PACA Trust Litigation Alert
On March 13, 2013, a civil action was filed in New York against Dutchie Enterprises LLC d/b/a ADJ Wholesale Produce to collect about $82,000.00 in alleged PACA trust debt.
On March 14, 2013, a civil action was filed in Florida against Quality Fruit Import-Export Corp. to collect about $610,995.00 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.
On March 14, 2013, SeaFax reported that:
East Coast Brokers & Packers Inc and six of its affiliates, Circle M Ranch Inc, Ruskin Vegetable Corporation, Oakwood Place Inc, Byrd Foods of Virginia Inc, Eastern Shore Properties Inc and Stellaro Bay Inc, and the companies’ principals, Batista and Evelyn Madonia, all filed petitions for Chapter 11 bankruptcy between March 6 and March 11 with the U.S. Bankruptcy Court for the Middle District of Florida.
The debtors filed motions March 12 seeking to have the bankruptcy cases jointly administered under East Coast Brokers & Packers Inc, Case #13-02894.
The debtors have not yet presented their schedules, but estimate they hold assets totaling from $50 million to $100 million and owe between 200 and 999 creditors liabilities ranging from $50 million to $100 million.
Although East Coast Brokers & Packers Inc, Circle M Ranch Inc, Ruskin Vegetable Corporation, Oakwood Place Inc and the Madonias each submitted their top 20 list of unsecured creditors, only one of the debtors names food vendors on the documents and claims total $15,500 or less.
According to court documents, East Coast Brokers & Packers Inc distributes tomatoes and other agricultural products farmed by Circle M Ranch Inc. Additionally, East Coast Brokers & Packers Inc is also responsible for managing the packing and sales operations of the Madonias’ businesses.
The debtors informed the bankruptcy court that Ruskin Vegetable Corporation and Byrd Foods of Virginia Inc own packing houses. In addition, court documents state Eastern Shore Properties Inc owns property used to house farm workers, Stellaro Bay Inc owns property in Virginia and Oakwood Place Inc owns property which previously operated as a hotel known as Red Rose Inn & Suites, but the hotel operations have ceased.
Court documents state the Madonias own more than 20% of the issued and outstanding common stock or membership interests in East Coast Brokers & Packers Inc, Circle M Ranch Inc, Ruskin Vegetable Corporation, Oakwood Place Inc, Byrd Foods of Virginia Inc, Eastern Shore Properties Inc and Stellaro Bay Inc.
The debtors said in their motions seeking joint administration that their operations are closely intertwined, other than Oakwood Place Inc.
According to the joint administration motion, each of the debtors is indirectly obligated on significant debts, with MetLife Agriculture Investments owed around $46 million by the Madonias, East Coast Brokers & Packers Inc and Circle M Ranch Inc, while Stellaro Bay Inc guaranteed that debt.
The debtors conveyed to the bankruptcy court that their farming operations have been reduced in scope due to their lack of funds to support farming operations, leading to the Chapter 11 filings.
On March 11, 2013, the Bankruptcy Court issued an order setting the initial status conference to be held on March 28, 2013. At this conference, the court will: (l) fixing a date by which the Debtor−in−Possession (DIP/Trustee) must assume or reject executory contracts or unexpired leases; (2) to set a date by which the DIP or Trustee, if one has been appointed, is to file a disclosure statement and the plan; (3) to set a date to solicit acceptance of the plan; (4) to set a date for which a party of interest, other than the Debtor, may file a plan; (5) to set a date by which a proponent of a plan, other than the Debtor, shall solicit acceptance of the plan; (6) to set the scope and format of the notice concerning a hearing on the approval of the disclosure statement; (7) and to consider whether or not the approval of the disclosure statement should be combined with the hearing on confirmation of the plan.
As reported by The Packer (and announced by the FDA), “the FDA is reopening the comment period for a draft risk assessment for certain food facilities that include farm packing operations for fresh fruits and vegetables.” See FDA Reopens Comment Period on Food Facilities.
To be clear, comments on the FDA’s “Draft Qualitative Risk Assessment of Risk Activity/Food Combinations for Activities (Outside the Farm Definition) Conducted in a Facility Co-Located on a Farm” are DUE ON MAY 16, 2013.
Here is a link to the Risk Assessment: DRAFT Qualitative Risk Assessment Risk of Activity/Food Combinations for Activities (Outside the Farm Definition) Conducted in a Facility Co-Located on a Farm
For those of you who have not yet read the risk assessment document mentioned above, this document addresses the various activities that occur on farms and other food facilities and categorizes the activities based on risk to human/animal health. Make no mistake, a food facilities’ activities will directly affect its registration classification (high risk or low risk). Specifically, the FDA will subject high risk food facilities (based on activity conducted therein) to more frequent inspections and other increased scrutiny. Low risk food facilities are subject to a more lenient inspection schedule because the activities conducted in low risk facilities present a lower risk to human/animal health.
This rule recognizes that food facilities are often co-located on farms, but the activities conducted at the facility could be very different from the types of activities conducted on the farm itself. As such, this rule provides a way for to classify food facilities based on the realities associated with they types of the activities actually conducted at the facility and without regard to its location or association with a high risk food facility or farming operation. The differences will save the industry money in terms of the cost of legal compliance and that makes this document worthy of comment.
More importantly, the Risk Assessment document provides detailed responses to the following important questions:
Question 1: What are the foods that would be manufactured, processed, packed or held by a farm mixed-type facility?
Question 2: What are the activities that might be conducted by farm mixed-type facilities on those foods?
Question 3: What are the hazards reasonably likely to occur in those foods?
Question 4: For the purpose of determining whether an activity/food combination is low risk, which hazards should be considered to have a reasonable probability of causing serious adverse health consequences or death?
Question 5: For the purpose of determining whether an activity/food combination is low risk, what foods have inherent controls that significantly minimize or prevent a biological hazard that is reasonably likely to occur in these foods and that is reasonably likely to cause serious adverse health consequences or death?
Question 6: What interventions significantly minimize or prevent a hazard that is reasonably likely to occur in these foods and that is reasonably likely to cause serious adverse health consequences or death?
Question 7: Which of these activities are reasonably likely to introduce, or increase the potential for occurrence of, hazards that are reasonably likely to cause serious adverse health consequences or death and what are these hazards?
Question 8: Which of these activities are interventions to significantly minimize or prevent hazards that are reasonably likely to cause serious adverse health consequences or death from consumption of these foods?
Question 9: Which activity/food combinations are low risk?
Please take the time to read this document and exercise your right to comment upon how it affects your business. Now is the time to voice any concerns.
On Thursday, May 9, 2013, Jason Klinowski will be one of three panel speakers addressing the “Hottest Topics in Food Today” at a food industry event hosted by Arthur J. Gallagher & Co. The topics the panel speakers will cover at this event include new food safety technology related to combating Listeria, alternative risk solutions for the middle market and a survey of legal issues affecting the food industry. At this event, Jason Klinowski will specifically address issues relating to food recalls, FDA/USDA inspection management and the critical components of a good hold harmless agreement.
More information about this event will shortly follow.
PACA Trust Litigation Alert
On March 5, 2013, a civil action was filed in Connecticut against Sardilli Produce & Dairy Co., Inc. in an effort to collect approximately $40,700.00 in alleged PACA trust debt.
On March 5, 2013, a civil action was filed in Tennessee against Green Hill Farms Produce, Inc. in an effort to collect approximately $141,200.00 in alleged PACA trust debt.
On March 7, 2013, a civil action was filed in Illinois against Agri-Sales, Inc. in an effort to collect approximately $82,900.00 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.
On March 6, 2013, East Coast Brokers & Packers, Inc. (“East Coast Brokers”) filed a Ch. 11 bankruptcy in the Middle District of Florida. Along with East Coast Brokers, Circle M Ranch, Inc., Ruskin Vegetable Corporation, Oakwood Place, Inc., and both Batista J. Madonia, Sr. and Evelyn M. Madonia all filed for bankruptcy protection. The Debtors are currently seeking the Court’s permission to administer all of the separately filed bankruptcy cases jointly.
Although the Debtors have not (as of the time of this entry) filed their schedules or list of top 20 creditors, court documents show that all of the debtors are “closely intertwined” and that the Madonias own at least 20% of the shares for each of the entities listed above. The Debtors did acknowledge that they owe “significant debts” and cited MetLife Agricultural Investments as an example of a creditor to whom they owe about $46 Million. The Debtors’ court documents also acknowledged owing money to Anthony Marano Company, Crop Production, and Triangle Chemical.
For those of you familiar with East Coast Brokers and the Madonias, you may remember that various news sources reported that East Coast “quit tomatoes” back in December of 2012 and that they owed “more than $15 million in judgments and liens to state and federal governments and crop production services.” At that time, Anthony Marano Company was reported to hold a $5.6 million dollar lien against East Coast Brokers.” See East Coast Brokers Quit Tomatoes
Counsel for East Coast Brokers should be filing various first day motions and the balance of its schedules in the very near future. These filings will contain additional information. Right now, we know that claims are due on May 20, 2013.
When a produce company files a chapter 11 bankruptcy case, one of the first questions my PACA trust creditor clients ask is whether the debtor will be able to keep any cash it may have in the bank or any cash it receives from collecting its accounts receivable.
The answer is that the debtor almost always has a bank or other secured creditor which holds a lien on substantially all of its assets. Property like inventory, machinery and equipment and the like is called hard collateral. Such items can be used and sold in the ordinary course of business in a chapter 11 case.
Liquid assets, like cash, bank accounts, and accounts receivable, however, are a different matter. These are called “cash collateral.” And cash collateral may not be used over the objection of a secured party without a court order. This order is called the “cash collateral order.” Simply put, the purpose of a cash collateral order is to allow the debtor to utilize its cash collateral even though the cash collateral is subject to the liens of a secured party. To do this, the debtor must provide its secured lenders with adequate protection (e.g. replacement liens in post-petition assets, super-priority administrative claims, etc.) necessary to facilitate the use of the cash collateral. Because the debtor’s ability to use its cash collateral is critical to its ability to successfully emerge from a chapter 11 filing, debtor’s counsel often seek court approval of a cash collateral order on the very first day of the bankruptcy filing.
If you are a PACA trust creditor, you must be mindful of the cash collateral order process because there are almost never any provisions included in a cash collateral order that protect the rights of the PACA trust creditors. As a result, a savvy PACA trust creditor will immediately object to the debtor’s use of cash collateral and create a seat at the negotiating table for the PACA trust creditors. A well advised PACA trust creditor understands the debtor’s obligations under PACA and will generally make the following objections to debtor’s use of cash collateral:
A timely filed objection to a debtor’s attempt to obtain a cash collateral order will often result in the full and immediate payment of the PACA trust claim. When that is not possible, the objecting PACA trust creditor will have the ability to either seek adequate protection (just like a secured party) from both the debtor and its secured creditors or force the case to convert to a chapter 7 liquidation case. Remember, a chapter 11 case will not stand if there are no estate assets to administer.
Key Point: If the PACA trust creditors do not act quickly when they are notified of a produce buyer’s insolvency, the debtor will obtain a cash collateral order that does not include any protections for PACA trust creditors. If that happens, the cash collateral order will allow the debtor to use trust assets (the Court won’t know unless someone speaks up) to administer its estate, obtain DIP financing, and otherwise place trust assets out of the PACA trust creditors reach (e.g. paying pre-petition wages, etc.)
The FDA recently issued a revised industry guidance document titled: What You Need To Know About Administrative Detention of Foods; Small Entity Compliance Guide Utilizing a question and answer format, this industry guidance document contains some valuable information. Here are some of the highlights you need to know:
Why is administrative detention needed?
Administrative detention provides a means through which FDA can hold adulterated or misbranded food and prevent it from reaching the marketplace, thus further enhancing FDA’s ability to ensure the safety of food for U.S. consumers.
What food is subject to administrative detention?
The term food refers to (1) articles used for food or drink for man or other animals, (2) chewing gum, and (3) articles used for components of any such article (section 201(f) of the FD&C Act [21 U.S.C. § 321(f)]). The term food also refers to dietary supplements, which are to be treated as food under the FD&C Act (section 201(ff) [21 U.S.C. § 321(ff)]).
How long may FDA administratively detain an article of food?
FDA may detain an article of food for a reasonable period, not to exceed 20 calendar days, after the detention order is issued. However, an article of food may be detained for 10 additional calendar days if a greater period of time is required to institute a seizure or injunction action. The entire detention period may not exceed 30 calendar days (21 CFR 1.379).
What criteria does FDA use to order an administrative detention?
An officer or qualified employee of FDA may order the administrative detention of any article of food that is found during an inspection, examination, or investigation under the FD&C Act if the officer or qualified employee has reason to believe that the article of food is adulterated or misbranded (21 CFR 1.378).
May an administratively detained article of food be delivered to another entity or transferred to another location?
It is a prohibited act under section 301(bb) of the FD&C Act [21 U.S.C. 331(bb)] to transfer an article of food subject to an administrative detention order and/or to alter or remove any mark or label that identifies an article of food as administratively detained.
Can an administrative detention order be modified?
FDA may approve a request for modification of an administrative detention order to allow for the destruction of the article of food or movement of the detained article of food to a secure facility, to maintain or preserve the integrity or quality of the article of food, or for any other purpose that the authorized FDA representative believes is appropriate in the case (21 CFR 1.381(c)).
What’s the difference between an import detention and administrative detention?
FDA’s authority to administratively detain food under section 304(h) of the FD&C Act [21 U.S.C. 334(h)] is separate and distinct from detention that may occur during FDA’s import admissibility review. Under section 801(a) of the FD&C Act [21 U.S.C. 334(h)], when food is imported or offered for import into the United States, FDA conducts an admissibility review to determined whether to admit the product into United States or detain the product.
On the other hand for administrative detentions under section 304(h) of the FD&C Act, FDA will issue an order to the owner of the suspect food notifying him that FDA is administratively detaining the food and that he has an opportunity to appeal the detention with or without a hearing (see 21 CFR Part 1 Subpart K).
When does an administrative detention order terminate?
If FDA terminates an administrative detention order or the detention period expires, an authorized FDA representative will issue an administrative detention termination notice to any person who received the detention order (or that person’s representative), releasing the article of food, as quickly as possible. If FDA fails to issue an administrative detention termination notice and the detention period expires, the administrative detention is deemed to be terminated (21 CFR 1.384).
Who pays the costs associated with the detention order, such as storage, moving, disposal or reconditioning?
As stated in the preamble to the 2004 final rule (69 Federal Register 31659 at 31690), the party or parties responsible for paying the storage costs of food that FDA orders administratively detained is a matter between the private parties involved with the food. FDA is not liable for those costs. An owner, operator, or agent in charge of the place where the food is located can always request modification of a detention order to destroy the food if they do not want to store it.
Please take the time to read the entire guidance document. It contains information about your rights and other deadlines that become very important if your product is administratively detained.