Golman-Hayden v. Fresh Source Produce ( 2000 )

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
Nos. 98-11506 & 99-10489
GOLMAN-HAYDEN CO., INC.;
IDEAL SALES INC.,
Plaintiffs-Appellees,
MARTIN BROTHERS PRODUCE; ROGER’S
PRODUCE INC.; BEAR PRODUCE CO., INC.;
SOUTHMILL DISTRIBUTION INC. doing
business as Southmill Dallas,
Intervenor Plaintiffs-Appellees,
versus
FRESH SOURCE PRODUCE INC., ET AL,
Defendants,
EDWARD TOMANENG,
Defendant-Appellant.
Appeals from the United States District Court
for the Northern District of Texas
July 17, 2000
Before POLITZ and DAVIS, Circuit Judges, and RESTANI, * Judge.
POLITZ, Circuit Judge:
*
Judge of the United States Court of International Trade, sitting by designation.
Fresh Source Produce, Inc. and Edward Tomaneng appeal an adverse
summary judgment and award of attorney’s fees in a suit brought under the
Perishable Agricultural Commodities Act (PACA).1 For the reasons assigned, we
affirm the summary judgment and reverse the award of attorney’s fees.
BACKGROUND
This action invoking PACA was filed on December 3, 1997. The original
plaintiffs, Golman-Hayden Company, Inc. and Ideal Sales, Inc., sued Fresh Source
Produce, Inc. and Edward Tomaneng, seeking amounts claimed due under the
PACA trust provisions. Intervenors Martin Brothers Produce, Roger’s Produce,
Inc., Bear Produce Company, Inc., and Southmill Distribution, Inc. also filed
complaints against Fresh Source and Tomaneng.2
Plaintiff-appellees are wholesale sellers of perishable agricultural
commodities. They sold produce to Fresh Source, a dealer and commission
merchant as defined in PACA. Fresh Source ceased doing business on November
21, 1997, and filed for protection under Chapter 7 of the Bankruptcy Code on April
3, 1998. Tomaneng is the sole shareholder and principal in Fresh Source.
The claims against Fresh Source and Tomaneng are based on the failure of
1
7 U.S.C. §§ 499a, et seq.
2
The original and intervening plaintiffs are hereinafter referred to as “Appellees.”
2
Fresh Source to make payments. Appellees alleged that they sold and delivered to
Fresh Source produce collectively worth $271,527.70. If the funds from Fresh
Source’s remaining accounts receivable were disbursed on a pro-rata basis to
Appellees, a shortfall of $134,582.60 would result.
Appellees moved for summary judgment, asserting that Tomaneng was the
sole principal, owner, officer, and director of Fresh Source, and that he was in a
position of total control over the dissipated trust assets. Because Fresh Source
lacked sufficient assets to satisfy their PACA trust claims, Appellees claimed that
Tomaneng was liable individually for breaching his fiduciary duty by failing to
exercise the requisite control to preserve the trust assets.
The district court agreed and concluded that Tomaneng, as the sole
shareholder of Fresh Source, was liable for breaching his duty to preserve trust
assets. Specifically, he failed to exercise reasonable care to ensure proper
management of the company. The court granted the motion for summary judgment
and entered a final judgment in the amount of $134,582.60, representing the
difference between the collective amount owed to Appellees and the amount being
held in trust by Fresh Source for their benefit. The court subsequently awarded
attorney’s fees in the amount of $58,015.75. Tomaneng timely appealed both the
3
summary judgment and award of attorney’s fees.3
ANALYSIS
I. Summary Judgment
Summary judgment is appropriate when the case presents no genuine issue
as to any material fact and the movant is entitled to judgment as a matter of law.4
In determining whether summary judgment was appropriate we conduct a de novo
review, judging the facts of record in the light most favorable to the non-movant.5
Tomaneng’s personal liability under PACA is at the core of this dispute.
PACA regulates the produce industry and promotes fair dealings in transactions
involving fruits and vegetables.6 Under the Act, when a seller, dealer, or supplier
ships produce to a buyer, a statutory trust is created upon acceptance of the
commodities. Once this trust comes into being, and the supplier’s rights are
properly preserved, the produce supplier obtains a priority interest in the trust assets
3
The appeals from the summary judgment (No. 98-11506) and the award of attorney’s fees (No.
99-10489) have been consolidated.
4
Fed. R. Civ. P. 56(c); City of Arlington v. FDIC, 963 F.2d 79 (5th Cir.), cert. denied sub nom,
506 U.S. 1021 (1992).
5
Horton v. City of Houston, 179 F.3d 188 (5th Cir.), cert. denied, ___ U.S. ___, 120 S. Ct. 530
(1999).
6
Wayne Cusimano, Inc. v. Block, 692 F.2d 1025 (5th Cir. 1982).
4
held by the debtor.7
Recognizing an absence of controlling precedents in our circuit, the trial
court relied on the holding of our Ninth Circuit colleagues in Sunkist Growers, Inc.
v. Fisher8 that “individual shareholders, officers, or directors of a corporation who
are in a position to control PACA trust assets, and who breach their fiduciary duty
to preserve those assets, may be held personally liable under the Act.”9 The trial
court also observed that district courts in New York have held sole shareholders of
a corporation secondarily liable for breach of a PACA trust.10 Notably, the trial
court à quo found persuasive the reasoning in Shepard v. K.B.Fruit & Vegetable,
7
Bartholomew M. Botta, Personal Liability for Corporate Debts: The Reach of the
Perishable Agricultural Commodities Act Continues to Expand, 2 Drake J. Agric. L. 339 (1997).
7 U.S.C. § 499e(c)(2) provides in part:
Perishable agricultural commodities received by a commission merchant, dealer, or broker in
all transactions, and all inventories of food or other products derived from perishable
agricultural commodities, and any receivables or proceeds from the sale of such commodities
or products, shall be held by such commission merchant, dealer, or broker in trust for the
benefit of all unpaid suppliers or sellers of such commodities or agents involved in the
transaction, until full payment of the sums owing in connection with such transactions has
been received by such unpaid suppliers, sellers, or agents.
8
104 F.3d 280 (9th Cir. 1997).
9
Id. at 283.
10
Bronia, Inc. v. Ho, 873 F. Supp. 854 (S.D.N.Y. 1995) (sole shareholder, director, and
president of corporation held personally liable for corporations breach of PACA trust); Morris
Okun, Inc. v. Harry Zimmerman, Inc., 814 F. Supp. 346 (S.D.N.Y. 1993) (sole shareholder who
was in a position to control trust assets but failed to preserve them for beneficiaries breached a
fiduciary duty and was held secondarily liable for unpaid produce).
5
Inc.,11 wherein the court concluded that the liability determination of individual
shareholders should be based on two factors: (1) whether the individuals’
involvement with the corporation was sufficient to establish legal responsibility,
and (2) whether the individuals, in failing to exercise any appreciable oversight of
the corporation’s management, breached a fiduciary duty owed to the PACA
creditors.12
In granting summary judgment the district court found that Tomaneng was
the sole shareholder of Fresh Source and that he was in a position to control the
company’s PACA trust assets. The court then concluded that he should be held
secondarily liable for breaching his fiduciary duty to preserve those assets.
We have recognized that PACA is a “tough law”.13 In addition to protecting
consumers, Congress expressly designed it to protect the producers of perishable
agricultural products, most of whom must entrust their products to a buyer who
may be thousands of miles away, and depend for their payment upon his business
11
868 F. Supp. 703 (E.D. Pa. 1994).
12
Id. at 706. Regarding the second factor, the Shepard court found that permitting the
corporation’s manager to operate the PACA-regulated business, which the individual shareholders
established and for which they were legally responsible, apparently without oversight to ensure that
PACA creditors were paid, was not reasonable under common law breach of trust principles.
13
Hawkins v. Agricultural Marketing Serv., 10 F.3d 1125, 1130 (5th Cir. 1993); Cusimano,
692 F.2d at 1028, n.2.
6
acumen and fair dealing.14 An investor in a perishable commodities corporation
“should know at the beginning of his association with such a corporation that he is
‘buying into’ a corporation which is strictly regulated by the federal government
through PACA.”15
PACA liability attaches first to the licensed commission merchant, dealer,
or broker of perishable agricultural commodities.16 If, however, the assets of the
licensed commission merchant, dealer, or broker are insufficient to satisfy the
PACA liability, then others may be held secondarily liable if they had some role
in causing the corporate trustee to commit the breach of trust.17 Thus, we join our
colleagues in the Ninth Circuit and hold that individual shareholders, officers, or
directors of a corporation who are in a position to control trust assets, and who
breach their fiduciary duty to preserve those assets, may be held personally liable
under PACA.18 We view this conclusion as consistent with the intent of Congress
14
Cusimano, 692 F.2d at 1028, n.2.
15
Hawkins, 10 F.3d at 1131.
16
See Sunkist, 104 F.3d at 283 (quoting Shepard, 868 F. Supp. at 706).
17
Id.
18
While individuals generally are not held responsible for the liabilities of a corporation, we
recognize that a corporation can act only through its agents and can fulfill fiduciary obligations only
through its agents. See Shepard, 868 F. Supp. 705-06. Thus, our holding does not necessitate a
piercing of the corporate veil. Rather, it is premised on the breach of one’s fiduciary duty to protect
PACA trust assets by an individual who is in a position to control such assets.
7
in establishing the statutory trust provisions of PACA.
It is undisputed that Tomaneng is the sole owner of Fresh Source. As the
sole shareholder, he manifestly had absolute control of the corporation.19 Although
Tomaneng maintains that he was a passive shareholder, he may not escape liability
based on a real or claimed failure to exercise his right and obligation to control the
company. We conclude that his refusal or failure to exercise any appreciable
oversight of the corporation’s management was a breach of his fiduciary duty to
preserve the trust assets. Our review of the record on appeal persuades that each
of the Appellees preserved their trust rights under PACA.20 Accordingly, the
district court correctly found and concluded that Tomaneng was liable personally
to the Appellees in the amount of $134,582.60.
II. Attorney’s Fees
19
PACA requires corporate licensees, such as Fresh Source, to list on the license all officers,
directors, and holders of more than 10% of the corporation’s stock. The record on appeal includes
a certified copy of Fresh Source’s license. Under the section for officers, directors, and holders of
more than 10% of the corporation’s stock, only one person is listed: Edward Tomaneng.
20
A supplier preserves its trust rights by giving written notice of intent to preserve the benefits
of the trust to the commission merchant, dealer, or broker within thirty days (i) after the expiration
of payment due date; (ii) after expiration of such other time by which payment is due, as expressly
agreed to by the parties in writing before entering the transaction; or (iii) after the time the supplier,
seller, or agent has received notice that the instrument properly presented for payment has been
dishonored. 7 U.S.C. § 499e(c)(3). Ordinary and usual billing or invoice statements may provide
notice of intent to preserve the trust if they include the information required by § 499e(c)(3) and
contain on the face of the statement certain language prescribed by the statute that puts the
commission merchant, broker, or dealer on notice that the commodities are being sold subject to the
PACA trust provisions. 7 U.S.C. § 499e(c)(4).
8
In Alyeska Pipeline Service Co. v. Wilderness Society,21 the Supreme Court
recognized the general rule that attorney’s fees are granted only when specified in
a statute. The Court, however, noted several exceptions allowing the award of
attorney’s fees where: (1) there was a willful violation of a court order; (2) a losing
party acted in bad faith; or (3) a litigant created a common fund for the benefit of
others.22
PACA does not provide for attorney’s fees, but it does mandate that proceeds
from the sale of perishable goods shall be held in trust for the unpaid suppliers.
Based upon the statutory requirement that a commission merchant, dealer, or
broker hold the proceeds in trust for the benefit of all unpaid suppliers, some courts
have held that recognition of the PACA trust established a common fund from
which attorney’s fees may be recoverable.23 Other courts, however, have denied
the recovery of attorney’s fees, concluding that the common fund exception does
21
421 U.S. 240 (1975).
22
Id. at 257-260.
23
See, e.g., In re Milton Poulos, Inc., 947 F.2d 1351 (9th Cir. 1991) (holding that PACA trust
fund was valid and enforceable under U.S.C. § 499e(c)(2) and should be used to pay attorney’s fees
under the common fund doctrine); Fishgold v. OnBank & Trust Co., 43 F. Supp. 2d 346 (W.D.N.Y.
1999) (same); JC Produce, Inc. v. Paragon Steakhouse Restaurants, Inc., 70 F. Supp. 2d 1119
(E.D. Cal. 1999) (holding that PACA trust created by the court under 7 U.S.C. § 499e(c)(2) should
be used to pay attorney’s fees because the statute does not preclude them); In re Monterey House,
Inc., 71 B.R. 244 (Bankr. S.D. Tex. 1986) (granting award of attorney’s fees under PACA trust fund
because t he PACA statutory provision is similar to the Packers & Stockyard Act, which allows
recovery of attorney’s fees).
9
not apply to PACA.24 In awarding attorney’s fees to Appellees, the district court
relied on the common fund exception.
A common fund is a trust having multiple parties sharing an interest.25 A
party may be entitled to attorney’s fees from a common fund when acting to either
protect the trust from destruction or to restore it to its purpose.26 The common fund
doctrine typically applies in situations where the attorneys sue for an interest
commonly held by members of a class or third parties who benefit from the suit.27
In the present case, several of Fresh Source’s PACA creditors sued for a
money judgment for their personal claims from the remaining accounts receivable
of Fresh Source or from Tomaneng personally. It does not appear that Appellees
sued to create a PACA trust from which all potential PACA creditors could be
compensated, as their complaints did not include a prayer for relief requesting the
24
Hereford Haven, Inc. v. Stevens, No. Civ. A.3:98-CV-0575-P, 1999 WL 155707 (N.D. Tex.
Mar. 12, 1999) (concluding that no attorney’s fees should be awarded from a PACA trust because
Congress contemplated attorney’s fees for actions under 7 U.S.C. § 499g(c) but did not include them
in 7 U.S.C. § 499e(c)(2)); Valley Chips Sales, Inc. v. New Arts Tater Chip Co. L.L.C., No. 96-
2351-JWL, 1996 WL 707028 (D. Kan. Oct. 10, 1996) (same); In re Fair, 134 B.R. 672 (Bankr.
M.D. Fla. 1991) (same); In re W.L. Bradley Co., 78 B.R. 92 (Bankr. E.D. Pa. 1987) (same). See
also In re Southland + Keystone, 132 B.R. 632 (B.A.P. 9th Cir. 1991) (finding that Congress did
not intend to award attorney’s fees because the statute does not provide for it).
25
Trustees v. Greenough, 105 U.S. 527 (1881); see also Marre v. United States, 117 F.3d 297
th
(5 Cir. 1997).
26
Greenough, 105 U.S. at 533.
27
Marre, 117 F.3d at 308, n.20.
10
preservation or creation of such a trust. Further, the district court’s opinion does
not reflect that it intended to create a common fund for the benefit of all unpaid
PACA creditors. Because the litigation did not result in the establishment of a
common fund, we must conclude that the district court erred in awarding attorney’s
fees to Appellees under the common fund exception. We express no opinion as to
whether the common fund exception would permit the recovery of attorney’s fees
under PACA if a common fund was established. That decision remains for another
day.
The judgment against Tomaneng in the amount of $134,581.60 is,
accordingly, AFFIRMED. The award of attorney’s fees is REVERSED.
11