Category Archives: Important Case Summaries

Chicago Bankruptcy Judge Dismisses the Complaint of a PACA Trust Creditor Who Sought to Prevent the Discharge of a PACA Trust Debt

On July 30, 2012, Judge Wedoff (U.S. Bankruptcy Judge in the Northern District of Illinois) issued a Memorandum of Decision in a personal chapter 7 bankruptcy case that addressed a very critical issue:

“Whether a person subject to the PACA trust who fails to secure payment for commodities that the trust encompasses incurs a debt excepted from discharge in bankruptcy…”

Relying heavily on Follett Higher Education Group, Inc. v. Berman (In re Berman), 629 F.3d 761, 767-69 (7th Cir. 2011)(tracing the history of decisions interpreting statutory provisions excepting debts from discharge based on a breach of fiduciary duty), Judge Wedoff said:No! See In re Jose Bolanos (N.D. IL) Adv. No. 11-A-2398.

As a prelude to this discussion, it is important to know, as Judge Wedoff pointed out, that “[a] number of courts have advanced a different interpretation of a PACA trustee’s fiduciary obligations for purposes of § 523(a)(4), holding the language of the PACA statute does impose a technical trust. See, e.g., E. Armata, Inc. v. Parra (In re Parra), 412 B.R. 99, 105 (Bankr. E.D.N.Y. 2009); A.J. Rinella & Co., Inc. v. Bartlett (In re Bartlett), 397 B.R. 610, 620 (Bankr. D. Mass. 2008); KGB Int’l, Inc. v. Watford (In re Watford), 374 B.R. 184, 190 (Bankr. M.D.N.C. 2007).

Case Summary:

The trust imposed on purchasers of agricultural commodities is set out in § 499e(c)(2) of PACA.  It states that

[p]erishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers  of  such  commodities  or  agents  involved  in  the transaction, 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). The regulations implementing PACA provide that “[t]rust assets are to be preserved as a non-segregated ‘floating’ trust” and that“[c]ommingling of trust assets is contemplated.” 7 C.F.R. § 46.46(b) (2010).  Based on this and Follett Higher Education Group, Inc. v. Berman (In re Berman), 629 F.3d 761, 767-69 (7th Cir. 2011), the Balanos court articulated two main reasons for holding that a  fiduciary capacity under § 523(a)(4) does not exist under the PACA.

First, a PACA trust does not put the purchaser in a fiduciary capacity under the 7th Circuit’s interpretation of § 523(a)(4) and PACA does not create an arrangement akin to an express trust.  The Court went on to say that, there is no property of the seller that the buyer is required to keep safely segregated, and ownership of the property is not intended to remain with the seller.  To the contrary the commodity buyer under PACA is fully expected to sell the property covered by the trust.  Under PACA, there is no requirement for segregation; the trust “floats” on all of the assets held by the purchaser. Accordingly, the PACA trust effectively functions as a lien, assuring payment for the goods shipped to and sold by the purchaser.

Second, the relationship between buyer and seller of agricultural commodities does not reflect any disparity of knowledge or power that would give rise to an implied fiduciary capacity in the buyer. Unlike lawyers and bank officers, the buyer of agricultural commodities has no particular expertise or authority relative to the seller. Indeed, the seller may be a substantial agribusiness and the buyer an individual with limited income.  The rationale for imposing the PACA trust has nothing to do with the power and knowledge of the participants in the sale transaction but rather with the nature of the commodities being sold, reflecting an intent on the part of Congress to give the seller a right to payment ahead of a buyer’s other secured creditors:

Due to a large number of defaults by the purchasers, and the sellers’ status as unsecured creditors, the sellers recover, if at  all, only after banks and other lenders who have obtained security interests in the defaulting purchaser’s inventories, proceeds, and receivables. See JSG Trading Corp. v. Tray–Wrap, Inc., 917 F.2d 75, 77 (2d Cir. 1990); H.R.Rep. No. 543, at 3, reprinted in 1984 U.S.C.C.A.N. at 406–07.  In order to redress this imbalance, Congress added Section 499e(c) to PACA, Pub.L. No. 98–273, 98 Stat. 165 (1984), which impresses a trust in favor of the sellers on the inventories of commodities.  H.R.Rep. No. 543, at 4, reprinted in 1984 U.S.C.C.A.N. at 407.

Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1067 (2d Cir. 1995).

Critical Note: It is important to note that the facts of this case were unique in that the Court merely dismissed an adversary complaint seeking to prevent Mr. Bolanos from discharging a PACA debt.  The Court raised this issue on its own as Mr. Bolanos apparently defaulted and otherwise failed to appear and defend himself in the adversary proceeding.  As a result, the Court’s ruling merely tested the allegations of the adversary complaint itself (as a matter of law) and is not a decision issued after a full trial on the merits.

PACA Proofs of Claim Due in the Adams Produce Bankruptcy

For those interested, the PACA Claims Procedure Order entered in the Adams Produce Bankruptcy established August 3, 2012 (Today!) as the deadline to file all PACA proofs of claim .  Any party that fails to file their PACA proof of claim by will be forever barred from asserting a PACA claim.

All PACA Trust Creditors must file a  PACA proof of claim no later than today, Friday, August 3, 2012. 

Once all of the PACA claims are asserted, the parties will begin the process of identifying the valid claims and eliminating all others.  Afterwards, the real amount of the PACA trust debt will be known and distributions will follow shortly thereafter.  As with most PACA cases, the validation process is critical because all of the Debtor’s unsecured creditors are waiting to see if there will be enough assets left to pay administrative claims and other unsecured obligations.   The answer to this question will come in the next few months.

Personal Liability Under PACA: Exposure for Non-Shareholding Officers

On August 2, 2012, the U.S. Court of Appeals for the 6th Circuit issued an unpublished decision that discussed, inter alia, personal liability under the Perishable Agricultural Commodities Act (“PACA”).  Specifically, the 6th Cir. addressed the issue of whether an individual could be held personally liable under PACA absent a showing of “active wrongdoing.”  The Court said: YES! See Arava USA, Inc. v. Karni Family Farm, LLC, 6th Cir. Case No. 11-1944.

In this case, the 6th Circuit found that an individual (who was an officer of the company, but not a shareholder) could be prosecuted personally for any shortfall in the company’s ability to fully satisfy it’s PACA trust obligations.

In so doing, the 6th Cir. agreed with the District Court (W.D. Mich.) and noted that thenon-shareholding officer at issue was not a statutory trustee of the PACA trust.  However, the 6th Cir. further held:

[b]ut that does not mean that [an individual] cannot be personally liable for interfering with [a PACA trust beneficiary’s] receipt of trust assets.  Ordinary principles of trust law apply to statutory trusts created by the Act. See Owner Operator Indep. Drivers Ass’n, Inc. v. Comerica Bank (In re Arctic Exp. Inc.), 636 F.3d 781, 798 (6th Cir. 2011).  This court has held that, where an officer causes a corporate trustee to commit a breach of trust, the beneficiary of the trust may sue the officer personally for the loss.  See Capitol Indemnity Corp. v. Interstate Agency, Inc. (In re Interstate Agency, Inc.), 760 F.2d 121 (6th Cir. 1985).  This liability arises not because the officer is a trustee or because of a piercing of the corporate veil, but rather because the officer himself has committed a tort against the trust’s beneficiary. Id. at 125.  The law of trusts is clear that “a beneficiary who is entitled to immediate distribution of . . . property may bring an action against a third party [i.e., not the trustee] who has damaged that property or interfered with its delivery to the beneficiary.” Restatement (Third) of Trusts § 107 cmt. c(1).  (emphasis added).

Every court of appeals to consider this issue has held that a corporate officer may be held personally liable under the Act.  See Coosemans Specialities, Inc. v. Gargiulo, 485 F.3d 701, 705–06 (2d Cir. 2007) (collecting cases from the First, Second, Third, Fifth, Seventh, and Ninth Circuits).   We now join them and hold that “individual shareholders, officers, or directors of a corporation who are in a position to control [statutory] trust assets,” and who fail to preserve those assets, may be held personally liable under the Act. Sunkist Growers, 104 F.3d at 283. Where the officer has “fail[ed] to maintain” the assets of a § 499e trust, trust law allows an unpaid produce seller to sue that officer in his personal capacity. 7 U.S.C. § 499b(4).

Critical Point

The thrust of this case is that you do not have to be a shareholder of a produce company to be exposed to PACA trust liability.  The proper test for determining liability is control over the PACA trust assets and how your actions affected the PACA trust beneficiary’s ability to receive full payment promptly.

Jason Klinowski Quoted in The Packer’s Updated Article on Adams Produce

The Packer quoted Jason Klinowski in its 7/12/2012 updated article announcing the entry of an Agreed Order Establishing a PACA Claims Procedure in the $50 million dollar Adams Produce bankruptcy case, which involves over $16 million in secured debt.

See: PACA Claims Due in Adams Produce Case

In this article, The Packer noted that: “Attorney Jason Klinowski, from Freeborn & Peters in Chicago, and Larry Meuers of Meuers Law Firm in Naples, Fla., represent produce companies seeking payment from Adams and were key players in the development of the plan. They worked with lawyers representing Adams, PNC Bank and other parties to resolve how the PACA claims should move forward.”  Id.

The article also quoted Jason as saying: “Getting the PACA trust beneficiaries paid quickly was our No. 1 priority,” Klinowski said. “A lot of good attorneys worked through some tough issues … Having been intimately involved in that process, I can tell you that it is not only a solid work product but the best way to get the PACA trust beneficiaries paid quickly.”  Id.

With the PACA Claims Procedure in place, here are some critical dates of interest:

EVENT

DEADLINE

Bankruptcy Proof of Claim Deadline

July 6, 2012

PACA Proof of Claim Deadline:

August 3, 2012

PACA Trust Asset Report Deadline:

August 3, 2012

Deadline to Object to PACA Proofs of Claim:

August 24, 2012

Deadline to Object to PACA Trust Asset Report:

August 24, 2012

Deadline to Schedule Meet and Confer:

August 31, 2012

Deadline to Meet and Confer:

September 14, 2012

Deadline to Notify Debtor of Result of Meet and   Confer Conferences:

September 17, 2012

Deadline to file Meet and Confer Report:

September 21, 2012

Deadline to Respond to Claim Objections:

September 28, 2012

Deadline to File PACA Trust Distribution Report:

October 5, 2012

Deadline to Object to PACA Trust Distribution   Report:

October 12, 2012

Deadline to Make First Interim Distribution:

October 19, 2012

Mediation Date for Disputed Claims and Disputed   Assets:

October __, 2012

Deadline to File Motion to Determine Disputed   Claims and Assets

December 7, 2012

Proofs of Claim Due in the Adams Produce Bankruptcy

Although the Court is set to establish a PACA Claims Procedure on July 9, 2012, the deadline to file all proofs of claim (PACA and non-PACA alike)  is July 6, 2012.  Importantly, any party that fails to file their proof of claim by July 6, 2012 will not be able to file their PACA proof of claim after the Court enters an approved order as the July 6, 2012 date is a statutory date.  Please do not be confused.

ALL creditors must file a proof of claim on or before July 6, 2012. 

In addition to meeting the July 6, 2012 deadline, the PACA creditors will be required to file a special PACA Proof of Claim as outlined in Judge Mitchell’s  forthcoming order.  Simply put, the PACA creditors need to be prepared to file two separate proofs of claim.  Any PACA creditor who fails to file any one of the two proofs of claim runs the risk of having the Court deny its claim.  Those familiar with this case can tell you that these dates are going to come fast.  Please do not wait to assert your rights.

Food Borne Illness Liability Forces Jensen Farms to File for Ch. 11 Bankruptcy Protection

On May 25, 2012, Jensen Farms, which is a general partnership, filed for Ch. 11 bankruptcy protection in Colorado.  With a list of the 20 largest creditors dominated by contingent, unliquidated and disputed estate claims, it is clear that wrongful death claims and other food safety related liabilities played a major role in the demise  of Jensen Farms.

The Produce News reported that Jensen Farms filed bankruptcy with $4.8 million in revenues in 2011, $2.1 million in current assets, $2.5 million in liabilities and an outstanding A/R from Frontera Produce in excess of $1.6 million.  The article went on to report that the bankruptcy should free up millions of dollars in insurance money to help fund settlements in numerous Listeria related wrongful death actions.  The Produce News – Jensen Farms Files for Bankruptcy Protection

This case will be closely watched as it is a glaring example of how important food safety issues are to the very sustainability and viability of a food company’s operations! 

Judge Rejects Deal from Adams Produce, PNC Bank and Pro*Act

On May 21, 2012, Judge Mitchell of the U.S. Bankruptcy Court for the Northern District of Alabama rejected a proposed settlement in the Adams Produce Bankruptcy, which the Court identified as a case of “national interest.”

On May 22, 2012, The Packer published an article outlining Judge Mitchell’s reasons for rejecting the proposed settlement, which can be found here:

Judge Rejects Deal from Adams Produce, PNC Bank and Pro*Act

Echoing Jason Klinowski and Brian Jackiw of Freeborn & Peters’ objections to the proposed settlement, the Court cited the “lack of financial statements,” the lack of “schedules, statement of affairs and a full creditors’ matrix.”  As key reasons the Court would not approve the proposed settlement.  The Court went further to say that “we know very little about this company” and we are only “three weeks and three days into this case.”  Simply put, settlement was both premature and overreaching given the timing and all of the conditions contained in the proposal.

Judge Mitchell, agreeing with counsel from Freeborn & Peters, also took issue with the liability releases contained in the proposed settlement agreement.  Specifically, the Court noted that the “deal would have benefitted PNC Bank because it would get other creditors off the books, clearing the way for it to receive payment on a $5 million lien it claims to have against Adams Produce.”    Jason Klinowski and Brian Jackiw of Freeborn & Peters were not willing to allow their clients to sign away their future rights and the Court clearly agreed!

Jason Klinowski Quoted in The Packer’s Updated Article on Adams Produce

The Packer quoted Jason Klinowski in its 5/18/2012 updated article discussing the battle over a proposed settlement in the Adams Produce bankruptcy case, which involves the Debtor, PNC Bank and certain PACA creditors.

See:  Future Recovery Rights at Heart of PACA Case

Jason Klinowski and Brian Jackiw of Freeborn & Peters LLP are leading the opposition to the proposed settlement on behalf of several other PACA trust creditors.  Steve Leara and Jay Clark of Wallace, Jordan, Ratliff & Brandt LLC are an important part of the PACA creditors’ opposition to the proposed settlement and have filed their client’s opposition jointly with Klinowski and Jackiw.   Similarly, Jason Read of Rynn & Janowsky LLP and Howard Spector of Spector & Johnson PLLC have each filed pleadings in opposition to the proposed settlement.

Oral arguments in this highly publicized case will be held on Monday, May 21, 2012 at 10:30 a.m. in the U.S. Bankruptcy Court for the Northern District of Alabama, which is located in Birmingham, Alabama. 

Jason Klinowski Quoted in The Packer’s Recent Article on Adams Produce

 

The Packer quoted Jason Klinowski in its 5/17/2012 article discussing the rapidly unfolding battle over a proposed settlement in the Adams Produce bankruptcy case.

See:  Adams Produce: Bankruptcy Deal Could Hamper PACA Creditors

Jason Klinowski and Brian Jackiw of Freeborn & Peters LLP are leading the opposition to the proposed settlement on behalf of several PACA trust creditors.

Jason Klinowski Cited in The Produce News’ Recent Article on Adams Produce

The Produce News quoted Jason Klinowski in its 5/17/2012 article discussing the rapidly unfolding battle over a proposed settlement in the Adams Produce bankruptcy case.

See:  Creditors Battling Over Potential Adams Produce Settlement

Jason Klinowski and Brian Jackiw of Freeborn & Peters LLP are leading the opposition to the proposed settlement on behalf of several PACA trust creditors.