Category Archives: Important Case Summaries

Adams Produce Company – A Changing Landscape

Adams Produce Company LLC filed a motion May 11 requesting the approval of a proposed settlement between the debtors, PNC Bank, Perishable Agricultural Commodities Act (PACA) claimants and their employees. As part of the proposed settlement, Adams Produce will be authorized to obtain post-petition financing from PNC in the amount of $1.45 million, with the bank being granted a first priority security interest in all of the debtors’ property except for the PACA trust assets.

According to the proposed settlement, the debtors’ employees shall be paid $1 million through the debtor-in-possession loan proceeds, while the total amount of $250,000 shall be transferred to an account set up to pay the costs of administering the PACA trust and the PACA claims procedures and $200,000 will be used to pay certain costs of administration of these cases. The debtors filing anticipates that the settlement amounts paid to the employees pursuant to the proposal will pay the workers in full for their approximately three weeks worth of unpaid wages, and in part for their accrued vacation, holiday and personal time off, health and other employee benefits, payroll deductions and reimbursement expenses.

Pursuant to the proposed settlement, several parties will be released from liability, including a partial release of PNC by the debtors, a partial release of the debtors by the employees and the PACA claimants, a partial release of the PACA claimants by the debtors and a partial release of certain professionals by the PACA claimants, the employees and PNC.

The proposed settlement also establishes an Adams Produce PACA trust, to be administered by a trustee, pursuant to procedures for establishing the validity and payment of PACA claims.

THE OPPOSITION

The problem with this proposed settlement is that it is controlled by the single largest PACA creditor and does not truly reflect the voice of the PACA trust beneficiaries as a whole.  Moreover, the proposed settlement appears to release certain parties from liability under PACA prior to the installation and completion of a PACA claims procedure designed to place a real dollar figure on damages to the PACA trust beneficiaries.  As you can imagine, this leaves many questions (i.e. who will be responsible for any shortfall in the Debtor’s ability to fully pay all the PACA trust claims) and provides no guarantees of full payment to the PACA trust beneficiaries.  Although the proposal may partially repay employees, it will all but deplete the $1.4 million in post-petition financing with arguably no real benefit to remaining creditors, including the PACA trust creditors. More alarmingly, what the proposal does do is insulate the bank and others from potentially millions in liability and in the short-term authorize the use of PACA trust assets to pay the Debtor’s non-PACA trust obligations. 

In opposition to the Debtor’s Motion to Approve Settlement, certain PACA trust beneficiaries recently filed an Adversary Proceeding that seeks the turn-over of the PACA trust assets and the disgorgement of millions of dollars of PACA trust assets allegedly received by various third parties, which is the exact liability the settlement proposal sought to avoid through a deal with the largest PACA trust creditor.  Furthermore, because the issues presented deal with PACA, not bankruptcy law, the creditor group filing the Adversary Proceeding also filed a Motion to Withdraw the Reference requesting the U.S. District Court for the Northern District of Alabama adjudicate the federal PACA trust issues and other claims presented in the Adversary Proceeding instead of the Bankruptcy Court. 

The opposition also seeks to stay the Bankruptcy Court’s consideration of the opposed Motion to Approve Settlement to allow the U.S. District Court an opportunity to rule on the Motion to Withdraw the Reference.  

Stay tuned…  

The Federal Court’s Current Thinking About Personal Liability Under the PACA

In a recent memorandum and opinion, the U.S. District Court for the District of Connecticut provided the industry with an in-depth look at personal liability under the Perishable Agricultural Commodities Act (PACA).  This opinion addressed all of the major cases and relevant authority on this topic and is a good representation of the Court’s current thinking on the issue of personal liability under the PACA. 

  

Personal Liability

An individual who is in a position to control the assets of a PACA trust and fails to preserve those assets may be held personally liable to the trust beneficiaries for breach of fiduciary duty. See, e.g., Golman-Hayden Co. v. Fresh Source Produce, Inc., 217 F.3d 348, 351 (5th Cir. 2000); Morris Okun, Inc., 814 F. Supp. at 348. This legal framework is distinguishable from “piercing the corporate veil” doctrine, where the corporate form is disregarded because the individual has committed a fraud or because the corporation is a “shell” being used by individual shareholders to advance their own personal interests rather than the interests of the corporation. Morris Okun, Inc., 814 F. Supp. at 348. While the corporation will be held liable in the first instance for the debt owed, individuals in a position to control trust assets who breached their fiduciary duties may be held secondarily liable for whatever amount of the debt is not recoverable from the corporation. Id. at 349-50.

The courts have held that individual liability turns not on whether the individual nominally held an officer position nor even the size of his or her shareholding, but whether he or she had the authority to direct the control of the PACA trust assets. See Bear Mountain Orchards, Inc. v. Mich-Kim, Inc., 623 F.3d 163, 169 (3d Cir. 2010); see also Grimmway Enters., Inc. v. PIC Fresh Global, Inc., 548 F. Supp. 2d 840, 849 (E.D. Cal. 2008); Shepard v. K.B. Fruit & Vegetable, Inc., 868 F. Supp. 703, 706 (E.D. Pa. 1994). “The test for individual liability continues un-brightlined, as each case depends on facts found by the trier at trial.” Bear Mountain, 623 F.3d at 169.

Most of the cases holding a controlling person secondarily liable have involved claims against the sole shareholder, president or principal officer, and director of the corporation. See, e.g., Coosemans, 485 F.3d at 706 (holding sole director and shareholder liable because he was in a position to control PACA trust assets); Morris Okun, Inc., 814 F. Supp. at 348 (finding sole shareholder who controlled the day-to-day operations of the company liable under PACA); Mid-Valley Produce Corp. v. 4-XXX Produce Corp., 819 F. Supp. 209, 213 (E.D.N.Y. 1993) (holding president liable but finding insufficient evidence to hold sole shareholder, who was not an officer, director, or employee of the corporation, or former directors liable); Bronia, Inc. v. Ho, 873 F. Supp. 854, 861 (S.D.N.Y. 1995) (finding sole shareholder to be “primary actor responsible” for corporation’s breach of PACA trust); see also Golden-Hayden Co., 217 F.3d 348, 352 (holding that sole shareholder manifestly had absolute control over the corporation despite his refusal or failure to exercise his right and obligation to control the corporation).

As the district court noted in a 1997 decision from the Northern District of Texas, Ideal Sales, Inc. v. McGriff, No. 3:95- CV-0991, 1997 WL 560779, at *3 (N.D. Tex. Sept. 2, 1997), “the cases reveal a willingness to hold the primary actor responsible for a breach of the trust, the sole or controlling shareholder, or the president personally liable, along with an unwillingness to hold other, less involved individuals personally liable.” However, since 1997, the cases do not draw such bright lines. As the court in Bear Mountain Orchards recognized, there is no bright line litmus test. 623 F.3d at 169. Each case turns on its own facts, and the inquiry is very fact-intensive.

Weis-Buy Farms, Inc., et al. v. Quality Sales LLC, 2012 U.S. Dist. LEXIS 11178 (Dist. CT 2012) (emphasis added).

Court’s Holding

In this case, the Court declined to enter a preliminary injunction against an officer of the Debtor produce company based upon the following facts:

FACTS IN FAVOR OF LIABILITY

FACTS AGAINST LIABILITY
  • Authorized signatory on the company’s operating account
  • No ability to control payments made from the company’s operating account
  • Possessed control over the company’s produce purchases
  • No authority to decide which vendors received payment
  • Identified as the buyer on the produce transactions
  • No authority to sign checks without direct approval from the owner
  • Possessed the title of Executive Vice President of the company
  • Not a shareholder or member of the company
  • Purchased produce from venders with knowledge of the company’s financial problems and the lack of sufficient funds to pay for said purchases
  • Not in a position to oversee the preservation of trust assets
  • Drove a company car
  • Position at the Company was not sufficient enough to establish legal responsibility for the trust assets
  • Identified in the Blue Book as an officer of the company
  • Not a manager of the LLC
 
  • Did not control from whom the company purchased produce or how much
 
  • Very little involvement in the subsequent sale of the produce once it arrived at the company
 
  • Worked as an employee
 
  • Not involved in the decision to extend credit terms with key vendors
 
  • Not involved in the company’s decision to file bankruptcy
 
  • Did not have direct access to information regarding the company’s financial situation
 
  • No responsibility for the collection of accounts receivable
 
  • No responsibility for the payment of outstanding invoices to the company
 
  • Not identified on PACA License as a principal
 
  • Not identified on the Secretary of State Documents as an owner of the Company

 The key take away here is that close attention must be paid to the company’s organizational structure and any contracts that govern the relationship between the company and the individuals who manage or own it.  PACA is a tough law and there is a significant risk for exposure to personal liability.  That risk needs to be understood and properly managed.