Endico Potatoes, Inc. v. CIT Group/Factoring, Inc.

• Decision Date: 02 October 1995
• Docket Number: D,Nos. 1751,1961,s. 1751
• Parties: ENDICO POTATOES, INC., McCain Foods, Inc. and UFS Industries, Inc., Plaintiffs-Appellants-Cross-Appellees, v. CIT GROUP/FACTORING, INC., Defendant-Appellee-Cross-Appellant. ocket 94-9330, 94-95-7080.
• Court: U.S. Court of Appeals — Second Circuit

Page 1063

67 F.3d 1063

ENDICO POTATOES, INC., McCain Foods, Inc. and UFS Industries, Inc., Plaintiffs-Appellants-Cross-Appellees, v. CIT GROUP/FACTORING, INC., Defendant-Appellee-Cross-Appellant.

Nos. 1751, 1961, Docket 94-9330, 94-95-7080.

United States Court of Appeals, Second Circuit.

Argued June 30, 1995.

Decided Oct. 2, 1995.

Mark C.H. Mandell, Annandale, NJ, for plaintiffs-appellants-cross-appellees.

Donald B. Relkin, New York City (S. Robert Schrager, Marc D. Klein, Kreindler & Relkin, P.C., New York, N.Y.) for defendant-appellee-cross-appellant.

Before VAN GRAAFEILAND and MINER, Circuit Judges, and COTE, District Judge. ^*

COTE, District Judge:

This action involves a dispute between those who sold products to, and the entity that financed the operations of a licensed dealer in perishable agricultural commodities, N. Merberg & Sons, Inc. ("Merberg"), which is now in bankruptcy. To resolve this dispute, we interpret and apply provisions of the Perishable Agricultural Commodities Act of 1930 ("PACA"), 7 U.S.C. Sec. 499a-499s.

Appellants-Cross-Appellees Endico Potatoes, Inc. ("Endico"), McCain Foods, Inc. ("McCain"), and UFS Industries, Inc. ("UFS") (referred to collectively as the "Producers"), are three of forty-four companies that filed this action on August 1, 1991, seeking to recover from Elliot Merberg, the president of Merberg, and CIT Group/Factoring On appeal the parties raise three issues. First, CIT asserts that Judge Sand erred in finding that CIT did not obtain an interest in Merberg's accounts receivable free of the PACA trust. Second, the Producers contend that Judge Sand read the PACA trust provisions and accompanying regulations in an overly restrictive manner in finding that the great majority of the goods sold by the Producers did not fall within PACA. Finally, Endico challenges Judge Sand's award of prejudgment interest at a rate of 6.09 percent rather than 9 percent.

Inc. ("CIT"), Merberg's secured lender, some $2 million owed to the Producers by Merberg for the sale of products claimed to fall within PACA. The Producers contend that they are beneficiaries of a trust established by PACA and consequently have a right to Merberg's accounts receivable superior to CIT, which has received nearly $3 million in payments on Merberg's accounts receivable since Merberg filed its bankruptcy petition. On August 19, 1993, as amended by an Order of November 24, 1993, the Honorable Leonard B. Sand of the Southern District of New York ruled on the parties' cross-motions for summary judgment, dismissing the claims against CIT asserted by UFS and McCain and granting Endico recovery against CIT in the amount of $10,659.11 plus interest.

STANDARD OF REVIEW

The district court may grant summary judgment so long as the submissions of the parties taken together "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). To defeat a motion for summary judgment, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on "mere allegations or denials" of the facts asserted by the movant. Fed.R.Civ.P. 56(e); accord Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 525-26 (2d Cir.1994). This Court must review a grant of summary judgment de novo, and may affirm the grant so long as no factual dispute exists or, based on the substantive law at issue, any existing factual dispute is not material.

In this case, the relevant facts are essentially without dispute. Merberg was, prior to entering bankruptcy on May 10, 1991, ¹ a dealer in perishable agricultural commodities and other foodstuffs. CIT provided financing to Merberg and held security interests in all of Merberg's assets including its equipment, inventory, and most significantly, accounts receivable. CIT's relationship to Merberg is governed by agreements that are in the record. The Producers each sold various foodstuffs to Merberg, which they claim are protected by the PACA trust provisions, and for which they have not received payment. The nature of the goods sold by the Producers to Merberg is based on affidavits and other information supplied by the Producers and which has not been challenged by CIT. Because there are no material facts in dispute, the Court may disturb Judge Sand's ruling only if the Court finds that additional facts are necessary in order to resolve the issues, or reaches a different conclusion in applying the controlling law to the facts presented.

PACA

PACA was enacted in 1930 in order to regulate the sale of perishable commodities. As stated in the House Report to the 1984 amendments to the Act, which are the focus of this action, PACA was enacted

to encourage fair trading practices in the marketing of perishable commodities by suppressing unfair and fraudulent business practices in marketing of fresh and frozen fruits and vegetables ... and providing for collecting damages from any buyer or seller who fails to live up to his contractual obligations.

H.R.Rep. No. 543, 98th Cong., 2d Sess. 3 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406. The Act requires licensing of all entities Although PACA as first enacted provided some protection for sellers of fresh produce, in 1984 Congress determined that greater protection was warranted. According to Congress, due to the need to sell perishable commodities quickly, sellers of perishable commodities are often placed in the position of being unsecured creditors of companies whose creditworthiness the seller is unable to verify. Due to a large number of defaults by the purchasers, and the sellers' status as unsecured creditors, the sellers recover, if at all, only after banks and other lenders who have obtained security interests in the defaulting purchaser's inventories, proceeds, and receivables. See JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 77 (2d Cir.1990); H.R.Rep. No. 543, at 3, reprinted in 1984 U.S.C.C.A.N. at 406-07. In order to redress this imbalance, Congress added Section 499e(c) to PACA, Pub.L. No. 98-273, 98 Stat. 165 (1984), which impresses a trust in favor of the sellers on the inventories of commodities, the products derived therefrom, and the proceeds of sale of such commodities and products. H.R.Rep. No. 543, at 4, reprinted in 1984 U.S.C.C.A.N. at 407.

qualifying as commission merchants, dealers, and brokers in perishable agricultural commodities, 7 U.S.C. Sec. 499c(a), and provides for various remedies that may be enforced either through a complaint filed with the Secretary of Agriculture, or through an action in any court of competent jurisdiction. Id. Sec. 499e(b).

Specifically, Section 499e(c)(2) of PACA provides that

[p]erishable 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 ... until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents.

7 U.S.C. Sec. 499e(c)(2). ² This provision imposes a "non-segregated floating trust" on the commodities and their derivatives, and permits the commingling of trust assets without defeating the trust. 7 C.F.R. Sec. 46.46(c); see also JSG Trading, 917 F.2d at 78. Through this trust, the sellers of the commodities maintain a right to recover against the purchasers superior to all creditors, including secured creditors. See, e.g., 7 U.S.C. Sec. 499e(c)(1); Tom Lange Co. v. Lombardo Fruit & Produce Co., 12 F.3d 806, 809 (8th Cir.1993); Regulations under the Perishable Agricultural Commodities Act, 49 Fed.Reg. 45735, 45738 (1984); see also First State Bank of Miami v. Gotham Provision Co., 669 F.2d 1000, 1009-10 (5th Cir.) (interpreting Section 206 of the Packers and Stockyards Act, 7 U.S.C. Sec. 196, on which the PACA trust provision was based), cert. denied, 459 U.S. 858, 103 S.Ct. 129, 74 L.Ed.2d 111 (1982).

CIT'S LIABILITY

Although not expressly stated in PACA, courts have unanimously held that the trust created by PACA is governed by general trust principles. See, e.g., Consumers Produce Co. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1381 (3d Cir.1994); C.H. Robinson Co. v. Trust Co. Bank, N.A., 952 F.2d 1311, 1316 (11th Cir.1992). At issue in this action is the well recognized principle from trust law that a bona fide purchaser of trust assets receives the assets free of any claim by the trust beneficiaries. See Restatement (Second) of Trusts Sec. 284 (1959); Consumers Produce, 16 F.3d at 1380; C.H. Robinson, 952 F.2d at 1313-14; George G. Bogert & George T. Bogert, The Law of Trusts and Trustees Sec. 881 (Rev.2d Ed.1995); see also Amendments to the Perishable Agricultural Commodities Act: Hearing on H.R. 3867 Before the Subcomm. on Domestic Marketing CIT contends that it qualifies as a bona fide purchaser of Merberg's accounts receivable and thus takes them free of any claim asserted by the beneficiaries of the PACA trust. The Producers, who prevailed before Judge Sand, assert that CIT is no more than a secured lender who, as the legislative history regarding the 1984 amendment to PACA indicates, holds its security subject to the rights of the trust beneficiaries.

Consumer Relations and Nutrition of the House Comm. on Agriculture, 98th Cong., 1st Sess. 24-25 (1983) (Subcommittee Chairman Leon Panetta and John Gardner, Chief of the Department of Agriculture's Fruit and Vegetable Division Regulatory Branch, describing, in substance, the concept of a bona fide purchaser).

As defined by the Restatement, a bona...