Summary of a Recent
Judicial Development in
Perishable Agricultural Commodities Act

PACA Does Not Authorize an Implied Preference
Recovery Action between Creditors

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In H.C. Schmieding Produce Co. v. Alfa Quality Produce, Inc., 597 F. Supp. 2d 313, 2009 WL 97253 (E.D.N.Y. 2009), the United States District Court for the Eastern District of New York held that the Perishable Agricultural Commodities Act does not recognize an implied preference recovery action brought by one creditor against another.

Background

Several produce sellers brought claims against produce retailers for violations of the trust provisions of the Perishable Agricultural Commodities Act (PACA), 7 U.S.C. § 499e(c). Id. at *1. Another seller, Amco, intervened and filed a cross-claim against one of the plaintiffs, Rosenstein, to recover allegedly preferential payments that Rosenstein received from the PACA debtors. Id. Rosenstein moved to dismiss the claim under Federal Rule of Civil Procedure 12(c), on the ground that PACA does not recognize a claim for preferential payments to a bona fide creditor. Id.

Arguments

Amco argued that Rosenstein received PACA trust assets from the insolvent defendants in payment of Rosenstein's pre-existing claims, and that as a co-beneficiary of the trust, Rosenstein owed a duty to Amco not to accept payment of its claims with trust assets to the exclusion of other PACA trust beneficiaries. Id.

Rosenstein argued that co-beneficiaries of a PACA trust do not owe a duty to one another not to receive trust assets as payment of their claims. Id.

Analysis and Holdings

The court explained that general trust law applies to PACA trusts unless the statute directs otherwise. Id. at *3. Under the common law, "payment of bona fide debts of an insolvent corporation to outsiders is not improper despite the fact that these payments deplete the remaining assets available for creditors," and the court noted that nothing in PACA contradicted that rule. Id. at *3-4. The court also distinguished between PACA's pro rata distribution requirement and the creation of an implied preference recovery action that could be brought by one creditor against another, and concluded that "without some guidance from Congress under PACA, there is no basis for implying such a remedy." Id. at *5. Moreover, the court noted that the Second Circuit had "made it clear that courts should not imply a cause of action for recovery in a statutory scheme based on the alleged 'wrongful' conduct of a creditor who is merely trying to get paid because the debtor is distressed." Id. at *6. The court further noted that while PACA authorizes district courts "to entertain actions by trust beneficiaries to enforce payment from the trust . . . [i]t says nothing about allowing a beneficiary to act like a trustee and recover preference payments on behalf of itself and all creditors." Id. at *7. Lastly, the court reasoned that "the express provision for broad preliminary injunctive relief in PACA further weighs against the implied recognition of a preference recovery right." Id. Therefore, the court granted Rosenstein's motion to dismiss Amco's cross-claim. Id. at *8.

The case was decided on January 15, 2009.