Summary of a Recent
Judicial
Development in
Perishable Commodities
Restaurant Granted Summary
Judgment In PACA Action
Jay KiihaNational AgLaw Center Graduate Assistant
In an action brought by a produce seller against a restaurant chain in which the seller sought to enforce its rights in the assets of a Perishable Agricultural Commodities Act statutory trust, the United States Bankruptcy Court for the Northern District of California has ruled in an unreported decision that the produce seller properly preserved its rights in the PACA statutory trust and that the entire amount of the seller's unpaid claim was payable from funds held in trust by the restaurant chain under the PACA. In re L.R. Holdings, Inc., No. 98-33952-TC, 98-33953-TC, 98-3412-TC, 2002 WL 31163661 (N.D. Cal. Aug. 28, 2002).
The Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. §§ 499a-499t, provides that dealers who receive perishable commodities from a produce seller hold the proceeds from the commodities in trust for the seller until "full payment of the sums owing in connection with such transactions has been received by such unpaid sellers . . . ." Id. (quoting 7 U.S.C. §499e(c)(2)). If the unpaid supplier fails to give "written notice of intent to preserve the benefits of the trust," the supplier loses the benefits of the trust. Id. (quoting 7 U.S.C. §499e(c)(3)). Notice may be provided on the invoice sent to the dealer relating to the commodities that have been sold to the dealer. See id. (citing 7 U.S.C. §499e(c)(4)).
Royal Foods, a produce supplier, delivered perishable agricultural commodities to Lyon's Restaurants ("Lyon's"). See id. at *1. On September 9, 1998, Lyon's filed a Chapter 11 bankruptcy petition. See id. At the time of the filing, Lyon's owed Royal Foods $1.2 million. See id. Lyon's sold its assets for $22.6 million. See id. The U.S. Bank National Association ("Bank") held a "valid lien on the sale proceeds securing a debt of more than $25 million." Id. Royal Foods argued that its claim was superior to that of the Bank's under the PACA. See id. The Bank did not dispute that Lyon's owed Royal Foods $1.2 million. See id. It also did not dispute that "Royal Foods has a superior claim to the sales proceeds to the extent those proceeds are held in trust for Royal Foods under PACA." Id. The Bank argued, however, that "only $207,313 of the amount due to Royal Foods was payable from funds held in trust under the PACA. See id.
The Bank also contended that Royal Foods did not preserve its rights in the statutory trust held by Lyon's with respect to deliveries made prior to May 26, 1998, because it failed to provide timely notice to Lyon's that those deliveries were subject to the PACA. See id. The Bank noted that Royal Foods received $1,012,712.00 from Lyon's after May 26, 1998. See id. The Bank asserted that if this amount was applied to the deliveries made after May 26, 1998, the amount due for those deliveries would not exceed $207,313.00. See id. The Bank argued that "Royal Foods should not be permitted to apply the payment to pre-May 26th deliveries . . . because such application would allow Royal Foods to receive a preferential payment on a general unsecured claim." Id. Royal Foods filed a motion for summary judgment to determine whether it had preserved its rights under the PACA and whether all of the funds reserved were subject to the PACA trust. See id.
The bankruptcy court first examined whether Royal Foods had properly preserved its rights in the PACA statutory trust. See id. It noted that the Bank did not argue "that the PACA notice contained in the post-May 26th invoices [was] insufficient, or that Royal Foods failed to take any other step necessary to preserve its PACA rights regarding the post-May 26th deliveries." Id. The Bank's only argument was that Royal Foods "failed to provide the required PACA notice regarding pre-May 26th deliveries." Id. (citation omitted).
The bankruptcy court ruled that Royal Foods had demonstrated that all of its invoices contained the proper PACA notice. See id. at *2. The court explained that all of the invoices submitted at trial contained notice that the commodities were subject to a PACA trust and that many of the invoices were sent prior to May 26, 1998. See id. As such, the court ruled "that Royal Foods . . . established beyond genuine dispute that all the Royal Foods invoices contained the PACA notice." Id.
The court then considered whether all the funds reserved by Lyon's were subject to the PACA trust. See id. The Bank argued that "only a small portion of the funds from which [Royal] seeks payment [were] proceeds from the sale of perishable commodities held in trust for [Royal]." Id. at *3. The Bank stated that perishable commodities were only 6.31percent of Lyon's total goods sold. See id. The Bank argued that "the only assets than can be considered proceeds of perishable commodities are Lyon's cash, inventory and receivables as of the petition date, which [totaled] $1,488,828." Id. Therefore, the Bank argued that Royal Foods was only entitled to 6.31percent of $1,488,828, or $93,999. See id.
The court rejected the Bank's argument, noting that "[a] PACA claimant is not required to trace the proceeds of perishable commodities." Id. (citations omitted). The court also noted that the PACA trust "presumptively applies to all assets used in the produce-related business" and that "the burden falls on the competing claimant to show that any such assets were paid for from a source other than the source of perishable commodities." Id. Because the Bank failed to prove that "the assets sold were purchased with funds other than the proceeds of the not-yet-paid-for perishables," or "that any income was derived from a non-produce-related business," the court held that the entire amount of the sale proceeds were subject to the PACA. Id.
The court also examined whether Royal Foods was entitled to prejudgment interest at the rate of eighteen percent as per express language contained in its standard form invoice. See id. The Bank argued that an issue of fact remained as to "whether the interest provision of the invoice became a part of the contract between Royal Foods and Lyon's." Id. The Bank reasoned that because Lyon's had been consistently late in paying Royal Foods on prior occasions and because Lyon's had never attempted to collect interest in the past, that payment of the interest listed in the standard form invoice was not an enforceable part of the contract. See id.
Although Royal Foods' motion for an eighteen percent prejudgment interest was denied, the court granted it interest at the rate of ten percent from October 1, 1998, because § 3289(b) of the Cal. Civ. Code provides that "[i]f a contract entered into after January 1, 1986, does not stipulate a legal rate of interest, the obligation shall bear interest at a rate of 10 percent per annum after a breach." Id. at *4. The court granted Royal Foods' proposed start date of October 1, 1998, in determining the calculation of prejudgment interest. See id. It stated that although Royal was entitled to "recover portions of the total amount due [from] many different dates," the fact that the "vast majority of the debt became due between July 1, 1998 and October 1, 1998" combined with the difficulty involved in calculating prejudgment interest between many separate dates made the selection of October 1, 1998, "advantageous . . . as well as convenient." Id. The court awarded prejudgment interest at ten percent per annum on $1,220,025.00, for a total of $446,285.00. See id. at *5.
Next, the bankruptcy court examined whether Royal Foods was entitled to collect attorneys' fees. See id. Royal Foods submitted evidence that all of its invoices contained language stating that "[c]ustomers agree to pay all court costs and reasonable attorneys fees." Id. Royal Foods also submitted a letter agreement dated May 26, 1998, between Royal Foods and Lyon's which stated that "[i]n the event it becomes necessary to commence legal action to collect the sums due under such transactions, the prevailing party will be entitled to recover reasonable attorneys fees and costs incurred thereby." Id. The Bank did not dispute this evidence, but instead argued that deliveries made before May 26, 1998, were not subject to the letter agreement and that the action before the court was not "an action to collect sums due," but was an action disputing whether deliveries from Royal Foods were subject to the PACA. Id.
concerns deliveries made before or after the May 26th letter agreement, because the fee provision in Royal Foods' invoices applies to all deliveries" pursuant to Cal. Comm. Code § 2207. Section 2207 provides, in relevant part, the following:
(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
(a) The offer expressly limits acceptance to the terms of the offer;
(b) They materially alter it; or
(c) Notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
Id. (quoting Cal. Comm. Code § 2207).
The court also noted that the Bank did not offer any evidence that Lyon's objected to any of the language contained in Royal Foods' invoices and that Lyon's did not engage in any conduct that was inconsistent with the enforceability of the fee provision. See id. It also noted that "in the May 26 letter agreement, Lyon's expressly agreed to a similar fee clause. Thus, the fee clause in Royal Foods' invoices became part of the contract under section 2207." Id.
The bankruptcy court concluded that Royal Foods "shall recover the sum of $1,844,261, which includes prejudgment interest, fees, and costs." Id. It reserved "for trial the question of whether Royal Foods is entitled to prejudgment interest at the rate of 18 percent." Id.
The case was decided on August 28, 2002; this summary was posted April, 2003