Summary of a Recent
Judicial Development in
Perishable Agricultural Commodities Act

Failure to Preserve PACA Trust Funds

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., No. 08 Civ. 0367(BMC), 2008 WL 4443278 (E.D.N.Y. Sept. 26, 2008), the United States District Court for the Eastern District of New York held that an officer of the defendant company who had actual control over Perishable Agricultural Commodities Act (PACA) trust assets had encumbered the assets, so he was liable to PACA creditors for failure to preserve the trust funds.

Background

Plaintiffs brought an action against Alfa Quality Produce (Alfa), its president, and an employee of Alfa for failure to preserve PACA trust funds, and moved for summary judgment. Id. at *1.

Analysis and Holdings

As a PACA trustee, a produce buyer is charged with a duty to "insure that it has sufficient assets to assure prompt payment for produce and that any beneficiary under the trust will receive full payment." Id. (quoting Cooseman's Specialties, Inc. v. Gargiulo, 485 F.3d 701, 705 (2d Cir. 2007)). To determine whether a PACA trustee's actions or omissions constitute a breach of fiduciary duty, courts examine whether the trustee "in any way encumbered the funds or rendered them less freely available to PACA creditors." Id. The court found that Alfa's president had actual control over the PACA trust funds, and by signing Alfa checks to pay employees, utility bills and rental or lease payments for Alfa's primary place of business, he encumbered the trust funds and thereby rendered them less freely available to PACA creditors; therefore, the court granted the plaintiffs' motion for summary judgment against him. Id. However, the employee-defendant argued that he was merely employed as a buyer/truck driver for Alfa and denied having any control over the PACA funds, so issues of material fact as to his role in the company precluded summary judgment against him. Id.

The case was decided on September 26, 2008.