Opinion ID: 587252
Heading Depth: 2
Heading Rank: 2

Heading: The Ambit of the Section 196(b) Statutory Trust.

Text: Section 196(b) provides in pertinent part: 32 All livestock purchased by a packer in cash sales, and all inventories of, or receivables or proceeds from meat, meat food products, or livestock products derived therefrom, shall be held by such packer in trust for the benefit of all unpaid cash sellers of such livestock until full payment has been received by such unpaid sellers.... 33 Id. (emphasis added). 34 A private right of action for damages for violations of the Act is provided by 7 U.S.C. § 209(a). 5 An assignee, such as Liberty Mutual, is entitled to bring such an action for violation of a § 196(b) trust. See In re Gotham Provision Co. (First State Bank of Miami v. Gotham Provision Co.), 669 F.2d 1000, 1015 (5th Cir. Unit B), cert. denied, 459 U.S. 858, 103 S.Ct. 129, 74 L.Ed.2d 111 (1982). In a proper case, such an action may be brought against an entity that finances a packer and to whom trust assets are transferred. See, e.g., C.H. Robinson Co. v. Trust Co. Bank, N.A., 952 F.2d 1311, 1313-16 (11th Cir.1992); Gotham Provision Co., 669 F.2d at 1008-12. Indeed, the addition of § 196 to the Act in 1976 was motivated by situations in which sellers of livestock went unpaid, because of the priority interests of secured lenders, when the purchasing packers became insolvent. This history was outlined in Gotham Provision Co., as follows: 35 It is clear that the purpose of the 1976 amendments to the Packers and Stockyards Act of 1921 was to provide some future protection for livestock sellers against the type of serious financial loss that cattlemen experienced when some major meat packers went bankrupt in the early 1970's. Of principal concern to Congress was the bankruptcy of American Beef Packers in 1975, at the time one of the largest meat packers in the country. That bankruptcy affected many farmers throughout the country who had delivered their entire year's output of cattle to American Beef Packers and did not receive payment. The provisions of the Uniform Commercial Code placed further impediments in the way of the cattlemen in their battle to obtain compensation, since lenders enjoyed priority over the cattlemen by virtue of secured interests in assets of the packer. The Senate Agriculture and Forestry Committee was explicit in identifying as a target of the legislation the favored position that lenders enjoyed over cattlemen in these situations: 36 Of particular concern to the livestock producers ... [in the case of American Beef Packers (ABP) ] was the fact that ABP's principal source of financing, General Electric Acceptance Corporation, stood ahead of them among the bankrupt's creditors by virtue of its duly protected security interest in ABP's inventory, i.e., livestock and derivative products which the producers had sold on a cash basis and for which they had not been paid. 37 Under present law, a packer is able to offer as security for a loan the livestock, meat, meat food products, or receivables or proceeds therefrom, which he has not paid for. The producer, who was responsible for raising, feeding, and caring for the livestock is left unpaid, while secured creditors reap the reward of his labors.... 38 What is needed to prevent future producer tragedies, as occurred following the ABP bankruptcy, is legislation that will afford a measure of protection to the livestock producer and feeder and yet not be so restrictive as to reduce competition in the livestock slaughtering business. H.R. 8410 accomplishes this dual objective. 39 S.Rep. No. 932, 94th Cong., 2d Sess. 5-6, reprinted in [1976] U.S.Code Cong. & Ad.News 2271, 2272. 40 669 F.2d at 1008 (alterations in Gotham ); see also § 196(a) supra note 1. 41 Gotham Provision Co. cited this history in response to a contention by the appellant secured lender that common law trust principles should govern the enforcement of the [§ 196(b) ] trust; therefore, the appellees must at minimum trace their sales into the accounts receivable over which the Bank held a security interest in order to recover. 669 F.2d at 1008. This position arguably finds support in the language of § 196(b) that specifies as trust assets certain livestock together with inventories of, or receivables or proceeds from meat, meat food products, or livestock products derived therefrom [emphasis added]. 42 Conceding that the specific statutory language does not resolve the issue, 669 F.2d at 1010, the Fifth Circuit invoked the legislative history, id. at 1010-11, and especially the nature of the meat packing business where, once slaughtered, animal carcasses are quickly cut into meat products and commingled, [resulting in] a practical impossibility to identify which receivables correspond to which seller's livestock, to reject the tracing requirement. Id. at 1011; see also JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 78 (2d Cir.1990) (noting that § 196(b) has consistently been interpreted as creating a nonsegregated floating trust, citing legislative history and Gotham Provision Co.). 43 The ruling of the district court in the instant case, however, goes well beyond Gotham Provision Co. Bankers Trust was not a secured lender to Arbogast, but rather to Rotches. The receivables in the possession of Bankers Trust and at issue in this litigation are not receivables owed to Arbogast by Rotches, but rather receivables owed to Rotches by its customers. These receivables were pledged as security for Rotches' open account with Arbogast, and that security interest was then subordinated to the security interest of Bankers Trust in a Subordination Agreement effected approximately a year prior to the sales of livestock that generated the statutory trust at issue in this litigation. 44 The § 196(b) trust in this case clearly covers receivables due to Arbogast from Rotches for sales of meat products derived from livestock sold to Arbogast by cash sellers. We see nothing in the statutory language, however, that extends the trust to property pledged to Arbogast by Rotches to secure payment of such receivables. 45 Nor can the language of the statute be sensibly construed to encompass receivables due to Rotches from third parties. The statute requires the packer to hold in trust certain livestock and derivative products, inventories, proceeds, and receivables. In the ordinary course, the packer would never have title to the products, inventories, proceeds, and receivables of third parties like Rotches, and could hardly be commanded to hold in trust property to which it never had title in the first place. 46 Thus, we disagree with the district court's ruling that Arbogast did not have power to enter into the [Subordination] Agreement which purported to subordinate trust assets, i.e. [Arbogast's] prior security interest in the assets of [Rotches]. 758 F.Supp. at 895 (footnote omitted). That security interest is not encompassed by the language of § 196(b). The statute did not command Arbogast to obtain such a security interest, and it did not constrain Arbogast from subordinating it. It only required that Arbogast hold the receivables due to Arbogast from Rotches, and any proceeds resulting from the payment of those receivables, in trust for cash sellers of livestock to Arbogast. 47 We see no undermining of the policy of the Act in this ruling. It cannot be plausibly contended that the Act barred Arbogast from selling to Rotches on credit, or required Arbogast to arrange any particular form of security (or for that matter any security at all) for the line of credit that it extended to Rotches. The statute only required that Arbogast pay over to cash sellers of livestock any payments received from Rotches, and not give any third party a preferred position as to the receivables directly due from Rotches to Arbogast. In sum, no § 196(b) claim could be made against Bankers Trust if Arbogast had never obtained any security interest from Rotches. We do not see how such a claim can result because Arbogast obtained such an interest and then, in the exercise of its business judgment, subordinated that interest to one held by Bankers Trust. 48 We add one caveat to the foregoing. There is in the record an internal Bankers Trust memorandum dated May 10, 1984 that states in part: 49 A few days ago Dave Rotches, President, called to inform the bank that he decided to cease operations due to problems with [Arbogast]. [Arbogast] over the years has been the subject's major supplier of dressed hogs. 50 By way of background, a key to the subject's success over the years has been the way in which they bought hogs. Dave Rotches negotiated the prices with farmers who shipped and sold their hogs to [Arbogast] at the price negotiated by Dave Rotches. [Arbogast] paid the farmer and slaughtered the hogs for Rotches. Under this method, Rotches was able to avoid the Packers and Stockyard Act (title passed to [Arbogast]. [Emphasis added.] It also allowed him to buy hogs a couple dollars per hundred weight, on average, below the market price. 51 Our opinion should not be read as addressing any issue regarding a fraudulent or otherwise wrongful circumvention of the Act that could result in Arbogast being regarded as an alter ego of Rotches for purposes of § 196(b). Cf. Central Trust Co. v. B & L Leasing, 669 F.Supp. 828, 829 (S.D.Ohio 1987) (secured lender challenged status of asserted cash seller because of overlapping ownership with purchaser/statutory trustee). In any such event, of course, some additional showing would be required as to any possible liability of Bankers Trust. Cf. C.H. Robinson Co., 952 F.2d at 1316 (secured lender that receives funds from statutory trustee for value and without notice of breach of trust entitled to retain payments) (dictum); Gotham Provision Co., 669 F.2d at 1011 (secured lender had constructive notice of the trust because a federal statute created the trust). In any event, no such case is presented on this appeal.