Category Archives: Important Case Summaries

Federal Judge Denies PACA Claim of Appetizer Company

United_States_Bankruptcy_Court_SealOn February 2, 2015, the U.S. Bankruptcy Court for the Western District of Arkansas issued an order denying the PACA claim of an appetizer company that sought PACA trust protection for breaded jalapenos with cheddar cheese, spicy breaded pickle slices, fried green tomatoes, and battered corn nuggets.  See 5:13-bk-73597 at [D.E. 1294].  The trial on this issue took two days and involved expert witnesses for both sides.  The central objection at issue in this order was the debtors’ objection that the goods sold to Allens, Inc. were not perishable agricultural commodities entitled to PACA trust protection under 7 U.S.C. § 499a(b)(4), which also considered the application of 7 C.F.R. § 46.2(u) and 7 C.F.R. § 46.2(v).

The Court’s decision re-affirms the fact that “PACA extends protection to ‘fresh’ fruits and vegetables only” and, in “addition to being fresh, the fruits and vegetables in question cannot be manufactured into ‘articles of food of a different kind or character.”  This case is very important to the produce industry because the case law in this area is very light and the cases that do address the topic of when fresh/frozen produce is manufactured into a food of a different kind or character are severely lacking in discussion.  Judge Ben Barry’s decision provides the industry with detail and real guidance.  As a direct result, Judge Barry’s order is positioned to be the leading case on this topic.

Specifically, Judge Barry set forth a detailed discussion in support of his finding that the products were manufactured into a food of a different kind or character based on changes to the product’s appearance, texture, flavor, and nutritional profile.  The Debtors’ expert witness, Dr. Gilliam Dagan of ABC Research Laboratories, testified that the appetizer company’s “manufacturing process introduced wheat and dairy allergens and fat (including saturated fat)” into the products that “did not exist in the native jalapenos, tomatoes, cucumbers, or corn.”  In addition, the Court found that the application of dry coatings (breading) “added a significant amount of carbohydrates.”

The Court also took a hard look at the individual manufacturing processes (when separated into individual steps and viewed in isolation) and addressed the argument that because no single step constitutes a per se violation of PACA the finished good is entitled to PACA trust protection.  Overruling this argument, the Court held that process taken together did in fact change the kind or character of the food.

Lastly, the Court rejected the argument that breading is synonymous with battering and coating.  In so holding, the Court noted that the breading process in this case was “not comparable in either form or effect.”  This ruling provides much needed industry guidance to both buyers and sellers of fruit or vegetable based manufactured food products.  Similarly, the banking industry now has better guidance for assessing the impact of potential PACA claims against borrowers.

Jason Klinowski Selected to Help Defend Midamar Corporation

Midamar Corp.

Jason Klinowski was selected to join the team assembled to defend Midamar Corporation against certain allegations of criminal violations of the Federal Food Drug & Cosmetic Act and other related charges.  In connection with this engagement, I had the opportunity to travel to Iowa to visit Midamar and members of the Aossey family.  After doing so, I can attest to how much the family cares about their commitment to the Islamic community and the products they sell to their customers.  The Aossey family has built a remarkable company and I am very proud to be associated with Midamar Corporation!

 

USDA Backs Off Investigation of Mucci Pac USA

Mucci_logoAs reported by The Packer on October 9, 2014, a civil action filed against the USDA in the Eastern District of Michigan – seeking both injunctive and declaratory relief – resulted in the USDA’s closure of its investigation of Mucci Pac USA.  Specifically, Mucci Pac and the USDA entered into a stipulation and agreed that Mucci Pac does not buy or sell produce.  As such, the USDA agreed that Mucci Pac does not need to maintain a PACA license and is not subject to PACA.  The U.S. District Court ratified the stipulated agreement and closed the case.  See USDA Backs Off Investigation of Mucci Pac USA (identifying Jason Klinowski as lead counsel for Mucci Pac USA)

This case did not go to trial and the court order is not much of a precedent for others to utilize, but it does show the industry that produce companies do have rights.  More importantly, this case shows that Canadian produce companies can properly establish and maintain distribution centers in the United States without subjecting themselves to USDA jurisdiction.  This practice holds immediate and obvious financial benefits for those Canadian companies that sell into the U.S. marketplace.

Jason Klinowski to Serve as Special PACA Counsel to Allens Canning During its Chapter 11 Bankruptcy Case

Allens Canning

On October 28, 2013, Allens, Inc. d/b/a Allens Canning (the “Debtor”) filed for Chapter 11 bankruptcy protection.  Anticipating over $20 million in potential PACA claims, the Debtor retained Jason Klinowski of Freeborn & Peters LLP’s food industry team to serve as special PACA counsel.  In this capacity, Jason assisted the Debtor in the preparation of the PACA claims procedure order and now manages the Debtor’s obligations under the order.  To be clear, the PACA claims procedure order is a Court approved procedure by which the Debtor and all potential PACA trust beneciaries test the validity of the PACA claims.

In the Courtroom, Jason also helps the Debtors address such complex PACA trust issues as:

  • Whether the Court Should Compel the Debtor to Create and Fund a Segregated PACA Trust Account  (NO)
  • Whether the Debtor May Use PACA Trust Assets in Connection With its Efforts to Reorganize Under Chapter 11 of the Bankruptcy Code (YES)
  • The Proper Use of Pre-Transaction Written Agreements to Limit PACA Trust Liability (to be determined)
  • And more…

The Debtor’s Chapter 11 case not only involves significant amounts of potential PACA trust liability, but it also contains several complex PACA trust issues, the resolution of which could change how the produce industry does business.

Government Not Required to Prove Intent or Consciousness of Wrongdoing to Convict the Jensen Brothers

Jensen Farms PicAs the produce industry follows the fate of Eric and Ryan Jensen many articles and commentary have surfaced in support of the brothers Jensen.  However, these articles and commentary all focus around a significant misconception about the government’s burden  of proof.  Specifically, the general misconception is that the U.S. Attorney’s Office must prove or otherwise show intent on the part of the Jensen brothers to obtain a criminal conviction.  This is wrong!

The Federal Food Drug and Cosmetic Act (“FD&C Act”) protects the consuming public by allowing the government to regulate the conditions under which food and drugs are manufactured and distributed and it requires those responsible to comply with its provisions.  Under the FD&C Act, misdemeanor criminal responsibility does not require intent or consciousness of wrongdoing.  On the other hand, felony criminal responsibility requires a knowing violation with the specific intent to defraud or mislead.  The FD&C Act also states that a  corporation may commit an offense and all persons who aid and abet its commission are equally guilty.

The Jensen brothers are facing misdemeanor criminal charges, which still carry the threat of imprisonment and significant financial penalties.  Given the misdemeanor nature of the charges, the U.S. Attorney’s Office does not need to allege or prove any type of intent on the part of the Jensen brothers to obtain a criminal conviction.

The foregoing is but one example of why the Jensen brothers’ criminal case is alarming to the produce industry.  With that said, are there any real and meaningful defenses available to the Jensen brothers?  The answer is yes!

Fresh & Easy Neighborhood Market, Inc. Files for Chapter 11 Bankruptcy Protection

freshandeasyneighborhoodmarketOn September 30, 2013, Fresh & Easy Neighborhood Market, Inc. filed for chapter 11 bankruptcy protection in the District of Delaware and was assigned case number 13-12569.  The Debtor’s voluntary petition estimates: (i) between 10,000 and 25,000 creditors; (ii) holding assets valued between $100 million and $500 million, and; (iii) liabilities between $500 million and $1 billion dollars.  This case was assigned to Judge Kevin J. Carey.

A review of the first day motions shows the Debtor has already filed a Motion to Pay PACA/PASA claims and are seeking permission from the Court to use $5,000,000.00 (in the aggregate) to pay all the PACA/PASA claims.  In addition, the Debtor is asking for a court order directing the Debtor’s bank to honor all checks presented for payment.  In addition to several other motions, the Debtor filed a 305 page list of creditors.

Please check back for updates.  I will update this entry further after I review the first day pleadings more fully and additional pleadings are filed.

Jason Klinowski and Freeborn’s Bankruptcy & Financial Restructuring Group Tapped to Represent the Official Committee of Unsecured Creditors in the Pro’s Ranch Markets Chapter 11 Case

Pros Ranch MarketThe Official Committee of Unsecured Creditors in the Pro’s Ranch Markets’ bankruptcy case recently retained Freeborn’s Bankruptcy and Financial Restructuring Group to help maximize their recovery in this Chapter 11 case.  Specifically, Freeborn possesses considerable experience representing official committees of unsecured creditors in chapter 11 cases involving retail grocers, food service companies, and food distribution companies.  Because the attorneys in Freeborn’s Food Industry Team routinely represent these same types of food industry clients, we are highly familiar with the issues affecting both debtors and creditors in this space.  This allows Freeborn to be incredibly effective when it comes to maximizing value for creditors.