PACA Trust Litigation Alert
On April 16, 2012, a civil action was filed in California against White Oak Frozen Foods, LLC in an effort to collect approximately $60,800.00 in alleged PACA debt. At this time, an Application for a Temporary Restraining Order is pending.
Please check your A/R to see if this case affects you. If it does, please do not wait to assert your rights.
Savvy credit managers need to understand how to use restrictive endorsements to their advantage and how to deal with any restricted check they may receive.
As a matter of policy, a company should make it a practice not to deposit any check containing a restrictive endorsement until they have discussed the issue with their legal counsel.
With that said, here is an overview of what credit managers should know about accord and satisfaction:
To constitute a valid accord and satisfaction it is essential that what is given shall be offered in full satisfaction and extinction of the original debt. That the debtor shall intend it as a full satisfaction of the original debt and that such intention shall be made known to the creditor in some unmistakable manner.
It is equally important that the creditor shall have accepted it with the intention that it should operate as a full satisfaction of the original debt.
Generally, an accord and satisfaction requires:
1 Am. Jur. Accord & Satisfaction, Section 22 et. seq. See also Louis Caric & Sons v. Ben Gatz Co., 38 Agric. Dec. 1486 (1979); Mendelson-Zeller Co. v. Michael J. Navilio, Inc., 34 Agric. Dec. 903 (1975); Kelman Farms v. Bushman Brokerage, 34 Agric. Dec. 1146 (1975); Mendelson-Zeller Co. v. The Season Produce Co., 31 Agric. Dec. 1288 (1972).
“To constitute an accord and satisfaction it is necessary that the money be offered in full satisfaction of the demand, and be accompanied by such acts and declarations as amount to a condition that the money, if accepted, is accepted in satisfaction; and it must be such that the party to whom it is offered is bound to understand therefrom that, if he takes it, he takes it subject to such conditions. The mere fact that the creditor receives less than the amount of his claim, with knowledge that the debtor claims to be indebted to him only to the extent of the payment made, does not necessarily establish an accord and satisfaction.”
Spada Distributors Co. v. Frank KenworthyCo., 17 Agric. Dec. 347 (1958). (emphasis added). Quoted in Mendelson-Zeller Co. v. The Season Produce Co., 31 Agric. Dec. 1288 (1972).
Clear and CONSPICUOUS terms required
Words: “This check is in settlement of the following invoices: . . .” and words: “This check is in settlement of the following. If incorrect please return.” did NOT constitute clearly conditional tender. Half Moon Fruit & Produce Co. v. North American Produce, 40 Agric. Dec. 1610 (1981) (emphasis added); Harvitz Brothers v. David Goldsamt, 20 Agric. Dec. 391 (1961).
Words: “Payment in Full” or “similar words” held effective. Kelman Farms v. Bushman Brokerage, 34 Agric. Dec. 1146 (1975) (emphasis added); Southmost Vegetable Co-Op v. M. & G. Tomato, 28 Agric. Dec. 966 (1969); Johnson & Allen v. Fernandez Bros., 27 Agric. Dec. 1127 (1968); Zinno v. Marvin, 24 Agric. Dec. 396 (1965); National Produce Distributors, Inc. v. Stewart Produce, 21 Agric. Dec. 955 (1962) [Transaction lacked bona fide dispute, and check was not offered in good faith where accord language was pre-printed on the check].
Where a partial payment check was tendered on the condition that it be accepted as payment in full, but debtor did not specify to what debt it was to be applied, and there were several open accounts at the time of tender, creditor was within its rights when it applied the payment to an open freight bill, and no accord and satisfaction of the produce debt was accomplished. Jody DeSomma d/b/a Impact Brokerage v. All World Farms, Inc., 61 Agric. Dec. 821 (2002).
Bona Fide Dispute Required!
One of the biggest misuses of restrictive endorsements arise from the mistaken belief that placing a restrictive endorsement on all checks as a matter of company policy provides some benefit if a unknowing recipient deposits a partial payment. NOT TRUE! There must be a bona fide or good faith dispute that the partial payment is intended to resolve. A “gotcha” move will not carry the day and will be resolved in the payee’s favor.
Although respondent’s partial payment checks stated that the checks were tendered as payment in full, it was found that no accord and satisfaction existed as to several transactions because respondent had not proven that a dispute existed between the parties as to such transactions. Eustis Fruit Company, Inc. v. The Auster Company, Inc., 51 Agric. Dec. 865 (1992). Where a Respondent presented evidence of a breach by the Complainant this was not enough to show that there had been a dispute. Richard Ruiz v. Pacific Sun Produce Co., 48 Agric. Dec. 1105 (1989).
Good Faith Tender As Full Payment Necessary
Debtor tendered payment in one check for six produce transactions. Four of the transactions were undisputed, and the check covered these transactions in their full amount. The remaining two transactions were disputed, and as to these the check tendered only partial payment. The creditor negotiated the check, and then sought to recover the balance alleged due on the disputed transactions. The debtor pled accord and satisfaction. It was held that the good faith tender requirement of UCC 3-311 would not be met by such a check, especially in view of the “full payment promptly” requirement of the Act and Regulations. Lindemann Produce, Inc. v. ABC Fresh Mktg., Inc., et al., 57 Agric. Dec. 7389 (1998).
In C. H. Robinson Company v.TrademarkProduce, Inc., 53 Agric. Dec. 1861 (1994) the words “Full and Final Payment” were pre-printed on all of respondent’s checks in very small type. Referencing Official Comment 4 to UCC Section 3-311 it was held that the requirement of “good faith tender” had not been met, and there was no accord and satisfaction.
Although respondent’s partial payment checks stated that the checks were tendered as payment in full, it was found that no accord and satisfaction existed as to one transaction because there was no manifested intent that the payment should apply to all the items on the invoice where respondent paid in full for one of the types of fruit. Eustis Fruit Company, Inc. v. The Auster Company, Inc., 51 Agric. Dec. 865 (1992).
Return the Check!
Under UCC Section 3-311 the return within 90 days of an amount paid in full satisfaction of a claim disputed in good faith precludes the discharge of the claim. Pacific Tomato Growers, LTD v. American Banana Co., Inc., 60 Agric. Dec. 352 (2001). Simply put, you must return the check containing a restrictive endorsement to the sender within 90 days of your receipt. If you keep it as a partial payment you will be deemed to have accepted full payment.
BEST PRACTICES
The April 2012 edition of Food Safety Magazine’s eDigest includes a Food Safety Modernization Act Update Article that I co-authored along with John Shapiro.
Please see a link to the article below:
Food Safety Magazine – FSMA Legislative Update
This article looks at the “FSMA One-Year Progress Report” and discusses where we are with the implementation of this historic act.
PACA Trust Litigation Alert
On April 16, 2012, a civil action was filed in California against Riverfield Export Import, Inc. in an effort to collect an alleged PACA debt. At this time, an Application for a Temporary Restraining Order is pending.
On April 16, 2012, a civil action was filed in Florida against Bostonia Produce, Inc. in an effort to collect approximately $16,300.00 in alleged PACA debt.
Please check your A/R to see if these cases affect you. If they do, please do not wait to assert your rights.
YES! The FDA may assess fees under Section 107 of the FSMA for non-compliance with a recall order under Section 423(d) or 412(f) of the FD&C Act.
Non-compliance may include:
1. Not initiating a recall as ordered by the FDA
2. Not conducting the recall in the manner the FDA specifies in the recall order
3. Not providing the FDA with requested information regarding the ordered recall
Who Pays the fee for non-compliance with a recall order?
The party responsible for paying the non-compliance with a recall order fees include:
The party paying the fee would be the party that received the recall order. Importantly, this means that a distribution or storage company who owns or operates a food facility to provide services to others may be subject to this penalty even though they may not own the food.
How much will a non-compliance with a recall order fee cost my company?
Rates: For Fiscal Year 2012, the hourly rate per FDA inspector participating in a reinspection is $224.00 per hour is no foreign travel is required and $325.00 per hour if foreign travel is required.
Number of FDA employees or agents assigned to a reinspection: The FDA will make this determination on a case-by-case basis. Relevant factors for this decision include the anticipated number of direct hours spent on taking action in response to the company’s failure to comply with a recall order.
Billable Activities: conducting recall audit checks, reviewing periodic status reports, analyzing the status reports and the results of the audit checks, conducting inspections, traveling to and from locations, and monitoring product disposition.
How can my company guard against or minimize its exposure to these fees?
BE PREPARED!
PACA Trust Litigation Alert
On April 4, 2012, a civil action was filed in New York against MJM Trading, Inc. in an effort to collect approximately $33,280.00 in alleged PACA debt.
On April 5, 2012, a civil action was filed in New York against Zhen Zhen Market, Inc. in an effort to collect approximately $16,500.00 in alleged PACA debt.
On April 5, 2012, a civil action was filed in New York against X&L Supermarket, Inc. in an effort to collect approximately $16,500.00 in alleged PACA debt.
Please check your A/R to see if these cases affect you. If they do, please do not wait to assert your rights.
The Blue Book Services recently published the April/May/June 2012 issue of its Blueprints – Produce Professionals’ Quarterly Journal publication and included a Food Safety Modernization Act Update that I authored. Please see a link to the article below:
FSMA: What Importers Need to Know
This article is VERY timely. I hope you find it informative and useful.
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:
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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.
Under the Federal Food Drug & Cosmetic Act (FD&C Act) an article of food subject to a detention order may not be delivered to any of its importers, owners, or consignees. To be clear, no person may transfer a detained article of food within or from the place where it has been ordered detained, or from the place to which it was removed, until an authorized FDA representative releases the article of food under or the detention period expires, whichever occurs first. The transfer of an article of food in violation of a detention order is prohibited.
Can I Move my Detained Articles of Food?
Yes. You have options! The FD&C Act does not preclude all movement of detained food. For example, at the FDA’s direction the imported food may be moved to a secure facility under an appropriate Customs’ bond, if required under the circumstances. When the FDA issues an order detaining any article of food, a Notice of Detention (FDA 2289 Form) is issued to the custodian of the detained food and (if readily identifiable) the owner of the detained food. Upon receipt of this notice, quick and informed steps need to be taken in order to minimize the impact of the detention.
An authorized FDA representative may approve, in writing, a request to modify a detention order to permit movement of a detained article of food for any of the following purposes:
(1) To destroy the article of food,
(2) To move the detained article of food to a secure facility under the terms of a detention order,
(3) To maintain or preserve the integrity or quality of the article of food, or
(4) For any other purpose that the authorized FDA representative believes is appropriate in the case.
21 C.F.R. 1.381(c).
As you can see, the importer possesses an arguably broad base for seeking a modification to a detention order. Similarly, the FDA representative possesses broad authority to reject or deny your request. This means that cooperation, professionalism, knowledge of your rights and a solid understanding of the FDA’s detention process is a MUST.
How to Modify a FDA Detention Order:
First, you must submit your request for modification of the detention order:
21 C.F.R. 1.381(d). Importantly, the person who approved the detention order is identified in Box#17 of the Notice of Detention. The FDA representative who approved the detention order is often NOT the same person who issued the Notice of Detention. As a practical matter, a FDA Inspector issues the Notice of Detention and a FDA Compliance Officer approves the detention order. Again, look at Box #17 on the Notice of Detention.
Secondly, you must state in your request:
Lastly, if you are requesting modification of a detention order for the purpose of destroying the detained article of food, you also must submit a verified statement identifying the ownership or proprietary interest you have in the detained article of food.
21 C.F.R. 1.381(d).
If FDA approves a request for modification of a detention order, the article may be transferred but remains under detention before, during, and after the transfer. FDA will state any conditions of transportation applicable to the detained article. You may not transfer a detained article of food without FDA supervision unless FDA has declined in writing to supervise the transfer. If FDA has declined in writing to supervise the transfer of a detained article, you must immediately notify in writing the authorized FDA representative who approved the modification of the detention order that the article of food has reached its new location, and the specific location of the detained article within the new location. Such written notification may be in the form of a fax, e-mail, or other form as agreed to by the authorized FDA representative.
21 C.F.R. 1.381(e). Please note that the movement of detained food requires lots of separate written notices, approvals and other paperwork. Care must be taken to keep your file as current as possible and to maintain copies of all the documents involved. It is also important to properly identify all the relevant and necessary parties as their respective contact information will be needed to quickly and efficiently navigate this regulatory process.
Finally, you must ensure that any required tags or labels accompany the detained article during and after movement. The tags or labels must remain with the article of food until the FDA terminates the detention order or the detention period expires, whichever occurs first, unless otherwise permitted by the authorized FDA representative who approves the modification of a detention order under this section.
21 C.F.R. 1.381(f).
Take Away…
The key point here is that a solid understanding of your rights and the processes you must be prepared to navigate upon short notice is key to mitigating the risk to the value of your imported food. Something as simple as quickly moving your perishable commodities from the port to a proper storage facility, as opposed to a shipping container, may make all the difference when it comes to your ability to sell your products post detention.
Neither the UCC nor the PACA recognize the term “Price After Sale“. The term is a subcategory of “Open Price.” A.P.S. Marketing, Inc. v. R.S. Hanline & Co., Inc., 59 Agric. 154 Dec. 407 (2000), Sucasa Produce v. A.P.S. Marketing, Inc., 59 Agric. Dec. 421 (2000), and Well Pict, Inc. v. Ag-West Growers, Inc., 39 Agric. Dec. 1221, 1227-1228 (1980).
See Eustis Fruit Co., Inc. v. The Auster Co., Inc., 51 Agric. Dec. 865 at 877 (1991) (“The term “price after sale” usually contemplates the parties agreeing to a price following the prompt resale of the produce. Such a sale is either f.o.b., delivered, or some variation thereof, in accordance with the agreement of the parties. If the parties do not specify f.o.b. or delivered then the Department assumes that the sale is f.o.b.”); Bonanza Farms, Inc. v. Tom Lange Co., Inc., 51 Agric. Dec. 839 at 846 (1991); M. Offutt Co., Inc. v. Caruso Produce, Inc., 49 Agric. Dec. 596 (1990).
Here is what you meant to say… “OPEN PRICE TERM”
UCC 2-305(1) defines an “Open Price Term” as follows:
(1) The parties, if they so intend, can conclude a contract for sale even though the price is not settled.
This first section means that a valid and enforceable contract may exist for the sale of goods even if the parties have not settled on an agreed price term. If the parties fail to agree upon a fixed price, the price will be set at a “reasonable price” and the question becomes: “what is a reasonable price?”
Under UCC 2-305(1), the price is a reasonable price at the time for delivery if:
(a) nothing is said as to price (i.e. no party timely objects); or
(b) the price is left to be agreed by the parties and they fail to agree; or
(c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.
Here are some examples of how the USDA deals with Open Price Term cases:
“Open Price” assumes parties will negotiate a price after the goods are sold. If they do not the reasonable value of the goods should be imputed. A.P.S. Marketing, Inc. v. R.S. Hanline & Co., Inc., 59 Agric. Dec. 407 (2000), and J. Macchiaroli Fruit Co. v. Ben Gatz Co., 38 Agric. Dec. 565 (1979). See also Anonymous, 5 Agric. Dec. 494 (1946).
The buyer cannot expect a seller to share in any losses which might be incurred in an open sale. Sharyland L.P. d/b/a Plantation Produce v. C.H. Robinson Company, 55 Agric. Dec. 1341 (1996). (emphasis added).
The term “open” is a generic term used to describe a SALE without a price being agreed to when the contract is first made. Other similar terms, which all fit under the generic term “open“ are:
These terms should be examined with care because they do not all have the same meaning.
The terms “price after” and “deferred billing” are so vague that one must look solely to the context of the transaction and perhaps guess at what the parties intended. See Eustis Fruit Co., Inc. v. The Auster Co., Inc., 51 Agric. Dec. 865 at 877 (1991) (The term “price after sale” usually contemplates the parties agreeing to a price following the prompt resale of the produce. Such a sale is either f.o.b., delivered, or some variation thereof, in accordance with the agreement of the parties. If the parties do not specify f.o.b. or delivered then the Department assumes that the sale is f.o.b.). See also Bonanza Farms, Inc. v. Tom Lange Co., Inc., 51 Agric. Dec. 839 at 846 (1991); M. Offutt Co., Inc. v. Caruso Produce, Inc., 49 Agric. Dec. 596 (1990); Dennis Produce Sales, Inc. v. Caruso-Ciresi, Inc., 42 Agric. Dec. 178 (1983); Northwest Fruit Sales v. The Norinsberg Corporation, 39 Agric. Dec. 1556 (1980); and Slayman Fruit Co. v. Wholesale Produce Supply, Inc., 30 Agric. Dec. 1751 (1971).
TAKE AWAY…
The KEY point here is that WORD CHOICE matters. It is perfectly acceptable to use Open Terms on sales contracts, but clear and unambiguous language is needed. Buyers bear the risk here… Don’t accept questionable language about price terms from your suppliers. Vague terms should be deemed a red flag and steps should be taken as early as practicable to clarify the open terms.
A buyer’s failure to clearly define its open term contracts invites disputes about reasonable prices. To this end, the USDA will not make a seller share in any losses. So, if you have a deal to move distressed produce… the terms of that deal better be clear or the seller will assume all the risk. You know what they say, no good deed goes un-punished.