptcy.See, e.g., Goldman-Hayden Co. v. Fresh Source Produce, Inc., 217 F.3d at 349 (corporate defendant First Source had ceased doing business and filed for bankruptcy); Sunkist Growers, Inc. v. Fisher, 104 F.3d at 281 (corporate defendant went out of business without satisfying prior state court judgment in plaintiff's favor).
In Morris Okun, Inc. v. Harry Zimmerman, Inc., it appears that the corporate defendants were still in business. 814 F. Supp. at 347.
Where the corporate defendant has liquid assets, it makes sense to order, as Judge Sand did, primary liability on the corporation and liability on the controlling shareholder only for any deficiency. Here, however, if Dom's has any assets, they are tied up in the Dom's-Platinum dispute. (See page 3 above.) Dom's position would require the PACA Claimants to wait until the Dom's-Platinum dispute is resolved (both at the trial level and on appeal), which could take years. Indeed, Dom's suggests that not only must the PACA Claimants wait for resolution of the Dom's-Platinum litigation, but perhaps also for the collection (by Dom's or plaintiffs) of accounts receivable that Platinum wrote off. (See Dkt. No. 167: Defs. Br. at 2, 6; Dkt. No. 169: Gargiulo Aff. ¶¶ 11-12 (referring to allowing "Dom's and/or the Plaintiffs [to] take appropriate legal action to recover these receivables.").)
The Court believes that where, as here, the corporation's assets, if any, are illiquid, PACA Claimants are entitled to judgment against both the corporation (here, Dom's) and the individual shareholder/officer (here, Gargiulo).
PACA regulations require trust assets to be "freely available":
Commission merchants, dealers and brokers are required to maintain trust assets in a manner that such assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities. Any act or omission which is inconsisent with this responsibility, including dissipation of trust assets, is unlawful and in violation of Section 2 of the Act ( 7 U.S.C. § 499b).7 C.F.R. § 46.46(d)(1) (emphasis added). Thus, PACA requires that the commodities' "buyer must 'maintain trust assets in a manner that such assets are freely available to satisfy outstanding obligations to the sellers' and 'dissipation of trust assets is unlawful.'" In re Snyder (N.P. Deoudes, Inc. v. Snyder), 184 B.R. 473, 475 (D. Md. 1995) (quoting 7 C.F.R. § 46.46(d); emphasis added); accord, Bronia, Inc. v. Ho, 873 F. Supp. at 860 (Regulations require the corporation and shareholder/officer "to maintain the trust assets 'in a manner that such assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities.' 7 C.F.R. § 46.46(e). . . . [F]ailing to turn over the trust assets when payment is due to the produce sellers breaches [defendants'] fiduciary duty to make the trust assets 'freely available' to the plaintiffs."). Here, even if Platinum owes Dom's money, that "asset" is tied up in litigation and not "freely available" to the PACA Claimants. The PACA Claimants should not be forced to await the conclusion of collateral litigation or collection efforts before they can recover trust amounts owed from the individual defendant. Of course, as between the corporation and that individual, the individual's liability is secondary to the corporation, so if Dom's obtains any assets from Platinum or unpaid accounts, Gargiulo is entitled to reimbursement from Dom's for any amount he pays plaintiffs.
See also, e.g., E. Armata, Inc. v. Korea Commercial Bank of New York, 367 F. 3d 123, 129 (2d Cir. 2004); American Banana Co. v. Republic Nat'l Bank of New York, 362 F. 3d 33, 41 (2d Cir. 2004); Boulder Fruit Express Heger Organic Farm Sales v. Transportation Factoring, Inc., 251 F. 3d 1268, 1271 (9th Cir. 2001); C.H. Robinson Co. v. Alanco Corp., 239 F. 3d 483, 487-88 (2d Cir. 2001).
Since Dom's assets, if any, are not freely available, the plaintiff PACA Claimants are entitled to judgment against both Dom's and Gargiulo. Such a result best satisfies the Congressional intent behind PACA.
CONCLUSION
The Court should grant summary judgment to the PACA Claimants against both Dom's and Gargiulo for $1,299,018.71, plus interest and attorneys' fees in an amount to be determined by the procedures set forth on page 8 above.
FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also Fed.R.Civ.P. 6. Such objections (and any responses to objections) shall be filed with the Clerk of the Court, with courtesy copies delivered to the chambers of the Honorable George B. Daniels, 40 Centre Street, Room 410, and to my chambers, 500 Pearl Street, Room 1370. Any requests for an extension of time for filing objections must be directed to Judge Daniels. Failure to file objections will result in a waiver of those objections for purposes of appeal. Thomas v. Arn, 474 U.S. 140, 106 S. Ct. 466 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993), cert. denied, 513 U.S. 822, 115 S.Ct. 86 (1994);Roldan v. Racette, 984 F.2d 85, 89 (2d Cir. 1993); Frank v.Johnson, 968 F.2d 298, 300 (2d Cir.), cert. denied, 506 U.S. 1038, 113 S.Ct. 825 (1992); Small v. Secretary of Health Human Servs., 892 F.2d 15, 16 (2d Cir. 1989); Wesolek v.Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir. 1988); McCarthy v.Manson, 714 F.2d 234, 237-38 (2d Cir. 1983); 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72, 6(a), 6(e).