In Re: Magic Restaurants, 99-5113

• Decision Date: 08 December 1999
• Docket Number: No. 99-5113,99-5113
• Citation: 205 F.3d 108
• Parties: (3rd Cir. 2000) IN RE: MAGIC RESTAURANTS, INC.; MAGIC AMERICAN CAFE, INC., Debtors MAGIC RESTAURANTS, INC.; MAGIC AMERICAN CAFE, INC. v. BOWIE PRODUCE CO., INC., Appellant PATRICIA A. STAIANO, Trustee. Argued:
• Court: U.S. Court of Appeals — Third Circuit

Page 108

205 F.3d 108 (3rd Cir. 2000)

IN RE: MAGIC RESTAURANTS, INC.; MAGIC AMERICAN CAFE, INC., Debtors

MAGIC RESTAURANTS, INC.; MAGIC AMERICAN CAFE, INC. v. BOWIE PRODUCE CO., INC., Appellant

PATRICIA A. STAIANO, Trustee.

No. 99-5113

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued: December 8, 1999

Filed March 1, 2000

On Appeal From the United States District Court For the District of Delaware (D.C. Civ. No. 97-300-JJF) District Judge: Honorable Joseph J. Farnan, Jr. Stephen P. McCarron, Esquire (Argued) McCarron & Associates 4910 Massachusetts Avenue, N.W., Suite 18 Washington, DC 20016, Mark Minuti, Esquire Saul, Ewing, Remick & Saul 222 Delaware Avenue, Suite 1200 Wilmington, DE 19899, Counsel for Bowie Produce Co., Inc.

Brendan Linehan Shannon, Esquire (Argued) Laura Davis Jones, Esquire Young Conaway Stargatt & Taylor, LLP Rodney Square North, 11th Floor Wilmington, DE 79899-0391, John A. Lee, Esquire Andrews & Kurth, L.L.P. 4200 Chase Tower Houston, TX 77002, Counsel for Magic Restaurants, Inc. and Magic American Cafe, Inc.

Before: NYGAARD, RENDELL and ROSENN, Circuit Judges.

OPINION ANNOUNCING THE JUDGMENT OF THE COURT

ROSENN, Circuit Judge.

The sole question presented by this appeal is whether restaurants are "dealers" under the Perishable Agricultural Commodities Act, 7 U.S.C. S 499a et seq. ("PACA"), and therefore subject to its trust provision, 7 U.S.C.S 499e(c). The United States Bankruptcy Court for the District of Delaware held that they are, and subsequently granted partial summary judgment in favor of the Appellant. The United States District Court reversed. We hold that restaurants are dealers under the plain language of PACA, and we therefore reverse the order of the district court and reinstate the order of the bankruptcy court.

I.

On April 6, 1995, Magic Restaurants, Inc. and Magic American Cafe, Inc. (collectively "Magic")filed voluntary bankruptcy petitions in the bankruptcy court for reorganization under Chapter 11 of the Bankruptcy Code. Magic, directly or through its subsidiaries, owned and operated fifteen restaurants in the Washington, D.C. and New York City metropolitan areas. These restaurants generated $20 million in sales revenues in a six month period in 1995-96. Magic purchased fresh fruits and vegetables from Bowie Produce Co., Inc. ("Bowie"), which it processed into food items, including salads or hamburger trimmings, and sold to its restaurant customers. At the time Magic filed for bankruptcy in April 1995, it owed Bowie $98,983.74 for these produce purchases.

Bowie commenced an adversarial proceeding in the bankruptcy court to recover full payment from Magic on the ground that the proceeds from the produce Magic had purchased were trust funds under Section 5(c) of PACA, 7 U.S.C. S 499e(c). Magic moved for summary judgment on the ground that as a restaurant, it was not a "dealer," and was therefore not subject to PACA's trust provision. By memorandum opinion and order dated June 18, 1996, the bankruptcy court denied Magic's motion and held that Magic was a "dealer" under the plain language of PACA. On January 15, 1997, the bankruptcy court granted partial summary judgment for Bowie, awarding it $93,173.29 in trust proceeds.

Magic appealed the bankruptcy court's ruling to the district court pursuant to 28 U.S.C. S 158(a). The district court reversed the bankruptcy court by memorandum opinion and order dated January 6, 1999, holding that Magic was not a "dealer" under PACA and therefore was not subject to its trust provision. This timely appeal followed.

II.

A. Statutory Background.

Congress enacted PACA in 1930 "to promote fair trading practices in the marketing of perishable agricultural commodities, largely fruits and vegetables." Consumers Produce Co., Inc. v. Volante Wholesale Produce, Inc. , 16 F.3d 1374, 1377-78 (3d Cir. 1994). PACA was " `designed primarily for the protection of the producers of perishable agricultural products -most of whom must entrust their products to a buyer or commission merchant who may be thousands of miles away, and depend for their payment upon his business acumen and fair dealing.' " In re Kornblum & Co., Inc., 81 F.3d 280, 283 (2d Cir. 1996) (quoting H.R. Rep. No. 1196, at 2 (1955), reprinted in 1956 U.S.C.C.A.N. 3699, 3701). Producers of perishable agricultural goods are in large part dependent upon the honesty and scrupulousness of the purchaser or consignee who geographically may be far removed. To provide producers with some protection, Congress fortified the original PACA with two primary weapons. First, it prohibited certain conduct by "commission merchants," "brokers," or "dealers." 7 U.S.C. S 499b. Failure to abide by these prohibitions rendered the "commission merchant, dealer, or broker . . . liable to the person or persons injured thereby for the full amount of damages . . . sustained in consequence of such violation." Id. SS 499e(a) & 499e(b). Second, PACA established a mandatory licensing scheme, under the supervision of the Secretary of Agriculture, for any "person" carrying on "the business of a commission merchant, dealer, or broker." Id. S 499c. The Secretary was given the power to refuse, suspend, or terminate licenses on numerous grounds, including conduct prohibited under S 499b. See 7 U.S.C. SS 499c, 499d, 499h. Any person doing business without the required license was subject to monetary penalties. Id. S 499c(a).

PACA in its original form therefore protected produce growers and producers, and worked to make "the marketing of perishable agricultural commodities more orderly and efficient." Hull Co. v. Hauser's Foods, Inc., 924 F.2d 777, 779 (8th Cir. 1991). Even with the passage of a half-century after its initial enactment, Congress, in 1984, determined that prevalent financing practices in the perishable agricultural commodities industry were placing the industry as a whole, including produce sellers, in jeopardy. It responded by amending PACA, explaining:

It is hereby found that a burden on commerce in perishable agricultural commodities is caused by financing arrangements under which commission merchants, dealers, or brokers, who have not made payment for perishable agricultural commodities purchased, contracted to be purchased, or otherwise handled by them on behalf of another person, 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, and that such arrangements are contrary to the public interest. . . .

7 U.S.C. S 499e(c)(1).¹

In order to "remedy such burden on commerce in perishable agricultural commodities and to protect the public interest," id., Congress "increase[d] the legal protection for unpaid sellers and suppliers of perishable agricultural commodities until full payment of sums due have been received by them," H.R. Rep. No. 98-543, at 3 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406 (emphasis added), by enacting 7 U.S.C. S 499e(c). This provision imposes a floating, non-segregated trust on produce buyers for the benefit of unpaid produce suppliers.² The corpus of this trust is comprised of (1) the perishable agricultural commodities purchased from these suppliers, (2) all inventories of food or other products derived from the perishable agricultural commodities, and (3) receivables or proceeds from the sale of such commodities or products. 7 U.S.C. S 499e(c)(2). The statutory trustee is the delinquent "commission merchant, dealer, or broker." Id. The unpaid supplier loses the benefits of the trust unless written notice of intent to preserve the trust is given to the trustee within thirty calendar days after payment must be made. Id. S 499e(c)(3). In essence, PACA's trust provision gives the unpaid supplier an interest in the trust corpus superior to the interest of any other lien or secured creditor. See Consumers Produce, 16 F.3d at 1379; In re W.L. Bradley Co., Inc., 75 B.R. 505, 509 (Bankr. E.D. Pa. 1987) (quoting In re Prange Foods, Corp., 63 B.R. 211, 214 (Bankr. W.D. Mich. 1986)).

B. The District Court's Decision.

Bowie's appeal hinges on its contention that Magic is a "dealer" under PACA.³ If Bowie is correct, it has priority to certain of Magic's assets as the beneficiary of PACA's statutorily imposed trust. PACA defines the term "dealer" as "any person engaged in the business of buying or selling in wholesale or jobbing quantities, as defined by the Secretary, any perishable agricultural commodity in interstate or foreign commerce . . . ." 7 U.S.C.S 499a(b)(6). PACA also provides three exceptions to this definition:

(A) no producer shall be considered as a "dealer" in respect to sales of any such commodity of his own raising;

(B) no person buying any such commodity solely for sale at retail shall be considered as a "dealer" until the invoice cost of his purchases of perishable agricultural commodities in any calendar year are in excess of $230,000; and

(C) no person buying any commodity other than potatoes for canning and/or processing within the State where grown shall be considered a "dealer" whether or not the canned or processed product is to be shipped in interstate or foreign commerce, unless such product is frozen or packed in ice, or consists of cherries in brine . . . .

Id. Finally, this provision notes that "[a]ny person not considered as a `dealer' under clauses (A), (B), and (C) may elect to secure a license under the provisions of section 499c of this title, and in such case and while the license is in effect such person shall be considered as a `dealer'." Magic has never secured such a license, and contends that no restaurant has done so.

The parties do not dispute that Magic purchases "wholesale or jobbing quantities" of perishable agricultural commodities in interstate commerce.⁴ Bowie therefore contends that, based on the plain language of the statute, Magic is...