Pacific International Marketing, Inc. v. a & B Produce, Inc. , 462 F.3d 279 ( 2006 )

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
8-30-2006
Pac Intl Marketing v. A&B Produce Inc
Precedential or Non-Precedential: Precedential
Docket No. 04-3399
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 04-3399
PACIFIC INTERNATIONAL MARKETING, INC.;
WALDEN-SPARKMAN, INC.; J&R ORCHARDS;
DESERT FRESH, INC.; CENTRE MARAICHER
EUGENE GUINOS JR., INC.; BONIPAK PRODUCE CO.;
BLAZER-WILKINSON, LLC; AGRI-SALES, INC.;
FRANK SPINGOLA & SON LTD.; MARK MARTIN'S
J-MART EXPRESS, INC.; **BURCH EQUIP., LLC;
UNITED SAVINGS BANK; FRUTECH, INC.;
WILLIAM WALTERS; TANIMURA & ANTLE, INC.;
METZ FRESH, LLC; DOUD & ASSOCIATES, INC.;
BOSKOVICH FARMS, INC.; DENNIS B. JOHNSTON;
GERALD A. JOHNSTON; JOHNSTON FARMS;
WEST COAST DISTRIBUTING, INC.;
*EXEL TRANSPORTATION SERVICES, INC.;
BARTOLOTTA, INC.
(Intervenors in D.C.)
v.
A & B PRODUCE, INC.; ANTHONY G. BADOLATO,
an individual; TEAMSTERS HEALTH AND WELFARE
FUND OF PHILADELPHIA, TEAMSTERS PENSION TRUST
FUND OF PHILADELPHIA AND VICINITY
(Eastern District of PA Civil No. 03-3564)
FRANK SPINGOLA & SONS, LTD.
v.
A & B PRODUCE, INC.; ANTHONY BADOLATO;
(Eastern District of PA Civil No. 03-5556)
*Exel Transportation Services, Inc.,
Appellant
*(Amended in accordance with the Clerk's Order dated 9/3/04)
** (Dismissed per the Clerk's Order of 9/22/04)
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civ. Nos. 03-3564 and 03-5556)
Honorable Louis H. Pollak, District Judge
Argued June 7, 2006
BEFORE: AMBRO, FUENTES, and GREENBERG, Circuit Judges
(Filed:August 30, 2006)
Meuers Law Firm
Lawrence H. Meuers (argued)
5395 Park Central Court
Naples, FL 34109
Whiteman, Bankes and Chebot
Jeffrey M. Chebot
Constitutional Place, Suite 1300
325 Chestnut St.
Philadelphia, PA 19106
Attorneys for appellees
Paul D. Keenan
Charles L. Howard (argued)
Jonathan F. Ball
Janssen Keenan & Ciardi
2005 Market St., Suite 2050
Philadelphia, PA 19103
Attorneys for appellant
2
OPINION OF THE COURT
GREENBERG, Circuit Judge.
I. INTRODUCTION
This matter comes on before the court on an appeal by Exel
Transportation Services, Inc. (“Exel”) from the district court’s order
entered on July 21, 2004, denying Exel’s claim for payment as
administrative expenses from the statutory trust created by the
Perishable Agricultural Commodities Act (“PACA”), 7 U.S.C. §
499e(c), for its services in transporting produce for defendant A & B
Produce, Inc. Exel, a logistics company, arranged and paid for the
transportation of produce from sellers and suppliers to A & B
Produce, Inc., but A & B Produce, Inc. did not pay Exel for its
services. At around the same time, various unpaid sellers and
suppliers of produce filed complaints against A & B Produce, Inc.
seeking to recover benefits pursuant to PACA. Even though there
were multiple sellers and suppliers of the produce, as a matter of
convenience we hereinafter will refer to one of the plaintiffs, Pacific
International Marketing, Inc. (“Pacific”), a seller and provider in the
same position in this litigation as all of the plaintiffs, as if it had been
the sole seller and provider and as the sole plaintiff. Exel intervened
seeking to recover its unpaid transportation expenses from the PACA
trust funds prior to their distribution to the trust beneficiaries. After
the district court denied Exel’s claim, Exel appealed, but we will
affirm the district court’s order.
II. FACTS AND PROCEDURAL HISTORY
The parties do not dispute the relevant facts. A & B Produce,
Inc., which now is defunct, formerly was engaged in the business of
buying produce from various sellers and suppliers for ultimate resale.
Pursuant to its contract with A & B Produce, Inc., Exel arranged and
paid for the transportation of produce from sellers and suppliers of
produce to A & B Produce, Inc. In doing so, Exel paid certain carriers
to transport seven shipments of produce from various sellers and
suppliers to, or for the benefit of, A & B Produce, Inc. Exel submitted
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invoices to A & B Produce, Inc., which acknowledges that it received
the shipments, for the freight charges in the sum of $39,200, but A &
B Produce, Inc. did not pay Exel for its services.
On June 10, 2003, Pacific, a produce wholesaler, filed a
complaint, later amended, in the district court against A & B Produce,
Inc. and Anthony Badolato, its president (collectively “A & B
Produce”), alleging that A & B Produce failed to pay for produce that
it purchased from Pacific. Pacific claimed that it was the beneficiary
of a statutory trust under PACA, 7 U.S.C. § 499e(c), from which it
was entitled to recover payment for the produce.
On October 1, 2003, Pacific and A & B Produce entered into a
stipulation and order, pursuant to which A & B Produce agreed to
liquidate its assets subject to the PACA trust for the benefit of the
potential PACA trust beneficiaries. On November 14, 2003, Exel
filed a complaint in intervention in Pacific’s action seeking to recover
the cost of the transportation services that it provided to A & B
Produce prior to the distribution of PACA trust funds to the PACA
trust beneficiaries. Exel, however, did not claim to be a PACA trust
beneficiary; rather, Exel sought payment for its transportation services
as an administrative expense chargeable to the res of the PACA trust
prior to any distribution of the PACA trust funds to the beneficiaries.
Pacific opposed Exel’s claim.
The district court denied Exel’s claim for payment for its
transportation services as administrative expenses of the PACA trust
on the ground that allowing Exel payment “ahead of the PACA trust
beneficiaries . . . would defeat the purpose of the PACA [trust] to
place unpaid sellers in a priority position and expand the term
‘administrative expense’ too far.” App. at 7. Exel then appealed.
III. JURISDICTION AND STANDARD OF REVIEW
The district court had subject matter jurisdiction over this case
pursuant to 7 U.S.C. § 499e(c)(5). See Tanimura & Antle, Inc. v.
Packed Fresh Produce, Inc., 222 F.3d 132, 138 (3d Cir. 2000)
(“[D]istrict courts clearly have jurisdiction over actions by private
parties seeking to enforce payment from the [PACA] trust.”). We
have jurisdiction pursuant to 28 U.S.C. § 1291 as the district court
certified the July 21, 2004 order as final under Fed. R. Civ. P. 54(b).
4
See Gerardi v. Pelullo, 16 F.3d 1363, 1368 (3d Cir. 1994). We review
the district court’s interpretation of PACA on a de novo basis.
Idahoan Fresh v. Advantage Produce, Inc., 157 F.3d 197, 202 (3d Cir.
1998).
IV. DISCUSSION
A. Background
We begin with an overview of PACA. In 1930, Congress
enacted PACA to promote fair trading practices in the produce
industry. See 7 U.S.C. §§ 499a-499s; Idahoan Fresh, 157 F.3d at 199.
Specifically, “Congress intended PACA to protect small farmers and
growers who were vulnerable to the practices of financially
irresponsible buyers.” Id. at 199 (footnote omitted). “Under PACA,
it is unlawful for buyers of produce, inter alia, to fail to make prompt
payment for a shipment of produce.” Id. (citing 7 U.S.C. § 499b(4)).
A buyer’s failure to tender prompt payment triggers civil liability and
the possible suspension or revocation of the buyer’s PACA license
that 7 U.S.C. § 499c requires. See 7 U.S.C. § 499h(a). The PACA
regulations define the time for prompt payment, which applies unless
the parties agree otherwise in writing to different payment provisions
prior to the transaction. See 7 C.F.R. § 46.2(aa).
Congress later amended PACA to provide the additional
remedy of a statutory trust provision for “suppliers, sellers, or agents”
against buyers who fail to make prompt payment. 7 U.S.C. § 499e(c);
see also P.L. 98-273; H.R. Rep. No. 98-543, at 2 (1983), reprinted in
1984 U.S.C.C.A.N. 405, 406. Congress provided this remedy because
“[p]rior to this amendment, unpaid produce suppliers were unsecured
creditors vulnerable to the buyers’ practice of granting other creditors
a security interest in their inventory and accounts receivable.”
Idahoan Fresh, 157 F.3d at 199. Under the PACA statutory trust
provision, a buyer’s produce, products derived from that produce, and
the proceeds gained therefrom are held in a non-segregated, floating
trust for the benefit of unpaid suppliers, sellers, and agents who meet
the applicable statutory requirements to be granted the status of PACA
trust fund beneficiaries. See 7 U.S.C. § 499e(c); 7 C.F.R. §§
46.46(b), (c). Thus, the PACA statutory trust grants certain unpaid
suppliers and sellers of produce and their agents an interest in the
PACA trust assets superior to that of a buyer’s perfected, secured
5
creditor. Idahoan Fresh, 157 F.3d at 199. The issue presented on this
appeal is whether Exel, which does not claim to be a PACA
beneficiary, is entitled to payment for its transportation services for
the shipments of produce to A & B Produce as administrative
expenses chargeable against the PACA trust prior to the distribution
of PACA trust funds to the PACA trust beneficiaries.
B. Common Law Trust Principles
Although PACA does not include a provision authorizing the
payment of trust administrative expenses, several courts have relied
on common law trust principles to allow for the payment of certain
administrative expenses, such as attorneys’ fees or fees for services
rendered in collecting receivables for the benefit of the PACA trust, to
be paid from the corpus of the PACA trust prior to its distribution to
the statutory beneficiaries. See, e.g., In re Milton Poulos, Inc., 947
F.2d 1351, 1353 (9th Cir. 1991); In re Southland + Keystone, 132
B.R. 632, 643 (B.A.P. 9th Cir. 1991); In re United Fruit & Produce
Co., 119 B.R. 10, 13 (Bankr. D. Conn. 1990) (“[W]ell-settled trust
law furnishes the basis for compensating a trustee, unless [PACA]
otherwise provides.”). These cases generally require the claimant to
demonstrate that its efforts and resultant expenses were “directly
responsible for the availability of the funds from the [PACA] trust.”
See, e.g, Milton Poulos, 947 F.2d at 1353. For example, in Milton
Poulos the Court of Appeals for the Ninth Circuit awarded attorneys’
fees to the attorneys for a produce supplier because, “[t]hrough their
efforts, the bankruptcy court declared the trust valid and enforceable,
thereby permitting the funds to be [disbursed] among the trust
[beneficiaries.]” Id. at 1353. The court further explained that “the
efforts of these attorneys resulted in a common fund for the group.”
Id.Similarly, in United Fruit the bankruptcy court relied on
common law trust principles as well as section 506(c) of the
Bankruptcy Code, 11 U.S.C. § 506, in compensating a bankruptcy
trustee for its “necessary” services from the PACA trust funds prior to
their distribution. 119 B.R. at 13 & n.5. The court explained that
“[t]he bankruptcy trustee of the debtor’s estate . . . rendered
substantial services in collecting the PACA receivable for the benefit
of the PACA beneficiaries and in contesting [a seller’s] claim that it is
entitled to a priority payment from [the PACA trust.]” Id. at 13. The
court further explained that “[t]he non-PACA creditors should not pay
for these services and the trustee should not be forced to donate
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them.” Id. The court in Southland + Keystone, in harmony with the
court in United Fruit, allowed the trustee “to offset [from PACA trust
fund monies] its collection costs.” 132 B.R. at 643. The court,
however, limited the amount of the offset “to the ‘hard’ costs of
collection such as outside attorney’s fees and expenses that were
necessary to the collection effort,” and stated that costs such as
“overhead expenses are not recoverable.” Id.Conversely, some courts have declined to allow the payment
of attorneys’ fees from the PACA trust funds. For example, in C.H.
Robinson Co. v. Alanco Corp., 239 F.3d 483, 485-88 (2d Cir. 2001),
the Court of Appeals for the Second Circuit dealt with a case in which
the attorney for the buyer of produce sought payment of attorneys’
fees incurred in collecting the buyer’s accounts receivable from which
the produce seller recovered a portion of its unpaid receivables. The
court did not allow the payment of the attorneys’ fees and in doing so
rejected the argument that the fees should be allowed on the theory
that the buyer’s accounts constituted assets of the PACA trust. See
also Goldman-Hayden Co. v. Fresh Source Produce, Inc., 217 F.3d
348, 352-53 (5th Cir. 2000) (declining to award attorneys’ fees to
sellers because “[i]t does not appear that [the sellers] sued to create a
PACA trust from which all potential PACA creditors could be
compensated . . . [and] [b]ecause the litigation did not result in the
establishment of a common fund” for the benefit of all unpaid PACA
creditors).
Exel argues that it “has a valid claim for recovery of its freight
charges as administrative expenses of the PACA trust because . . . A
& B Produce incurred those freight charges in its role as the trustee of
the PACA trust account.” Appellant’s br. at 21. Exel asserts that,
“[w]ithout [its] services, there would be substantially less trust assets
for distribution.” Id. at 20. But even if we accept the factual basis for
Exel’s argument and adhere to the general view that a non-PACA
creditor in some circumstances is entitled to payment of necessary and
actual charges that it incurred for the benefit of the PACA trust
beneficiaries, we are satisfied that the transportation costs that Exel
seeks to recover do not constitute administrative expenses incurred for
the benefit of the PACA trust beneficiaries. Therefore, common law
trust principles do not afford Exel the right to payment for its
transportation services as administrative expenses of the PACA trust.1
1
Exel argues, inter alia, that it is entitled to payment under
common law trust principles because the PACA trust “attached to the
7
In particular, Exel did not provide the transportation services
to A & B Produce to increase the value of the trust res for the benefit
of the PACA trust beneficiaries. In other words, even though the
transportation of the produce to A & B Produce ultimately generated a
portion of the proceeds that came to constitute the res of the PACA
trust, Exel’s services were not “directly responsible for the availability
of the funds,” Milton Poulos, 947 F.2d at 1353, and its services
certainly do not qualify as the “hard costs of collection.” Southland +
Keystone, 132 B.R. at 643 (internal quotation marks omitted). Exel
performed these services for A & B Produce during the ordinary
course of A & B Produce’s business operations rather than to augment
the corpus of the trust.
Obviously, when Exel arranged for the transportation of the
produce to A & B Produce, Pacific and A & B Produce had not yet
entered into the October 1, 2003 stipulation and order concerning the
imposition and administration of the trust. Moreover, Exel provided
for the transportation of the produce without any court order
authorizing or directing it to do so; rather Exel acted in accordance
with its contract with A & B Produce. Indeed, we cannot even
conceive that if Exel had believed before it arranged for and paid for
the transportation of the produce to A & B Produce or for its benefit
that it would need to seek payment for its services as an
administrative expense from a PACA trust, it would have accepted A
& B Produce’s business.
As Pacific correctly notes, if we accepted Exel’s
characterization of its transportation services as being “in furtherance
of its administration of the trust,” Appellant’s br. at 21, “a multitude
of general unsecured creditors [of the buyer of the produce] could step
forward and assert ‘administrative expense’ claims for services
performed in the course of produce transactions.” Appellees’ br. at
28. A partial list of these creditors would include “trucking
companies which transport produce, utility companies, which ensure
produce at the time it was tendered to [the carrier] for carriage.”
Appellant’s br. at 22. However, the existence of the trust is not
dispositive inasmuch as we still must consider the central issue in
deciding whether to apply common law trust principles, i.e., whether the
efforts and expenses of an alleged PACA trustee, such as A & B Produce
in employing Exel to transport the produce, were “directly responsible
for the availability of the funds from the [PACA] trust.” See Milton
Poulos, 947 F.2d at 1353.
8
that produce companies have electrical power to refrigerate the
produce, paper companies, which provide the paper on which invoices
are printed and employees, who sold the [p]roduce and collected the
proceeds.” Appellee’s br. at 28. Ultimately characterizing Exel’s
services as administrative expenses would enable all sorts of the
buyer’s unpaid creditors to assert priority administration expense
claims ahead of the claims of the sellers and other entities that
Congress intended to protect as beneficiaries of the PACA trust. The
claims of such creditors, including Exel’s, are simply too tangential to
the claims that Congress intended PACA to protect to permit their
payment as PACA administrative expenses.
We further emphasize that “[t]rusts created under PACA are
statutory trusts, [to which] common law trust principles are not
applicable if they conflict with the language of [PACA], the clear
intent of Congress in enacting the statute, or the accompanying
regulations.” C.H. Robinson, 239 F.3d at 487. Indeed, “[t]he
applicability of any principle of trust law to a PACA trust must be
tested against the language and purpose of the statute and the
accompanying regulations.” Id. PACA expressly protects unpaid
sellers, suppliers, and agents as trust beneficiaries, see 7 U.S.C. §
499e(c)(2), and “entitles the trust beneficiary to a sum certain.” C.H.
Robinson, 239 F.3d at 487. “PACA’s purpose, as Congress has
crystallized, is to ensure payment to the unpaid seller in the perishable
agricultural commodities industry.” Tanimura, 222 F.3d at 138.
Accordingly, “[i]f PACA’s trust is to have any meaning, and
Congress’s intent is to be effectuated in any way, trust assets must be
preserved and not dissipated,” id., and “PACA trust beneficiaries are
entitled to full payment before trustees may lawfully use trust funds to
pay other creditors.” C.H. Robinson, 239 F.3d at 488.
Accordingly, we will not apply common law trust principles to
allow Exel to recover charges that it characterizes as administrative
expenses when doing so would conflict with the statutory language
and Congress’ intent to protect unpaid sellers and suppliers above
non-PACA beneficiaries such as Exel. See C.H. Robinson, 239 F.3d
at 486 (“[C]ases in which there was no clash between the language of
PACA and common law trust principles do not undermine the most
fundamental principle of statutory interpretation that the language of
the statute must govern.”).
C. Statutory Basis
9
Exel also argues that “[a]llowance of payment [in this case] is
consistent with the statutory and regulatory treatment of direct costs or
expenses incurred by the buyer in connection with its purchases of
produce impressed with the PACA trust.” Appellant’s reply br. at 6.
We recognize that PACA does not limit the recovery of a seller,
supplier, or agent to only the cost of the commodity itself. Indeed,
Congress “chose to allow ‘full payment of the sums owing in
connection with [commodities] transactions,’ [which] unambiguously
encompasses not only the price of commodities but also related
expenses.” Country Best v. Christopher Ranch, LLC, 361 F.3d 629,
632 (11th Cir. 2004) (per curiam) (emphasis by court) (quoting 7
U.S.C. § 499e(c)(2)). Thus, a PACA beneficiary also may recover
expenses and fees that are due contractually or otherwise “in
connection with” the transaction that is the subject of the PACA trust
claim. See Middle Mountain Land & Produce, Inc. v. Sound
Commodities, Inc., 307 F.3d 1220, 1223 (9th Cir. 2002).
For example, in Middle Mountain, 307 F.3d at 1223, the Court
of Appeals for the Ninth Circuit allowed a trust beneficiary to collect
attorneys’ fees and interest because the invoice for the produce
created a contractual right to such fees, and thus the fees were “within
the scope of the statute’s protection of ‘full payment owing in
connection with the [PACA] transaction.’” (quoting 7 U.S.C. §
499e(c)(2)). The court explained that “[i]t is unlikely that Congress,
in enacting a statute to provide better insolvency remedies to
perishable agricultural commodities sellers, wanted selectively to
exclude legitimate portions of a covered contract from the scope of a
PACA claim.” 307 F.3d at 1224 (emphases added). Similarly, courts
have deemed certain “handling, pallet, and freight charges [as] a
necessary part of the produce transaction and therefore . . . included
within the phrase ‘sums owing in connection with’ the sale of fresh
fruit and produce.” Lincoln Diversified, Inc. v. Mangos Plus, Inc.,
No. 98 Civ. 5593 (RWS), 2000 U.S. Dist. LEXIS 9192, at *5
(S.D.N.Y. July 5, 2000) (quoting 7 U.S.C. § 499e(c)(2)); accord
Fishgold v. OnBank & Trust Co., 43 F. Supp. 2d 346, 350 (W.D.N.Y.
1999) (“[H]andling fee . . . was included on an invoice for the
shipment of produce, and appears to be related to the produce charges
noted on the bill. As such, this charge is recoverable from the PACA
trust.”); Prestige Produce, Inc. v. Silver Creek, Inc., No. CV 04-491-
S-EJL, 2006 U.S. Dist. LEXIS 13356, at *7 (D. Idaho Mar. 9, 2006).
In this case, however, there is no statutory basis for allowing
Exel to recover the cost of its transportation services, either prior to or
10
as part of the distribution of PACA funds, because the transaction
between A & B Produce and Exel for the transportation of produce
was not made “in connection with” any other transaction between A
& B Produce and Exel for the sale of produce. In this regard, we
reject Exel’s proposition that it is entitled to recovery of its
transportation expenses because “[t]he amount claimable against the
trust by a beneficiary or grower will be the net amount due after
allowable deductions of contemplated expenses . . . made in
connection with the transaction by the commission merchant, dealer,
or broker.” Appellant’s br. at 25 (emphasis added by appellant)
(quoting 7 C.F.R. § 46.46(e)(4)). In relying on the above cases to
support its position, Exel overlooks their critical distinction from this
case in that the claimants in those cases, unlike Exel, were sellers and
suppliers who qualified as trust beneficiaries. See, e.g., Country Best,
361 F.3d at 631 (“We must decide whether sellers who are
beneficiaries of a trust established under [PACA] are entitled to
attorney fees and costs as provided in their contracts.”) (emphasis
added). Thus, in each case a PACA beneficiary sought to recover
administrative expenses such as attorneys’ fees or freight charges in
addition to its underlying claims for unpaid produce. See, e.g., id.Exel is not, and does not claim to be, a PACA trust beneficiary
as a “supplier, seller, or agent,” see 7 U.S.C. § 499e(c)(2), and Exel
did not seek to recover administrative expenses in addition to unpaid
charges for the produce itself. The transaction between A & B
Produce and Exel for the transportation of produce was not made “in
connection with” a commodities transaction, or, so far as we are
aware, any other transaction, between A & B Produce and Exel, and
the contract between Exel and A & B Produce is not otherwise
“covered” by PACA. See Middle Mountain, 307 F.3d at 1224. In
fact, the transportation services Exel supplied were not a “necessary
part of the produce transaction” inasmuch as Exel and A & B Produce
did not engage in a transaction for the sale and purchase of produce.
See Lincoln Diversified, 2000 U.S. Dist. LEXIS 9192, at *5.
The facts are clear. Exel did not sell or supply produce to A &
B Produce but instead merely was a third party to the underlying
produce transactions between A & B Produce and Pacific. As we
noted above, Congress intended to protect sellers and suppliers of
produce, not third-party service providers whose services are ancillary
to the sale of produce. Inasmuch as “[s]trict eligibility requirements
accompany the extraordinary protection afforded by PACA’s trust
provision,” Am. Banana Co. v. Republic Nat’l Bank of N.Y., 362 F.3d
1133, 42 (2d Cir. 2004), we cannot circumvent the provisions and intent
of PACA by allowing Exel to recover its transportation expenses prior
to the distribution of the trust funds to the qualified beneficiaries.2
V. CONCLUSION
For the foregoing reasons we will affirm the order of July 21,
2004, denying Exel’s claim for its transportation services as
administrative expenses against the PACA trust.
2
According to Pacific, the PACA claims against A & B Produce
far exceeded the available PACA trust funds, and “each PACA Trust
Beneficiary recover[ed] only about 12% of the principal amount of its
claim against A & B [Produce].” Appellees’ br. at 3. Although these
funds already have been distributed to the PACA beneficiaries, at oral
argument counsel indicated that approximately $25,000 remains in an
escrow account. We believe that, perhaps subject to trust expenses, the
remaining $25,000 will be distributed to the PACA trust beneficiaries to
supplement the initial 12% distribution when we issue this opinion and
accompanying judgment affirming the order denying Exel’s claim.
Therefore, any payment of fees to Exel would impair the ability of the
PACA beneficiaries to recover the PACA trust funds and thus frustrate
the purpose of PACA. See C.H. Robinson, 239 F.3d at 488.
12