Opinion ID: 399116
Heading Depth: 1
Heading Rank: 2

Heading: application of the trust provisions to the bank

Text: 27 The second major argument advanced by the Bank is that even if the appellees are cash sellers, the trust provisions of the Packers and Stockyards Act should not be construed to give the cash sellers a superior interest in Gotham's accounts receivable as against the Bank. The Bank urges that common law trust principles should govern the enforcement of the § 206 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. We are unable to reconcile the Bank's arguments with the language of the statute and its legislative history. 28 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: 29 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. 30 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.... 31 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. 32 S.Rep. No. 932, 94th Cong., 2d Sess. 5-6, reprinted in (1976) U.S.Code Cong. & Ad.News 2271, 2272. 33 As finally adopted by Congress, the 1976 amendments, Pub.L. No. 94-410, 90 Stat. 1251, create a comprehensive framework for the protection of the interests of livestock producers in their dealings with packers. The amendments empower the Secretary to require large packers to be bonded, empower the Secretary, after notice and hearing, to order an insolvent packer to cease purchasing livestock, allow the Secretary to seek temporary injunctions and restraining orders against packers, create a private right of action against packers for violation of the Act, require packers to make prompt payment for cash purchases, create a statutory trust for the benefit of unpaid cash sellers, and preempt certain provisions of state law. 34 Although each of these protections help, to some degree, to ensure that the market for livestock will operate more equitably, it is the trust provision which was most squarely directed at the problem discussed in the Senate Report quoted above-that of secured creditors taking priority over cash sellers of livestock in the event of a packer bankruptcy. To make this clear, Congress included in the trust provision of the Act, § 206, the following statement of findings and intent: 35 It is hereby found that a burden on and obstruction to commerce in livestock is caused by financing arrangements under which packers encumber, give lenders security interest in, or place liens on, livestock purchased by packers in cash sales, or on inventories of or receivables or proceeds from meat, meat food products, or livestock products therefrom, when payment is not made for the livestock and that such arrangements are contrary to the public interest. This section is intended to remedy such burden on and obstruction to commerce in livestock and protect the public interest. 36 7 U.S.C.A. § 196(a) (West 1980). 37 If any doubt is left regarding whether Congress intended § 206, the trust provision of the amendments to the Act, to give priority to the interests of cash sellers of livestock in packer inventories, accounts receivable, and proceeds derived from the cash seller's livestock over lenders who take security interests in these assets, we think that the following statement of the principal sponsor of the 1976 amendments to the Act, Rep. Thone, during the House debates lays any such doubt to rest: 38 Why do we need this trust provision? Frankly, as I see it, this is central to the bill. Without the trust provision we have not really helped (farmers such as those injured by the American Beef Packers bankruptcy). 39 What is the need for it, then? What are the arguments for the trust? First we have the simple answer of equitable treatment. How can one argue that a packer should be able to commit property as collateral for a loan, in this particular case livestock, for which he has not paid and does not actually own, to a third party, and then allow the third party to stand ahead of the producers if the packer fails? 40 Again some would argue that by having the bond and the prompt pay and the solvency test, why do we need this trust provision? The answer is that the trust provision will help prevent a packer from giving a priority to subsequent secured creditors, over the livestock producer who has not been paid. The trust is the only provision here that gives any help to the farmer. 41 122 Cong.Rec. 12864 (May 6, 1976) (emphasis added). 9 In view of the foregoing, we believe that if a lender could defeat the § 206 trust merely by taking a security interest in inventories and receivables, the clear intention of Congress would be thwarted and the trust provision of the Act would be reduced to a nullity. 10 We hold that so long as cash sellers remain unpaid for their livestock sold to a packer subject to § 206, that packer must hold his inventories, accounts receivable and proceeds derived from cash sales for the benefit of the cash sellers until such time as they are fully paid. Where the packer has given a lender a security interest in inventories or receivables that are subject to the § 206 trust, the unpaid cash sellers have priority over those assets and may recover the proceeds of those receivables to the extent of the outstanding balance on the cash sales. In this case, the appellees are entitled to the collections of the receivables held in escrow, and the Bank must return to the appellees from the payments on the accounts receivable which were applied to reduce the balance of the Bank's loan to Gotham the amount necessary to compensate the appellees in full for their cash sales to Gotham. 42 The Bank argues that the appellees must trace the particular accounts receivable derived from the sale of their livestock into the Bank's hands in order to recover. The Secretary of Agriculture, as amicus curiae, advances a different interpretation of the statute. The Secretary argues that no specific identification of the accounts receivable that cover the products of an individual cash seller was intended by Congress. The bankruptcy court below agreed with the Secretary, holding that the trust consisted of a floating pool of those assets derived from appellees' livestock as well as inventories, receivables and proceeds derived from other cash sellers' livestock. In re Gotham Provision Co., Inc., 1 B.R. 255, 260-61 (Bkrtcy.S.D.Fla.1979) 43 We conclude that the bankruptcy court was correct in rejecting the Bank's argument that specific tracing is required to establish that accounts receivable are subject to a § 206 trust. The language of the Act itself, § 206(b), does not clearly answer this question. However, a review of the legislative history convinces us that Congress did not intend that livestock producers perform the almost impossible task of tracing their products into specific receivables. 44 The report of the Senate Committee on Agriculture and Forestry directly refutes the Bank's specific tracing argument. Discussing the § 206 trust, the Committee stated: 45 Under this provision, no specific identification of the livestock or the carcasses, meats, proceeds or receivables derived therefrom is required. Instead, they are held in a pool in trust for the benefit of all unpaid cash sellers. Each cash seller would be entitled to a pro rata share in settlement of his account. 46 S.Rep. No. 932, supra at 13, (1976) U.S.Code Cong. & Ad.News at 2279. (emphasis added). Further support for the notion that specific tracing is unnecessary and that the trust consists of a floating pool of inventories and receivables is found elsewhere in the legislative history. See, e.g., Business Meetings of the House Committee on Agriculture, supra, at 63. 11 47 We concede that the legislative history is not totally unambiguous on the issue of which inventories and receivables are subject to the § 206 trust. However, due to the nature of the meat packing business where, once slaughtered, animal carcasses are quickly cut into meat products and commingled, it is a practical impossibility to identify which receivables correspond to which seller's livestock, whether that seller be an unpaid cash seller, a paid cash seller, or a credit seller. This problem was recognized in the House debates. Referring to the language of § 206(b), 12 Reps. Latta and Thone engaged in the following colloquy: 48 Mr. LATTA.... 49 I would like to ask the gentleman whether or not he is referring in All livestock purchased to include livestock that may be paid for by the packer. Say he has livestock and say 50 percent of it has been paid for. Is the gentleman talking about all in the context of the livestock that has not been paid for? 50 Mr. THONE. We are talking about all in the context of what has not been paid for. But as a practical matter what will occur is that a floating trust will exist to insure that unpaid livestock cash sellers are ultimately paid. It need not and should not prevent a packer from obtaining a loan on his livestock, meat products and accounts receivable for normally the amount of unpaid cash sellers outstanding at any one time should not be very great. 51 122 Cong.Rec. 12867 (May 6, 1976). The floating trust to which Rep. Thone refers here is not limited to assets which unpaid cash sellers can prove were derived from their products. To so construe the statute would effectively destroy the trust provision. 52 In the case at bar, the bankruptcy court found, based on testimony of a principal of Gotham and an officer of the Bank, that the meat products of cash and credit sellers had been commingled, and that the accounts receivable derived from producer cash sales could not be distinguished from those derived from credit sales. The Bank presented no evidence to establish which accounts may be free of the trust. 53 According to general principles of trust law, noted by the bankruptcy court below, where trust funds are commingled with funds not subject to the trust, a lien on the entire commingled fund exists for the benefit of the beneficiaries of the trust, and those who receive a transfer of assets from the commingled fund with actual or constructive notice of the trust are subject to the lien. Scott, The Law of Trusts, §§ 219.4, 519.1 (3d ed. 1967). In this case, the Bank had constructive notice of the trust because a federal statute created the trust. 54 We hold that where there is a commingling of livestock products such that it is impossible to determine whether a packer's inventories and accounts receivable have been derived from livestock purchased by the packer in a cash sale or credit sale, all of the packer's inventories, accounts receivable and proceeds attributable to livestock sales are subject to the § 206 trust to the extent of the amount owed to the unpaid cash seller. 13 The only burden on the unpaid cash sellers in such a case is to prove the balance due to them and the existence of a floating pool of commingled inventories of livestock products, accounts receivables and proceeds derived from cash and credit livestock sales. 14 Since the appellees have carried this burden in this case, they are entitled to recover against the Bank the amount awarded by the bankruptcy court.