Opinion ID: 198270
Heading Depth: 2
Heading Rank: 1

Heading: Likelihood of Success Against Clermont and Koplovsky Under PACA

Text: 15 In 1984, Congress amended PACA by creating a statutory trust over any goods, receivables, or proceeds from perishable agricultural commodities until the buyer makes full payment. 7 U.S.C. § 499e(c). The commodities, receivables, or proceeds shall be held by such commission merchant, dealer or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities ... until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents. 7 U.S.C. § 499e(c)(2). In essence, PACA creates a trust in favor of the seller of the unpaid goods which is superior to the interest of the buyer's secured lender. See Sanzone-Palmisano Co. v. M. Seaman Enterprises, Inc., 986 F.2d 1010, 1012 (6th Cir.1993). One result is that the res of the trust is subject to the seller's lien and never becomes part of the buyer's estate in the event of the buyer's bankruptcy. In re W.L. Bradley Co., Inc., 75 B.R. 505, 512 (Bkrtcy.E.D.Pa.1987). 16 To preserve benefits under a PACA trust, a supplier of perishable agricultural goods must deliver written notice of his intent to preserve trust benefits to the debtor and to the United States Secretary of Agriculture within a certain period of time. 2 PACA establishes a ten-day time period within which a PACA seller is to be paid (see 7 C.F.R. § 46.2(aa)(5)), but parties may extend the time period for payment by written agreement up to thirty days without negating the PACA trust provisions. Any agreement extending the payment period beyond thirty days generally constitutes a waiver of rights under the PACA trust. Title 7 C.F.R. § 46.46(e)(2) provides that [t]he maximum time for payment for a shipment to which a seller, supplier, or agent can agree and still qualify for coverage under the trust is 30 days after receipt and acceptance of the commodities. Id. 17 The circumstances in the instant case are unique, because the Hiller Supply Agreement requires that 75% of the purchase price be paid within ten days of acceptance, but allows for 25% of the purchase price to be paid more than thirty days after acceptance. Whether an agreement providing for partial payment within the thirty-day requirement and partial payment outside that time period constitutes complete waiver of PACA protections is an issue of first impression in the federal courts. Every other court that has addressed the applicability of the PACA trust has dealt with total amounts due under an agreement for delivery of perishables within or outside the thirty-day requirement. 18 The district court found that Hiller completely waived all rights to trust protection under PACA by allowing for partial payment beyond the thirty-day requirement. In reaching that conclusion, the court relied on cases which have upheld the thirty-day period as the maximum limit for payment. See In re Lombardo Fruit and Produce Co., 12 F.3d 806, 809 (8th Cir.1993); In re Altabon Foods, Inc., 998 F.2d 718, 720 (9th Cir.1993); In re Davis Distributors, Inc., 861 F.2d 416, 417-18 (4th Cir.1988); Mid-Valley Produce Corp. v. 4-XXX Produce Corp., 819 F.Supp. 209, 211 (E.D.N.Y.1993). Although the district court found this case to be analogous to In re Lombardo and In re Altabon, it recognized that the Supply Agreement in the instant case var[ied] slightly from the contracts in the other cases because of this Agreement's partial payment provision. The court looked to the regulations which define full payment promptly as specifying the period of time for making payment without committing a violation of the act. 7 C.F.R. § 46.2(aa). The court reasoned that  'full payment promptly' in connection with the 'maximum time for payment' in Section 46.46(e)(2) indicates ... that the entire payment must be made within the thirty-day period. In order, thus, to be eligible for the protection of the PACA statutory trust, the written agreement must comply with PACA's maximum payment terms. Hiller Cranberry Prods., Inc., 2 F.Supp.2d at 161. 19 Hiller argues that it did not waive its rights under the PACA trust, at least with respect to 75% of the contract price. 3 Though there are no cases that have interpreted PACA so as to provide for partial rights in this context, Hiller claims that the remedial nature of the statute dictates that this court construe the statute liberally in light of its remedial purpose to afford trust protection to qualifying sellers. See Hull Co. v. Hauser's Foods, Inc., 924 F.2d 777 (8th Cir.1991); Continental Fruit Co. v. Thomas J. Gatziolis & Co., 774 F.Supp. 449 (N.D.Ill.1991); In re Richmond Produce Co., 112 B.R. 364 (Bkrtcy.N.D.Cal.1990). Hiller contends that because the Supply Agreement provided for partial extension of the payment term, then Hiller's waiver, if any, of its PACA trust rights should be viewed as only partial in nature. 20 KFI responds that Hiller's positions are unfounded, and that the thirty-day requirement for full payment promptly is consistent with PACA's purposes. KFI points out that, in a related proceeding, a district court in New York has adopted the district court's analysis of the Supply Agreement in question and has determined that no PACA protection is available to Hiller. Hiller Cranberry Prods., Inc. v. Koplovsky, 5 F.Supp.2d 89 (N.D.N.Y.1998). In fact, the New York court did adopt the conclusion of the district court in the instant case, but it relied almost entirely on the same analysis. See id. at 91-92. Thus, we give that decision little weight in reaching our ultimate conclusion. 21 Congress created the availability of the PACA trust to address burdens on commerce arising out of financing arrangements between sellers and buyers of produce: 22 [A] burden on commerce in perishable agricultural commodities is caused by financing arrangements under which commission merchants, dealers, or brokers, who have not made payment for perishable agricultural commodities purchased, contracted to be purchased, or otherwise handled by them on behalf of another person, encumber or give lenders a security interest in, such commodities, or on inventories of food or other products derived from such commodities, and any receivables or proceeds from the sale of such commodities or products, and ... such arrangements are contrary to the public interest. This [Act] is intended to remedy such burden on commerce in perishable agricultural commodities and to protect the public interest. 23 7 U.S.C. § 499e(c)(1). Thus, PACA is a remedial statute that should be given a liberal construction in favor of promoting Congress' intended purpose. 4 See Hull, 924 F.2d at 782. Guided by the general principle that we should construe this legislation in a liberal manner, we consider whether PACA covers the Supply Agreement in the instant case. 24 As indicated above, the district court found this case to be analogous to Lombardo and Altabon. In Lombardo, the parties had entered into a written contract for the sale of produce providing for the payment of the purchase price within PACA's thirty-day limitation. In the parties' course of dealing, however, the seller sometimes allowed the buyer to pay outside the thirty-day window. Thus, the buyer's secured creditor argued in bankruptcy proceedings that the written agreement was a sham, and that by allowing the buyer to pay outside the thirty days the seller lost its protection under PACA. The issue before the court was whether the parties' course of dealing was relevant in determining whether the seller was entitled to trust protection. The court held that the contract was valid and enforceable, even though the parties may not have strictly operated under its terms. The court recognized, however, that the seller could qualify for PACA protection with respect to those transactions for which timely notice had been given. To allow the seller in that case to recover for only those transactions supported the sole purpose of PACA, which is to protect sellers of fresh produce for payment of their accounts from the assets derived from the sale of the purchased produce in case of bankruptcy, liquidation or other financial distress as against the claims of secured creditors. 5 Lombardo, 12 F.3d at 811. 25 In Altabon, the seller and buyer of produce entered into several contracts that provided for payment periods of 45-60 days. After the buyer filed for bankruptcy, the seller filed its notice of its intent to seek trust protection under PACA. The buyer's creditor filed an action seeking to determine the rights of the parties, and argued that the seller could not avail itself of PACA's trust protections because the contract between the parties contained payment periods in excess of thirty days. The court found that the thirty-day maximum imposed by Congress was reasonable and was a permissible construction of the statute. Altabon, 998 F.2d at 720. 26 We have no disagreement with the holdings in Lombardo or Altabon. We do not find, however, the reasoning in those cases to be determinative of the issue at bar. Similarly, we do not find controlling other cases in which the thirty-day limitation was upheld and enforced. See In re Davis Distributors, 861 F.2d 416 (4th Cir.1988) (refusing to allow imposition of the PACA trust provisions when contract allowed 60 days for payment); Mid-Valley Produce Corp. v. 4-XXX Produce Corp., 819 F.Supp. 209 (E.D.N.Y.1993) (finding that the written contract satisfied PACA's provisions, despite the fact that the parties' course of dealing may have allowed for a longer payment term). 27 In each of the cases cited above, the courts focused on the payment terms of the written contract between the parties and found that the written agreement was controlling. In the instant case, the terms of the Supply Agreement are clear--75% of the payment is due within PACA's thirty-day limitation and 25% is due outside that time period. The question is whether allowing for such a payment scheme negates in total the statutory trust provisions, or whether the PACA protection was preserved as to 75% of the Agreement. 28 We are persuaded that construction of PACA in a strict and unbending fashion would erode the trust protections PACA was meant to provide. The statutory language in PACA itself does not address the situation in the instant case where a contract explicitly provides for partial payments both within and outside PACA's thirty-day requirement. Furthermore, there is no guiding precedent directly on point. 29 Though there are no cases addressing the applicability of PACA in a part-payment situation, there are a plethora of cases that are instructive as to the purposes and intent of PACA. In Hull Co. v. Hauser's Foods, Inc., 924 F.2d 777 (8th Cir.1991), the court sets out well the general purposes and operation of the Act: 30 Congress ... amended PACA in 1984 to provide additional protection to produce sellers. Congress recognized that, under the prevailing law, sellers of fresh fruits and vegetables [were] unsecured creditors and 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. H.R. Rep. at 407. The statutory amendments make a legislative finding that financing arrangements made by commission merchant dealers and brokers who have not made payment for the goods deprive suppliers of payment and disserve the public interest. 7 U.S.C. § 499e(c)(1). 31 Congress remedied this situation by amending PACA to make produce sellers' interests in the commodities superior to those of the buyers' secured creditors. Under the amendments, buyers of perishable agricultural commodities are now required to hold the purchased commodities, and any resulting proceeds, in trust for the benefit of the sellers until the sellers are paid in full. 7 U.S.C. § 499e(c)(2). The statutory history indicates that the trust imposed on the assets of a buyer of perishable commodities related to those supplying credit on a short term basis. In re Davis Distributors, Inc., 861 F.2d 416, 417 (4th Cir.1988). Congress left the specifics to the regulatory discretion of the USDA, including the task of prescribing the time by which payment must be made. 7 U.S.C. § 499e(c)(3). 32 Id. at 780, 781 (footnote omitted). The Eighth Circuit then proceeded to the following conclusion about the construction of the Act: 33 [R]emedial legislation should be given a liberal construction to effectuate its statutory purpose. International Nutrition v. United States Dep't of Health, 676 F.2d 338, 341 (8th Cir.1982); Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967). Here, the PACA amendments serve to provide suppliers and sellers of fruits and vegetables, or their agents, [with] a self-help tool that will enable 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. 49 Fed.Reg. 45,735, 45,737 (1984). 34 Id. at 782. We agree with Hull Co. and believe that plaintiff has complied with PACA requirements as to 75% of the total contract; our decision does not thwart the remedial nature of the statute. Id. at 783; see also In re W.L. Bradley Co., Inc., 75 B.R. 505, 511 (Bkrtcy.E.D.Pa.1987) (resolving ambiguities of PACA in favor of the seller and being guided by the general legislative intent to establish increased production and an effective remedy for sellers, suppliers and agents.); O'Day v. George Arakelian Farms, 536 F.2d 856, 857-58 (9th Cir.1976) (stating that the principal purpose of PACA is to provide a practical remedy to small farmers and growers who were vulnerable to the sharp practices of financially irresponsible and unscrupulous brokers in perishable commodities. (citation omitted)); Continental Fruit Co. v. Thomas J. Gatziolis & Co., 774 F.Supp. 449 (N.D.Ill.1991) (PACA is a remedial statute, and it is a long-established principal [sic] of statutory construction that remedial statutes are to be construed liberally.). 35 One of the factors that we deem to weigh in favor of Hiller in this case is the clarity with which the Supply Agreement provided that KFI was to pay 75% of the amount within the statutory thirty days and then, upon this three-quarters fulfillment of its written commitment, the remaining 25% was to be paid at some time after thirty days. This arrangement constituted a partial waiver of PACA rights by Hiller. The parties contemplated by their Agreement that KFI was bound to pay 75% of the total price for the cranberries within ten days. Consistent with the purposes of the Act, we conclude that the arrangement under consideration was equivalent to a sale of 75% of the cranberries with payment to be made for these berries within ten days thereafter. 36 In sum, we find that Hiller is eligible for PACA protection with respect to 75% of the Supply Agreement. 6 This finding, however, does not conclude the relevant inquiry. Whether Clermont is liable as a PACA broker, or whether Koplovsky is liable as a PACA trustee, are issues that require further consideration by the district court. The court should be mindful of the effect of the imposition of the PACA trust: 37 PACA establishes a statutory trust for the benefit of sellers and suppliers. This trust arises from the moment perishable goods are delivered by the seller. An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for that tortious act. This legal framework is to be distinguished from the piercing the veil doctrine, where the corporate form is disregarded because the individual has either a committed a fraud, or because the corporation is a shell being used by the individual shareholders to advance their own purely personal rather than corporate ends. Wm. Passalacqua Builders v. Resnick Developers, 933 F.2d 131 (2d Cir.1991). We find persuasive the reasoning holding a fiduciary liable for breach of trust under PACA. 38 We recognize at the outset that a PACA trust in effect imposes liability on a trustee, whether a corporation or a controlling person of that corporation, who uses the trust assets for any purpose other than repayment of the supplier. This includes use of the proceeds from the sale of perishables for legitimate business expenditures, such as the payment of rent, payroll, or utilities. Proceeds from the sale of perishables subject to PACA receive special treatment in other respects as well. Thus, a PACA beneficiary has priority over any secured creditor on the purchaser's commodity-related assets to the extent of the amount of his claim. 39 Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F.Supp. 346, 348 (S.D.N.Y.1993) (citations omitted); see also In re Baird, 114 B.R. 198, 204 (9th Cir. BAP 1990) (finding that an officer who causes a corporate trustee to commit a breach of trust causing loss to the trust administered by the corporation is personally liable to the beneficiaries for the loss). 40 Thus, we reverse and remand to the district court to assess the potential liability of either Clermont or Koplovsky under PACA. 41 B. Likelihood of Success Against Clermont and Koplovsky on Theories of Alter Ego and Piercing KFI's Corporate Veil 42 Hiller argued that Clermont should be held liable as the alter ego of KFI, and that the corporate veil of KFI should be pierced to hold Koplovsky personally liable for KFI's debts. The district court rejected these claims against Clermont and Koplovsky, and concluded that Hiller was unlikely to succeed on these alter ego theories. 7 Consequently, the court dissolved the injunctions against those defendants. 43 Although the district court noted that [i]t is undisputed that Edward M. Koplovsky exercises pervasive control over KFI and Clermont, it found this factor insufficient to support the alter ego theory, and declined to pierce the corporate veil of either KFI or Clermont. The basis for this decision was that there was no failure to make clear which corporation was taking action nor any failure to observe with care the corporate form. As pointed out by the district court, the Hiller-KFI Agreement specifically identified only KFI as the buyer, and concluded with the following sentence, added by Koplovsky, which amended a broader provision proposed by Hiller: By executing this Agreement, Clermont, Inc. and Edward M. Koplovsky, together with any other entities under their control, hereby join in the obligations of Buyer under Section 5.3 hereof [an agreement not to solicit berries from any other source but Hiller]. 44 We cannot find the facts as determined by the district court to have been erroneous with respect to piercing the corporate veil or alter ego liability. Neither can we conclude that the district court misinterpreted Massachusetts law in this regard. A recent Massachusetts case has cited controlling authority on these issues and has concluded: 45 In order for a court to disregard separate corporate entities, a plaintiff must meet a very high standard. American Home Assurance Co. v. Sport Maska, Inc., 808 F.Supp. 67, 73 (D.Mass.1992). Under Massachusetts law, disregarding separate corporate entities is the exception, not the rule,.... A court may pierce a corporate veil only when there is evidence of a confused intermingling between corporate entities or where one corporation actively and directly participates in the activities of the second corporation, apparently exercising pervasive control. American Home, 808 F.Supp. at 73. 46 Dale v. H.B. Smith Co., Inc., 910 F.Supp. 14, 18 (D.Mass.1995). In formulating the Supply Agreement, Hiller contracted to incorporate Koplovsky and Clermont for the sole purpose of their committing not to solicit berries from Hiller's independent grower competitors during the term. Clermont and Koplovsky made clear from the outset that they were not parties to the general Supply Agreement. 47 For these reasons and for the reasons stated by the district court, we affirm the court's determination that Hiller will not likely succeed against Clermont or Koplovsky pursuant to alter ego theories of liability. 48 C. Likelihood of Success on Claims of Misrepresentation and Fraudulent Conveyance 49 The district court ruled that there was no reasonable likelihood of success against Koplovsky individually on the claims of misrepresentation. As one basis for this determination, the court noted that there was no federal subject matter jurisdiction in this case because the PACA claim failed. As heretofore determined, the district court was in error in reaching its conclusion on the merits of the PACA claim. We have also remanded for further consideration as to whether Koplovsky may be liable as a trustee under the circumstances of this case. We deem the misrepresentation claim to be related to the potentiality of trustee liability. In discussing misrepresentation, we have recognized that the element of fraudulent intent may be proved by showing that a defendant made a statement 'as of [his] own knowledge' that was false. Metropolitan Life Ins. Co. v. Ditmore, 729 F.2d 1, 5 (1st Cir.1984) (quoting Snyder v. Sperry & Hutchinson Co., 368 Mass. 433, 333 N.E.2d 421, 428 (Mass.1975)). Reliance upon such statement might also be shown. In light of the circumstances, we cannot at this juncture hold that Hiller has not alleged a sufficient claim of misrepresentation against Koplovsky, whether acting individually or as a trustee. Thus, we reverse the dismissal of that claim and remand for its further consideration. 50 We also remand to the district court Hiller's fraudulent conveyance claim because we cannot agree that there may not be a reasonable likelihood of success against Koplovsky individually on one or more of those claims. The district court will, therefore, on remand, hold a hearing to determine the issues remaining in light of our opinion. 51 In summary, we reverse the district court's determination that Hiller is ineligible for PACA protection with respect to 75% of the Supply Agreement. We remand to the district court for further proceedings consistent with this opinion to determine the likelihood of success against Clermont and Koplovsky under PACA. We affirm the district court's determination that Hiller is unlikely to succeed on its claim that Clermont and Koplovsky are liable under alter ego theories. We reverse, however, the district court's dismissal of the claims of misrepresentation and fraudulent conveyance and remand for further consideration in light of this opinion. 52 Under the circumstances, we deny defendant Koplovsky's motion to dissolve the stay of the district court's order. Since we remand certain issues involving Koplovsky to the district court, defendant is not precluded from renewing his motion in that court provided such relief is consistent with this opinion. 53