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Idahoan Fresh v. Advantage Produce

October 06, 1998


On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Civ. No. 97-00237)

The opinion of the court was delivered by: Greenberg, Circuit Judge.

Submitted under Third Circuit LAR 34.1(a) October 5, 1998

BEFORE: GREENBERG and MCKEE, Circuit Judges, and LUDWIG, District Judge.*

*Honorable Edmund V. Ludwig, Senior United States District Judge, for the Eastern District of Pennsylvania, sitting by designation.



C.H. Robinson Company ("CHR") appeals from the district court's order of November 7, 1997, denying its motion to exclude certain suppliers of perishable agricultural commodities ("produce") from the universe of unpaid suppliers entitled to recover benefits under the statutory trust created by the Perishable Agricultural Commodities Act, 7 U.S.C. § 499e(c). CHR intervened in this action filed by Idahoan Fresh ("Idahoan") against Advantage Produce, Inc. ("Advantage") to enforce the trust and challenged Idahoan's proposed schedule of qualified claimants under the trust.

The district court had jurisdiction pursuant to 7 U.S.C. § 499e(c)(5). We have jurisdiction over the district court's interlocutory order denying the exclusion of Idahoan and Alsum Produce, Inc. ("Alsum") as qualified beneficiaries pursuant to 28 U.S.C. § 1292(b) as the district court certified the order of November 7, 1997, for immediate

appeal and we granted CHR's Petition for Permission to Appeal.


A. Statutory and Regulatory Framework of Perishabl e Agricultural Commodities Act of 1930

We begin with a brief overview of the Perishable Agricultural Commodities Act ("PACA"). In 1930, Congress enacted PACA to promote fair trading practices in the produce industry. See 7 U.S.C. § 499a et seq.; Consumers Produce Co. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1377 (3d Cir. 1993). In particular, Congress intended PACA to protect small farmers and growers who were vulnerable to the practices of financially irresponsible buyers.*fn1 See Hull Co. v. Hauser's Foods, Inc., 924 F.2d 777, 780 (8th Cir. 1991). Under PACA, it is unlawful for buyers of produce, inter alia, to fail to make prompt payment for a shipment of produce. See 7 U.S.C. § 499b(4). A buyer's failure to tender prompt payment triggers civil liability and the possible revocation of the buyer's PACA license required by 7 U.S.C. § 499c. See 7 U.S.C. §§ 499e(a), 449h(a). Prompt payment is defined by regulations which apply unless the parties agree otherwise in writing prior to the transaction. See 7 C.F.R. § 46.2(aa).

In 1984, Congress amended PACA to protect further certain unpaid suppliers*fn2 of produce by including a statutory trust provision which provides an additional remedy for sellers against a buyer failing to make prompt payment. See P.L. 98-273; H.R. Rep. No. 98-543, at 2 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406. Prior to this amendment, unpaid produce suppliers were unsecured creditors vulnerable to the buyers' practice of granting other creditors a security interest in their inventory and accounts receivable. See Tom Lange Co. v. Lombardo Fruit & Produce Co. (In re Lombardo Fruit & Produce Co.), 12 F.3d 806, 808-09 (8th Cir. 1994) (citing H.R. Rep. No. 98-543, at 3 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 407). Under the 1984 provision, a buyer's produce, products derived from that produce, and the proceeds gained therefrom are held in a non-segregated, floating trust for the benefit of unpaid suppliers who have met the applicable statutory requirements. See 7 U.S.C. § 499e(c); 7 C.F.R. § 46.46(b). Thus, the provision gives certain unpaid sellers of produce an interest in the PACA trust assets superior to that of a perfected, secured creditor. See Consumers Produce, 16 F.3d at 1379. In a 1995 amendment to PACA, which we discuss below, Congress made procedural changes in the trust fund provisions. See P.L. 104-48,§ 6, 7 U.S.C. § 499e(c)(4).

To enforce its rights under the statutory trust, a qualified beneficiary may file a claim in the district court immediately upon the buyer's failure to tender prompt payment. See 7 U.S.C. § 499e(c)(5). A qualified unpaid seller remains entitled to benefits until paid in full. See 7 C.F.R. § 46.46(c)(1). A seller eligible for the statutory trust benefits must preserve its rights by satisfying a notice requirement by either sending notice to the buyer within 30 days of a payment default or, as provided in the 1995 amendment to PACA, including a statutory statement referencing the trust on its invoices. See 7 U.S.C. § 499e(c)(3), (4); 7 C.F.R. § 46.46(c), (f). While a seller may agree in writing to a payment period other than that defined in the regulations as prompt, an unpaid seller loses its right to participate in the trust if it agrees in writing to extend the payment period beyond 30 days. See 7 C.F.R. § 46.46(e)(2). The issue presented by this appeal is whether a seller also forfeits its right to participate in the PACA trust if it fails to reduce to writing an agreement to extend the payment term.

B. Current Dispute

Over a period of several months, Advantage purchased produce from Idahoan, CHR, Alsum, O.P. Murphy & Sons ("Murphy"), and Powerhouse Produce, L.L.C.

("Powerhouse"). The details of these transactions are not in dispute.*fn3

In a series of transactions from August 7, 1996, through December 28, 1996, Idahoan sold a total of $116,684.26 worth of produce on credit to Advantage. See app. 9.*fn4 All of Idahoan's invoices to Advantage contain the language required under 7 U.S.C. § 499e(c)(4), the 1995 PACA amendment, to notify the buyer that the seller intends to preserve its trust claim against the buyer. Idahoan and Advantage did not enter into a written agreement extending the payment term which, in this case, in the absence of a written agreement altering the term, is ten days. See 7 C.F.R. § 46.2(aa)(5). However, William Carson, president of Advantage, alleges that they had an oral agreement extending the payment term to 20 days. Additionally, 28 of the 30 outstanding invoices issued by Idahoan to Advantage stated "PAYMENT TERMS: Net 20 days." The remaining two invoices contain no payment term.

Alsum sold, on credit, a total of $10,708.00 worth of produce to Advantage in two transactions on October 9 and 24, 1996. Alsum and Advantage did not enter into a written agreement extending the payment term. As with Idahoan, Carson claims that Alsum and Advantage had an oral agreement to extend the term, though in Alsum's case the extended term was 15 rather than 20 days. Notwithstanding the oral agreement, both of Alsum's unpaid invoices state "PAYMENT TERMS: NET 10." Both invoices also contain the statutory language as provided in the 1995 PACA amendment notifying Advantage that Alsum intended to preserve its PACA trust claim.

CHR sold $36,004.80 worth of produce to Advantage pursuant to their written agreement to extend the payment term to 30 days. CHR's invoices for these sales included a payment term of 30 days as well as the statutory language required to preserve its interest in the PACA trust. See app. 5.

Advantage failed to pay Idahoan, Alsum, and CHR the amounts due on these outstanding invoices. On February 10, 1997, Idahoan filed a complaint against Advantage and its officers, William Carson and William Carson III, for damages and injunctive relief alleging violations of PACA based upon Advantage's failure to pay its invoices and breach of the statutory trust. The district court issued a temporary restraining order on February 11, 1997, enjoining the defendants from further dissipating the constructive trust imposed by 7 U.S.C. § 499e(c). On February 20, 1997, Idahoan and Advantage filed a Stipulated Order for Preliminary Injunction which stated a procedure for identifying all of Advantage's qualified and unpaid PACA trust creditors.

CHR intervened as a party plaintiff in the action on May 27, 1997. See app. 5. On June 2, 1997, Idahoan and Advantage filed a Joint Status Report and Motion for an Order for the Distribution of PACA Trust Proceeds ("Joint Motion") identifying the following universe of qualified PACA trust creditors:

Idahoan $116,684.26 CHR 36,004.80 Murphy 4,300.00 Alsum 10,708.00 Powerhouse 4,868.00 ____________ $172,565.06

App. 6.

Although CHR was a party to the action at the time Advantage and Idahoan filed the Joint Motion, they did not consult CHR or invite CHR to join in the Joint Motion. On June 5, 1997, CHR filed an objection to the Joint Motion and served discovery requests upon Advantage seeking documents which established the alleged qualified status of the creditors set forth in the Joint Motion. See app. 7. CHR then filed a Motion to Exclude Alsum and Idahoan from the universe of qualified PACA trust creditors on the grounds

that they failed to comply with the statute and regulations. In particular, CHR argued that Idahoan and Alsum orally agreed to extend the payment term beyond the ten-day period established in the regulations, and they were, therefore, not qualified PACA trust creditors because the agreements were not reduced to writing prior to the transaction. See app. 9.

At the time of briefing on this appeal, the total amount of available PACA trust funds was approximately $45,000.00. See Br. for Appellant at 5. If Idahoan and Alsum are excluded from the universe of qualified trust beneficiaries, the total qualified and unpaid trust claims would be $45,172.80. Thus, their exclusion would result in payment virtually in full, rather ...

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