Summary of a Recent
Judicial Development in
Perishable Agricultural Commodities Act

Plaintiffs Attempt to Hold Produce Company Owners Personally Liable for
Deficiency in PACA Trust Funds

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Bear Mountain Orchards, Inc. v. Mich-Kim, Inc., Nos. 07-853, 07-892, 2008 WL 4710920 (E.D. Pa. Oct. 22, 2008), the United States District Court for the Eastern District of Pennsylvania held that because genuine issues of material fact remained concerning a defendant's degree of active involvement in the produce company owned by her and her husband, the plaintiffs' motion for summary judgment against her individually to hold her personally liable for a deficiency in the company's PACA trust assets was not appropriate.

Background

Plaintiffs sold and delivered produce to the Fleisher Produce Company, thereby becoming beneficiaries of a trust consisting of all of Fleisher's produce-related assets, pursuant to the Perishable Agricultural Commodities Act (PACA), 7 U.S.C. § 499(e)(c). Id. at *1. They properly preserved their status as beneficiaries of the PACA trust by sending invoices to Fleisher Produce, and after they were not paid for their products, they filed this action to enforce the trust. Id. Fleisher Produce had insufficient assets to meet the PACA trust claim, and plaintiffs filed a motion for summary judgment to hold its owners individually liable for the deficiency, and also sought to have property transferred by the Fleishers to their daughter voided as a fraudulent conveyance made in anticipation of their potential personal liability. Id. at *1-2.

Arguments

Plaintiffs argued that the conveyance of the Fleisher's condominium in Puerto Rico to their daughter was intended to hinder, delay, and defraud the PACA trust creditors. Id. at *2.

Defendants argued that Mrs. Fleisher should not be held personally liable because she had previously resigned her position as an officer of the company and returned her shares, which were reissued to Mr. Fleisher who became the sole shareholder, and that she was no longer actively involved in running the company. Id. at *3.

Analysis and Holdings

The court noted that personal liability could only be imposed where a person's involvement with the corporation is sufficient to establish a significant relationship between them, so the plaintiffs were required to show active involvement in the company, not merely control. Id. at *6. Considering the evidence provided, the court could not conclude as a matter of law that Mrs. Fleisher was actively involved in and thus legally responsible for the company, and denied the plaintiff's motion for summary judgment against her individually. Id. at *6-7. The court also denied the plaintiffs' request for leave to amend their complaint to include the fraudulent conveyance claim, because they had offered no explanation as to why they did not move to amend their complaint earlier in the proceedings, reasoning that "allowing amendment of the complaint to add a completely new claim on a collateral issue that is unrelated to and based on different facts than the underlying liability claim would unfairly prejudice the defendants." Id. at *8.

The case was decided on October 22, 2008.