PACA Trust Litigation Alert
On February 13, 2015, a civil action was filed in Pennsylvania against Van Bennett Food Co., Inc. in an effort to recover about $12,000.00 in alleged PACA trust debt.
Please check your A/R to see if this case affects you. If it does, please do not wait to assert your rights.
PACA Trust Litigation Alert
On January 15, 2015, a civil action was filed in Pennsylvania against Stea Bros., Inc. in an effort to recover about $135,800.00 in alleged PACA trust debt.
On January 19, 2015, a civil action was filed in Michigan against Cherry Growers, Inc. in an effort to recover about $152,500.00 in alleged PACA trust debt.
On January 22, 2015, a civil action was filed in California against R & R Fresh Fruits and Vegetables of California, Inc. in an effort to recover about $110,000.00 in alleged PACA trust debt.
On January 27, 2015, a civil action was filed in California against A.L.L. Groups, Inc. d/b/a Vic’s Market in an effort to recover about $33,000.00 in alleged PACA trust debt.
On January 28, 2015, a civil action was filed in Georgia against Roberta Giant Mart, Inc. in an effort to recover about $22,000.00 in alleged PACA trust debt.
On January 30, 2015, a civil action was filed in Texas against Heart of Texas Produce, Inc. in an effort to recover about $148,500.00 in alleged PACA trust debt.
On February 2, 2015, a civil action was filed in Florida against Monterey Market LLC in an effort to recover about $667,000.00 in alleged PACA trust debt.
On February 11, 2015, a civil action was filed in New York against New Farm, Inc. in an effort to recover about $40,000.00 in alleged PACA trust debt.
Please check your A/R to see if these cases affect you. If they do, please do not wait to assert your rights.
In all sales of goods where the seller is considered a merchant with respect to the goods in question, there is an implied warranty that the goods will be merchantable, which means the goods must be of the quality and type ordinarily acceptable among sellers and buyers. See U.C.C. § 2-314(1). For goods to be merchantable they must, inter alia, “pass without objection in the trade under the contract description.” Id. This means that sellers of perishable agricultural commodities (“Produce“) sell their Produce subject to an implied warranty of merchantability and this warranty is a necessary part of the selling price.
In the Produce industry, the parties to the primary or original sale include the seller of the Produce who sets a sale price based on market conditions and a buyer of Produce who agrees to the sale price based on market conditions and the expectation of a bargained for level of quality. If the seller delivers Produce to the buyer that is rejected or otherwise objectionable based on quality or condition defects, the seller has breached its implied warranty of merchantability because the Produce did not “pass without objection.” A seller’s breach of the implied warranty of merchantability justifies rejection of the Produce or the modification of the contract of sale.
After Produce has been rejected or subjected to objection due to quality or condition defects the Produce is either dumped or sold at a discount as distressed Produce. The sale of distressed Produce constitutes a secondary market sale because it involves the sale of Produce after said Produce was rejected or otherwise subject to a timely quality or condition objection in connection with the original sale. The sale of distressed Produce on a secondary market is materially different than the sale of merchantable Produce on the primary market because merchantable Produce (e.g. unobjectionable and un-rejected) is entitled to a premium. Part of this premium (fair market value) includes the value of any and all express or implied warranties. By way of an example, a new car with full factory warranty costs more than the sale of a used car that no longer has an effective warranty. The presence or absence of warranties affects the value and price of the product. The purchase and sale or Produce is no different.
The first and best method of ascertaining the value the goods would have had if they had been as warranted is to use the average price as shown by the USDA Market News Service Reports. Pandol Bros., Inc. v. Prevor Marketing International, Inc., 49 Agric. Dec. 1193 (1990). The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted (assuming the contract is modified and the Produce not simply rejected) and the value they would have had if the Produce had been as warranted (e.g. no objection based on quality or condition). See U.C.C. § 2-714(2).
The value of the goods accepted (e.g. accepted after objection and pursuant to a modified sale contract) is best shown by the gross proceeds of a prompt and proper resale. R.F. Taplett Fruit & Cold Storage Co. v. Chinook Marketing Co., et. al., 39 Agric. Dec. 1537 (1980). While PACA’s regulations do not place a duty to account upon a buyer who purchases on an open or price after sale basis, a buyer who fails to account accurately and in detail does so at his own risk, as a properly prepared account of sale may be useful in determining the reasonable value of the goods in the event the parties fail to agree upon a price. A.P.S. Mktg. v. R.S. Hanline & Co., 59 Agric. Dec. 407, 411 (2000); Carmack v. Selvidge, 51 Agric. Dec. 892, 898 (1992).
This is important because the buyer stands to lose if the parties fail to agree upon a price term after the fixed price term sale contract is modified to reflect open price or price after sale terms. If such a dispute arises and the buyer does not have a proper account of sale the USDA Market News Service Report will be used to decide the disputed price term. This hurts the buyer who elected not to reject the Produce, but rather to change the contract of sale and move the product under open or PAS terms because the USDA Market News Service Report reflects the sale of Produce that passed between sellers and buyers without objection as to quality or condition. As such, the USDA Market News Service Report price information fails to take into account any type of discount for the seller’s breach of the implied warranty of merchantability. You don’t want to be stuck in a position that requires you to defend your returns on the sale of distressed Produce against the reported sale of non-distressed Produce.
The difference between the USDA Market News Report price and the gross sale proceeds identified in a proper account of sale (assuming prompt and proper resale) represents the value of the warranty of merchantability. For example, if the USDA Market News Report price for a given commodity is $5.00 per carton and proper account of sale shows a prompt and proper resale at $2.00 per carton, the value of the warranty of merchantability is $3.00 per carton. Therefore, the value of the distressed Produce (e.g. Produce sold without the benefit of a warranty) is $2.00. Stated another way, the seller could command $3.00 more per carton had its Produce been accepted without objection by the buyer. This also means that without a proper account of sale the buyer would not be in a position to quantify the value of the missing warranty and could be forced to compare its sale of distressed Produce to the market price for good Produce. If this happens, the buyer could lose money on the transaction post-objection based on its own failure to prepare a proper account of sale.
On 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.