Opinion ID: 786069
Heading Depth: 2
Heading Rank: 1

Heading: PACA Trusts

Text: 9 PACA protects growers and suppliers of perishable agricultural commodities — the so-called PACA creditors — by establishing a trust for their benefit from the proceeds of the ultimate sale of such commodities by commission merchant[s], dealer[s], or broker[s]: 10 Perishable agricultural commodities received by a commission merchant, dealer, or broker ... and any receivables or proceeds from the sale of such commodities ... 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.... 11 7 U.S.C. § 499e(c)(2) (emphasis added). We held in Endico Potatoes that [t]his provision imposes a `non-segregated floating trust' on the commodities and their derivatives, and permits the commingling of trust assets without defeating the trust. Endico Potatoes, 67 F.3d at 1067. PACA therefore requires each commission merchant, dealer, or broker (for our purposes, dealers or PACA trustees), to hold in trust his income from the sale of such commodities until all his PACA creditors have been paid, but does not require him to maintain such assets separately from other assets. Id. A dealer is responsible to the trust's beneficiaries — his unpaid PACA creditors — for maintaining the trust. 7 C.F.R. § 46.46(d). 6 The trust provides PACA creditors with a right to recover against the purchasers superior to all creditors, including secured creditors. Endico Potatoes, 67 F.3d at 1067. 12 PACA does not explicitly assign to third parties, such as banks, any responsibility for preserving a PACA trust. Albee Tomato, Inc. v. A.B. Shalom Produce Corp., 155 F.3d 612, 615 (2d Cir.1998). However, general trust law applies to PACA trusts. Id. (citing Endico Potatoes, 67 F.3d at 1067), cited in American Banana, 362 F.3d at 41. Accordingly, we turn to general trust principles to determine the circumstances, if any, under which a bank that accepts trust proceeds as deposits may be liable to PACA-trust beneficiaries for receipt of funds in breach of that trust. 13 As we noted recently in American Banana, under general trust principles, a third party such as [a bank in KCB's circumstances] cannot be liable for receiving funds in breach of a PACA trust unless the [PACA] trustee's transfer of funds to the third party constituted a breach of its duty as trustee to maintain trust assets. See American Banana, 362 F.3d at 41 (citing Restatement (Second) of Trusts § 283 (1959) (If the trustee transfers trust property to a third person ... and the trustee in making the transfer ... does not commit a breach of trust, the third person holds the interest so transferred ... free of the trust, and is under no liability to the beneficiary. (emphasis added))). Thus, in the instant case, any possible liability of KCB as a third-party transferee must be predicated on a breach of trust by DLPS, the PACA trustee. Put another way, DLPS must have committed a breach of trust in depositing funds in its KCB account before KCB can legally be responsible for receiving those funds in breach of trust. 7 Accordingly, in order to hold a bank in KCB's position liable for receiving any DLPS funds, we must first establish that DLPS's deposit of funds in its bank account constituted a breach of DLPS's duties as a PACA trustee. 14 We turn, therefore, to what constitutes a breach of trust by a produce dealer under PACA. In general, a breach of trust is a violation by the trustee of any duty which as trustee he owes to the beneficiary. See id. (quoting Restatement (Second) of Trusts § 201 (1959) (internal quotation marks omitted)). Federal regulations prescribe the duties of produce dealers as PACA trustees, which consist primarily of maintain[ing] 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)(1); see also American Banana, 362 F.3d at 41. The same regulation provides that [a]ny act or omission which is inconsistent with this responsibility, including dissipation of trust assets, is unlawful and in violation of [PACA]. 7 C.F.R. § 46.46(d)(1); see also American Banana, 362 F.3d at 41. Dissipation that would constitute a breach of trust includes any act or failure to act which could result in the diversion of trust assets or which could prejudice or impair the ability of unpaid suppliers, sellers, or agents to recover money owed in connection with produce transactions. 7 C.F.R. § 46.46(a)(2); see also American Banana, 362 F.3d at 41.