Greg Orchards & Produce, Inc. v. Roncone, 98-2501
| Decision Date | 22 June 1999 |
| Docket Number | No. 98-2501,98-2501 |
| Citation | 180 F.3d 888 |
| Parties | GREG ORCHARDS & PRODUCE, INC., Plantation Produce Company, and Tom Lange Company, Inc., Plaintiffs-Appellees, v. Edwin P. RONCONE, Paul Roncone, Alan Roncone, and Austin J. Merkel Company, Inc., Defendants-Appellants. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 95 C 6602--David H. Coar, Judge.
Before Bauer, Rovner, and Evans, Circuit Judges.
This appeal is from a district court decision holding that produce suppliers Greg Orchards & Produce, Inc. ("Greg"), Plantation Produce Company ("Plantation"), and Tom Lange Company, Inc. ("Lange") were qualified for coverage under a Perishable Agricultural Commodities Act ("PACA") trust held by Austin J. Merkel Company, Inc. ("Merkel"). Merkel and its officers argue that the suppliers became disqualified from coverage under the trust when the suppliers entered into post-default agreements with Merkel that permitted Merkel to pay its outstanding obligations in weekly or monthly installments, thereby extending the time for payment beyond the 30 day maximum set by USDA regulations. We reverse and remand.
Greg, Plantation, and Lange sold produce to Merkel between December 1992 and April 1995. Merkel, which has since dissolved, was a licensed "dealer" of perishable agricultural commodities within the meaning of PACA, 7 U.S.C. sec. 499a(b)(6). Edwin and Paul Roncone were officers and directors of Merkel, and Alan Roncone was an employee who served as an officer of Merkel until October 1993.
After Merkel failed to timely pay for the produce delivered to it by Greg, Plantation, and Lange, the suppliers filed notices of intent to preserve the benefits of a statutory trust held by Merkel on behalf of its unpaid suppliers pursuant to PACA. See 7 U.S.C. sec. 499e(c)(2), (3). Faced with Merkel's imminent bankruptcy, however, Greg and Lange subsequently entered into post-default agreements with Merkel that allowed Merkel to pay its outstanding obligations in weekly installments. The parties disagree about whether Plantation entered into a similar agreement with Merkel. In any case, Merkel made several payments to all three suppliers. On May 31, 1995, however, the USDA revoked Merkel's license to operate in the produce industry due to Merkel's repeated PACA violations. When Merkel went out of business shortly thereafter, all payments ceased. Greg, Plantation, and Lange (as well as another supplier, Weis-Buy Services, Inc., who is not a party to this appeal) brought suit in federal court to enforce their PACA trust rights. In addition to naming Merkel as a defendant, the suit named all three Roncones, claiming that they were "responsible persons" within the meaning of 7 U.S.C. sec. 499a(b)(9).
In the district court, Merkel and the Roncones argued, inter alia, that Greg, Plantation, and Lange were not qualified for coverage under the PACA trust because they had entered into postdefault agreements that extended Merkel's time for payment of outstanding debts beyond 30 days. In support of this argument, Merkel and the Roncones pointed to a USDA regulation that states that an unpaid supplier will not qualify for coverage under a PACA trust if the supplier sets a maximum time for payment in excess of 30 days after receipt and acceptance of the commodities. 7 C.F.R. sec. 46.46(e)(2).
On cross-motions for summary judgment, the district court ruled in favor of Greg, Plantation, and Lange with respect to the PACA trust enforcement claim, holding that "where, as here, there is no evidence of a seller's attempt to evade the strictures of PACA, post-transaction agreements extending the time period for payment of liquidated debt held in a PACA trust will not serve [to] waive the benefits of an otherwise validly preserved trust." WeisBuy Services Inc. v. Roncone, 1997 WL 323523 at * 9 (N.D.Ill. June 9, 1997). The district court declined to decide whether Plantation had entered into a valid postdefault agreement because its holding had mooted the issue. Id. at * 10 n. 10.
As for the individual defendants, the lower court found that Edwin and Paul Roncone had breached their fiduciary duties to Greg, Plantation, and Lange by transferring ownership of Merkel's assets to themselves or third parties. However, the court found that a genuine issue of material fact existed as to the degree of control exerted by Alan Roncone. In order to avoid the need for a trial (and in exchange for the dismissal of a breach of contract claim against him), Alan Roncone stipulated to certain contested facts that permitted entry of a judgment against him. (Final Judgment dated May 14, 1998.) This appeal followed.
The only substantive issue on appeal is whether a produce supplier becomes ineligible to assert its PACA trust rights when it enters into a forbearance agreement with a dealer extending the dealer's time for payment beyond 30 days from the receipt and acceptance of the produce. We review de novo the district court's determination, on summary judgment, that such an agreement does not affect a supplier's PACA trust rights. Target Market Publ'g, Inc. v. Advo, Inc., 136 F.3d 1139, 1141 (7th Cir.1998).
PACA mandates that perishable agricultural commodities received by a federally licensed dealer, as well as sales proceeds from such commodities, shall be held by the dealer in trust for the benefit of all unpaid suppliers of such commodities until full payment has been made. 1 7 U.S.C. sec. 499e(c)(2). More simply put, the "trust ... requires the produce buyer to hold the proceeds from its sales of produce and use them to pay suppliers before using those funds to pay its ... other liabilities." In re Lombardo Fruit and Produce Co., 12 F.3d 806, 809 (8th Cir.1993). The trust is created by operation of law whenever a dealer receives and accepts perishable commodities. See 7 C.F.R. sec. 46.46(e)(2). Nonetheless, to preserve its PACA trust rights, a supplier must comply with the notice requirements set forth at 7 U.S.C. sec. 499e(c)(3),(4) and 7 C.F.R. sec. 46.46(f). Properly preserved, trust rights are superior to the interests of secured creditors. See Lombardo, 12 F.3d at 809; Hiller Cranberry Products, Inc. v. Koplovsky, 165 F.3d 1, 5 (1st Cir.1999).
The purpose of PACA's trust provisions is to protect suppliers from dealers who "encumber or give lenders a security interest in, such commodities, or on inventories of food or other products derived from such commodities, and any receivables or proceeds from the sale of such commodities or products." 7 U.S.C. sec. 499e(c)(1). However, this protection is only intended to extend to suppliers who sell produce on a cash or short-term credit basis. As the House Report states:
[T]he Committee does not intend the trust to apply to any credit transaction that extends beyond a reasonable period. Under the bill the Secretary is required to establish, through rulemaking, the time by which, the parties to a transaction must agree payment on a transaction must be made, to qualify it for coverage under the trust. An agreement for payment after such time will not be eligible to receive the benefits of the trust.
H.R.Rep. No. 543, 98th Cong., 2d Sess. 7, reprinted in 1984 U.S.C.C.A.N. 410. Pursuant to PACA's directive, the USDA promulgated regulations stating that "[t]he maximum time for payment for a shipment to which a seller, supplier, or agent can agree and still qualify for coverage under the trust is 30 days after receipt and acceptance of the commodities." 7 C.F.R. sec. 46.46(e)(2).
The parties do not dispute that Greg, Plantation, and Lange complied with PACA's notice requirements. However, Merkel and the Roncones contend that all three suppliers became ineligible to assert their PACA trust rights when they entered into post-default agreements with Merkel that extended Merkel's time for payment beyond 30 days. Since this is an issue of first impression in this Circuit, we turn to the Eighth Circuit's decision in Lombardo for guidance. As the district court noted, Lombardo "presents a factual scenario that is virtually identical to that of the instant case." 1997 WL 323523 at * 8.
In Lombardo, Lange (now a party to this case) sold produce to a dealer under an agreement that complied with PACA. 12 F.3d at 809...
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