Patterson Frozen v. Crown Foods Int'l ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 01-2470
PATTERSON FROZEN FOODS, INC.,
Plaintiff-Appellee,
v.
CROWN FOODS INTERNATIONAL, INC.,
a corporation f/k/a CROWN FOODSERVICE
GROUP, INC., and PHILIP H. ECKERT,
Defendants-Appellants.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 7305—John C. O’Meara, Judge.*
____________
ARGUED FEBRUARY 19, 2002—DECIDED OCTOBER 15, 2002
____________
Before COFFEY, EASTERBROOK, and DIANE P. WOOD,
Circuit Judges.
DIANE P. WOOD, Circuit Judge. In May and June of
1998, plaintiff Patterson Frozen Foods sold seven bulk
shipments of frozen peas to Crown Foodservice Group,
a predecessor of defendant Crown Foods International.
* The Honorable John C. O’Meara, United States District Judge
for the Eastern District of Michigan, sitting by designation.
2 No. 01-2470
Crown, owned by co-defendant Philip H. Eckert, defaulted
on the purchases. The sale of frozen peas and other per-
ishable goods is regulated by the Perishable Agricultural
Commodities Act, 7 U.S.C. § 499 et seq. (PACA), a law
enacted to protect produce sellers during the Great De-
pression and modified from time to time since then. Under
certain circumstances, PACA allows produce sellers to
establish a constructive trust over funds owed for sales
on short-term credit and to recover against a responsible
shareholder of the debtor company. Because we find that
Patterson failed to observe the formalities necessary to
preserve its PACA trust rights by agreeing in writing to
extend time for payment, we reverse the judgment of the
district court.
I
Crown is a defunct Illinois corporation that once oper-
ated as a federally licensed produce dealer. Eckert was
Crown’s president and had check-signing authority. In
May and June of 1998, Patterson, a produce wholesaler,
sold Crown $58,600 worth of frozen peas. All of Patter-
son’s invoices contained the statutory language required
to preserve PACA trust rights and a payment term of net
30 days. Crown failed to pay. On December 21, 1998, after
informal attempts to collect its debt proved fruitless,
Patterson filed an administrative reparation claim pur-
suant to 7 U.S.C. § 499f with the United States Depart-
ment of Agriculture (USDA). The USDA responded with
a form letter stating the prerequisites to an investigation
of the complaint and indicating its willingness to help
the parties reach an acceptable settlement.
Negotiations continued between Neil Morosa, Patterson’s
Vice-President of Finance, and Eckert’s son, Jason. On Jan-
uary 8, 1999, Jason faxed Morosa a proposed repayment
plan providing for eight monthly payments of $8,356.46
No. 01-2470 3
plus 8.5% interest on the outstanding balance, with the
first payment due February 8. Morosa faxed a reply that
afternoon in which he moved the payment dates to the
twentieth of each month beginning January 20 and ad-
justed the interest accordingly. Morosa’s signature ap-
pears at the bottom of the fax.
On January 11, Morosa informed the USDA of this
development. He stated that Crown “has proposed to pay
the remaining invoices totaling $66,851.65 with interest
at 8.5% over an eight month period, per the following
schedule.” After setting out a schedule identical to the
one he had faxed Jason, Morosa wrote, “We are agreeable
to this providing PACA will still be in force in case the
respondent defaults on its plan.” The next day, Morosa
faxed Jason a copy of the letter and indicated a bank ac-
count to which he should wire the January 20 payment.
Crown made its first payment, but its financial troubles
worsened and it sent only $2,000 on February 20. Three
days later Morosa wrote the USDA, stating that Patter-
son “did enter into the proposed agreement with respon-
dent to pay the outstanding invoices,” but that, as Crown
had failed to make its second payment, Patterson now
considered the agreement void. Crown made further pro-
posals to work out a revised payment plan, which Patter-
son rejected. On April 1, Patterson faxed a “Balance
Due” schedule with a revised listing of payment due dates
(through December 1999) and a place for Eckert to sign, but
Eckert refused. On April 29, 1999, the USDA issued a
reparation order in favor of Patterson for the amount
due plus interest at 10%. Two months later it suspended
Crown’s PACA license, causing Crown to cease operations.
Patterson then filed a four-count complaint seeking en-
forcement of the reparation order against Crown under
7 U.S.C. § 499g(b) (Count I), alleging a breach of contract
(Count II) and failure to account for assets under § 499b(4)
4 No. 01-2470
(Count IV) against Crown, and alleging that Eckert
breached his fiduciary duties as trustee of a statutory
trust under § 499e(c) (Count III). The parties stipulated
to judgment against Crown on Counts I and II. After a
bench trial, the district court found in favor of Patterson
on the two remaining counts, entering judgment against
both Crown and Eckert in the amount of $55,995. It also
awarded attorneys’ fees of $45,410 against both defendants.
II
PACA comprehensively regulates the nation’s produce
industry. It authorizes the Secretary of Agriculture to li-
cense those who deal in “[f]resh fruits and fresh vegetables
of every kind and character.” 7 U.S.C. § 499a(b)(4)(A). (We
do not know why frozen peas should be considered fresh
or perishable, but as the parties have not made a point
about this, we do not either.) Among its many provi-
sions, PACA provides that perishable agricultural com-
modities received by a licensed dealer, as well as the
proceeds from sales of those commodities, are held in trust
for the benefit of unpaid suppliers until full payment
has been made. 7 U.S.C. § 499e(c)(2). This floating trust
is automatically created when the dealer accepts the
goods so long as the supplier complies with the specific
notice requirements set out in 7 U.S.C. § 499e(c) and
7 C.F.R. § 46.46(f). Greg Orchards & Produce, Inc. v.
Roncone, 180 F.3d 888, 890-91 (7th Cir. 1999). PACA
trust rights take priority over the interests of all other
creditors, including secured creditors. C.H. Robinson Co.
v. Trust Co. Bank, N.A., 952 F.2d 1311, 1315 (11th Cir.
1992). Thus, PACA gives sellers of perishable goods a
superior secured interest, just as a seller of durable goods
may perfect an interest in its property. (A perishable goods
dealer could of course take an Article 9 secured interest
in its produce, but as these items are usually sold and
No. 01-2470 5
consumed rapidly and spoil quickly, that interest would
not really be worth the bother.)
PACA trust rights may be enforced either through a
reparation order issued by the Secretary of Agriculture
and subsequent judicial enforcement, 7 U.S.C. § 499f & g,
or through a court action for breach of fiduciary trust, 7
U.S.C. § 499e(c)(5). The latter remedy permits recovery
against both the corporation and its controlling officers.
Golman-Hayden Co. v. Fresh Source Produce, Inc., 217 F.3d
348, 351 (5th Cir. 2000). The principal justifications Con-
gress has given for granting such generous protection for
sellers of produce are (1) the need to protect small deal-
ers who require prompt payment to survive and (2) the
importance of ensuring the financial stability of the en-
tire produce industry. In re Magic Rests., Inc., 205 F.3d 108,
111 (3d Cir. 2000).
In return for its protections, PACA establishes strict
eligibility requirements. A PACA supplier must be sell-
ing produce on a cash or short-term credit basis. Greg
Orchards, 180 F.3d at 891. The Secretary of Agriculture
has determined that “the maximum time for payment
for a shipment to which [parties] can agree and still qual-
ify for coverage under the trust is 30 days after receipt
and acceptance.” 7 C.F.R. § 46.46(e)(2). If a produce sup-
plier enters a written post-default agreement with a deal-
er that extends the dealer’s time for payment beyond
30 days, the supplier becomes ineligible to assert its trust
rights. Greg Orchards, 180 F.3d at 892; In re Lombardo
Fruit and Produce Co., 12 F.3d 806, 809 (8th Cir. 1993). On
the other hand, an oral agreement for an extension or a
course of dealing allowing more than 30 days for payment
will not abrogate a PACA trust. Idahoan Fresh v. Advan-
tage Produce, Inc., 157 F.3d 197, 205 (3d Cir. 1998); Hull
Co. v. Hauser’s Foods, Inc., 924 F.2d 777, 781-82 (8th Cir.
1991).
6 No. 01-2470
The principal dispute in this case is whether the post-
default dealings between the parties nullified Patterson’s
PACA trust rights. Our earlier decision in Greg Orchards,
which we are bound to follow, points the way to the res-
olution of the questions now before us. If Patterson and
Crown entered a written post-default agreement giving
Crown more than 30 days to pay for its peas, there is no
enforceable PACA trust. That conclusion in turn would
mean that Eckert was not subject to any fiduciary duty
derived from PACA (which is the only source of such a duty
alleged here). On the other hand, if the parties had no
agreement at all to extend the time for payment, or if
any such agreement was merely oral, then PACA re-
mains in force and Eckert can be personally liable for
any breach committed by Crown. The district court
found that “[a]lthough several payment proposals were
exchanged between the parties, no written agreement
was executed to extend payment terms,” and concluded
from this that the PACA trust was still in force. We re-
view the district court’s fact finding for clear error and
its legal conclusions de novo. NRC Corp. v. Amoco Oil Co.,
205 F.3d 1007, 1011 (7th Cir. 2000).
In Greg Orchards, a produce dealer, Merkel, failed to
make payments to three suppliers: Greg, Lange, and Plan-
tation. Greg and Lange executed written agreements set-
ting weekly payment schedules, while Plantation sent
Merkel an amortization schedule fixing monthly payments.
Merkel paid under both plans for about 14 months and
then defaulted. Greg Orchards, 180 F.3d at 889. At that
point, the suppliers sued under PACA. Reversing the
district court, this court held that Greg and Lange had
indisputably entered into written post-default agree-
ments extending time for payment beyond 30 days, pre-
cluding them from recovering. Greg Orchards, 180 F.3d
at 892. Plantation’s claim was remanded to the district
court for determination of whether its amortization sched-
ule was an enforceable written agreement. Id. at 892-93.
No. 01-2470 7
Patterson’s claim here is nearly identical to Plantation’s.
There is no formal executed contract between the parties,
but there is a written payment schedule which Morosa
sent to both Crown and the USDA. Both the January 11
letter to the USDA and the January 12 fax to Crown
declare that Patterson was “agreeable” to this schedule and
ask Crown to wire payment to a specific bank account.
Crown complied with its first payment. When it missed
the second payment, Morosa informed the USDA that
Patterson now considered the agreement void. The obvious
corollary to this statement is that Patterson had previous-
ly considered the agreement effective. It had agreed to
forebear from asserting its reparation claim, but only so
long as Crown continued to make payments under the
new plan. As in Greg Orchards, it is clear that the par-
ties entered some sort of agreement.
Patterson argues that only a signed and executed “formal
written contract” can abrogate a created PACA trust.
Neither Greg Orchards nor any other prior decision
we have found clearly establishes exactly what is neces-
sary to create a “written agreement” for purposes of PACA.
All of the cases rejecting the effect of mere oral agree-
ments have involved nothing more than course-of-dealing
evidence demonstrating that a supplier has routinely
allowed the dealer more than 30 days to make payment. See
Hull Co., 924 F.2d at 778; Stowe Potato Sales, Inc. v.
Terry’s, Inc., 224 B.R. 329, 333 (W.D. Va. 1998); A & J
Produce Corp. v. CIT Group/Factoring, Inc., 829 F. Supp.
651, 655 (S.D.N.Y. 1993). On the other hand, the only
cases denying trust rights through post-default writ-
ten agreements have involved formally executed docu-
ments. Greg Orchards, 180 F.3d at 892; Lombardo, 12
F.3d at 810; Israel v. Merrill, 812 So. 2d 347, 352 (Ala. Civ.
App. 2001). No court has had to resolve whether a written
agreement means merely a writing sufficient to satisfy
8 No. 01-2470
the Statute of Frauds or an actual executed agreement
signed by both parties and integrating all relevant terms.
If all that is required for an agreement to be “written” for
purposes of abrogating PACA rights is a document sat-
isfying the Statute of Frauds, then Patterson is out of
luck. The faxes and letters in this case, signed by Morosa
as Patterson’s agent, reasonably identify the contract’s
subject matter and demonstrate agreement on payment
terms of $8,356.46 per month for eight months. The docu-
ments also state with reasonable certainty the unper-
formed promises in the contract, that Crown will pay on
the dates indicated, and that Patterson will forebear
from going forward with its PACA reparation action so
long as payments are forthcoming. See Restatement
(Second) of Contracts § 131; Consolidation Serv., Inc. v.
KeyBank Nat’l Ass’n, 185 F.3d 817, 819 (7th Cir. 1999).
Patterson argues that more should be required to abro-
gate a PACA trust, relying on the general proposition that
PACA is to be construed liberally in favor of sellers, and
that it should therefore receive the benefit of the doubt
in this dispute. See, e.g., Hull Co., 924 F.2d at 782. While
we accept the general principle, we also note that PACA
and PACA trust rights are designed to protect small
produce sellers who operate in a cash market and depend
upon prompt payment to survive. Patterson is not some
poor local pea farmer but a sophisticated vegetable whole-
saler. To the extent it (or even a smaller company) chose
to bargain at arm’s length to create an alternate remedy,
it was at the same time choosing to opt out of the PACA
regime. Filing a PACA trust claim may be beneficial to
it in the short run, but if it prevails it might put one of
its large buyers out of business (because the USDA will
revoke the dealer’s license). Therefore, it might decide
in some instances to enter into extra-statutory arrange-
ments even if this means relinquishing certain legal rights.
No. 01-2470 9
Another major objective of PACA is to avoid large finan-
cial collapses in the produce industry. The strict 30-day
time limits are purposely designed to bring a subper-
forming dealer to the attention of the USDA quickly, so
that it can act to resolve the problem or suspend the
dealer’s license. If one industry member is in financial
distress, not much is at stake. But if many large whole-
salers work out long-term payment plans and extensions,
allowing a dealer to amass huge liabilities, that dealer’s
eventual bankruptcy or license revocation could cause
much more severe repercussions throughout the industry.
One would not want to reward the wholesalers who
helped create such a mess by then giving them a strong
right to recover their debts through superpriority in
bankruptcy or through trust suits piercing the corporate
veil.
Based on this analysis, we conclude that PACA rights
are lost whenever the parties enter into a written agree-
ment that satisfies the generally applicable Statute of
Frauds. Nothing in either PACA itself or the policies that
lie behind it justifies the judicial creation of a rule that
can be satisfied only by a formally executed document
with the word “CONTRACT” typed at the top. Also sup-
porting our position is the fact that a PACA trust can
be created through letters, invoices, or anything else
reduced to writing with no requirement of formality.
7 C.F.R. § 46.46(f)(1); In re Richmond Produce Co., 112 B.R.
364, 373 (Bankr. N.D. Cal. 1990). We see no reason why
modification of the trust should require more than its
creation.
With that rule of law established, the only thing left is
to decide whether we have proof of a written agreement
here. Patterson offers only minimal evidence to contest
the existence of writings evidencing a specific agreement. It
points to an April 1999 letter from Eckert to Patterson
where Eckert notes that several attempts were made to
10 No. 01-2470
reach satisfactory payment arrangements and that he
hopes the parties can come to some sort of agreement. But
the letter was written long after Crown breached the
relevant January agreement, and thus it has little or no
bearing on the original existence of the first written
agreement. The parties could have had an agreement in
January and February but still tried to work out a new
deal when the old one failed rather than force Patterson
to sue for breach.
Patterson also briefly contends that it entered negotia-
tions only “because of the PACA Department’s Rules
and Procedures,” and that its written agreement was
without prejudice to its PACA rights. However, no such
rules and procedures have been introduced into evidence.
All that is before us is a letter from the USDA stating
that it will attempt to assist the parties in reaching a
mutually satisfactory settlement. This is boilerplate
and does not come close to establishing that the USDA
somehow compelled Patterson to negotiate a repayment
schedule or told it that agreeing to such a plan would
not implicate its rights to a PACA trust. As for the at-
tempted reservation of rights, we conclude that private
parties do not have the power to modify the statutory
formalities that Congress put in place for the creation
and maintenance of an enforceable PACA trust.
In the end, the only possible conclusion to be drawn
from the evidence is that Patterson entered into a post-
default written agreement extending payment terms that
abrogated its PACA rights. To the extent the district
court found otherwise, its determinations were based on
a view of the law that we have rejected and as such
are clearly erroneous.
The defendants have also asked us to reverse the award
of attorneys’ fees entered against them. Because we are
reversing judgment on the only claim against Eckert, the
No. 01-2470 11
attorneys’ fee claim against him must be vacated. Patter-
son prevailed pursuant to a stipulated judgment against
Crown on some counts, however, and so we will vacate
the fee award against it and remand for recalculation
relating only to those counts (worthless though such a
judgment apparently is, as it appears that Crown has no
assets).
III
We conclude that a written agreement need not be
formally executed by both parties to abrogate PACA
trust rights and that the payment schedule and letters
in this case constitute a written agreement to permit
Crown to pay its obligations more than 30 days after
shipment in violation of PACA. We therefore REVERSE the
judgment of the district court and REMAND this case for
entry of judgment in favor of the defendants on Counts
III and IV and a recalculation of attorneys’ fees.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—10-15-02