Court Opinion

ID: 8986546
Source: CourtListenerOpinion
Date Created: 2022-11-27 11:54:01.068927+00
Date Added: 2024-06-11T17:10:49.392366
License: Public Domain

McMILLIAN, Circuit Judge,
dissenting.
I respectfully dissent. For the reasons discussed below, I would hold that the sellers, Hull Co. and J & J Distributing Co. (J & J), have lost their eligibility for trust protection. Under my analysis, as set forth below, I would not reach the issue of the adequacy of the notice under 7 C.F.R, § 46.46(g)(3).
The underlying facts are not disputed. All the parties were licensed under the Perishable Agricultural Commodities Act (PACA), as amended, 7 U.S.C. §§ 499a-499t. Hull’s invoices specified that payment was due 10 days after delivery; J & J’s invoices did not specify any payment date. Hull orally agreed to accept payment 45 days after delivery, J & J 30 days after delivery. Hull and J & J have not been paid for certain shipments delivered before April 14, 1989. The buyer, Hauser’s Foods, Inc. (Hauser), defaulted and owes Gateway Foods, Inc. (Gateway), some $13 million. Gateway seized Hauser’s assets as the holder of a perfected security interest in Hauser’s assets and inventory. Hull and J & J filed this lawsuit against Gateway, claiming an interest superior to that of Gateway as the beneficiaries of statutory trusts created under PACA in their favor as unpaid sellers of perishable agricultural commodities. Gateway argued that Hull and J & J failed to comply with the requirements necessary to preserve trust benefits and that J & J’s notices of intent to preserve trust benefits were inadequate. The majority opinion agreed with the district court that because, under PACA and the regulations, any agreement extending the payment period beyond 10 *784days after delivery must be in writing, any such oral agreements have no effect and violate PACA. Slip op. at 9. The majority reasoned that if such oral agreements cannot be used by the buyer as a defense against claims for payment, then neither should the buyer’s secured creditor be able to use them as a defense against the unpaid sellers’ claims as PACA trust beneficiaries. Id. at 9-10. I disagree.
Congress amended PACA in 1984 to provide sellers of agricultural commodities with a statutory trust on certain assets of defaulting buyers in order to give sellers additional financial protection. 7 U.S.C. § 499e(c)(2); see H.R.Rep. No. 543, 98th Cong., 2d Sess. 3-4, reprinted in 1984 U.S. Code Cong. & Admin.News 405, 406-07 (House Report). Sellers who have not been paid for delivered commodities are unsecured creditors. House Report at 3. Because buyers often use the commodities as collateral to finance their business operations, their lenders become secured creditors. Id. The assets of buyers who go bankrupt first go to the secured creditors, leaving the seller in a precarious financial position as an unsecured creditor. Id. PACA remedies this by impressing a trust in favor of the unpaid seller on the buyer’s inventory or proceeds that is superior to any lien or security interest in inventory held by the buyer’s secured lender. House Report at 4; see, e.g., JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 77 (2d Cir.1990).
However, sellers are not automatically protected by a PACA trust. “There are a number of procedural and substantive prerequisites to securing the protection of a PACA trust, the specifics of which [PACA] leaves largely to the regulatory discretion of the Department of Agriculture.” In re Davis Distributors, Inc., 861 F.2d 416, 417 (4th Cir.1988). For example, “PACA requires that buyers make ‘full payment promptly’ for all merchandise received from produce suppliers.” Id., citing 7 U.S.C. § 499b(4). The regulations define “full payment promptly” as payment within 10 days of delivery. See 7 C.F.R. § 46.2(aa)(5). The buyer and seller may elect to use different times of payment, but they “must reduce their agreement to writing before entering into the transaction.” Id. § 46.2(aa)(ll). As noted in In re Davis Distributors, Inc., “[n]one of these provisions, of course, directly implicates a seller’s eligibility for the protection of a PACA statutory trust.” 861 F.2d at 417. However, the regulations further provide that “[t]he maximum time for payment for a shipment to which a seller ... can agree and still qualify for coverage under the trust is 30 days after [delivery].” 7 C.F.R. § 46.46(f)(2) (emphasis added). Thus, under the statute and regulations, not only must any agreement providing for payment more than 10 days after delivery be in writing, the maximum payment period on which the buyer and seller may agree is limited to 30 days. See In re Davis Distributors, Inc., 861 F.2d at 417; In re Lombardo Fruit & Produce Co. (Tom Lange Co.), 107 B.R. 952, 958-59 (Bankr.E.D.Mo.1989); In re Lombardo Fruit & Produce Co. (Goldman Fruit & Produce Co.), 106 B.R. 593, 599 (Bankr.E.D.Mo.1989) (citing House Report at 7 (contracts that call for payment later than 30 days should not qualify for trust coverage) and 49 Fed.Reg. 45735, 45738 (1984) (agreement for payment after 30 days will not be eligible to receive benefits of trust)); In re Prange Foods Corp., 63 B.R. 211, 216 (Bankr.W.D.Mich.1986).
In the present case Hull and J & J each agreed to payment terms longer than 10 days after delivery but failed to reduce the agreement to writing as required by the statute and regulations. Hull also agreed to payment terms in excess of the 30-day limit imposed by the regulations. Because of such noncompliance, I would hold that neither seller qualified for PACA trust coverage. The sellers should not be allowed to hide behind what were essentially sham invoices in order to qualify for PACA trust coverage. Under the above analysis it is not necessary to reach the issue of the adequacy of the notice.
Accordingly, I would reverse the judgment of the district court.