Summary of a Recent
Judicial Development in
Commodities

Post-Default Agreement Abrogates
Supplier's Rights in PACA Trust

Harrison M. Pittman
Staff Attorney

In an action brought by a produce wholesaler against a produce dealer and the dealer's owner seeking to enforce its rights in a statutory trust created by the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. §§ 499a-499t, the United States Court of Appeals for the Seventh Circuit has ruled that the wholesaler's post-default dealings with the dealer were sufficient to nullify the wholesaler's rights in the PACA trust. Patterson Frozen Foods, Inc. v. Crown Foods, Int'l, 307 F.3d 666, 667 (7th Cir. 2002). The court also ruled that the right to enforce a PACA trust is lost whenever the parties enter into a written agreement that satisfies the generally applicable Statute of Frauds. See id. at 671-72.

The PACA was enacted "to protect small [produce] dealers who require prompt payment to survive" and to ensure "the financial stability of the entire produce industry." Id. at 667 (citing In re Magic Restaurants, Inc., 205 F.3d 108, 11 (3d Cir. 2000)). The PACA provides that "perishable agricultural commodities received by a licensed dealer, as well as the proceeds sales of those commodities, are held in trust for the benefit of unpaid suppliers until full payment is made." Id. at 669 (citing 7 U.S.C. § 499e(c)(2)). The trust is created "when the dealer accepts the goods so long as the supplier complies with the specific notice requirements" set out in the PACA and its implementing regulations. See id. (citing 7 U.S.C. § 499e(c) and 7 C.F.R. § 46.46(f)).

Under the PACA "'the maximum time for payment for a shipment to which [parties] can agree and still qualify for coverage under the trust is 30 days after receipt and acceptance.'" Id. at 669 (quoting 7 C.F.R. § 46.46(e)(2)). In the event that "a produce supplier enters into a written post-default agreement with a dealer that extends the dealer's time for payment beyond 30 days, the supplier becomes ineligible to assert its trust rights." Id. (citing Greg Orchards, 180 F.3d 888, 892 and In re Lombardo Fruit and Produce Co., 12 F.3d 806, 809 (8th Cir. 1993)). However, "an oral agreement for an extension or a course of dealing allowing more than 30 days for payment will not abrogate a PACA trust." Id. (citing Idahoan Fresh v. Advantage Produce, Inc., 157 F.3d 197, 205 (3d Cir. 1998) and Hull v. Hauser's Foods, Inc., 924 F.2d 777, 781-82 (8th Cir. 1991)).

Patterson Frozen Foods, Inc. ("Patterson") delivered $58,600.00 worth of frozen peas to Crown Foodservice Group in May and June, 1998. See id. at 667. Crown Foodservice Group was a predecessor to Crown Foods International ("Crown"), defendant. See id. Crown was owned by Philip H. Eckert, also a defendant. See id.

Patterson's Vice-President of Finance, Neil Morosa, and Eckert's son, Jason Eckert, attempted to negotiate an acceptable settlement of the matter. See id. On January 8, 1999, Jason proposed that the amount due be paid in "eight monthly payments of $8,356.46 plus 8.5% interest . . . with the first payment due February 8." Id. Morosa sent a reply containing his signature on the same day "in which he moved the payment dates to the twentieth of each month beginning January 20 and adjusted the interest accordingly." Id. On January 11, 2000, as required by the PACA, Morosa informed the USDA of this development. See id.

He presented to the USDA a payment schedule identical to the one he mailed to Jason Eckert and wrote, "'[w]e are agreeable to this providing PACA will still be in force in case the respondent defaults on its plan.'" Id. On the next day, Morosa sent Jason Eckert a copy of the correspondence he had sent to USDA. See id. Crown made the first payment, but sent only $2,000.00 when the second payment was due. See id. Three days later Morosa notified the USDA that Patterson "'did enter into the proposed agreement with respondent to pay the outstanding invoices,' but that, as Crown had failed to make its second payment, Patterson now considered the agreement void." Id.

On April 29, 1999, the USDA "issued a reparation order in favor of Patterson for the amount due plus 10% interest." Id. Patterson subsequently brought an action "seeking enforcement of the reparation order against Crown under 7 U.S.C. § 499g(b) . . ., alleging breach of contract . . . and failure to account for assets under § 499b(4) . . . against Crown, and alleging that Eckert breached his fiduciary duties as trustee of a statutory trust under § 499e(c)." Id. The parties stipulated to a judgment against Crown with respect to enforcing the reparation order and the breach of contract claim. See id.

With respect to the remaining claims, the district court ruled in favor of Patterson, "entering judgment against both Crown and Eckert in the amount of $55,995.00." Id. at 668-69. The district court also awarded $45,410.00 in attorneys' fees to Patterson. See id. In making its rulings, the district court stated that "'[a]lthough several payment proposals were exchanged between the parties, no written agreement was executed to extend payment terms . . . .'" Crown appealed the district court's decision to the Seventh Circuit. See id.

The Seventh Circuit stated that "[t]he principal dispute in this action is whether the post-default dealings between the parties nullified Patterson's PACA trust rights." Id. It reversed the district court's decision and remanded the matter for an entry of judgment in favor of the defendants and a recalculation of the award of attorneys' fees. See id. at 670-72.

In Greg Orchards, the court explained, a produce dealer had failed to pay three of its suppliers. See id. at 670. Two of the suppliers entered into written agreements that established weekly payment schedules, while the remaining supplier sent the dealer an amortization schedule fixing monthly payments. See id. The dealer made payments under these two plans for approximately fourteen months before defaulting to each supplier. See id. (citation omitted). The suppliers brought an action against the dealer seeking to enforce their rights in the PACA trust assets. See id.

With respect to the two suppliers who entered into written agreements establishing weekly payment schedules, the Seventh Circuit ruled that the suppliers "indisputably entered into written post-default agreements extending time for payment beyond 30 days, precluding them from recovering." Id. (citation omitted). The court remanded the remaining supplier's claim to the district court to determine "whether its amortization schedule was an enforceable written agreement." Id. (citation omitted).

In the present case, the court stated that Patterson's claim was nearly "nearly identical" to that of the supplier in Greg Orchard whose claim was remanded. See id. The court noted that there was no "formal executed contract" between Patterson and the defendants, but there was "a written payment schedule which Morosa sent to both Crown and the USDA." Id. It also noted that both the January 11, 2000, letter to the USDA and the January 12, 2000, letter to Crown state that Patterson was "'agreeable'" to the payment schedule and instructed Crown to send payment to a specific bank account. See id.

Patterson asserted that "only a signed and executed 'formal written contract' can abrogate a created PACA trust." Id. The court noted that no other decision, including Greg Orchards, had determined what was necessary to constitute a "'written agreement' for purposes of the PACA." Id. It added that

[N]o court has had to resolve whether a written agreement means merely a writing sufficient to satisfy the Statute of Frauds or an actual executed agreement signed by both parties and integrating all relevant terms. If all that is required for an agreement to be "written" for purposes of abrogating PACA rights is a document satisfying the Statute of Frauds, then Patterson is out of luck.

Id. at 670-71.

The court noted that the letters Morosa sent to Crown and the USDA "reasonably identify the contract's subject matter and demonstrate agreement on payment terms of $8,356.46 per month for eight months." Id. at 671. It also noted that the letters indicated "with reasonable certainty the unperformed promises in the contract, that Crown will pay on the dates indicated, and that Patterson will forbear from going forward with its PACA reparation action so long as payments are forthcoming." Id. (citations omitted). The court concluded that

PACA rights are lost whenever the parties enter into a written agreement that satisfies the generally applicable Statute of Frauds. Nothing in either PACA itself or the policies that lie behind it justifies the judicial creation of a rule that can be satisfied only by a formally executed document with the word "CONTRACT" typed at the top. Also supporting our position is the fact that a PACA trust can be created through letters, invoices, or anything else reduced to writing with no requirement of formality. We see no reason why modification of the trust should require more than its creation.

Id. (citing 7 C.F.R. § 46.46(f)(1) and In re Richmond Produce Co., 112 B.R. 364, 373 (Bankr. N.D. Cal. 1990)).

The case was decided on October 15, 2002; this summary was posted May, 2003