Kornblum & Co., Inc., In re

• Decision Date: 09 April 1996
• Docket Number: D,No. 265,265
• Citation: 81 F.3d 280
• Parties: In re KORNBLUM & CO., INC., Debtor. TOM LANGE CO., INC., and Scott Finks Co., Inc., Plaintiffs-Appellants, v. KORNBLUM & CO., INC., Defendant-Appellee. ocket 95-5013.
• Court: U.S. Court of Appeals — Second Circuit

Page 280

81 F.3d 280

28 Bankr.Ct.Dec. 1168

In re KORNBLUM & CO., INC., Debtor TOM LANGE CO., INC., and Scott Finks Co., Inc., Plaintiffs-Appellants, v. KORNBLUM & CO., INC., Defendant-Appellee.

No. 265, Docket 95-5013.

United States Court of Appeals Second Circuit.

Argued Sept. 19, 1995.

Decided April 9, 1996.

Appeal from a Judgment of the United States District Court for the Southern District of New York that affirmed, as modified, a prior order of the United States Bankruptcy Court for the Southern District of New York. The bankruptcy court had held that certain assets Belonging to defendant-appellee Kornblum & Co., Inc. were not subject to a statutory trust created by a provision of the Perishable Agricultural Commodities Act of 1930, as amended, 7 U.S.C. § 499e(c)(2).

Stephen P. McCarron, Washington, D.C. (McCarron & Associates, Washington, D.C., of counsel), for Plaintiffs-Appellants.

Robert P. Herzog, New York City, for Defendant-Appellee.

Before LUMBARD, MINER, and MAHONEY, Circuit Judges.

MAHONEY, Circuit Judge:

Plaintiffs-appellants Tom Lange Co., Inc. ("Lange") and Scott Finks Co., Inc. ("Finks") (collectively the "Creditors") appeal from a judgment entered February 10, 1995 in the United States District Court for the Southern District of New York, John E. Sprizzo, Judge, that affirmed, as modified, an order dated August 4, 1993 of the United States Bankruptcy Court for the Southern District of New York, Francis G. Conrad, Bankruptcy Judge. The bankruptcy court had granted summary judgment in favor of Jeffrey L. Sapir, the trustee in bankruptcy (the "Trustee") of defendant-appellee Kornblum & Co., Inc. ("Kornblum"), ¹ dismissing the Creditors' adversary complaint, which sought recovery for unpaid debts pursuant to a provision of the Perishable Agricultural Commodities Act of 1930, as amended ("PACA" or the "Act"), 7 U.S.C. § 499e(c)(2).

We vacate the judgment of the district court and remand for further proceedings not inconsistent with this opinion.

Background

At all relevant times prior to December 2, 1991, when it filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et seq., Kornblum was a dealer and/or a commission merchant of perishable agricultural commodities ("Produce") licensed under § 1(b) of PACA, 7 U.S.C. § 499a(b), and subject to the provisions of the Act.

In March 1981, Kornblum, as tenant, and the City of New York (the "City"), as landlord, entered into a nine-year lease for four store units and six accompanying office units located in the Hunts Point Terminal Market (the "Market") in the Bronx, New York. In May 1986, the City granted to the Hunts Point Terminal Produce Cooperative Association, Inc. (the "Cooperative") a master lease covering the Market. Each tenant then holding a lease with the City was given the option of surrendering its existing lease and purchasing an interest in the Cooperative. Kornblum exercised this option in May 1986, purchasing four membership certificates at a total cost of $32,000, and receiving accompanying proprietary leases for its four store and six related office units. As a member of the Cooperative, Kornblum agreed to pay maintenance fees of $1,050 per month on each store unit.

On May 22, 1991, Kornblum sold its interests in one store and one office unit for a total of $160,000. Kornblum retained possession of the membership certificates and proprietary leases relating to the remaining three store and five office units (the "Units"), and continued to pay the monthly maintenance fees on the Units until it filed for bankruptcy on December 2, 1991. Thereafter, the Trustee contracted to sell Kornblum's interests in the Units for $310,000. At the time of its bankruptcy, the Units constituted the primary asset listed on Kornblum's bankruptcy schedules.

Lange and Finks are suppliers of Produce and, like Kornblum, were licensed as dealers and commission merchants of Produce under PACA. Lange supplied Produce to Kornblum on credit between June 30, 1989 and July 28, 1989 for which Lange is owed approximately $24,000. Finks supplied Produce to Kornblum on credit between May 8, 1991 and June 11, 1991 for which Finks is owed $40,440. Both Lange and Finks filed written notices with Kornblum and the United States Department of Agriculture (the "Department") in order to preserve their rights under PACA, see 7 U.S.C. § 499e(c)(3), and subsequently filed claims against Kornblum in bankruptcy. Their claims, along with those of eighteen other Produce creditors, appear on a list of PACA trust beneficiaries supplied to the Trustee by the Department.

Lange and Finks commenced an adversary proceeding in bankruptcy court on May 18, 1992, contending that Kornblum's interest in the Units constituted property of the statutory trust created for their benefit by PACA, and seeking to be paid out of the proceeds from the sale of the Units. Ruling on cross-motions for summary judgment, the bankruptcy court ordered judgment in favor of the Trustee on August 4, 1993. The court determined that the Trustee was the real party in interest and that the Creditors' complaint should be dismissed for failure to name him as a party. Kornblum I, order at 2. The bankruptcy court also ruled that Kornblum had not diverted any PACA trust assets when it made its maintenance payments on the Units in the ordinary course of its business, and that the "Ex Post Facto Doctrine" prohibited the PACA trust from affecting the Units. Id.

The Creditors appealed, and the district court affirmed. The district court first rejected the Trustee's argument that the bankruptcy court lacked jurisdiction over the action, concluding that the action was a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). Kornblum II, 177 B.R. at 190. The court also held that the Trustee was a necessary party who had been effectively joined by the bankruptcy court. Id. at 190-91; see also supra note 1. Turning to the merits of the Creditors' complaint, the court concluded that the Units could not be part of the PACA trust because they had been acquired by Kornblum prior to any transactions between Kornblum and the Creditors. Id. at 192. Finally, the court held that Kornblum's monthly maintenance payments on the Units, though made subsequent to Kornblum's transactions with the Creditors, had been made in the ordinary course of business, and accordingly were not subject to recapture by the PACA trust. Id. at 192.

This appeal followed.

Discussion

Congress enacted PACA in 1930 to regulate commerce in perishable agricultural commodities, which are defined by the Act as "[f]resh fruits and fresh vegetables of every kind and character," "whether or not frozen or packed in ice." 7 U.S.C. § 499a(b)(4)(A). The Act established a mandatory licensing scheme, under the supervision of the Secretary of Agriculture, for dealers, brokers, and commission merchants of perishable agricultural commodities, id. § 499c, and prohibits certain unfair practices in the trading of such commodities, id. § 499b. The Act 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." H.R.Rep. No. 1196, 84th Cong., 1st Sess. 2 (1955), reprinted in 1956 U.S.C.C.A.N. 3699, 3701. "It was enacted to provide a measure of control over a branch of industry which is almost exclusively in interstate commerce, is highly competitive, and presents many opportunities for sharp practice and irresponsible business conduct." Zwick v. Freeman, 373 F.2d 110, 116 (2d Cir.) (citing H.R.Rep. No. 1196 at 2), cert. denied, 389 U.S. 835, 88 S.Ct. 43, 19 L.Ed.2d 96 (1967).

Congress amended PACA in 1984 to broaden the protections afforded to produce suppliers. In discussing the need for these amendments, the pertinent House report noted that:

Sellers of perishable agricultural commodities are often located thousands of miles from their customers. Sales transactions must be made quickly or they are not made at all. Many sales are consummated while the commodities are en route to a particular destination. Under such conditions, it is often difficult to make credit checks, conditional sales agreements, and take other traditional safeguards.

....

Many [buyers] ... operate on bank loans secured by [the] inventories, proceeds or assigned receivables from sales of perishable agricultural commodities, giving the lender a secured position in the case of insolvency. Under present law, sellers of fresh fruits and vegetables are unsecured creditors and receive little protection in any suit for recovery of damages where a buyer has failed to make payment as required by the contract.

H.R.Rep. No. 543, 98th Cong., 1st Sess. 3 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406-07; see also Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1067 (2d Cir.1995). The Act now provides in pertinent part:

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. § 499e(c)(2).

The Act establishes a scheme in which a purchaser of Produce on credit (a "Produce Debtor") is required to hold the Produce and its derivatives or proceeds in trust for the unpaid seller. Ordinary principles of trust law apply to the trusts created by the Act, see Endico Potatoes, 67 F.3d at...