Summary of a Recent
Judicial
Development in
Perishable Agricultural Commodities Act
Secured Creditor Fails to Meet Evidentiary Burden
to Reach PACA Trust Assets
Eric H. FoyNational AgLaw Center Research Associate
Summary of Decision
In A & J Produce Corp. v. Bronx Overall Economic Development Corp., 542 F.3d 54 (2d. Cir. 2008), the United States Court of Appeals for the Second Circuit affirmed the judgment of the district court, which held that a defendant's secured lien on Perishable Agricultural Commodities Act (PACA) trust assets was not a transfer of assets beyond the reach of PACA-protected creditors.
Background
In 1986, American Banana Company, Inc. (ABC), a perishable agricultural commodities dealer, purchased unit shares in a produce cooperative association. Id. at 56. Bronx Overall Economic Development Corp. (BOEDC) made a one million dollar loan to American Banana Realty (ABR), and affiliate of ABC, which was guaranteed by ABC and ABR, and secured by a first priority interest in the unit shares. Id. at 56-57. In 2001 and 2002, several produce sellers filed complaints against ABC for failing to pay for delivered produce. Id. at 57. The instant case is a consolidation of their complaints. Id.
In addition, ABR defaulted on the BOEDC loan, and BOEDC initiated foreclosure proceedings. Id. A & J Produce Corporation (A & J) moved to enjoin the foreclosure action. Id. Ultimately, all parties agreed to allow A & J to purchase the unit shares and deposit the net proceeds into the court's registry to await the resolution of the competing claims. Id. Thereafter, produce sellers moved for turnover of the proceeds and other PACA trust assets allegedly held by ABC to PACA creditors. Id. BOEDC cross-motioned for summary judgment. Id. The district court held that the assets were subject to a PACA trust in existence when produce sellers brought their claims, and BOEDC's security interest in the unit shares did not remove the assets from the PACA trust or give BOECD priority over PACA creditors. Id. BOEDC appealed. Id.
Arguments
Produce sellers argued that because a PACA trust was in existence when the unit shares were purchased, the trust proceeds were used to purchase the unit shares, and the trust remained in continuous existence, their claims were superior to the claims of BOEDC. Id.
BOEDC contended that the trust terminated when the produce sellers, with claims as to goods sold prior to BOEDC's loan, were paid in full. Id.
Analysis and Holdings
In In re Kornblum & Co., 81 F.3d 280 (2d Cir. 1996), the instant court held that:
the challenging party bears the burden of proving either that (1) no PACA trust existed when the Units were purchased; (2) even though a PACA trust existed at that time, the Units were not purchased with trust assets; or (3) although a PACA trust existed when the Units were purchased and the Units were purchased with trust assets, the PACA trust debtor thereafter paid all unpaid sellers in full prior to the transactions involving the Creditors, thereby terminating the trust.
Id. at 57.
Applying its Kornblum holding to the instant action, the court held that there was no evidence indicating that all PACA creditors were paid in full between the time the unit shares were purchased and when the lien was granted to BOEDC. Id. at 58. For this reason, the court held that BOEDC failed to demonstrate that the unit shares were free of the PACA trust. Id.
The case was decided on September 10, 2008.