17

‐ 1949

‐ (L)

The PACA Trust Creditors v. Genecco Produce Inc.

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

August Term, 2018

(Submitted: September 5, 2018 Decided: January 9, 2019)

Docket Nos. 17

‐ 1949

‐ cv, 17

‐ 2051

‐ cv

T HE PACA T RUST C REDITORS OF L ENNY P ERRY ʹ S P RODUCE

, I NC

., Plaintiffs

‐ Appellees

‐ Cross

‐ Appellants

,

v.

G ENECCO P RODUCE I NC

., D AVID G ENECCO

, Defendants

‐ Appellants

‐ Cross

‐ Appellees

. *

Before: S ACK

, R AGGI

, AND C HIN

, Circuit Judges

.

The plaintiffs brought an adversary proceeding in the United States

Bankruptcy Court for the Western District of New York alleging that the

defendants wrongfully failed to pay the debtor Lenny Perry ʹ s Produce, Inc., for

produce held in trust for the plaintiffs, in violation of the Perishable Agricultural

Commodities Act, 7 U.S.C. § 499. The United States District Court for the

Western District of New York (William M. Skretny, Judge ) adopted a bankruptcy

* The Clerk of the Court is directed to amend the official caption to conform to the

listing of the parties above.17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

2 judge ʹ s report and recommendation (Michael J. Kaplan, Bankruptcy Judge ) that

summary judgment be granted to the plaintiffs in the proceeding but that the

defendants receive a pro rata share of assets of the trust established under the

Act. We agree with the bankruptcy judge and district court. Because assets

subject to the Act are held in a ʺ floating ʺ trust for the benefit of unpaid produce

suppliers and never become part of a bankruptcy estate, when a purchaser of

produce files for bankruptcy under Chapter 7, a creditor covered by the Act ʹ s

provisions is entitled to a pro rata share of trust assets, but not to a complete

offset of mutual debts between it and the bankrupt. Here, the defendants elected

not to file a proof of claim after the district court issued a claims process order

under the Act. Nevertheless, they preserved their PACA claims by providing

statutorily required notice to the debtor in connection with each pre

‐ bankruptcy

sale of fresh produce; filed a proof of claim with the bankruptcy court before the

district court had issued the claims process order; and reasonably, although

mistakenly, thought that they could vindicate their rights as creditors using a

bankruptcy offset. Under those circumstances, we conclude that the district17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

3 court did not err in awarding the defendants a pro rata share of the PACA trust

assets.

The district court ʹ s decision is therefore:

AFFIRMED.

David L. Rasmussen, Mallory Kass Smith,

Davidson Fink LLP, Rochester, New York,

for Defendants

‐ Appellants

‐ Cross

‐ Appellees.

Christopher M. Corrigan, Martyn &

Associates, Cleveland, Ohio, for Plaintiffs

‐ Appellees

‐ Cross

‐ Appellants.

S ACK

, Circuit Judge :

The plaintiffs and the defendants are creditors of debtor Lenny Perry ʹ s

Produce, Inc. ( ʺ LPP ʺ ). Between 2005 and 2008, defendant Genecco Produce, Inc.,

( ʺ GPI ʺ ) and debtor LPP regularly sold produce to one another. Because the

goods were perishable agricultural commodities, these transactions were

governed by the federal Perishable Agricultural Commodities Act, 7 U.S.C. § 499

( ʺ PACA ʺ ).

Instead of paying each other after each transaction, GPI and LPP

accumulated mutual debts intended to offset one another. By the end of 2008,17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

4 those debts totaled $204,774.88, owed by GPI to LPP, and $26 3 ,061.92, owed by

LPP to GPI

— a net balance of $58,287.04 in GPI ʹ s favor.

On January 27, 2009, LPP filed for bankruptcy protection under Chapter 7

of the United States Bankruptcy Code in the United States Bankruptcy Court for

the Western District of New York. The plaintiffs, also unpaid sellers of

perishable agricultural commodities to LPP, brought an adversary proceeding

against the defendants in the bankruptcy court. They alleged that the $204,774.88

owed by GPI to LPP constituted assets of a trust that arose for their benefit under

the terms of PACA ( ʺ PACA Trust ʺ ). In response, the defendants asserted that

federal bankruptcy law, 11 U.S.C. § 55 3 (a), and New York State law, N.Y. Debt. &

Cred. L. § 151, entitled them to a complete offset of any amount otherwise due to

the PACA Trust by amounts that had been due to the defendants from LPP.

On June 7, 2017, the United States District Court for the Western District of

New York (William M. Skretny, Judge ) entered a judgment adopting the

bankruptcy judge ʹ s report and recommendation (Michael J. Kaplan, Bankruptcy

Judge ) recommending that summary judgment be granted to the plaintiffs. The

district court concluded that the defendants were not entitled to a full offset of17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

5 their mutual unpaid debts, but only to a pro rata share of the PACA Trust along

with other unpaid LPP produce suppliers.

The defendants argue that the district court erred because New York State

law and federal bankruptcy law entitle them to a complete offset of any amounts

they owed LPP or the PACA Trust; in the alternative, they claim that questions of

fact regarding the transfer of accounts receivable into the PACA Trust render the

district court’s grant of summary judgment improper.

We disagree. Because PACA assets are held in trust for the benefit of

unpaid produce suppliers generally and never become part of a bankruptcy

estate, and because such PACA creditors enjoy priority over non

‐ PACA

creditors, the defendants ʹ offset defense under section 55 3 of the U.S. Bankruptcy

Code and New York State law is unavailing. The district court therefore

correctly found that the plaintiffs ʹ claims against the defendants are not subject to

the statutory offset sought by the defendants.

Meanwhile, the plaintiffs assert that the district court erred in permitting

the defendants to recover even a pro rata share of the PACA Trust. The plaintiffs

do not dispute that the defendants, like the plaintiffs, are PACA creditors.

Rather, they contend that the defendants are barred from recovery because they17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

6 did not file a proof of claim pursuant to the district court ʹ s claims procedure

order ( ʺ Claims Procedure Order ʺ ), which established deadlines for the plaintiffs ʹ

counsel to issue written notice to potential PACA claimants and for prospective

claimants to file proofs of claim.

We conclude otherwise. The defendants preserved their PACA claims by

providing statutorily required notice to the debtor in each invoice at issue and

filed a proof of claim with the bankruptcy court before the district court had

issued the PACA Claims Procedure Order. Based at least, in part, on ambiguities

in that Order, they reasonably, although mistakenly, thought that they could

vindicate their rights as PACA creditors using a bankruptcy offset and elected

not to file a PACA proof of claim. Under these circumstances, as the district

court correctly concluded, PACA ʹ s statutory purpose is best realized if the

defendants are permitted to collect pro rata shares of the PACA assets. The

district court did not err in allowing the defendants to recover their pro rata

share.

The judgment of the district court is therefore affirmed.17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

7 BACKGROUND

General Factual Background

At all relevant times, GPI, and LPP before it filed for bankruptcy, were

merchants of perishable agricultural commodities operating out of the Niagara

Frontier Food Terminal in Buffalo, New York. Between September 2005 and

October 2008, LPP and GPI regularly sold produce to one another for resale to

their respective customers. In connection with each transaction, the seller—LPP

or GPI—issued an invoice to the other with a notice of intent to preserve its

PACA rights. 1

Usually, neither GPI nor LPP would pay the other for the produce they

sold to one another. Instead, they maintained open, off

‐ setting accounts.

Although GPI and LPP tried ʺ to make sure

. . . GPI was not sending Lenny

Perry ʹ s more produce than Lenny Perry ʹ s was sending GPI, ʺ their efforts were

not entirely successful. Report and Recommendation at 4, PACA Trust Creditors

1 The invoices contained the following language, which the Act, at section 499 e(c)( 4 ),

identifies as sufficient to provide notice of intent to preserve PACA benefits: ʺ The

perishable agricultural commodities listed on this invoice are sold subject to the

statutory trust authorized by section 5 (c) of the Perishable Agricultural Commodities

Act, 19 3 0 ( 7 U.S.C. 499 e(c)). The seller of these commodities retains a trust claim over

these commodities, all inventories of food or other products derived from these

commodities, and any receivables or proceeds from the sale of these commodities until

full payment is received. ʺ See LPP Invoices, App ʹ x 1 3 4

‐ 3 95

.17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

8 of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc.

, No. 09

‐ 1269

‐ MJK (W.D.N.Y.

Feb. 12, 2014), ECF No. 126. By January 2009, LPP owed GPI $26 3 ,061.92, and

GPI owed LPP $204,774.88, resulting in a net balance of $58,287.04 in GPI ʹ s favor.

The plaintiffs 2 are also merchants dealing in perishable agricultural

commodities. Like GPI, they sold fresh produce to LPP. Those sales for which

the plaintiffs were never paid are governed by PACA. When LPP filed for

bankruptcy, it owed the plaintiffs an estimated $292,417. 3 9.

Procedural History

On January 27, 2009, LPP and its principal, Leonard R. Perry, filed

ʺ Voluntary Petitions ʺ for protection under Chapter 7 of the Bankruptcy Code in

the United States Bankruptcy Court for the Western District of New York. On

February 17, 2009, GPI filed a proof of claim for $26 3 ,061.92. On March 9, 2009,

the plaintiffs brought an adversary proceeding against LPP and Perry in that

2 The plaintiffs are Burch Equipment LLC, Jackson’s Farming Co., Pismo Oceano

Vegetable Exchange, Wings Landing Farm, Brooks Tropicals LLC, John B. Ordille Inc.,

and Weis

‐ Buy Farms Inc.17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

9 court alleging PACA violations and a breach of fiduciary duty owed to the

PACA beneficiaries.

The plaintiffs filed a motion to establish a PACA claims procedure, which

the bankruptcy court granted on August 7, 2009. Under the Claims Procedure

Order, LPP was required, on or before August 12, 2009, to provide the plaintiffs ʹ

counsel with names and addresses of all potential PACA claimants not already

listed in the bankruptcy petition. Also by order of the court, the plaintiffs ʹ

counsel had until August 17, 2009, to issue written notice of the Claims

Procedure Order to potential PACA claimants, and prospective PACA claimants

had until August 3 1, 2009, to file complaints in intervention and PACA proofs of

claim. Although the plaintiffs timely served GPI with notice of the Claims

Procedure Order, GPI elected not to file a PACA claim but to pursue its offset

claim instead.

On November 4

, 2009

, the PACA Trust beneficiaries instituted an

adversary proceeding against the defendants alleging that between September

2005 and October 2008

, LPP delivered to GPI fresh produce worth a total of

$ 204

, 774

. 88

, for which they were not compensated. The beneficiaries further

alleged that LPP ʹ s accounts receivable from those sales constituted PACA Trust17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

10 assets. On December 3 0

, 2009

, the defendants filed an answer asserting that they

were ʺ entitled to a setoff in the amount of $ 26 3, 061

. 92

, ʺ owed to them by LPP,

ʺ which is in excess of the $ 204

, 774

. 88 claimed to be due and owing by [the

plaintiffs]. ʺ App ʹ x 94

.

Motion to Strike

On January 15

, 2010

, the plaintiffs filed a motion to strike the defendants ʹ

statutory

‐ offset defense. They argued that the defendants ʹ offset rights, if any,

could only be asserted against LPP, not the PACA Trust or its beneficiaries. On

August 14

, 2012

, the bankruptcy court recommended that the district court deny

the plaintiffs ʹ motion because it would be ʺ unfair and inequitable ʺ to strike the

offset defense unless the defendants are ʺ permitted a late ʹ opt

‐ in ʹ to share as []

beneficiar[ies] of the Trust. ʺ 3 PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v.

Genecco Produce, Inc. (In re Lenny Perry ʹ s Produce)

, Bankr. No. 09

‐ 10297 K, 2012

WL 7767580

, at * 4

, 2012 Bankr. LEXIS 5440

, at * 14 (Bankr. W.D.N.Y. Aug. 14

,

2012 ). On November 12

, 2012

, the district court adopted the bankruptcy court ʹ s

3 Although the district court has jurisdiction over the adversary proceeding between

the plaintiffs and the defendants, it entered a Special Order of Reference to the

bankruptcy court. Pursuant to that Special Order, the bankruptcy court presided over

each of the motions filed in this matter and issued reports and recommendations to the

district court.17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

11 recommendation. John B. Ordille, Inc. v. Lenny Perry ʹ s Produce, Inc.

, No. 12

‐ MC

‐

54 S, 2012 WL 5499652

, 2012 U.S. Dist. LEXIS 161648 (W.D.N.Y. Nov. 12

, 2012 ).

Motion for Summary Judgment

On May 3, 201 3, the plaintiffs moved for summary judgment, renewing

their argument that GPI could only bring an offset claim against LPP, not against

the plaintiffs. On February 12

, 2014

, the bankruptcy court recommended that the

district court grant the plaintiffs ʹ motion. Report and Recommendation, PACA

Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc.

, No. 09

‐ 1269

‐

MJK (W.D.N.Y. Feb. 12

, 2014 ), ECF No. 126

. It rejected the defendants ʹ argument

that a long

‐ term bartering arrangement had extinguished GPI ʹ s debts to LPP.

The bankruptcy court noted that GPI had failed to produce any tax documents or

other evidence to substantiate its claim of a bartering arrangement with LPP. To

the contrary, it concluded, ʺ the parties were simply selling commodities to each

other

. . . , maintaining open, off

‐ setting accounts that remained so (meaning

never materially reconciled by off

‐ set) right up until the [d]ebtor went out of

business. ʺ Id. For that reason, it recommended that the district court enter

judgment in favor of the plaintiffs in the amount that GPI owed to LPP, less GPI ʹ s

pro rata share of the PACA Trust.17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

12 On September 4

, 2014

, the district court remanded the matter to the

bankruptcy court for further proceedings. PACA Trust Creditors of Lenny Perry ʹ s,

Inc. v. Genecco Produce, Inc.

, No. 14

‐ MC

‐ 0 3 6 S, 2014 WL 4 3 854 3 6

, at * 1

, 2014 U.S.

Dist. LEXIS 12 3 965

, at *3 (W.D.N.Y. Sept. 4

, 2014 ). It explained that because

ʺ bartering and setoff are different concepts, ʺ the absence of a bartering

relationship does not necessarily defeat an offset defense. Id. at *3

‐ 4 ; 2014 U.S.

Dist. LEXIS 12 3 965

, at * 7

. The district court directed the bankruptcy court, on

remand, to consider whether (i) GPI’s debt to LPP and LPP ʹ s debt to GPI

constitute ʺ mutual debt[s] ʺ for purposes of section 55 3 of the Bankruptcy Code,

and (ii) whether any funds due from GPI to LPP are PACA Trust assets not

subject to the defendants ʹ offset claim. Id. at * 2

‐ 3; 2014 U.S. Dist. LEXIS 12 3 965

, at

* 7

, 9

‐ 10

.

On February 2 3, 2015

, the bankruptcy court issued a ʺ Clarified Report and

Recommendation, ʺ which explained in greater detail—but did not materially

alter—its February 12

, 2014 recommendation. PACA Trust Creditors of Lenny

Perry ʹ s Produce, Inc. v. Genecco Produce, Inc. (In re Lenny Perry ʹ s Produce, Inc.)

,

No. 09

‐ 10297 K, 2015 Bankr. LEXIS 271 3 (Bankr. W.D.N.Y. Feb. 2 3, 2015 ). On

August 12

, 2015

, the district court again remanded the matter to the bankruptcy17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

1 3 court, explaining that ʺ clarification of the issues raised in the parties ʹ submissions

as well as this Court ʹ s prior order is warranted. ʺ PACA Trust Creditors of Lenny

Perry ʹ s Produce v. Genecco Produce, Inc.

, No. 15

‐ MC

‐ 028 S, 2015 WL 4761627

, at * 6

,

2015 U.S. Dist. LEXIS 105908

, at * 15 (W.D.N.Y. Aug. 12

, 2015 ).

The bankruptcy court issued what turned out to be its final report and

recommendation on December 28

, 2015

. PACA Trust Creditors of Lenny Perry ʹ s

Produce, Inc. v. Genecco Produce, Inc. (In re Lenny Perry ʹ s Produce, Inc.)

, No. 09

‐

10297 K, 2015 WL 9581 3 8 3, 2015 Bankr. LEXIS 4 3 71 (Bankr. W.D.N.Y. Dec. 28

,

2015 ). The court concluded that ʺ the Trust’s rights are not now, and never were,

subject to the limitations that [LPP] suffered as to [GPI], or the defenses that

[GPI] had against [LPP]. ʺ Id. at * 2 ; 2015 Bankr. LEXIS 4 3 71

, at * 4

‐ 5

. In the

bankruptcy court ʹ s view, ʺ every item of perishable commodities [LPP] ever

handled was held by it in trust, as were any proceeds realized from those items, ʺ

so that ʺ everything that [LPP] received from [GPI] or was entitled to receive from

[GPI] on account of perishable commodities delivered to [GPI] was subject to the

statutory PACA Trust in favor of growers, cooperatives, etc.[,] which were owed

money for those commodities. ʺ Id. ; 2015 Bankr. LEXIS 4 3 71

, at * 5

. The PACA17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

14 Trust existed ʺ from the moment that [LPP] bought or sold commodities subject to

PACA. ʺ Id. ; 2015 Bankr. LEXIS 4 3 71

, at * 5

.

The bankruptcy court further decided that LPP and GPI ʹ s method of doing

business by maintaining mutual debts ʺ was not consistent with PACA, ʺ which

requires timely payments ʺ so that all providers of perishable agricultural

commodities to [LPP] had a chance to receive cash payments from [GPI] for what

they provided. ʺ Id. at * 4 ; 2015 Bankr. LEXIS 4 3 71

, at * 11

‐ 12

. It concluded that

ʺ equity requires treatment that PACA would seem to require, ʺ id. ; 2015 Bankr.

LEXIS 4 3 71

, at * 12 : a judgment against GPI equal to ʺ the difference between what

[GPI] owed [LPP] on the date of the Chapter 7 petition (and therefore owes to the

PACA Trust) and the amount that [GPI] would receive as a PACA Trust

beneficiary, ʺ id. at * 6 ; 2015 Bankr. LEXIS 4 3 71

, at * 19 (emphasis in original).

On June 7

, 2017

, the district court adopted the bankruptcy court ʹ s

recommendation in full. PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v.

Genecco Produce Inc.

, No. 16

‐ MC

‐ 4 S, 2017 WL 24620 3 5

, 2017 U.S. Dist. LEXIS

87488 (W.D.N.Y. June 7

, 2017 ). The district court rejected the defendants ʹ

argument that they are entitled to a complete offset. It observed that offsets only

apply to mutual debts, and the debts between GPI and LPP are ʺ mutual only to17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

15 the extent [d]efendants are co

‐ beneficiaries to the PACA Trust. And, to the

extent that they are co

‐ beneficiaries, [p]laintiffs and [d]efendants owe one

another a fiduciary duty to take no more than their [pro rata] share of trust

assets. ʺ Id. at * 2 ; 2017 U.S. Dist. LEXIS 87488

, at * 4

. The district court also

rejected the plaintiffs ʹ argument that the defendants ʹ failure to file a PACA claim

precludes them from recovering a pro rata share of the PACA Trust. Instead, the

district court decided that allowing the defendants limited recovery as PACA

creditors ʺ best furthers the policies of PACA. ʺ Id. at * 1 ; 2017 U.S. Dist. LEXIS

87488

, at * 4

. The district court concluded that although the defendants are not

entitled to an offset under bankruptcy law, they may recover a pro rata share of

the PACA Trust. Id. ; 2017 U.S. Dist. LEXIS 87488

, at * 4

‐ 5

.

DISCUSSION

There are two issues raised on appeal: First, whether the district court

erred in concluding that LPP ʹ s accounts receivable constitute PACA Trust assets

and that the defendants are therefore not entitled to a statutory offset of their

debts to LPP against LPP ʹ s debts to them; and second, whether the district court

erred in allowing the defendants to recover a pro rata share of the PACA Trust.

The defendants argue that the Bankruptcy Code, 11 U.S. Code § 55 3

, which17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

16 governs ʺ Setoff, ʺ entitles them to a complete offset of any amount otherwise due

to the PACA Trust. The plaintiffs respond that the defendants may not recover

even a pro rata share of the PACA Trust because they elected not to participate in

the PACA claims procedure in the bankruptcy court. For the reasons discussed

below, we affirm the district court ʹ s judgment in its entirety.

I. Standard of Review

ʺ We review a grant of summary judgment de novo, examining the

evidence in the light most favorable to, and drawing all inferences in favor of, the

non

‐ movant. ʺ Blackman v. N.Y. City Transit Auth.

, 491 F. 3 d 95, 98 (2d Cir. 2007)

(per curiam) (quoting Sheppard v. Beerman

, 3 17 F. 3 d 3 51, 3 54 (2d Cir. 200 3 )).

Summary judgment is appropriate only if ʺ the movant shows that there is no

genuine dispute as to any material fact and the movant is entitled to judgment as

a matter of law. ʺ Fed. R. Civ. P. 56(a). A genuine dispute exists if ʺ the evidence

is such that a reasonable jury could return a verdict for the nonmoving party. ʺ

Fireman’s Fund Ins. Co. v. Great Am. Ins. Co. of N.Y.

, 822 F. 3 d 620, 6 3 1 n.12 (2d Cir.

2016) (internal quotation marks omitted). However, ʺ a party may not rely on

mere speculation or conjecture as to the true nature of the facts to overcome a

motion for summary judgment. ʺ Fletcher v. Atex, Inc.

, 68 F. 3 d 1451, 1456 (2d Cir.17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

17 1995) (internal quotation marks omitted). The party opposing summary

judgment ʺ must do more than simply show that there is some metaphysical

doubt as to the material facts. ʺ Matsushita Elec. Indus. Co. v. Zenith Radio Corp.

,

475 U.S. 574, 586 (1986).

When a district court interprets its own order, we apply an abuse

‐ of

‐

discretion standard. Garcia v. Yonkers Sch. Dist.

, 561 F. 3 d 97, 10 3 (2d Cir. 2009);

see also United States v. Spallone

, 3 99 F. 3 d 415, 42 3 (2d Cir. 2005) ( ʺ When an issuing

judge interprets his own orders, we accord substantial deference to the

draftsman, and we will not reverse the judge ʹ s construction of an ambiguity in

his own words except for abuse of discretion. ʺ ).

II. Statutory Offset

The defendants advance two arguments challenging the district court ʹ s

conclusion that they are not entitled to a complete offset of the debts covered by

PACA from them to LLP against those from LLP to the defendants under New

York State law and federal bankruptcy law. First, they argue that LPP ʹ s relevant

accounts receivable were transferred to the PACA Trust, if at all, subject to the

defendants ʹ offset rights. Second, they argue that factual disputes exist as to17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

18 whether LPP ʹ s accounts receivable constituted PACA Trust assets. We reject

both arguments.

1. Availability of Offset Defense Against the Plaintiffs’ PACA Claim

The defendants claim that ʺ [n]o authority exists, ʺ Defendants ʹ Br. 14, that

would require the defendants to ʺ pay [their] debts in full to the bankrupt[], while

allowing the [defendants] to recover only a percentage of the debts owed to

[them] by the bankrupt[, LPP], ʺ id. at 1 3 (internal quotation marks omitted). Not

so. The statutory language of PACA and section 55 3 of the U.S. Bankruptcy

Code, as well as this Court ʹ s prior decisions, require precisely that.

The PACA trust provision, which Congress enacted in order ʺ to make the

sellers ʹ interests in the commodities and sales proceeds superior to those of the

buyers ʹ creditors, ʺ Am. Banana Co. v. Rep. Nat ʹ l Bank of N.Y.

, 3 62 F. 3 d 33

, 3 7 (2d

Cir. 2004), states in relevant part:

Perishable agricultural commodities received by a

commission merchant, dealer, or broker in all

transactions

. . . 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.17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

19 7 U.S.C. § 499e(c)(2). Under regulations adopted by the U.S. Department of

Agriculture ( ʺ DOA ʺ ), PACA assets ʺ are to be preserved as a nonsegregated

ʹ floating ʹ trust. ʺ 7 C.F.R. § 46.46(b). PACA and related DOA regulations provide

produce sellers with ʺ a self

‐ help tool enabling them to protect themselves against

the abnormal risk of losses resulting from slow

‐ pay and no

‐ pay practices by

buyers or receivers of fruits and vegetables. ʺ Coosemans Specialties, Inc. v.

Gargiulo

, 485 F. 3 d 701, 705 (2d Cir. 2007) (citations omitted).

We have explained that ʺ [o]rdinary principles of trust law apply to the

trusts created by [PACA]

. . . so that the Produce Debtor holds the legal title to

the Produce and its derivatives or proceeds but the seller retains an equitable

interest in the trust property pending payment[.] ʺ Tom Lange Co. v. Kornblum &

Co. (In re Kornblum & Co.)

, 81 F. 3 d 280, 284 (2d Cir. 1996) (citations omitted).

Because PACA creditors hold an equitable interest in the PACA trust pending

payment, ʺ the Bankruptcy Code excludes PACA trust assets from the bankruptcy

estate. ʺ Id. (citing, inter alia

, United States v. Whiting Pools, Inc.

, 462 U.S. 198, 205

n.10 (198 3 ) (explaining that the Bankruptcy Code ʺ plainly exclude[s from the

bankruptcy estate] property of others held by the debtor in trust at the time of

the filing of the [bankruptcy] petition ʺ )). Consequently, PACA ʺ gives unpaid17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

20 [produce] suppliers

. . . priority over secured lenders

. . . to PACA trust assets. ʺ

Albee Tomato, Inc. v. A.B. Shalom Produce Corp.

, 155 F. 3 d 612, 615 (2d Cir. 1998).

The defendants ʹ reliance on bankruptcy law to defend against PACA

claims is misplaced. To the extent the disputed assets represent PACA Trust

assets, they are held outside the bankruptcy estate, and their disposition is,

therefore, governed by trust law rather than bankruptcy law. See Kornblum

, 81

F. 3 d at 284. To permit a bankruptcy offset against PACA Trust assets would be

inconsistent with Congress ʹ s intent in amending PACA in 1984 to ʺ broaden the

protections afforded to produce suppliers ʺ who had previously ʺ receive[d] little

protection in any suit for recovery of damages where a buyer ha[d] failed to

make payment as required by the contract. ʺ Id. at 28 3 (citation omitted). Because

PACA provides unpaid produce sellers with priority over other creditors and

establishes that the disposition of PACA assets is governed by trust law, see id. at

284, we conclude that the district court did not err in deciding that the

defendants are not entitled to the offset they seek under New York and federal

‐

bankruptcy law. 4

4 This conclusion is buttressed by the language in section 55 3 of the U.S. Bankruptcy

Code, which makes offsets available only for ʺ mutual ʺ debts. 11 U.S.C. § 55 3 (a).17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

21 2. No Genuine Dispute of Material Fact

The defendants next argue that material factual disputes exist as to

whether LPP ʹ s accounts receivable for the sale of produce to the defendants,

totaling $204,774.88, constitute PACA Trust assets. The defendants suggest that

because they sought an offset before the district court issued its Claims

Procedure Order, LPP ʹ s receivables never became PACA Trust assets, or, if they

did, they were transferred subject to the defendants ʹ offset rights.

The defendants ʹ argument misses the mark. We have explained that a

PACA trust ʺ is automatically established each time a broker or merchant

purchases perishable commodities. ʺ D.M Rothman & Co., Inc. v. Korea Commercial

Bank of N.Y.

, 411 F. 3 d 90, 96 (2d Cir. 2005); accord C&E Enters., Inc. v. Milton

Mutuality exists where debts ʺ are due to and from the same persons in the same

capacity. ʺ Westinghouse Credit Corp. v. D’Urso

, 278 F. 3 d 1 3 8, 149 (2d Cir. 2002) (citations

omitted). The debts here are not mutual because the defendants and LPP appear in

different capacities: The defendants assert their claim to $26 3 ,061.92 in their capacity as

creditors in LPP’s bankruptcy proceeding; LPP, by contrast, does not—and cannot—

assert a claim for $204,774.88 in its capacity as a creditor, but instead pursues those

funds solely on behalf of unpaid suppliers. See 7 U.S.C. § 499e(c)(2) (“Perishable

agricultural commodities received by a

. . . merchant,

. . . and any receivables or

proceeds from the sale of such commodities

. . . , shall be held

. . . in trust for the benefit

of all unpaid suppliers

. . . until full payment of the sums owing

. . . has been received

by such unpaid suppliers[.]”); cf. D ʹ Urso

, 278 F. 3 d at 149 ( ʺ [O]bligations lack mutuality

where one party is a trust beneficiary asserting his or her rights against a trustee, and

the other is a creditor exercising his or her contractual rights[.] ʺ ).17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

22 Poulos, Inc. (In re Milton Poulos, Inc.)

, 947 F.2d 1 3 51, 1 3 52 (9th Cir. 1991) ( ʺ The

[PACA] trust automatically arises in favor of a produce seller upon delivery of

produce[.] ʺ ); Patterson Frozen Foods, Inc. v. Crown Foods Int’l, Inc.

, 3 07 F. 3 d 666, 669

(7th Cir. 2002) ( ʺ Th[e PACA] floating trust is automatically created when the

dealer accepts the goods[.] ʺ ). Any factual dispute as to whether the defendants

asserted their offset claim before the district court issued the Claims Procedure

Order is immaterial: Even if the defendants ʹ offset claim predates the Claims

Procedure Order, the PACA Trust arose immediately upon the sale of produce

from the plaintiffs to LPP—long before the defendants asserted their offset

claim—such that the accounts receivable associated with those transactions

would not be subject to that defense.

The defendants further argue that the plaintiffs have failed to establish that

the accounts receivable were PACA Trust assets. This argument, too, fails. It is

the defendants who bear the burden of demonstrating that disputed assets do not

constitute PACA trust assets. Kornblum

, 81 F. 3 d at 287. They have not met that

burden. Nothing in the record suggests that LPP entered into a factoring

agreement with GPI, that LPP and GPI engaged in a bartering relationship, or

that LPP and GPI paid down their mutual debts. Instead, the record establishes17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

2 3 that LPP and GPI ʹ s debts to each other remained outstanding when GPI filed for

bankruptcy.

The defendants thus have failed to identify any genuine dispute of

material fact as to whether LPP ʹ s accounts receivable constitute PACA Trust

assets.

III. Pro Rata Share

Finally, we address the district court ʹ s decision to award the defendants a

pro rata share of the PACA Trust, in light of the defendants ʹ loss on their set

‐ off

claim and failure to file a proof of claim after the district court issued the Claims

Procedure Order. The bankruptcy court recommended that the district court

allow the defendants to recover a pro rata share, in part because the Claims

Procedure Order did not specify which ʺ receivables ʺ were ʺ trust assets ʺ ; it was

therefore ʺ not unreasonable for [GPI] to have relied upon its belief that ordinary

setoff rights as to ʹ receivables ʹ would apply. ʺ In re Lenny Perry ʹ s Produce

, 2012

WL 7767580, at *4, 2012 Bankr. LEXIS 5440, at *14

‐ 15, adopted

, John B. Ordille, Inc.

v. Lenny Perry ʹ s Produce, Inc.

, No. 12

‐ MC

‐ 54S, 2012 WL 5499652, 2012 U.S. Dist.

LEXIS 161648 (W.D.N.Y. Nov. 12, 2012).17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

24 The district court agreed: It noted that the ʺ [d]efendants raised their

defense of offset even before the PACA Claims Procedure was established, ʺ and

concluded that they ʺ had a good faith basis for pursuing their claims through a

bankruptcy offset rather than through the PACA claims process. ʺ PACA Trust

Creditors of Lenny Perry ʹ s Produce

, Inc.

, 2017 WL 24620 3 5, at *1, 2017 U.S. Dist.

LEXIS 87488, at *4.

The district court did not err in allowing the defendants to recover a pro

rata share of the PACA Trust. It is undisputed that the defendants complied

with all statutory requirements to preserve their PACA claims: In each invoice

that GPI sent to LPP, it provided written notice of intent to preserve its PACA

rights. It is also undisputed that the defendants filed a proof of claim in

bankruptcy court before the Claims Procedure Order was issued, for an offset in

the amount of $26 3 ,061.92. Having filed an offset claim, the defendants

reasonably thought that their debt to LPP was not a ʺ receivable ʺ under the

Claims Procedure Order and that they were not required to submit a PACA

proof of claim. The bankruptcy court and district court properly concluded that,

in light of ambiguities in the Claims Procedure Order and the novelty of the legal17

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The PACA Trust Creditors of Lenny Perry ʹ s Produce, Inc. v. Genecco Produce, Inc., David Genecco

25 issues presented, the defendants had a good

‐ faith basis to pursue their claims

through a bankruptcy offset in lieu of a PACA claim.

Moreover, the statute states, in relevant part, that perishable goods and

any receivables from their sale are held in trust ʺ 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. ʺ 7 U.S.C. § 499e(c)(2)

(emphasis added). The defendants are unpaid suppliers of produce. Denying

them a pro rata share of the PACA Trust, even though they preserved their

PACA claims and filed a proof of claim in bankruptcy court, would be, we think,

inconsistent with the statutory text and the district court ʹ s interpretation of its

own Claims Procedure Order. We therefore conclude that the district court did

not err in permitting the defendants to recover a pro rata share of the PACA

Trust.



### CONCLUSION

We have considered the parties ʹ other arguments on appeal and conclude

that they are without merit. For the foregoing reasons, we AFFIRM the

judgment of the district court.