In re Northeast Dairy Co-op. Federation, Inc.

Decision Date11 March 1987
Docket NumberAdv. No. 85-0084.,Bankruptcy No. 85-00721
Citation72 BR 663
PartiesIn re NORTHEAST DAIRY COOPERATIVE FEDERATION, INC., Debtor. NORTHEAST DAIRY COOPERATIVE FEDERATION, INC., Plaintiff, v. DELLWOOD FOODS, INC., Eastern Milk Producers Cooperative Association, Inc., Sunnydale Farms, Inc., Thomas A. Wilson as Market Administrator, John R. Block, U.S. Secretary of Agriculture, Canajoharie Cooperative Milk Producers, Inc., Poland Milk Producers Cooperative Dairies, Inc., Schoharie County Cooperative Dairies, Inc., and Hershey Foods Corporation, Defendants.
CourtU.S. Bankruptcy Court — Northern District of New York

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Hancock & Estabrook, Syracuse, N.Y., for debtor; Donald J. Kemple, of counsel.

Botein, Hays & Sklar, New York City, for Dellwood Foods, Inc.; James Altman, of counsel.

Williams, Micale & Wells, Syracuse, N.Y., for Eastern Milk Producers Co-op. Ass'n, Inc.; Peter N. Wells, of counsel.

Moses & Singer, New York City, for Sunnydale Farms, Inc.; David Rebinowitz, of counsel.

Frederick J. Scullin, Jr., U.S. Atty., N.D.N.Y., Syracuse, N.Y., for Thomas A. Wilson, Market Adm'r; William H. Pease, Asst. U.S. Atty., of counsel.

Kevin F. Meckus, Dept. of Agriculture, Washington, D.C., for John R. Block, U.S. Secretary of Agriculture.

McPhillips, Fitzgerald, Meyer & McLenithan, Glens Falls, N.Y., for Canajoharie Co-op. Milk Producers, Inc. and Schoharie County Co-op. Dairies, Inc.; James D. Horowitz, of counsel.

Walter G. Pratt, Utica, N.Y., for Poland Milk Producers Co-op. Dairies, Inc.

Finkel, Goldstein & Berzow, New York City, for Hershey Foods Corp.; Kevin J. Nash, of counsel.

Menter, Rudin & Trivelpiece, P.C., Syracuse, N.Y., for Creditors' Committee; Peter L. Hubbard, of counsel.

MEMORANDUM-DECISION, PROPOSED FINDINGS OF FACT, PROPOSED CONCLUSIONS OF LAW, AND PROPOSED ORDER PURSUANT TO FEDERAL RULES OF BANKRUPTCY PROCEDURE 7056

STEPHEN D. GERLING, Bankruptcy Judge.

On August 30, 1985, Northeast Dairy Cooperative Federation, Inc. ("Nedco") commenced a voluntary bankruptcy case under Chapter 11 of Title 11 of the United States Code ("Code") by filing a petition in the United States Bankruptcy Court for the Northern District of New York. On November 15, 1985, Nedco, as debtor-in-possession, filed its complaint to compel turnover of property pursuant to Code § 542, and Fed.R.Bankr.P. 7001(1). Nedco sought an order directing Dellwood Foods, Inc. ("Dellwood") to pay over the sum of $1,940,628.32, together with interest thereon. Named as additional defendants were Eastern Milk Producers Cooperative Association, Inc. ("Eastern"), Sunnydale Farms, Inc. ("Sunnydale"), Thomas A. Wilson as Market Administrator and John R. Block as United States Secretary of Agriculture, (collectively, "Market Administrator"), Canajoharie Cooperative Milk Producers, Inc. ("Canajoharie"), Poland Milk Producers Cooperative Association, Inc. ("Poland"), Schoharie County Cooperative Dairies, Inc. ("Schoharie"), and Hershey Foods Corporation ("Hershey"). At the time Nedco commenced the adversary proceeding, all the foregoing entities were also parties to an interpleader action commenced by Dellwood in the United States District Court for the Southern District of New York ("Southern District interpleader action").1

On February 18, 1986, Nedco moved for summary judgment against all defendants. As usual, this action precipitated similar motions from the majority of the defendants, most of which assert cross-claims against Dellwood. Dellwood seeks summary judgment on counterclaims and cross-claims concerning payment responsibility for milk deliveries received by it, and looks to discharge further liability for the contested funds. Dellwood also seeks to join Citicorp Industrial Credit, Inc. ("Citicorp") as a party defendant. All motions were consolidated for hearing on April 29, 1986, with the matter submitted for decision on June 5, 1986. The Court's review of the affidavits and other evidence submitted by the parties reveal certain material facts to be uncontested, and the following is issued pursuant to Fed.R.Bankr.P. 7056.

FINDINGS OF FACT

Nedco is a cooperative corporation organized and existing under the laws of the State of New York.

In May and June of 1985, Nedco was engaged in the business of buying and selling milk. As part of this business, Nedco sold milk to Dellwood pursuant to a written contract between these parties. Dated January 5, 1982, this agreement provided that Nedco would sell to Dellwood, and Dellwood would buy from Nedco, raw milk for Dellwood's business of processing, packaging and distributing fluid milk and cream. Under this contract, Nedco agreed to deliver the raw milk to designated Dellwood production plants pursuant to weekly schedules set by Dellwood. Also on that date, these parties entered into an agreement providing for the transportation of the milk purchased under the prior contract. Both agreements were in full force and effect in May and June of 1985.

Nedco billed Dellwood for certain milk sold and delivered in May and June, 1985. May milk was sold for a total of $2,712,529.23. Of this amount, Dellwood paid Nedco $1,269,510.61; as Nedco owed Dellwood $114,867.53 for transportation of the May milk pursuant to the transportation agreement, the net amount due Nedco for May milk was $1,328,151.09. June milk was sold for a total of $925,701.85. From this amount, $46,075.63 was deducted for transportation expenses, with a net due Nedco for June milk sold of $879,626.22. The total net due was $2,207,777.31.

During these months, Nedco was also purchasing milk from Dellwood. When the totals for these milk purchases ($173,314.95 and $93,874.19 for May and June, 1985, respectively) are subtracted from the total due on the Nedco to Dellwood sales, the result is $1,940,588.17. During the course of the Southern District interpleader action, Dellwood acknowledged an obligation to Nedco in an amount of $1,940,628.32. ($40.15 more than Nedco's figures).

In May and June of 1985, Nedco purchased milk (which it in turn sold to Dellwood) from three primary sources; cooperative organizations which were then members of Nedco, cooperatives which were not members of Nedco, and other proprietary dealers in milk. In addition to the defendants other than Dellwood, Nedco purchased milk from thirteen member cooperatives, and one non-Nedco cooperative; it in turn sold this milk to Dellwood. These fourteen non-party cooperatives have generally not been paid by Nedco for certain of the purchases made.

During the months of May and June, 1985, Dellwood would provide Nedco with a weekly estimate of Dellwood's milk requirements, and also scheduled the quantities of milk which it needed in the upcoming week. In response, Nedco would purchase the milk from its suppliers, and direct those suppliers to have available the quantities of milk necessary to meet Dellwood's requirements. After reviewing Dellwood's expected needs, Nedco would make arrangements with milk haulers, including Dellwood, and inform them of the place and time at which the milk could be picked up from the suppliers. The milk was then picked up by the haulers, and delivered to Dellwood processing plants in Copaigue, Yonkers, Fraser, and New York, New York, as well as Wallington, New Jersey. Less than one-half of the milk was transported by Dellwood pursuant to its contract with Nedco.

Nedco billed Dellwood directly for the milk sold and delivered to the latter in May and June, 1985. Dellwood also paid Nedco in full for milk it purchased in April, 1985, with this payment made prior to May 19, 1985. On or about June 5, 1985, Dellwood made the referenced partial payment for June milk.

During all relevant times, the buying and selling of the milk was regulated pursuant to the Federal Agricultural Marketing Agreement Act of 1937, as amended, 7 U.S.C.A. § 601, et seq. (West 1980, Supp. 1986) ("Act"). In particular, the May and June sales were regulated by federal milk marketing regulations promulgated by the United States Department of Agriculture. See General Provisions of Federal Milk Marketing Orders, 7 C.F.R. §§ 1001.1-1001.7 (1986), and Milk in New York-New Jersey Marketing Area, 7 C.F.R. §§ 1002.1-1002.500 (1986) ("Order No. 2"). Additionally, certain provisions of New York State law were relevant to the transactions. See N.Y.Agric. & Mkts. Law, Art. 21, §§ 252-258aa (McKinney Supp.1987).

Nedco's shaky financial condition, rumored throughout the dairy industry prior to its bankruptcy filing, caused certain of the defendants to make direct claim against Dellwood for portions of the monies due for the May and June, 1985 deliveries. The conflicting claims led to Dellwood's filing of the Southern District interpleader action.

For clarity's sake, the uncontested material facts germane to each defendant, as well as the nature of its cross-claim and/or counterclaim where appropriate, are set forth below.

CANAJOHARIE

Canajoharie is a dairy cooperative organized and existing pursuant to Article 8 of the New York Cooperative Corporation Law (McKinney 1951, Supp.1987). Prior to April 1, 1985, Canajoharie had been a member cooperative of Nedco. On April 1, 1985, Nedco and Canajoharie entered into an affiliate membership agreement, which Canajoharie claims superceded a prior marketing contract of the parties entered into in June, 1978. Whether or not this earlier marketing agreement was displaced by the latter contract of these parties, it is undisputed that in May and June, 1985, Nedco determined which customers would receive Canajoharie milk, Nedco directed haulers to pick up Canajoharie milk on its behalf, and Canajoharie milk was intermingled with milk of other Nedco suppliers prior to sale. Canajoharie did not decide or choose which of Nedco's customers were to receive its milk, and a portion of its milk was delivered to Dellwood, as well as other Nedco customers.

In May, 1985, Nedco purchased 3,711,638...

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