A Case Summary of a Recent
Judicial
Development in
Perishable Agricultural
Commodities
Tomato Sellers' PACA Statutory
Trust Claims Barred
E. John Edwards IIINational AgLaw Center Graduate Assistant
In an action brought by several tomato sellers against a tomato buyer and the buyer's lending institution seeking to recover the balance due on tomatoes delivered by the sellers to the buyer, the United States District Court for the Northern District of Indiana has ruled that the sellers could not recover the balance due because they failed to comply with the procedures required by the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. §§ 499a-499t, to properly preserve their rights in the PACA trust. King v. Hartford Packing Co., Inc., 189 F.Supp.2d 917, 925-27 (N.D. Ind. 2002).
Hartford Packing Co., Inc. ("Hartford"), defendant, was a family-owned company that processed fresh tomatoes purchased from local area farmers. See id. at 920. Allen King and Marilyn King, plaintiffs, were farmers who grew tomatoes, among other crops. Luellen Farms, Inc. ("Luellen Farms"), also a plaintiff, was a closely held family-owned corporation that raised corn, soybeans, wheat, and tomatoes. See id. The Kings began selling tomatoes to Hartford in the mid-1990's. See id. Hartford usually contacted the Kings in February or March and advised them of the number of acres Hartford "wanted the Kings to plant in tomatoes for Hartford's use in the fall." Id. By contrast, Luellen Farm's relationship with Hartford evolved such that "Hartford expected approximately 1100 to 1700 tons of tomatoes from Luellen [Farms] each fall." Id.
Because the tomato business was volatile, "the Kings and Hartford customarily entered into . . . oral agreements each year whereby the Kings delivered their tomatoes to Hartford in the fall and received payment in the first quarter of the following calendar year, as Hartford sold its inventory." Id. Luellen Farms also entered into oral agreements with Hartford, pursuant to the terms of which "Luellen [Farms] usually received some payment in the calendar year in which the tomatoes were delivered and then received the remaining balance in the first quarter or first half of the following calendar year." Id.
In the fall of 1999, the Kings delivered more than 2,843 tons of tomatoes to Hartford. See id. In return, Hartford orally agreed to pay the Kings $237,013.15. See id. Hartford sent the Kings a letter dated July 22, 1999, that memorialized the oral agreement and confirmed that the Kings would be paid between October 25, 1999, and August 1, 2000, for the tomatoes delivered in the fall of 1999. See id. Hartford paid the Kings $162,087.56 for the tomatoes, leaving a balance due of $74,925.59. See id.
Luellen Farms delivered 1,794 tons of tomatoes to Hartford in the fall of 1999. See id. In return, a Hartford representative promised to pay $170,491.75 on or before June 1, 2000. See id. Hartford made no payments to Luellen Farms for tomatoes delivered during the fall of 1999. See id.
Prior to the 1999 tomato harvest, Hartford obtained a loan in excess of $6 million from Wells Fargo Business Credit, Inc. ("Wells Fargo"). See id. at 921. In exchange for the loan, Hartford executed a Credit and Security Agreement that granted Wells Fargo "a first position security interest in the personal property of Hartford, including equipment, inventory, receivables, and proceeds thereof." Id.
The harvest of tomatoes in 1999 was especially large throughout the United States. See id. at 922. As a result, "the market price of tomato products dropped dramatically and many tomato packers went out of business." Id. The liquidation of tomato packers further depressed prices of not only tomato products but also tomato packing equipment. See id. These market conditions resulted in Hartford's defaulting twice on the Wells Fargo loan. See id. Wells Fargo ultimately foreclosed on May 9, 2000. See id. Afterward, Wells Fargo proceeded to liquidate the personal property of Hartford that secured the loan, a process completed by the end of September, 2000. See id.
By a letter dated June 13, 2000, the Kings informed Hartford that they "sought to preserve their trust benefits under PACA." Id. On June 21, 2000, Luellen Farms sent a similar letter to Hartford. See id. When Hartford failed to make any additional payments, the plaintiffs filed suit in Indiana state court against Hartford and Wells Fargo. See id. at 919, 922. The suit was subsequently removed to federal district court. See id.
Under PACA § 499b(4), any buyer of produce is required to make prompt payment to the seller for shipments of produce. See id. at 925. To further protect unpaid suppliers of produce, Congress amended the PACA in 1984 to create a statutory trust provision. See id. Under this amendment, "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 the unpaid suppliers who have met the applicable statutory requirements." Id. The purpose of the amendment was to provide unpaid sellers who complied with its requirements "an interest in the trust assets superior to that of a perfected, secured creditor." Id.
Under the PACA, in order to preserve statutory trust benefits "a supplier of produce must send notice of the supplier's intent to preserve its PACA trust benefits to the buyer within 30 days of a payment default." Id. In the alternative, a supplier can "give notice of its intent to preserve its trust benefits by including a statement referencing the trust on its invoices." Id.
PACA provides that payment is due to the supplier within ten days after delivery unless the parties have extended the time for payment pursuant to a written agreement. See id. at 926. The written extension of time is limited to thirty days. See id. If an unpaid supplier agrees in writing to extend payment beyond thirty days, it loses its PACA statutory trust rights. See id.
The plaintiffs argued that "when Wells Fargo liquidated Hartford's assets, it wrongfully converted [the] PACA trust benefits to its own use." Id. Wells Fargo argued that the plaintiffs had failed to preserve their rights in the PACA trust as required by the PACA. See id.
The district court stated that it was "undisputed that both the Kings and Luellen agreed to extend the time for payment more than 30 days, from October of 1999 until at least June 1, 2000." Id. The court also stated that it was "undisputed that they did so orally, rather than in writing." Id. The court noted that the plaintiffs failed to send a written notice of their intent to preserve the "PACA trust benefits until June 13, 2000 and June 21, 2000, respectively--clearly more than 30 days after payment was due under PACA." Id. As a result, the court ruled that the plaintiffs had "failed to adequately preserve their trust benefits," and granted summary judgment in favor of the defendants. Id. at 926-27. The court stated that although the "PACA produce[d] a 'tough' result in this case[,] . . . this Court can do no more than enforce that which the legislature chooses to provide." Id. at 927.
The district court also ruled that the sellers were not able to recover the balance due under Indiana's criminal conversion statute. See id. at 927. In addition, the court determined that issues of fact precluded summary judgment with respect to whether (1) the lender had taken over the buyer's operations, thereby becoming liable to the sellers for the balance due; (2) that the lender had not become the a principal of the buyer, thereby becoming liable for the balance due; and (3) that the lender was not liable as a participant in a joint venture. See id. at 927-30. These issues are not addressed in this case summary.
The case was decided on March 13, 2002; this summary was posted May, 2003