UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

ANTHONY MARANO COMPANY, )

)

Plaintiff, )

)

v. ) No. 12 C 1906

)

J & S PRODUCE CORP, GEORGE PAPPAS, ) Judge Sara L. Ellis

BELMONT BANK & TRUST COMPANY, )

and SOUTH CENTRAL BANK, NATIONAL )

ASSOCIATION, )

)

Defendants. )

OPINION AND ORDER

Having been left holding the bag in unpaid produce bills, Plaintiff Anthony Marano 

Company (“Marano”) brought this action against J&S Produce Corp. (“J&S”), its principals, and 

two banks that serviced J&S. Fourteen additional parties intervened as Plaintiffs. Marano and 

the Intervening Plaintiffs (collectively, “Plaintiffs”) sue Defendants pursuant to the Perishable 

Agricultural Commodities Act, 7 U.S.C. § 499a et seq. (“PACA”), seeking to recover damages 

resulting from the approximately $1,643,000 in produce Plaintiffs delivered to J&S and for 

which Plaintiffs were not paid. The parties do not dispute that J&S’s failure to pay its PACA 

creditors constitutes a breach of the PACA trust. As such, Plaintiffs seek to exercise their rights 

as PACA trust beneficiaries to recover the principal amount owed as well as interest and 

attorneys’ fees. With J&S and its principals no longer parties to this suit,1 Plaintiffs seek to 

disgorge payments that J&S made to Defendants South Central Bank and Belmont Bank. 

1 Plaintiffs have settled their claims against J&S and its principals. See Doc. [199, 223, 226]. 

Therefore, Plaintiffs’ requests for summary judgment against J&S and George Pappas are rendered 

moot. Because Intervening Plaintiff Central Produce seeks summary judgment only against J&S and 

George Pappas, its motion [158] is denied in its entirety as moot. 

 
Now before the Court are five cross-motions for summary judgment. Plaintiffs allege 

that South Central and Belmont improperly received PACA trust assets when J&S transferred 

hundreds of thousands of dollars to each bank, mostly in the form of loan payments. As PACA 

beneficiaries, Plaintiffs are entitled to priority over the PACA trust assets ahead of even secured 

creditors like South Central and Belmont. Patterson Frozen Foods, Inc. v. Crown Foods Int’l, 

Inc., 307 F.3d 666, 669 (7th Cir. 2002). Therefore, Plaintiffs seek to disgorge PACA trust funds 

that South Central and Belmont received from J&S. South Central and Belmont respond by 

arguing primarily that Plaintiffs cannot disgorge these payments because the banks were bona 

fide purchasers, as they received the payments for value and without knowledge that J&S had 

breached its PACA trust obligations. South Central also raises a number of other defenses, 

including that revolving loan payments cannot be disgorged because Plaintiffs were not harmed 

by those payments, and that the payments on a loan from J&S’s affiliate Reliable Food 

Distribution Center, Inc. (“Reliable”) cannot be disgorged because those payments were never 

PACA trust assets. 

The Court denies Plaintiffs’ motions for summary judgment [146, 1492

], as questions of 

fact regarding the banks’ knowledge of J&S’s breach preclude summary judgment. The Court

also denies Belmont’s motion for summary judgment [161] because questions of fact regarding 

Belmont’s knowledge of J&S’s breach preclude summary judgment. The Court grants South 

Central’s request for summary judgment [175] only with regard to the payments on the Reliable 

Loan, as the record shows that these funds came from Reliable and were merely parked in J&S’s 

account for a matter of days before J&S transferred the funds to South Central. The Court denies 

2 Agri Sales Group filed its own motion for summary judgment [149], but it did not offer an 

independent rationale. Instead, Agri Sales Group adopts the arguments in Plaintiff and Intervening 

Plaintiffs’ motion for summary judgment [146]. Therefore, the Court will apply the same analysis to 

both motions. 

2

 
South Central’s motion with regard to all other payments because questions of fact regarding 

South Central’s knowledge of J&S’s breach of the PACA trust preclude summary judgment. 

BACKGROUND3

Plaintiffs are wholesalers of “perishable agricultural commodities,” commonly known as

produce. J&S purchased wholesale quantities of produce from Plaintiffs and sold it to other 

customers. J&S also sold dry goods, which made up approximately 50% of its business. 

Plaintiffs are licensed produce dealers under PACA. Plaintiffs delivered millions of dollars’ 

worth of produce to J&S and invoiced J&S for the produce. Plaintiffs included on those invoices 

language required by 7 U.S.C. § 499e(c)(4) indicating Plaintiffs’ intent to preserve their PACA 

trust benefits. J&S filed for bankruptcy in March of 2012 and has failed to pay Plaintiffs for 

approximately $1,643,000 in produce that Plaintiffs delivered. The vast majority of unpaid 

invoices were dated between June 24, 2011 and March 21, 2012. However, J&S also failed to 

pay invoices from Intervening Plaintiff Strube Celery & Vegetable, Co. (“Strube”) dated 

between April 10, 2010 and April 23, 2010. 

Defendants South Central Bank and then Belmont Bank were J&S’s primary banks 

during the relevant period. South Central served as J&S’s primary bank from 2004 until May of 

2010. During this time, South Central provided loans to and housed the accounts of J&S and its 

affiliates. J&S moved its business to Belmont in May of 2010. Like South Central, Belmont 

provided multiple loans to J&S and housed J&S’s accounts. 

3 The facts set forth in this section are derived from the statements of fact submitted by the parties to 

the extent they comport with Local Rule 56.1. In assessing each motion for summary judgment, the 

statements are taken in the light most favorable to the non-movant. The Court has considered the 

parties’ responses to the statements of fact and supporting exhibits and has included in this 

background section only those portions of the statements and responses that are appropriately 

presented, supported, and relevant to resolution of the pending motions for summary judgment.

3

 
Specifically, South Central provided J&S with a line of credit in the amount of $300,000. 

South Central also provided J&S with a mortgage loan in the amount of $2.6 million securing the 

real property at 2300 W. Lake Street in Chicago, from which J&S operated. Both the line of

credit and the mortgage loan were secured by all of J&S’s assets, including its accounts 

receivable, inventory, and equipment. The mortgage loan and the line of credit were also crosscollateralized, meaning that the security interest given in the collateral would secure any other 

liabilities that J&S owed to South Central. The loans also provided South Central with a right of 

set-off against all of J&S’s accounts to the extent permitted by law. J&S’s principals James

Stamas and Steve Pappas personally guaranteed the loans. The loan agreements entitled South 

Central to examine and audit J&S’s books and records and required J&S to provide South 

Central with tax returns, quarterly balance sheets, and audited annual balance sheets and income 

statements. 

The revolving line of credit afforded J&S with access to additional cash by automatically 

transferring money to J&S when the balance in J&S’s checking account was low and 

automatically transferring funds from J&S’s checking account back to South Central when the 

account balance was higher. Plaintiffs seek to disgorge $565,264 in payments from J&S to 

South Central on the revolving line of credit between January 4, 2010 and August 31, 2011. 

Because of the nature of the line, South Central transferred $582,442 to J&S over that same 

period of time. 

In addition to the line of credit and the mortgage loan, J&S and its affiliate, Reliable,

jointly entered into a Small Business Administration Loan with South Central in August of 2008

(the “Reliable Loan”). The Reliable Loan provided J&S and Reliable with $600,000, which was 

to be repaid from J&S and Reliable’s business operations. The loan was cross-collateralized by a 

4
security interest in all assets of J&S and Reliable. The loan document noted that “[p]erishable 

agricultural commodities are subject to super priority interest under PACA.” Doc. 148 ¶ 16 

(alteration in original). To repay the loan, Reliable made monthly payments of $8,900 to J&S 

from January through July of 2011. Shortly after receiving each payment, J&S transferred

$8,910 to South Central, which included a $10 service fee. J&S transferred a total of $62,350 to 

South Central related to the Reliable Loan.

4

 Plaintiffs seek to disgorge five of these seven 

payments, totaling $44,550. 

While doing business with South Central, J&S’s financial performance showed signs of 

strength, while other factors predicted its eventual bankruptcy. For example, prior to the facts 

that brought about this case, J&S failed to pay its PACA creditors on three separate occasions. 

First, in August of 2009, a judge in this district entered a temporary restraining order against J&S 

in response to an unpaid debt J&S owed to Windsor Distributing Inc., one of its suppliers. See 

Windsor Distributing, Inc. v. J&S Produce Corp., et al, No. 09 C 5122, Doc. 14 (N.D. Ill. Aug. 

27, 2009). In response to the Windsor suit, South Central reviewed J&S’s accounts receivable, 

assigned J&S a higher risk code, and temporarily added J&S to a “watch list.” Windsor and J&S 

settled, with J&S paying the $62,112 it owed to Windsor on August 28, 2009. 

In early 2010, Intervening Plaintiff Gourmet’s Finest (also known as “Domestic 

Mushroom Co.”) filed a PACA action against J&S in case number 10 C 1435. On March 30, 

2010, Gourmet’s Finest and J&S entered a stipulation stating that “Gourmet’s Finest was an 

unpaid PACA trust creditor on a debt for produce from October 17, 2009 through March 10, 

2010 in the total trust amount of $395,611.03.” Doc. 148 ¶ 25. J&S agreed to pay Gourmet’s 

Finest pursuant to a payment plan. J&S complied with the payment plan until March of 2012, 

4 The record does not reveal why seven payments of $8,910 would equal $62,350, rather than $62,370, 

but the distinction is not material to this Opinion. 

5

 
when it became unable to pay. To date, J&S has not fully satisfied its obligation to Gourmet’s 

Finest. 

J&S also failed to pay Intervening Plaintiff Strube on invoices dated between April 10, 

2010 and April 23, 2010. J&S entered into an informal payment plan with Strube and made 

some payments, but never completely satisfied its debt to Strube. In addition to the April 2010 

debt, J&S also failed to pay Strube invoices dated between March 15, 2012 and March 21, 2012. 

In August of 2009, South Central reviewed J&S’s income statements, balance sheets, and 

cash flow statements for 2006 through 2008 and determined that J&S’s accounts payable 

increased from $990,633 at the end of 2006 to $1,670,714 at the end of 2008. South Central 

informed J&S in early September of 2009 that it would not extend any further credit, including 

covering checks returned for insufficient funds, until J&S could demonstrate that it had sufficient

working capital to ensure that it would not be subject to any further PACA claims. From 

November of 2009 through October of 2010, J&S’s accounts at South Central were regularly 

overdrawn, resulting in dozens of overdraft charges. Doc. 153 at 38–46.

J&S requested that South Central increase its available line of credit at least twice. First,

in June or July of 2009, Steve Pappas of J&S requested that South Central double the amount of 

J&S’s line of credit from $300,000 to $600,000. South Central refused to increase the revolving 

line of credit “because of the special risks commercial banks have in financing produce 

companies as a result of [PACA].” Doc. 216 ¶ 1. In early 2010, J&S again requested that South 

Central increase the size of J&S’s revolving line of credit, this time to $500,000. J&S provided 

South Central with specific financial information concerning its need for additional credit. South 

Central also declined that request, noting that South Central “is a small bank and did not want to 

extend significant credit to a produce supplier—any produce supplier—in light of the restrictions 

6
on South Central Bank’s ability to take security interests under [PACA].” Doc 174-1 ¶ 7. James

Stamas, one of J&S’s owners, testified that South Central declined to increase the line of credit

in part because J&S’s accounts payable were outstanding for an average of 68 days, more than 

double the industry average of approximately 30 days. Doc. 148-5 at 25; Doc. 153-1 at 10. 

South Central placed J&S back on its “watch list” in March of 2010. South Central also 

demanded immediate repayment of the $300,000 line of credit, plus interest and late charges. In 

response, J&S paid down some of the balance on the loan and deposited funds into its operating 

account. In April of 2010, South Central notified J&S that it had defaulted on its line of credit 

pursuant to the “reasonable insecurity” provision in the loan agreement. J&S remained on South 

Central’s watch list until its loans were completely paid off in September of 2010.

In light of South Central’s repeated refusal to increase J&S’s line of credit, J&S decided

to move its business to Belmont. In May of 2010, Belmont conducted a credit review analysis of 

J&S, which included reviewing J&S’s balance sheet as of December 31, 2009. The balance 

sheet showed assets of $3.1 million, accounts payable of $1.48 million, and J&S’s average 

“accounts payable days” of 68 days. On May 19, 2010, Belmont extended J&S a revolving line 

of credit in the amount of $700,000, cross-collateralized by a security interest in all of J&S’s and

Reliable’s assets. J&S also entered a Business Loan Agreement with Belmont that required J&S 

to maintain its deposit accounts at Belmont and provided Belmont with access to certain 

financial information, such as J&S’s balance sheets, tax returns, and income statements.

Additionally, Belmont provided a $2.5 million mortgage loan agreement secured by the 

property at 2300 W. Lake Street. The borrower on the mortgage was listed as “2300 W. Lake 

Street Unit A, LLC,” while J&S, Reliable, and their individual owners served as guarantors on 

the mortgage loan. Doc. 163 ¶ 53. The mortgage loan document notes that two of the risks of 

7
providing the loan were “Guarantor’s lack of liquidity” and “[s]ales of tenant trending 

downwards due to general economic recession but showing signs of recovery in 2010.” Doc. 

153-1 at 43. The amount of the mortgage loan was later increased to $2.62 million. 

In September of 2010, Belmont paid off the revolving line of credit and the mortgage 

loan that J&S had taken out from South Central. In November of 2010, Belmont agreed to 

provide J&S with an additional $70,000, in the form of a promissory note. Like the loans from 

South Central, all of Belmont’s loans to J&S were personally guaranteed by J&S’s principals, 

cross-collateralized, and included a right of set-off. 

J&S paid its PACA creditors on all invoices dated between April 23, 2010 and June 24, 

2011, but J&S often paid invoices late. Beginning in the summer of 2010, J&S’s demand 

deposit account at Belmont was regularly overdrawn, including by $44,000 at the end of 

September, 2010. Belmont charged J&S hundreds of overdraft fees during this time. 

Although Belmont never fully reviewed or audited J&S’s books and records, it requested 

and received Accounts Receivable Aging Reports from J&S on at least five occasions between

May of 2010 and May of 2011. Belmont also monitored, albeit intermittently, J&S’s accounts 

payable. In December of 2010, Belmont received an Accounts Payable Aging Report as of 

September 30, 2010, showing that J&S owed over $500,000 in payables that were more than 30 

days old, but only $70,523 that were more than 90 days past due. Belmont also received a 

March 31, 2011 Accounts Payable Aging Report that showed over $625,000 in payables that 

were more than 30 days old. Further warning of J&S’s financial difficulty, in May of 2011

Belmont received a balance sheet from J&S, which included a Note Payable to Gourmet’s Finest 

in the amount of $258,313 relating to the March 30, 2010 stipulation between J&S and 

Gourmet’s Finest. This is the first time that Belmont learned of J&S’s debt to Gourmet’s Finest. 

8
However, much of the news on the March 31, 2011 balance sheet was positive for J&S, as it 

indicated current assets of $3.95 million and accounts payable of $1.53 million. 

In June of 2011, Belmont increased J&S’s line of credit to $900,000. In February of 

2012, Belmont provided J&S with a $75,000 commercial loan secured by a UCC lien on J&S 

and on the principal residence of James Stamas. 

Payments on the line of credit, the mortgage, and the business loans all came from J&S’s 

checking account maintained at Belmont. Between July 30, 2010 and March 30, 2012, Belmont 

received a total of $676,654 from the J&S checking account, which it applied to the loan 

balances and various bank fees and overdraft charges owed to Belmont. Belmont asserts that it 

only became aware that J&S “was or could be in violation of PACA trust obligations” in March 

of 2012, when it received the pleadings in this case. Doc. 163 ¶ 35. 

On March 21, 2012, the Court entered a temporary restraining order freezing J&S’s 

assets. J&S filed for Chapter 7 bankruptcy relief on March 26, 2012, in case number 12 BK 

12063. As of August 31, 2013, J&S had only $67,882 in accounts receivable on deposit at 

Belmont. J&S owes approximately $1,643,000 to Plaintiffs, exclusive of interest and attorneys’ 

fees. 

LEGAL STANDARD

Summary judgment obviates the need for a trial where there is no genuine issue as to any 

material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56. 

To determine whether a genuine issue of fact exists, the Court must pierce the pleadings and 

assess the proof as presented in depositions, answers to interrogatories, admissions, and 

affidavits that are part of the record. Fed. R. Civ. P. 56 & advisory committee’s notes. The party 

seeking summary judgment bears the initial burden of proving that no genuine issue of material 

9
fact exists. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 91 L. Ed. 2d 265 

(1986). In response, the non-moving party cannot rest on mere pleadings alone but must use the 

evidentiary tools listed above to identify specific material facts that demonstrate a genuine issue 

for trial. Id. at 324; Insolia v. Philip Morris Inc., 216 F.3d 596, 598 (7th Cir. 2000). Although a 

bare contention that an issue of fact exists is insufficient to create a factual dispute, Bellaver v. 

Quanex Corp., 200 F.3d 485, 492 (7th Cir. 2000), the Court must construe all facts in a light 

most favorable to the non-moving party and draw all reasonable inferences in that party’s favor. 

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). 

The same standard applies when considering cross-motions for summary judgment. Int’l Bhd. of 

Elec. Workers, Local 176 v. Balmoral Racing Club, Inc., 293 F.3d 402, 404 (7th Cir. 2002). 

Therefore, when considering Plaintiffs’ motions for summary judgment, the Court views all 

evidence in the light most favorable to Defendants; and when considering Defendants’ motions, 

the Court views all evidence in the light most favorable to Plaintiffs. See id.

ANALYSIS

As beneficiaries of a PACA trust in J&S’s produce proceeds, Plaintiffs seek to disgorge 

purported PACA trust assets from South Central and Belmont, alleging that the banks received 

payments from J&S that should have been held in trust for Plaintiffs’ benefit. Specifically, 

Plaintiffs allege that J&S transferred $655,2645 in PACA trust assets to South Central between

January 4, 2010 and August 31, 2011, and $676,654 to Belmont between July 30, 2010 and 

March 30, 2012. 

Congress enacted PACA in 1930 to regulate the sale of perishable commodities. 

Patterson Frozen Foods, 307 F.3d at 667. Its original purpose was “to encourage fair trading 

5 This sum is comprised of $565,264 in payments on the line of credit, $44,550 in payments on the 

Reliable Loan, an unspecified amount of payments on the mortgage loan, and $12,648 in bank fees 

and charges. 

10

 
practices in the marketing of perishable commodities by suppressing unfair and fraudulent 

business practices.” H.R. Rep. 98-543, at 3, 1984 U.S.C.C.A.N. 405, 406. PACA requires all 

qualifying produce merchants, dealers, and brokers to obtain licenses, and provides remedies that 

PACA trust beneficiaries may enforce through a complaint filed with the Secretary of 

Agriculture or through a court action for breach of fiduciary trust. Patterson Frozen Foods, 307 

F.3d. at 669. 

Congress amended PACA in 1984 to provide greater protection to produce wholesalers 

because, given the perishable nature of produce, wholesalers “are often placed in the position of 

being unsecured creditors of companies whose creditworthiness the seller is unable to verify.” 

Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1067 (2d Cir. 1995). Because 

produce wholesalers were normally unsecured creditors, they “generally stood in line behind 

banks and other lenders who had obtained security interests in the defaulting purchaser’s 

inventories, proceeds, and receivables. As a result, sellers were often unable to collect monies 

owed to them.” Am. Banana Co. v. Republic Nat. Bank of New York, N.A., 362 F.3d 33, 37 (2d 

Cir. 2004). Congress therefore amended PACA to create a statutory trust to benefit unpaid 

sellers of commodities. Id. The trust applies to the commodities themselves and the inventory or 

products derived from the commodities, as well as the proceeds therefrom. Patterson Frozen 

Foods, 307 F.3d at 669. Produce buyers “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.” 7 C.F.R. § 46.46(d)(2). In other words, purchasers of perishable 

commodities, like J&S, must maintain the trust by “retaining the commodities or their proceeds 

until the commodities are paid.” Nickey Gregory Co., LLC v. Agricap, LLC, 597 F.3d 591, 595

(4th Cir. 2010). Produce sellers, therefore, have priority over produce proceeds ahead of even 

11
secured lenders. Id.; Am. Banana, 362 F.3d at 37. PACA grants district courts jurisdiction to 

hear “actions by trust beneficiaries to enforce payment from the trust.” 7 U.S.C. § 499e(c)(5)(i). 

A PACA trust is automatically created by the sale of produce on credit to a purchaser. 

Tanimura & Antle, Inc. v. Packed Fresh Produce, Inc., 222 F.3d 132, 136 (3d Cir. 2000); In re 

Kornblum & Co., 81 F.3d 280, 285 (2d Cir. 1996). As additional suppliers sell produce to a

purchaser on credit, they join the “undifferentiated pool of trust beneficiaries, and the [p]roduce 

purchased from these suppliers becomes the property of the single PACA trust.” Kornblum, 81 

F.3d at 285. A PACA debtor or any party disputing that assets are subject to a PACA trust bears 

the burden of establishing that no trust existed when the unpaid-for produce was purchased. Id.

at 287. While trust assets may be commingled with non-trust assets, a party challenging the 

scope of the trust bears the burden of tracing the origin of any disputed assets to demonstrate that 

those assets are not trust assets. Id. at 284; Sanzone-Palmisano Co. v. M. Seaman Enters., Inc., 

986 F.2d 1010, 1012 (6th Cir. 1993); Six L’s Packing Co. v. W. Des Moines State Bank, 967 F.2d 

256, 258 (8th Cir. 1992). 

 General trust principles govern PACA trusts so long as those principles do not conflict 

with the language of the Act. Nickey Gregory, 597 F.3d at 595. “Thus, when trust assets are 

held by a third party, resulting in the failure of the trustee to pay unpaid sellers of perishable 

agricultural commodities, the third party may be required to disgorge the trust assets unless the 

third party can establish that it has some defense, such as having taken the assets as a bona fide 

purchaser without notice of the breach of trust.” Id. at 595–96. 

I. Bona Fide Purchaser Defense

Both South Central and Belmont affirmatively contend that they were bona fide

purchasers because they received PACA trust assets (1) in exchange for value, and (2) without 

12
notice of the breach of the trust. See Restatement (Second) of Trusts § 284 (1959) (“If the 

trustee in breach of trust transfers trust property to . . . a person who takes for value and without 

notice of the breach of trust, and who is not knowingly taking part in an illegal transaction, the 

latter holds the interest so transferred or created free of the trust, and is under no liability to the 

beneficiary.”). In order to establish this defense, South Central and Belmont bear the burden of 

satisfying both the value and notice elements. Albee Tomato, Inc. v. A.B. Shalom Produce Corp.,

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

A. Transfers For Value

As to the first element, Plaintiffs acknowledge that loan payments from J&S to South 

Central and Belmont constitute transfers for value. See Doc. 170 at 13 (“Plaintiffs do not dispute 

that the line of credit and mortgage payments made by J&S to Belmont were ‘for value’ and 

ordinary course payments.”). Transferring trust assets to satisfy a pre-existing debt normally 

does not satisfy the “for value” prong. Restatement (Second) of Trusts § 304(1) (1959); 

Consumers Produce Co. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1380 (3d Cir. 1994). 

However, when the trust property that is transferred to satisfy a pre-existing debt is a negotiable 

instrument or money, such transfers meet the “for value” requirement. Consumers Produce, 16 

F.3d at 1380. The rationale behind this exception is to promote confidence among businesses 

engaging in cash transactions. C.H. Robinson Co. v. Trust Co. Bank, N.A., 952 F.2d 1311, 1314 

(11th Cir. 1992) (“It is absolutely necessary for practical business transactions that the payee of 

money in due course of business shall not be put upon inquiry at his peril as to the title of the 

payor.” (quoting Austin W. Scott & William F. Fratcher, The Law of Trusts § 304 (4th ed. 

1989))). Given these principles and Plaintiffs’ concession, the Court finds that J&S’s loan 

13
payments to Belmont and South Central satisfy the “for value” prong of the bona fide purchaser 

determination. 

However, Plaintiffs contend that the overdraft fees J&S paid to the banks were not 

ordinary course payments and therefore do not constitute transfers for value. Plaintiffs cite

precedent from the Eleventh and Third Circuits for the proposition that 

when secured lenders use their security agreement to foreclose on property or 

otherwise enforce their contractual rights, they essentially force the transfer of 

trust property in satisfaction of an antecedent debt. Any such transfer, including 

transfers of negotiable instruments and money, through the exercise of rights 

under a security agreement is not for value. 

C.H. Robinson, 952 F.2d at 1316 n.5. Stated another way, “[t]he ‘for value’ portion of the bona 

fide purchaser standard thus only protects secured lenders who receive PACA trust assets in the 

ordinary course of business. Lenders who seize PACA trust assets through the enforcement of a 

security agreement will not be protected by the bona fide purchaser defense.” Consumers 

Produce, 16 F.3d at 1380 n.3. Even though there is no evidence before the Court that South 

Central or Belmont ever attempted to foreclose or threatened to foreclose on J&S’s accounts, 

Plaintiffs attempt to extend the C.H. Robinson and Consumers Produce rationale to this case. 

In response, South Central and Belmont point out that they did not “seize” J&S’s assets, 

“foreclose” on its account, or otherwise “force” J&S to pay overdraft fees. South Central and 

Belmont rely on the premise that “costs associated with maintaining an account for PACA trust 

funds does not breach a PACA trustee’s obligations provided the costs are commercially 

reasonable.” D.M. Rothman & Co. v. Korea Commercial Bank of N.Y., 411 F.3d 90, 100 (2d Cir. 

2005). South Central and Belmont also cite E. Armata, Inc. v. Korea Commercial Bank of New 

York, where the Second Circuit held that “a PACA trustee’s payment of interest and fees to 

maintain a checking account with overdraft privileges does not per se constitute breach of the 

PACA trust.” 367 F.3d 123, 133 (2d Cir. 2004). The Second Circuit found that maintaining a 

14
checking account with overdraft protection in exchange for a commercially reasonable fee may 

actually assist a PACA trustee in meeting its obligations to PACA creditors. Id. at 133–34. 

South Central and Belmont assert that because their overdraft charges were commercially 

reasonable, payments on those charges were made in exchange for value. 

On the record before it, the Court agrees with South Central and Belmont that J&S’s 

payments of overdraft and other fees constitute transfers for value to the extent that they were 

commercially reasonable. Id. at 133. In exchange for these payments, J&S received a checking 

account with overdraft privileges and access to additional funds. Id. at 134 (“Indeed, it is 

difficult to imagine how a PACA trustee would make funds available to its PACA creditors 

without entering into some such relationship with a bank.”). Additionally, this result 

corresponds to the principle that “[i]t is absolutely necessary for practical business transactions 

that the payee of money in due course of business shall not be put upon inquiry at his peril as to 

the title of the payor.” C.H. Robinson, 952 F.2d at 1314. Whether the charges were 

commercially reasonable is a question of fact for the jury. 

B. Notice

The bulk of the argument in the papers discusses the second prong of the bona fide 

purchaser defense—whether South Central and Belmont were on notice that J&S had breached 

the trust. Again, the burden is on South Central and Belmont to establish that they had no notice 

of J&S’s breach of the PACA trust when they received payments from J&S. Albee Tomato, 155 

F.3d at 615. Plaintiffs may recover if South Central and Belmont had actual notice or 

constructive notice of J&S’s breach of trust. Constructive notice is defined as when the 

transferee should know of the breach. Restatement (Second) of Trusts § 297 (1959). 

Specifically, a transferee should know of a breach: 

15
when he knows facts which under the circumstances would lead a reasonably 

intelligent and diligent person to inquire whether the trustee is a trustee and 

whether he is committing a breach of trust, and if such inquiry when pursued with 

reasonable intelligence and diligence would give him knowledge or reason to 

know that the trustee is committing a breach of trust.

Id. Thus, the Restatement’s definition of constructive notice includes what some courts have 

called “inquiry notice,” where a party may be required to inquire into the financial health of the 

trust. Consumers Produce, 16 F.3d at 1383 (“Thus, a duty of inquiry arises when a person 

knows facts which under the circumstances suggest (1) that the person is dealing with a trustee 

and (2) that the trustee may be committing a breach of trust. If a duty of inquiry exists, and such 

inquiry would have disclosed the breach of trust, a person “should have known” of the breach of 

trust.”). 

The question of notice often requires a factual determination that is not appropriate for 

summary judgment. See Albee Tomato, 155 F.3d at 617 (reversing summary judgment, holding 

that factual questions regarding the defendant’s notice precluded summary judgment); Gargiulo 

v. G.M. Sales, Inc., 131 F.3d 995, 1000 (11th Cir. 1997) (reversing summary judgment, noting 

that “genuine issues of material fact exist as to whether the bank was a bona fide purchaser and 

whether the bank was without notice of GMS’s breach of the PACA trust”). The relevant 

question is not merely whether South Central or Belmont had notice that J&S was subject to a 

PACA trust, but whether the banks had actual or constructive notice that J&S had breached its 

PACA trust obligations. See Consumers Produce, 16 F.3d at 1383. 

Here, Plaintiffs allege that South Central and Belmont knew sufficient facts to put them 

on notice that J&S may be in breach of its trust obligations and that had South Central or 

Belmont inquired they would have learned that J&S had breached its obligations. Plaintiffs point 

out that South Central and Belmont knew that J&S was experiencing cash flow problems, 

evidenced by J&S repeatedly requesting additional credit and overdrawing its checking account 

16
while it maintained accounts at each bank. Specifically, during the summer of 2009, J&S asked 

South Central to increase its line of credit from $300,000 to $600,000 as a result of slow paying 

customers. Plaintiffs contend that from this request, “South Central knew in June or July of 2009 

that J&S had significant cash flow problems.” Doc. 217 at 6. Belmont ultimately obtained 

J&S’s business only after it offered to more than double J&S’s line of credit. J&S’s owner 

James Stamas testified that “at some point” before J&S moved its business to Belmont it “had 

stopped becoming profitable” and that J&S was “having a hard time collecting on a lot of the 

receivables.” Doc. 148-5 at 27. Plaintiffs also point out that J&S was subject to a temporary 

restraining order in August 2009 after it failed to pay a PACA creditor’s invoices. South Central 

received service of the temporary restraining order, but accepted J&S’s explanation that it was 

no more than a “dispute with a supplier and that it would be taken care of immediately.” Doc. 

216 ¶ 8. South Central and Belmont were aware that J&S took an average of 68 days to pay its 

accounts payable, more than double the industry average. Additionally, South Central put J&S 

on a “watch list” of potentially troubled loans in 2009 and again in 2010. South Central steadily 

increased J&S’s risk code from 3 in September of 2009 to 7 in July of 2010.6

 Moreover, both 

South Central and Belmont were contractually entitled to review J&S’s complete books and 

records, and while both banks requested and reviewed specific documents, neither bank 

exercised nearly all of its rights. 

South Central and Belmont contend that they had no notice of J&S’s breach until March 

21, 2012, when they received service of the temporary restraining order in this case. South 

Central and Belmont contend that it was not unusual for high volume businesses like J&S to 

experience overdraft fees. South Central and Belmont further note that J&S was financially 

6 South Central assessed risk codes on a scale of 1 to 10 where 1 is the least risky and 10 is the most 

risky. Risk codes from 1 through 7 are commercially acceptable under South Central’s underwriting 

criteria. 

17

 
healthy through June of 2011 because it paid all of its invoices dated between April of 2010 and 

June 24, 2011. South Central and Belmont also point to a balance sheet indicating that as of 

December 31, 2009 J&S had current assets in excess of $3 million and accounts payable of less 

than $1.5 million. J&S’s March 31, 2010 balance sheet showed current assets of almost $1.9 

million and accounts payable of only $157,576. James Stamas testified that J&S “was still doing 

well” as of April of 2010. Doc. 148-5 at 27. South Central also points out that it never assigned 

J&S a risk code that would make J&S a commercially unacceptable borrower. 

Thus, the record reveals that J&S was profitable in 2010 and at least occasionally 

maintained cash reserves far in excess of its accounts payable, while also at least occasionally 

overdrawing its account. The evidence further shows that J&S historically paid all but a few of 

its PACA creditors through June of 2011, but that it often paid late. At some point, J&S’s cash 

position changed significantly, as it stopped paying its creditors altogether in June of 2011 and 

filed for bankruptcy in March of 2012. It is not clear from the record when specifically J&S’s 

circumstances changed from its large cash surplus on March 31, 2010 to not paying its PACA 

creditors’ invoices dated June of 2011. Nor does the record reveal what caused J&S’s finances 

to devolve so rapidly. More importantly for purposes of the pending motions, the Court cannot 

determine on the record before it what South Central and Belmont knew or should have known 

about J&S’s deteriorating finances and when they knew it or should have known it. On this 

evidence, the Court finds that genuine issues of material fact with regard to South Central and 

Belmont’s knowledge, and whether that knowledge constituted sufficient notice, preclude 

summary judgment for either Plaintiffs or Defendants. 

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II. Other Defenses

A. Date of Breach

South Central also claims that it cannot be liable because J&S did not breach its PACA 

trust until after J&S moved its business to Belmont in May of 2010. But this ignores the 

breaches of the trust created when J&S failed to pay Windsor, Gourmet’s Finest, and Strube. 

While J&S might have been financially healthy on the date of its last payment to South Central, 

J&S clearly breached its PACA trust obligations well before terminating its relationship with 

South Central. Namely, Gourmet’s Finest filed a PACA claim against J&S related to unpaid 

invoices from October of 2009 through March of 2010. To date, J&S has not satisfied its 

obligations to Gourmet’s Finest. J&S also failed to pay Strube’s invoices dated April of 2010 

and has not completely satisfied its debt to Strube. The terms of PACA indicate that trust assets 

must be held “for the benefit of all unpaid suppliers” and the trust remains in place until the 

suppliers receive “full payment of the sums owing.” 7 U.S.C.A. § 499e(c)(2). Therefore, there 

is at least a question of fact with regard to whether J&S’s breaches of the PACA trust in 2009 

and 2010 persist, as Gourmet’s Finest and Strube remain unpaid. Cf. Greg Orchards & Produce, 

Inc. v. Roncone, 180 F.3d 888, 892 (7th Cir. 1999) (holding that a PACA creditor’s agreement 

with a debtor to enter into a forbearance agreement renders the creditor ineligible to assert its

PACA trust rights). None of the submitted statements of fact describe the terms of J&S’s 

agreements with Gourmet’s Finest or Strube such that the Court could conclude that Greg 

Orchards governs those agreements and mandates that Gourmet’s Finest or Strube have forfeited 

their PACA trust rights.

7

 

7 Nor do the parties address whether and to what extent the holding in Greg Orchards affects the date 

on which J&S may be held to have breached its PACA trust obligations. 

19

 
In its response to Plaintiffs’ motion for summary judgment, Belmont accuses Strube of a 

“suspicious and tenuous attempt to back date its claims to April 2010” and asserts that “[t]here is 

no corroboration that Strube had unpaid invoices at any date and certainly not as far back as 

2010.” Doc. 180 at 13. But the record reveals nothing suspicious and no corroboration is 

necessary, as at least South Central explicitly acknowledges that “J&S also owed money to 

[Strube] in April 2010,” and that this debt remains unpaid. Doc. 174 ¶¶ 10, 12. 

B. Lack of Injury

South Central also contends that J&S’s PACA creditors were not injured by J&S’s 

payments on the revolving line of credit. South Central contends that the nature of the line of 

credit distinguishes this case from others because during the period in which South Central 

collected $565,264 in line of credit payments from J&S, it transferred $582,442 to J&S. South 

Central contends that the line of credit actually benefitted Plaintiffs because it “simply gave J&S 

more available cash to pay Plaintiffs’ invoices.” Doc. 175 at 14.

However, South Central fails to meaningfully distinguish cases where courts found that 

payments on a line of credit may be subject to disgorgement under PACA. See Nickey Gregory, 

597 F.3d at 607 (affirming summary judgment for the plaintiffs, finding that the plaintiffs could 

disgorge collections on a loan that was essentially a line of credit); Gargiulo, 131 F.3d at 1000 

(reversing summary judgment in favor of the lender who provided a line of credit to a PACA 

debtor). South Central attempts to distinguish Nickey Gregory by asserting that South Central 

“collected nothing from J&S and paid nothing to itself from” the proceeds of J&S’s produce 

sales. Doc. 175 at 14. South Central cites Nickey Gregory for the proposition that merely taking 

a security interest in a PACA debtor’s accounts receivable did not violate PACA, it was the 

lender’s collection on those accounts and its acceptance of proceeds ahead of the commodities 

20
sellers that rendered it liable to the produce sellers. Nickey Gregory, 597 F.3d at 603. South 

Central misreads Nickey Gregory and attempts to distinguish between the payments on a line of 

credit the defendant bank collected there, with the payments South Central received here. Nickey 

Gregory affirmed summary judgment for the plaintiffs after finding that “[i]t is not disputed that, 

in this case, [the finance company] used its position as collection agent and lender to satisfy [the 

PACA debtors’] obligations to it ahead of [the debtors’] obligations to its PACA creditors.” Id.

at 603–04. This is exactly what happened here. It is not disputed that, as a secured creditor to 

J&S, South Central received $565,264 in payments from J&S on the revolving line of credit 

during the relevant period. 

While the fact that South Central also provided funds to J&S is relevant to the question of 

whether the transfers were for value, it does not render Plaintiffs uninjured. For example, South 

Central must agree that if a bank provided a lump sum loan to a PACA debtor and then collected 

regular payments on that loan, the bank could not avoid disgorgement on the debtor’s 

repayments merely by asserting that it provided even more capital at the front end than it 

received from the debtor. After all, South Central provided such a lump sum to J&S in the form 

of the mortgage loan, and South Central apparently concedes that J&S’s payments on the 

mortgage harmed Plaintiffs. South Central fails to explain why payments on the line of credit 

are any different from the payments on the mortgage loan in this context and the Court does not

see any valid distinction. 

Moreover, this argument simply misinterprets the purpose of PACA. It is undisputed that 

Plaintiffs remain unpaid for invoices totaling over $1.6 million. Despite South Central’s 

repeated contention that a judgment in Plaintiffs’ favor would constitute a “windfall,” see, e.g.,

Doc. 175 at 3, 17; Doc. 219 at 12, Plaintiffs merely seek to recoup debts they are owed. The 

21
question before the Court is not, as South Central contends, “[w]hat . . . South Central should 

have done [differently] with respect to the Revolving Line?” Doc. 219 at 12. The Court need 

not find that South Central acted maliciously or underhandedly in order to disgorge payments. 

Instead, this is a case where there are not enough assets to go around and the question is which 

party is entitled to the assets that are available. In creating a statutory trust, PACA does not seek 

to assign blame to one party or another when a produce purchaser defaults; rather, the statute sets 

out that unpaid wholesalers who have retained their PACA trust rights have priority in repayment 

of the debts of a defaulting borrower. Nickey Gregory, 597 F.3d at 595 (“Congress enacted the 

1984 amendments to protect the commodities sellers by giving them a priority position over even 

secured creditors.”). While “[t]his reordering of priorities” may cause banks like South Central 

to increase the cost of capital to produce buyers or to forego making such loans altogether, “[t]he 

judiciary . . . should not insert itself in these policy matters by questioning or debating legislative 

judgments, as it is constituted only to comprehend, interpret, and apply what Congress has duly 

provided.” Id. at 608. South Central and Belmont almost certainly “anticipate a level of 

protection from their secured creditor positions. Their efforts, however, are trumped by 

Congress’ policy choice to give produce suppliers a favored creditor position, not only in the 

produce [J&S] sell[s], but also in derivative products and commingled proceeds in the hands of 

PACA dealers.” Id. at 607. Therefore, the Court rejects South Central’s argument that Plaintiffs 

cannot recover as a matter of law on the line of credit payments because they were not injured.

 C. Payments on the Reliable Loan

Plaintiffs seek to disgorge $44,550 in payments J&S made on the Reliable Loan. South 

Central argues that Plaintiffs are not entitled to disgorge these payments as they were never 

PACA trust assets. South Central contends that Reliable provided all the funds to satisfy these 

22
payments and merely “parked” those funds in J&S’s account before making payments to South 

Central. While commingling of PACA trust funds with non-PACA funds is allowed, South 

Central bears the burden of demonstrating that the payments on the Reliable Loan did not come 

from PACA trust assets. Six L’s Packing, 967 F.2d at 258. Furthermore, “the mere fact that 

non-trust funds were temporarily parked in an account containing trust funds is not enough to 

convert those non-trust funds into trust assets, as it is permissible to commingle PACA trust 

assets with non-trust assets.” Id.

Reliable and J&S are affiliates. Together, Reliable and J&S obtained a loan from South 

Central, using J&S assets as collateral. However, the record reveals that Reliable paid off the 

loan exclusively with its own funds. Reliable wrote seven checks to J&S, each for $8,900. J&S 

deposited these seven checks into its account on January 21, 2011, February 22, 2011, March 18, 

2011, April 21, 2011, May 23, 2011, June 21, 2011, and July 22, 2011. J&S then made seven

transfers of $8,910 each (including a $10 servicing fee) to South Central on January 26, 2011, 

March 21, 2011, March 22, 2011, April 25, 2011, May 25, 2011, June 23, 2011, and July 22, 

2011. 

Plaintiffs do not respond to South Central’s argument that the Reliable Loan payments 

are not subject to PACA. The undisputed record reveals that Reliable paid off the loan 

exclusively with its own funds. And there is no evidence that Reliable is itself a PACA debtor. 

Therefore, because Reliable merely “parked” its assets in J&S’s account, normally for a matter 

of days, before J&S transferred those funds to South Central, the Court finds that these payments 

were never a part of the PACA trust. See id. Therefore, the Court grants South Central summary 

judgment with regard to the $45,550 in payments it received on the Reliable Loan. 

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D. Non-Produce Sales

South Central also contends, briefly, that even if the Court disgorges funds that the bank 

collected from J&S, the Court should allow South Central to retain 50% of the payments it 

received because “[o]nly about 50% of J&S’s business came from produce sales.” Doc. 175 at

21. In support of this proposition, South Central relies on Six L’s Packing, where the Eighth 

Circuit affirmed the district court’s holding that PACA creditors could disgorge only 75% of a 

PACA debtor’s payments to a bank because 25% of the debtor’s income came from non-produce 

sales. Six L’s Packing, 967 F.2d at 259. The Six L’s Packing court noted, however, that this 

issue is very similar to the question of commingling of PACA trust assets with non-trust assets. 

Id. While commingling is permitted, the burden is on the party challenging disgorgement to 

demonstrate that certain funds were not PACA trust funds. Here, aside from payments on the 

Reliable Loan, neither South Central nor Belmont has demonstrated that any of the payments 

either bank received came from non-PACA assets such that the Court could make such a 

determination on summary judgment. Because questions of fact pervade on this issue, the Court 

rejects, at the summary judgment stage, South Central’s argument that Plaintiffs can only 

disgorge 50% of J&S’s payments to the bank. 

E. Payments on the Mortgage Loan

Finally, South Central argues that J&S’s payments on the mortgage loan did not violate 

PACA because those payments “were really just its rent payments.” Doc. 175 at 16. South 

Central asks the Court to conclude that “as with reasonable bank fees – a PACA trustee may 

incur and pay ordinary rent payments.” Id. South Central, however, does not develop this 

argument. Nor does South Central cite any case law for the proposition that rent payments are 

not subject to disgorgement by PACA trust beneficiaries. And it is far from clear on the record 

24
that South Central’s mortgage payments were, in fact, “really just its rent payments.” Id. The 

record reveals that J&S entered a real estate loan with South Central in the amount of $2.6 

million secured by the property at 2300 W. Lake Street, which J&S occupied. J&S initially paid 

off the mortgage via an intermediary called 2300 W. Lake St. LLC, but then “decided to 

eliminate the middle man and have J&S pay the loan payments for the Real Estate Loan directly 

to South Central Bank.” Doc. 174 ¶ 33. Without explaining why, South Central contends that 

the existence of the intermediary overcomes the reality that J&S obtained a loan secured on real 

property and then repaid the loan while its PACA trust beneficiaries went unpaid. The Court is 

not convinced. The Court finds that, at the very least, questions of fact preclude summary 

judgment in South Central’s favor on the payments on the mortgage loan. 

CONCLUSION

For the reasons stated above, Plaintiffs’ motions for summary judgment [146, 149] are

denied, as questions of fact with regard to South Central Bank’s and Belmont Bank’s notice of 

the breach preclude summary judgment. Intervening Plaintiff Central Produce’s motion for 

summary judgment [158] is denied as moot in its entirety because Central Produce seeks 

judgment only against parties who have been dismissed from this case. The Court also denies 

Belmont Bank’s motion for summary judgment [161] because questions of fact regarding its 

knowledge of J&S’s breach preclude summary judgment. The Court grants South Central’s 

motion for summary judgment [175] with regard to J&S’s payments on the Reliable Loan. The 

Court denies the remainder of South Central’s motion because the record does not reveal whether 

South Central had notice of J&S’s breach. 

Dated: September 30, 2014 ______________________

SARA L. ELLIS

United States District Judge

25