American Banana v. Republic Nat. Bank of New York

• Decision Date: 11 March 2004
• Docket Number: Docket No. 02-9504(XAP).,Docket No. 02-9442(L).
• Citation: 362 F.3d 33
• Parties: AMERICAN BANANA CO., INC., Finest Fruits, Inc., Bronco Produce Corp., Jacobson Produce Corp., Morris Okun, Inc., D.M. Rothman, Inc., Rubin Bros. Produce Corp., Rosenthal & Klein, Inc., Square Produce, Inc., Post & Taback, Inc., A.J. Trucco Corp., and Wishnatzki & Nathel, Inc., Plaintiffs-Appellants-Cross-Appellees, L & P Fruit Corp., H. Schnell & Co., Inc., and Martin Striks & Sons, Inc., Plaintiffs, v. REPUBLIC NATIONAL BANK OF NEW YORK, N.A., Defendant-Third-Party-Plaintiff-Appellee-Cross-Appellant, Gail Werner, Jack Turano, PMD Produce Brokerage Corp., and Mark Werner, Third-Party-Defendants.
• Court: U.S. Court of Appeals — Second Circuit

362 F.3d 33

AMERICAN BANANA CO., INC., Finest Fruits, Inc., Bronco Produce Corp., Jacobson Produce Corp., Morris Okun, Inc., D.M. Rothman, Inc., Rubin Bros. Produce Corp., Rosenthal & Klein, Inc., Square Produce, Inc., Post & Taback, Inc., A.J. Trucco Corp., and Wishnatzki & Nathel, Inc., Plaintiffs-Appellants-Cross-Appellees, L & P Fruit Corp., H. Schnell & Co., Inc., and Martin Striks & Sons, Inc., Plaintiffs, v. REPUBLIC NATIONAL BANK OF NEW YORK, N.A., Defendant-Third-Party-Plaintiff-Appellee-Cross-Appellant, Gail Werner, Jack Turano, PMD Produce Brokerage Corp., and Mark Werner, Third-Party-Defendants.

Docket No. 02-9442(L).

Docket No. 02-9504(XAP).

United States Court of Appeals, Second Circuit.

Argued: September 10, 2003.

Decided: March 11, 2004.

COPYRIGHT MATERIAL OMITTED

Leonard Kreinces (Howard S. Rosenberg, on the brief), Kreinces & Rosenberg, P.C., Westbury, NY, for Plaintiffs-Appellants-Cross-Appellees.

John P. Amato, Hahn & Hessen LLP, New York, NY, for Defendant-Third-Party Plaintiff-Appellee-Cross-Appellant.

Before: VAN GRAAFEILAND, CABRANES, and B.D. PARKER, JR., Circuit Judges.

B.D. PARKER, JR., Circuit Judge.

From 1995 to 1996, Plaintiffs-Appellants ("Sellers")¹ sold fruit and other fresh produce to Third-Party Defendant PMD Brokerage Corp. ("PMD"), which maintained a checking account at Defendant Republic National Bank of New York (predecessor of HSBC Bank, USA, and for our purposes, "HSBC"). Such sales are regulated by the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. §§ 499a-499t. At issue in this appeal is a provision of PACA that requires produce dealers, such as PMD, to hold all perishable agricultural commodities they have purchased on short-term credit, as well as any proceeds from sales of those commodities, in trust for the benefit of the unpaid sellers of the produce until full payment has been made. 7 U.S.C. § 499e(c)(2).

After PMD defaulted on amounts it owed, and the Sellers failed in their efforts to obtain repayment from PMD, the Sellers sued HSBC. They claimed that HSBC's retention of deposits made by PMD to offset PMD's overdraft balance constituted a breach of the PACA trust. After a bench trial, the District Court concluded that HSBC had breached the PACA trust by accepting PMD's deposits of PACA funds, to the extent that such funds were then paid to creditors who were not beneficiaries of the PACA trust. The Court then awarded the Sellers $278,967 in damages and interest. On appeal, both parties challenge the scope of liability. For the reasons that follow, we reverse the judgment of the District Court and remand with instructions to enter judgment for HSBC.

BACKGROUND

I. PACA

Congress enacted PACA in 1930 to regulate the sale and marketing of produce in interstate commerce. See H.R. REP. NO. 98-543, at 3 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406; Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1066 (2d Cir.1995). Through PACA, Congress sought "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. 98-543, at 3 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406.

Among other things, PACA requires licensing of all entities qualifying as commission merchants, dealers, and brokers ("buyers"), see 7 U.S.C. § 499c; bars a variety of unfair trade practices by buyers, see id. § 499b; and provides various remedies when violations occur, see id. § 499e. PACA requires buyers to make "full payment promptly" for all commodities received from produce sellers. Id. § 499b(4). If a buyer fails to make a prompt payment, a seller may seek to recover resulting damages by either (1) filing a complaint with the Secretary of the U.S. Department of Agriculture ("USDA"), or (2) filing a lawsuit "in any court of competent jurisdiction." Id. § 499e(a), (b).²

In the early 1980s, Congress reexamined PACA in the wake of a sharp increase in defaults among buyers. Although it found that PACA generally worked well in making the marketing of perishable agricultural commodities more orderly and efficient, Congress determined that sellers needed greater protection. See H.R. REP. NO. 98-543, at 3 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406. Congress noted that, as a result of the exigencies of the perishable commodities business, sellers were typically required to sell their produce quickly and frequently found themselves in the position of unsecured creditors of buyers whose creditworthiness could not be verified. If buyers defaulted, sellers could look only to the commodities (which would have perished) or to the sales proceeds of the commodities. Since sellers were typically unsecured creditors, they generally stood in line behind banks and other lenders who had obtained security interests in the defaulting purchaser's inventories, proceeds, and receivables. As a result, sellers were often unable to collect monies owed to them. See 7 U.S.C. § 499e(c)(1); H.R. REP. No. 98-543, at 3-4 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406-07; Endico Potatoes, 67 F.3d at 1067; JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 77 (2d Cir.1990). Congress viewed this instability as a burden on commerce and contrary to the public interest. See 7 U.S.C. § 499e(c)(1); H.R. REP. NO. 98-543, at 4-5 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 408.

As a remedy, Congress amended PACA in 1984 to make the sellers' interests in the commodities and sales proceeds superior to those of the buyers' creditors, including secured creditors. It did so by adding section 499e(c), which requires licensed dealers to hold all perishable commodities purchased on short-term credit, as well as sales proceeds, in trust for the benefit of unpaid sellers:

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.

7 U.S.C. § 499e(c)(2). This provision impresses a "non-segregated `floating' trust" on the commodities and their derivatives, in the sense that it permits buyers — i.e., trustees — to commingle PACA trust assets with their other assets. 7 C.F.R. § 46.46(b); accord Endico Potatoes, 67 F.3d at 1067; JSG Trading, 917 F.2d at 78; H.R. REP. NO. 98-543, at 2, 4, 5, 10, 11, 12 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406, 407, 409, 414, 415. To enforce payment from the trust, PACA beneficiaries may sue in an appropriate U.S. district court. 7 U.S.C. § 499e(c)(5)(i).³

Through these mechanisms Congress, in effect, extended a new benefit to produce sellers. To be entitled to trust protection the sellers were required to extend only short-term credit, see H.R. REP. NO. 98-543, at 6-7 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 410; Regulations Under the Perishable Agricultural Commodities Act; Addition of Provisions to Effect a Statutory Trust, 49 Fed.Reg. 45735, 45738 (Nov. 20, 1984) [hereinafter Trust Regulations], and, in the event of defaults, promptly to pursue administrative and judicial remedies. See Patterson Frozen Foods, Inc. v. Crown Foods Int'l, Inc., 307 F.3d 666, 671 (7th Cir.2002); In re: Havana Potatoes of N.Y. Corp., 55 Agric. Dec. 1234 (U.S.D.A.1996). The sellers' prompt resort to administrative remedies was intended to isolate and to put pressure on financially insecure buyers to meet their obligations or to be forced from the business. The sellers who complied were, in turn, afforded a highly unusual trust beneficiary status that permitted them, in the case of defaults, to trump the buyers' other creditors, including secured ones. But nothing in the text of PACA, in its legislative history, or in its implementing regulations indicates that PACA's super-priority was intended to benefit sellers who dealt in other than short-term credit in accordance with PACA's regulations. See Patterson Frozen Foods, 307 F.3d at 671; H.R. REP. NO. 98-543, at 6-7 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 410; Trust Regulations, supra, 49 Fed.Reg. at 45738.

II. Factual Background

Until its demise in September 1996, PMD bought and sold produce at the New York City Terminal Market at Hunts Point, New York ("Market"). To facilitate its business, PMD opened a checking account at HSBC in October 1995. All of the monies PMD deposited into its HSBC account were proceeds from the sale of produce and thus covered by PACA's trust provision, as HSBC knew. Am. Banana Co. v. Republic Nat'l Bank of N.Y., N.A., No. 99 Civ. 1330(AGS), slip op. at 3, 9 (S.D.N.Y. Aug. 6, 2002).⁴ During this relationship, HSBC processed hundreds of PMD checks made payable to dozens of payees, typically produce sellers, in the normal course of business.⁵

In January 1996, HSBC began to provide PMD with overdraft privileges as the bank began to receive checks presented for payment against PMD's account in amounts greater than the available funds in the account. On the mornings after such checks were presented to HSBC, the bank's computer system automatically issued a "referral report" that showed PMD's available funds, total funds on deposit (including deposited checks that had not yet cleared), and the amount and number of checks presented for payment the previous day. HSBC then would contact Mark Werner, PMD's owner, and request that he make a deposit to cover checks that had been presented the previous day. In this...