Kingdom Fresh Produce, Inc. v. Stokes Law Office, L.L.P. (In re Delta Produce, L.P.)

• Decision Date: 21 December 2016
• Docket Number: C/w 14-51080,No. 14-51079,14-51079
• Citation: 845 F.3d 609
• Parties: In the MATTER OF: DELTA PRODUCE, L.P.; Staci Properties, Limited, Debtors Kingdom Fresh Produce, Incorporated; I. Kunik Company, Incorporated; Five Brothers Jalisco Produce Company, Inc orporated, doing business as Bonanza 2001 ; Rio Bravo Produce, Limited Company, L.L.C.; G.R. Produce, Incorporated, Appellees Cross-Appellants v. Stokes Law Office, L.L.P., Appellant Cross-Appellee In the Matter of: Delta Produce, L.P.; Superior Tomato-Avocado, Limited; Atled, Limited; Staci Properties, Limited, Debtors Kingdom Fresh Produce, Incorporated; I. Kunik Company, Incorporated; Five Brothers Jalisco Produce Company, Inc orporated, doing business as 300Bonanza 2001; Rio Bravo Produce, Limited Company, L.L.C.; G.R. Produce, Incorporated, Appellees v. Stokes Law Office, L.L.P., Appellant
• Court: U.S. Court of Appeals — Fifth Circuit

845 F.3d 609

In the MATTER OF: DELTA PRODUCE, L.P.; Staci Properties, Limited, Debtors

Kingdom Fresh Produce, Incorporated; I. Kunik Company, Incorporated; Five Brothers Jalisco Produce Company, Inc orporated, doing business as Bonanza 2001 ; Rio Bravo Produce, Limited Company, L.L.C.; G.R. Produce, Incorporated, Appellees Cross-Appellants

v.Stokes Law Office, L.L.P., Appellant Cross-Appellee

In the Matter of: Delta Produce, L.P.; Superior Tomato-Avocado, Limited; Atled, Limited; Staci Properties, Limited, Debtors

Kingdom Fresh Produce, Incorporated; I. Kunik Company, Incorporated; Five Brothers Jalisco Produce Company, Inc orporated, doing business as 300Bonanza 2001; Rio Bravo Produce, Limited Company, L.L.C.; G.R. Produce, Incorporated, Appellees

v.Stokes Law Office, L.L.P., Appellant

No. 14-51079

C/w 14-51080

United States Court of Appeals, Fifth Circuit.

Filed December 21, 2016

Michael John Keaton, Attorney, Keaton Law Firm, P.C., Deerfield, IL, for Appellees Cross-Appellants.

Mark Charles Hewitt Mandell, Annandale, NJ, Maurleen Worley Cobb, Craig Alan Stokes, Stokes Law Office, L.L.P., San Antonio, TX, for Appellant Cross-Appellee.

Bartholomew M. Botta, Rynn & Janowsky, L.L.P., Newport Beach, CA, for Rynn & Janowsky, L.L.P., Amicus Curiae.

Before REAVLEY, PRADO, and COSTA, Circuit Judges.

GREGG COSTA, Circuit Judge:

The prior opinion is withdrawn and the following is substituted to clarify in response to the final argument made in Appellees Cross-Appellants' petition for panel rehearing. The motion is denied otherwise.

This attorney's fee dispute has its roots in the Perishable Agricultural Commodities Act (PACA), a Depression-era statute designed to protect sellers of perishable produce from delinquent purchasers. Two such purchasers filed for bankruptcy and the bankruptcy court appointed special counsel to collect and disburse funds to PACA-protected sellers that had claims against the purchasers-turned-debtors. When special counsel sought approval of his fees and expenses, which would be paid out of the PACA fund, some sellers objected and appealed the bankruptcy court's fee award to the district court, which vacated it. Now that this same chain of events—fee awards, objections, appeals, and vacaturs—has occurred twice more, this case is ripe for decision. The question is: can special counsel's fees and expenses be disbursed from the PACA fund?

I

A

We begin with some background on PACA.

The short lifespan of produce makes it a risky business. It has been described as an industry "engaged almost exclusively in interstate commerce, which is highly competitive, and in which the opportunities for sharp practices, irresponsible business conduct, and unfair methods are numerous." See H.R. Rep. No. 84-1196 (1956), reprinted in 1956 U.S.C.C.A.N. 3699, 3701. Sellers "must entrust their products to a buyer who may be thousands of miles away, and depend for their payment upon his business acumen and fair dealing." Golman – Hayden Co. v. Fresh Source Prod. Inc. , 217 F.3d 348, 351 (5th Cir. 2000) ; see also Endico Potatoes, Inc. v. CIT Grp./Factoring, Inc. , 67 F.3d 1063, 1067 (2d Cir. 1995) ("[D]ue to the need to sell perishable commodities quickly, sellers of perishable commodities are often placed in the position of being unsecured creditors of companies whose creditworthiness the seller is unable to verify."). Congress thus enacted PACA in 1930 to regulate and "promote fair dealing in the sale of fruits and vegetables," Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co. , 336 F.3d 410, 413 (5th Cir. 2003) (internal citation and quotation marks omitted), in part by making it a violation of federal law for buyers of perishable commodities to "fail ... [to] make full payment promptly" to sellers. 7 U.S.C. § 499b(4).

In 1984, Congress strengthened the protections of the Act by requiring buyers—often brokers that purchase the produce from farmers and then sell it to grocery stores or restaurants—to hold either the produce or all proceeds or accounts receivable from a subsequent sale of the produce in trust for the benefit of unpaid suppliers until "full payment of the sums owing in connection with such transactions has been received by" the supplier. See id. § 499e(c)(2). These amendments were modeled after the statutory trust provisions that Congress added to the Packers and Stockyards Act in 1976, 7 U.S.C. §§ 196 –197, so courts have often looked to those "parallel" provisions when interpreting PACA's trust provisions. See In re Monterey House, Inc. , 71 B.R. 244, 246 (Bankr. S.D. Tex. 1986) ; In re Fresh Approach , Inc. , 51 B.R. 412, 419–20 (Bankr. N.D. Tex. 1985) ; see also Consumers Produce Co. v. Volante Wholesale Produce, Inc. , 16 F.3d 1374, 1382 n.5 (3rd Cir. 1994).

As intended by Congress, which was concerned that suppliers of produce were typically unsecured creditors who lost out when purchasers gave banks a security interest in their accounts receivable,¹ the PACA trust has had a significant effect in bankruptcy. See In re Lombardo Fruit & Produce Co. , 12 F.3d 806, 808–09 (8th Cir. 1993). Although buyers hold legal title to the assets in this "nonsegregated ‘floating’ trust in favor of unpaid sellers," Bocchi Americas Assocs. Inc. v. Commerce Fresh Mktg. Inc. , 515 F.3d 383, 388 (5th Cir. 2008), "the seller retains an equitable interest in the trust assets pending full payment." C.H. Robinson Co. v. Alanco Corp. , 239 F.3d 483, 487 (2d Cir. 2001). The trust assets are thus insulated from the buyer's bankruptcy estate. See 11 U.S.C. § 541(d) ( "Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest , ... becomes property of the estate ... only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold." (emphasis added)). Sellers therefore have a " ‘superpriority’ right that trumps the rights of the buyer's other secured and unsecured creditors." Bocchi , 515 F.3d at 388 ; see also Golman – Hayden , 217 F.3d at 351 ("We have recognized that PACA is a ‘tough law.’ ... An investor in a perishable commodities corporation ‘should know at the beginning of his association with such a corporation that he is "buying into" a corporation which is strictly regulated by the federal government through PACA.’ " (internal citations omitted)). To the extent PACA funds are insufficient to pay each seller in full, the assets are shared pro rata. See Golman – Hayden , 217 F.3d at 349.

The Ninth Circuit has provided a useful illustration of how this works:

Farmer sells oranges on credit to Broker. Broker turns around and sells the oranges on credit to Supermarket, generating an account receivable from Supermarket. Broker then obtains a loan from Bank and grants Bank a security interest in the account receivable to secure the loan. Broker goes bankrupt. Under PACA, Broker is required to hold the receivable in trust for Farmer until Farmer was paid in full; use of the receivable as collateral was a breach of the trust. Therefore, Farmer's rights in the Supermarket receivable are superior to Bank's. In fact, as a trust asset, the Supermarket receivable is not even part of the bankruptcy estate.

Boulder Fruit Express & Heger Organic Farm Sales v. Transportation Factoring, Inc. , 251 F.3d 1268, 1271 (9th Cir. 2001).

B

It is within this statutory framework that this litigation arose in late 2011 when various unpaid sellers of perishable produce sued Delta Produce, L.P. and Superior Tomato-Avocado—San Antonio-area "repackers" that purchased produce from farmers that they then sold to grocers—and Delta's individual owner in district court for claims arising under PACA. On January 3, 2012, Delta and Superior filed a voluntary petition for chapter 11 bankruptcy. The two cases were consolidated, with the PACA case being referred to bankruptcy court. The PACA creditors that had filed suit in district court explicitly consented to the reference. The remaining PACA claimants filed their claims directly in the bankruptcy court.

Soon thereafter, the debtors, Craig Stokes—an attorney who had previously represented the debtors—and various PACA claimants moved to appoint Stokes as "Special PACA Counsel." A week before filing the motion, one of the PACA claimants emailed a draft of the motion to the other claimants, seeking any comments because "there would probably be a shortened amount of notice to respond" once the motion was filed. The email explained that Stokes "has the working relationship with the Debtor, and it is in the Debtors' and its principal's interest to maximize collections for the trust, so there is no conflict of interest." Although the record reflects that Kingdom Fresh's attorney responded with some "major concerns," none specifically dealt with the issue it raises now about the propriety of paying Stokes with trust funds. The motion was filed on January 19, a hearing was held five days later, and the order—which established a deadline to file claims, laid out the procedure for administering those claims, and appointed Stokes as "Special PACA Counsel"—issued the following day.

As Special PACA Counsel, Stokes was deputized to "take those steps reasonably necessary to preserve and collect the PACA trust assets ... and to facilitate the distribution of the collected PACA trust assets." The order also provided for Special PACA Counsel's "fees and costs" at a rate of $350 an hour. Those fees and costs would be paid from the PACA trust funds.

In addition to being appointed as Special PACA Counsel, the debtors also moved to appoint Stokes as debtors' "PACA litigation counsel" pursuant to 11 U.S.C. § 327(e).² In an affidavit attached to the section 327(e) motion, Stokes attested that he held a $33,000 retainer from debtors as of the commencement of the case, and agreed to be paid $350 an hour for his section 327(e) services, except that any payment from chapter 11 or PACA trust assets ...