Opinion ID: 786069
Heading Depth: 2
Heading Rank: 4

Heading: KCB's Liability for Funds It Retained for Interest and Fees

Text: 29 As noted above, the only funds that were encumbered in any way upon their deposit at KCB were the $18,390.09 that KCB retained as payment for interest and fees associated with DLPS's checking account. In order to determine whether KCB is liable as a third-party transferee for receiving these funds in breach of [a PACA] trust, we must first determine whether DLPS's transfer of $18,390.09 in interest and fees to KCB constituted a breach of its obligations as PACA trustee. 13 See Discussion, Part III.C, ante (citing Restatement (Second) of Trusts § 283 (1959)). 30 To consider this question, we turn again to the Ninth Circuit's decision in Boulder Fruit. In that case, PACA creditors alleged that a PACA trustee breached his PACA obligations by entering into a factoring agreement, or an agreement to convert[] receivables into cash by selling them at a discount. Boulder Fruit, 251 F.3d at 1271 (citing Black's Law Dictionary (7th ed.1999)). Plaintiffs argued that selling trust assets at below their face value constituted per se breach of the PACA trust. Id. The Ninth Circuit disagreed, and held that a commercially reasonable sale of accounts for fair value, even if less than face value, was entirely consistent with the trustee's primary duty under PACA and 7 C.F.R. § 46.46(d)(1) — to maintain trust assets so that they are `freely available to satisfy outstanding obligations to sellers of perishable commodities.' Id. The Court of Appeals further reasoned that [t]he goal of PACA, after all, is ... to assure that growers are paid for their commodities. Id. Thus, as long as the assets remained freely available, and the value received from the transaction was commercially reasonable, a PACA trustee's entry into a factoring agreement that reduced the face value of trust assets did not constitute a breach of a PACA trust. Id. at 1271-72. 31 Recognizing that a PACA trustee's use of trust funds to conduct a commercial transaction with a third party does not constitute per se breach of trust under PACA, the Boulder Fruit Court noted, to the contrary, that such arrangements may facilitate the PACA dealer's payment of PACA creditors, which is the goal of PACA. Id. at 1271. We agree with the Ninth Circuit in Boulder Fruit, that it is not a breach of trust for a PACA dealer to use PACA funds to enter into commercially reasonable transactions with parties not protected by PACA, particularly where such transactions facilitate a PACA dealer's fulfillment of his obligations to PACA beneficiaries. 32 Applying that conclusion to the circumstances presented in the instant case, we hold 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. A commercial banking relationship like the one at issue here is analogous to the factoring agreement considered by the Ninth Circuit in Boulder Fruit, in the sense that the maintenance of such a business relationship may be entirely consistent with a produce dealer's duties as a PACA trustee. Id.; see also American Banana, 362 F.3d at 42 (Nor are we convinced that a trustee's payments of commercially reasonable fees and interest in exchange for routine banking services such as check cashing services and overdraft privileges extended to facilitate payments to beneficiaries necessarily constitute a breach of the PACA trust.). Like entering into a factoring agreement that is commercially reasonable, Boulder Fruit, 251 F.3d at 1271, maintaining a checking account with commercially reasonable terms may facilitate, rather than impede, the fulfillment of a PACA trustee's duty to maintain trust assets so that they are `freely available to satisfy outstanding obligations to sellers of perishable commodities,' id. (quoting 7 C.F.R. § 46.46(d)(1)). 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. Accordingly, we hold that a PACA trustee's payment of commercially reasonable interest and fees to maintain a checking account in support of its duty to maintain trust assets as freely available to repay his PACA creditors does not constitute a breach of trust under PACA. 33 As well noted by the Ninth Circuit, whether a particular... arrangement is commercially reasonable will depend upon its terms. Id. Considering the reasonableness of the factoring agreement before it in Boulder Fruit, that Court noted that the arrangement actually enhanced the trust, in part because it allowed [the produce dealer] to convert invoices that were not payable for 30 days ... into cash that [it] could have used to immediately pay growers. Id. at 1272. At first blush, it seems likely to us that DLPS's payment of $18,390.09 in interest and fees to KCB was commercially reasonable consideration for maintaining a checking account that facilitated approximately 2 million dollars of payments, primarily to PACA creditors, and for the extension of overdraft privileges that regularly allowed payment of PACA creditors in excess of DLPS's available funds. The facts may even permit a finding that this arrangement, like that in Boulder Fruit, actually enhanced the trust by making more funds available to PACA creditors than otherwise would have been. See id. However, because the District Court did not consider whether the checking account DLPS maintained at KCB was commercially reasonable, and because we are not satisfied that the record is fully developed on this point, remand to the District Court is necessary for a determination of whether DLPS's banking arrangements with KCB were indeed commercially reasonable. 34 If the District Court concludes that DLPS's banking relationship with KCB was commercially reasonable, then DLPS's expenditures on interest and fees in maintenance of its checking account did not constitute a breach of its duties as a PACA trustee, and, consequently, KCB cannot be held liable as a third-party transferee for the funds it retained as fees and interest to maintain the account. If, on the other hand, the District Court concludes that DLPS's expenditures on the checking account were not commercially reasonable, and that the payment of $18,390.09 in interest and fees therefore constituted a breach of DLPS's duty as a PACA trustee, then the Court should proceed to determine whether KCB is liable for receipt of those funds in breach of a PACA trust. Finally, if the District Court holds that the bank is liable for receipt of those funds in breach of a PACA trust, the Court must reconsider KCB's defenses to liability. 14