JSG Trading Corp. v. Tray-Wrap, Inc.

• Decision Date: 26 September 1990
• Docket Number: No. 982,D,INC,TRAY-WRA,982
• Citation: 917 F.2d 75
• Parties: JSG TRADING CORP., Plaintiff-Appellee, v., Defendant-Appellant. ocket 89-9032.
• Court: U.S. Court of Appeals — Second Circuit

Page 75

917 F.2d 75

JSG TRADING CORP., Plaintiff-Appellee, v. TRAY-WRAP, INC., Defendant-Appellant.

No. 982, Docket 89-9032.

United States Court of Appeals, Second Circuit.

Argued March 14, 1990.

Decided Sept. 26, 1990.

Linda Strumpf, Bayside, N.Y., for defendant-appellant.

Mark C. Mandell, New York City, for plaintiff-appellee.

Before KEARSE, CARDAMONE, and MAHONEY Circuit Judges.

CARDAMONE, Circuit Judge:

Underlying this litigation is an alleged delay in a shipment of $24,000 worth of tomatoes. Delay is serious in the tomato business because what is today a marketable commodity becomes tomorrow spoiled and unmarketable garbage. In common parlance tomatoes are vegetables, as the Supreme Court observed long ago, see Nix v. Hedden, 149 U.S. 304, 307, 13 S.Ct. 881, 882, 37 L.Ed. 745 (1893), although botanically speaking they are actually a fruit. 26 Encyclopedia Americana 832 (Int'l. ed. 1981). Regardless of classification, people have been enjoying tomatoes for centuries, even Mr. Pickwick, as Dickens relates, ate his chops in "tomata" sauce.

At issue in this appeal is whether legislation enacted to mitigate sellers' damages in transactions involving perishable commodities authorizes preliminary injunctive relief against a buyer that refused to pay for the tomatoes it ordered because of a contract dispute. It was Congress' aim to protect sellers by requiring all proceeds from unpaid perishable commodities to be held in trust, but a seller is not automatically entitled to a preliminary injunction that would require a buyer to segregate and hold trust assets separate from other assets of the buyer's business. Because the district court granted an injunction without applying the traditional standards for its issuance, we reverse.

BACKGROUND

Appellant, Tray-Wrap, Inc. (Tray-Wrap), a distributor of fruits and vegetables, licensed under the Perishable Agricultural Commodities Act by the Secretary of Agriculture, 7 U.S.C. Sec. 499a et seq. (1988) (Act or Perishable Commodities Act), conducts a wholesale produce business in the Bronx, New York. Appellee, JSG Trading Corp. (JSG), a New Jersey corporation, is also a licensed wholesale dealer of produce. Tray-Wrap purchases bulk quantities of tomatoes that come from various parts of the country, repackages them into consumer-sized packages, and sells them to supermarkets in the Greater New York market. On April 25, 1989 it ordered a large shipment of tomatoes over the telephone from JSG at an agreed price of $24,080. JSG shipped this order on May 9, 1989 and it was received by Tray-Wrap three days later on May 12. Apart from these conceded facts, nearly all the other facts in this case are in dispute.

Tray-Wrap alleges that its April 25th order was to be shipped on that date and that it inquired of JSG concerning its arrival, prior to purchasing replacement tomatoes at a higher price from a different supplier. JSG asserts to the contrary that Tray-Wrap's order was not accepted with a specific shipping date in mind, but was to be shipped "ASAP," indicating that the shipper is not sure when it can ship but expects it will be within a reasonable time and, in any event, "as soon as possible." 7 C.F.R. Sec. 46.43(h) (1990). Tray-Wrap further contends that it had contracted for # 2 grade, green Florida tomatoes "delivered." In the trade the term "delivered" or "delivered sale" means that "the produce is to be delivered by the seller ... free of any and all charges for transportation or protective service. The seller assumes all risks of loss and damage in transit not caused by the buyer." Id. Sec. 46.43(p). JSG contends that no grade was specified and that condition As a result of JSG's alleged late delivery of out-of-grade tomatoes, Tray-Wrap claims to have suffered damages in excess of the value of those it purchased and has refused to pay for them. JSG therefore on May 18, 1989 filed a notice with the United States Department of Agriculture, claiming that it was a beneficiary of the trust created by the Act. As such, it preserved its rights to a trust in the tomatoes, and to all inventories of food or other products derived from them and to any receivables or proceeds realized from their sale until Tray-Wrap made full payment. JSG also instituted the instant action and sought a preliminary injunction pursuant to Fed.R.Civ.P. 65 that would require Tray-Wrap, as statutory trustee under the Act, to deposit $24,080 into a separate interest bearing account to be supervised by the court and to be maintained until a final disposition of JSG's suit. On September 22, 1989 the United States District Court for the Southern District of New York (Keenan, J.) issued an order granting JSG a preliminary injunction.

on arrival was agreed upon in the oral order of sale.

Tray-Wrap appeals from that order, contending that neither the language nor the legislative history of the Perishable Commodities Act requires that a statutory trustee segregate trust funds prior to defending a suit under the Act. Thus, appellant argues that the court should have applied the usual requirements for preliminary injunctive relief and denied appellee's request for injunctive relief because JSG made no showing of likelihood of irreparable harm if the trust assets were not segregated.

DISCUSSION

I Trustee's Responsibility Under the Act

We turn first to the Act which, as amended in 1984, provides suppliers of commodities with a statutory trust to enforce the payment obligations of commission merchants, dealers and brokers:

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. Sec. 499e(c)(2).

Congress added this trust provision to protect the security interest of sellers of perishable agricultural products that are sold and delivered to buyers, but not paid for. Arrangements under which merchants, dealers and brokers that had not made payment for the agricultural commodities, but used the produce instead as collateral to finance their business operations, Congress believed constituted a burden on interstate commerce. H.R.Rep. No. 543, 98th Cong., 2d Sess. 3-4, reprinted in 1984 U.S.Code Cong. & Admin.News 405, 406-07 (House Report). Were the merchants, dealers or brokers to experience cash-flow difficulties or go bankrupt, whatever funds and assets remained would therefore go first to pay secured creditors. Id. at 3, 9, reprinted in 1984 U.S.Code Cong. & Admin.News at 407, 413. The seller of the perishable agricultural goods as an unsecured lender would have to look to the equity left in the buyer's business for payment--a most unpromising vista.

Although the use of a trust under the Act was aimed at remedying problems created by buyers' bankruptcies, the trust was also envisioned as a method of enforcing debts against solvent buyers. In fact, by operation of Sec. 499e(c)(2), a statutory trust in a defined res is created whenever a seller or supplier of perishable agricultural products provides such products to a commission merchant, dealer, or broker on credit. See, e.g., Frio Ice, S.A. v. Sunfruit, Inc., 724 F.Supp. 1373, 1376-77 (S.D.Fla.1989); Fresh Western Marketing v. M Yet neither the language of the statute nor its legislative history suggests that trust assets actually need to be segregated from a buyer's other assets. Instead, the statute clearly provides that a trust is created in the "[p]erishable agricultural commodities[,] ... 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." Id. Sec. 499e(c)(2).

& L Food Center, Inc., 707 F.Supp. 515, 516 (S.D.Fla.1989); DeBruyn Produce Co. v. Victor Foods, Inc., 674 F.Supp. 1405, 1407 (E.D.Mo.1987). If the seller gives timely notice of its intent to preserve its benefits under the trust, the buyer must conduct itself as trustee of its assets until the seller is paid in full. See 7 U.S.C. Sec. 499e(c)(2), (3).

Additionally, even a cursory review of the Perishable Commodities Act's history reveals that the segregation of trust fund assets was not one of Congress' purposes:

The trust impressed by section 5(c)(2) is a nonsegregated "floating trust" made up of all a firm's commodity related liquid assets, under which there may be a commingling of trust assets. Under this provision there is no necessity to specifically identify all of the trust assets through each step of the assets accrual and disposal process. Since commingling is contemplated, all trust assets would be subject to the claims of unpaid seller-suppliers and agents to the extent of the amount owed them.

House Report at 5, reprinted in 1984 U.S.Code Cong. & Admin.News at 409; see also 7 C.F.R. Sec. 46.46(c) (1990) ("Trust assets are to be preserved as a nonsegregated 'floating' trust. Commingling of trust assets is contemplated.").

The term "nonsegregated floating trust" is used extensively throughout the brief legislative history of the 1984 amendment to describe the nature of the trust created under the Act. House Report at 2, 4, 5, 11, 12, reprinted in 1984 U.S.Code Cong. & Admin.News at 406, 407, 409, 414, 415. Congress apparently thought it unnecessary to include this term in the statutory language in light of the fact that a similar trust provision in the Packers and Stockyards Act, 7 U.S.C. Sec. 196(b) ("[a]ll livestock purchased by a packer in cash sales, and all inventories of, or receivables or...