Summary of a Recent
Judicial Development in
Perishable Commodities

District Court Rules that Officers and
Directors of Corporation Must Pay
Commodity Wholesaler

Harrison M. Pittman
Staff Attorney

The United States District Court for the Middle District of Florida has ruled that meals prepared by a corporation from produce received by the corporation were "products derived from perishable agricultural commodities" as defined under the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. Sec. 499a, and that the conduct of the officers and directors of the corporation should be judged on fiduciary duty standard, and that the officers and directors of the corporation violated fiduciary duty standards owed to an agricultural commodities wholesaler. Red's Market v. Cape Canaveral Cruise Line, Inc., 181 F.Supp.2d 1339 (M.D. Fla. 2002).

The PACA was enacted to regulate trading in perishable agricultural products with the intention of "'preventing unfair business practices and promoting financial responsibility in the fresh fruit and produce industry.'" Id. at 1341-42 (quoting Sunkist Growers, Inc., v. Fisher, 104 F.3d 280, 282 (9th Cir. 1997) (and quoting Farley & Calfee, Inc. v. United States Dep't of Agric., 941 F.2d 964, 966 (9th Cir. 1991)). The PACA mandates that dealers make prompt and full payment when purchasing produce. Id. at 1342. (citing 7 U.S.C. Sec. 499b(4)). The PACA defines "perishable agricultural commodities" as "'fresh fruits and vegetables of every kind and character.'" Id. (quoting Sec. 499a(b)(4)). 499e(c)(2) provides:

Perishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any other receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents . . . .

Id.

Red's Market ("Red's") brought an action under the PACA against Cape Canaveral Cruise Lines, Inc. ("Cape"), and several of Cape's officers and directors ("individual defendants") to recover payment for produce delivered by Red's Market to Cape. Id. at 1340. It was undisputed that Cape failed to pay for the produce delivered by Red's. Id. at 1340-41. It was also undisputed that the individual defendants were officers and directors of Cape during the period of time in question. Id. at 1340. The parties eventually agreed to settle the matter in favor of Red's for $24,553.70. Id. The debt went unpaid because Cape had ceased its operations and was insolvent. Id. at 1341. Red's subsequently attempted to collect the $24,553.70 from the individual defendants. Id.

Red's argued that the PACA applied not only to Cape, but also to the individual defendants. Id. The individual defendants argued that the PACA was inapplicable to them as officers and directors of Cape, because Cape did not fit the PACA's definition of "dealer." Id. The district court decided that Cape was a "dealer" under the PACA, and that the PACA applied to both Cape and the individual defendants. Id. Because there was no evidence indicating that the individual defendants were in positions of control over the PACA trust assets, the court rejected Red's argument as to the issue of liability of the individual defendants. Id.

The parties stipulated at trial that the individual defendants "were in positions of control over the PACA trust assets and were responsible for all aspects of Cape's business, which included directing payments to be made to Cape's creditors." Id. In their final written argument, the individual defendants contended once again that the PACA did not apply to them. Id. They argued that once the produce was converted to meals the PACA trust no longer existed because the trust applied only to "perishable goods, receivables and sale proceeds thereof, and not to those products which have been manufactured into a food product of a different kind or character." Id. The defendants also argued that Red's could only seek relief from the corporation, and not its officers and directors, unless there was a finding of fraud or other improper conduct on the part of the officers and directors in positions of control over PACA assets. Id.

The district court stated that "the plain language of the statute provides that the res of a PACA trust includes not only the produce itself but also those products derived from the produce and the proceeds from the sale of the products." Id. The court added, "that by enacting section 499e(c)(2), Congress intended that PACA trusts remain in effect until full payment is made by the purchaser of agricultural commodities." Id. The court also pointed out that 7 C.F.R. Sec. 46.46(d)(1) requires that dealers "'maintain trust assets in a manner that such assets are freely available to satisfy outstanding obligations to sellers or perishable agricultural commodities.'" Id.

Finally, the court relied on J.C. Produce, Inc. v. Paragon Steakhouse Restaurants, Inc., 70 F.Supp.2d 1119, 1121 (E.D. Cal. 1999), which held that the PACA statutory trust provisions applied to produce and the products derived from the produce. Id. The court in J.C. Produce stated that the trust provisions also applied "to the revenue derived from the sales of produce and produce-derived products, which plainly encompasses menu items, such as those sold in Paragon's restaurants, and revenues derived therefrom." Id. (quoting J.C. Produce, 70 F.Supp.2d at 1121).

The district court determined that the individual defendants were subject to the PACA liability, even though there was no evidence that as corporate officers they did not effectively execute their responsibilities to Cape. Id. The court stated that under the PACA dealers owe a fiduciary duty to protect the res of the trust once they accept delivery of the produce. Id. at 1343. The court added that holding "those in control of the trust assets [liable] is reasonable and necessary in order to enforce the goals of Congress in establishing the statutory trust. If liability were limited to corporate dealers, the intent of the federal statute to protect consumers and sellers of produce would be easily frustrated." Id. at 1343-44 (citing Bruhn's Freezer Meats of Chicago, Inc. v. U.S. Dep't of Agric., 438 F.2d 1332, 1343 (8th Cir. 1971) (noting that in context of Packers and Stockyards Act of 1921, 7 U.S.C. Sec. 181, that "'an order limited in its application only to corporate petitioners would prove futile'" and that "'[t]he law is well settled that the 'corporate entity may be disregarded when the failure to do so would enable the corporate device to be used to circumvent a statute'") (quoting Schenley Distillers Corp. v. United States, 326 U.S. 432, 437 (1946)).

Further, the court noted that the United States Court of Appeals for the Ninth Circuit has held that individuals in a position of control over PACA trust assets who breach their duty to preserve the trust assets, can be personally liable under the PACA. Id. at 1344 (citing Sunkist, 104 F.3d at 283). The court also recognized that the Fifth Circuit had previously agreed with the Sunkist decision, stating that "'it is appropriate to impose personal liability on shareholders, officers, and directors, of corporate buyers who are in a position to control PACA trust assets and fail to maintain the assets.'" Id. (citing Golman-Hayden Co., v. Fresh Source Produce Inc., 217 F.3d 348, 350 (5th Cir. 2000) (quoting Hawkins v. Agric. Mktg. Serv., 10 F.3d 1125, 1130 (5th Cir. 1993)).

This case summary was prepared June, 2002