Tag Archives: PACA Trust

PACA Trust Litigation Alert

PACA Trust Litigation Alert

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.

Jason Klinowski Published in The Produce Professionals’ Quarterly Journal

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.

 

 

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.

The FDA detained my imported food… What can I do?

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:

  • in writing and
  • to the authorized FDA representative who approved 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:

  1. the reasons for movement;
  2. the exact address of and location in the new facility (or the new location within the same facility) where the detained article of food will be transferred;
  3. an explanation of how the new address and location will be secure, if FDA has directed that the article be detained in a secure facility; and
  4. how the article will be held under any applicable conditions described in the detention order.

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.

 

The law does not recognize “Price After Sale” terms…

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:

  •  “price after sale”
  • “price arrival”
  • “deferred billing”
  • “price after”  

These terms should be examined with care because they do not all have the same meaning. 

  • “price after sale” usually means that the parties will agree to a price after the buyer completes its resales at destination.
  • “price arrival” means that the parties will agree on a price when the goods arrive at destination after opportunity for inspection (see 7 C.F.R. 46.43 (cc)).

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.

PACA Trust Litigation Alert

PACA Trust Litigation Alert

PACA Trust Litigation Alert

On March 28, 2012, a second civil action was filed in New York against X & L Supermarkets, Inc. in an effort to collect approximately $89,495.00 in alleged PACA debt.  

Please check your A/R to see if this case affects you.  If it does, please do not wait to assert your rights.

New PACA WebGuide Launched

McCarron & Diess recently launched what they are calling a PACA Web Guide.

“This WebGuide is written in non-legal language, and is searchable to obtain general information about PACA, or about a particular PACA issue.”

The WebGuide’s author warns its readers that “problems under the PACA often need further clarification from PACA officials or an attorney.  The WebGuide is not legal advice.” 

The USDA also maintains lots of free online information about PACA and it provides a free online training course that may be accessed here: USDA’s Online PACA Training.  This 10 part course is written in a non-legal language and those who successfully complete the course will receive a certificate from the USDA.  The purpose of the USDA’s online PACA training course is to provide you with valuable information on your rights and responsibilities under PACA.

Some of the topics covered in the USDA’s online training course include:

  • The difference between a Price After Sale transaction and a Consignment
  • How to make a claim for damages in the event of a breach of contract
  • How to preserve and enforce PACA trust rights
  • How to interpret an inspection certificate
  • When to expect payment
  • What constitutes a proper rejection of produce, and the consequences of acceptance
  • And more…

As a Produce Industry advocate, I am a big fan of free access to information that is important to the day-to-day operations of the industry.

PACA Trust Litigation Alert

PACA Trust Litigation Alert

PACA Trust Litigation Alert

On March 26, 2012, a civil action was filed in Ohio against Baker Produce LLC in an effort to collect approximately $47,000.00 in alleged PACA 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

PACA Trust Litigation Alert

PACA Trust Litigation Alert

On March 20, 2012, a civil action was filed in California against Premier Fresh and its principals in an effort to collect approximately $98,000.00 in alleged PACA debt.  

Please check your A/R to see if this case affects you.  If it does, please do not wait to assert your rights.

Guilty Plea Entered in Tomato Fraud Case

Scott Salyer, former CEO of SK Foods LP, pleads guilty to allegations of price-fixing, bribery and racketeering. 

SK Foods, LP was a grower and processor of tomato and other food products.  According to various court documents, SK Foods paid bribes and kickbacks to purchasing agents of several of SK Foods’ customers.  In return for these routine payments, purchasing managers at B&G Foods, Inc., Frito-Lay, Inc. and Kraft Foods, Inc. promoted SK Foods products at their respective companies in order to ensure SK Foods obtained certain supply contracts.

According to these same documents, SK Foods also routinely and materially falsified the values of the various grading factors and data contained on the certificates of analysis, bills of lading, invoices, and bin labels.   These documents were falsified in order to make it appear to SK Foods’ customers that they were in fact receiving product that met their purchasing requirements and to avoid rejections of troubled product.  A specific example of this type of activity included the alleged modification of the labeling on certain tomato paste from conventional to organic.  This labeling change was alleged to have been made in order to make a sale to a customer who would not purchase conventional tomato paste. 

The court documents further discuss a price-fixing scheme involving product sold to McCain Foods, USA, Inc.  The primary purpose of the alleged price-fixing scheme was to install a floor in the base price for tomato paste sold to McCain Foods through a competitive bidding process.

Assuming the Court accepts the plea agreement, Salyer may face between four and seven years of incarceration.  In addition, Salyer must forfeit to the United States his right, title and interest in millions of dollars he transferred out of the United States in January of 2010.

Scott Salyer Pleads Guilty in Tomato Fraud Case – The Packer