Liberty Mut. Ins. Co. v. Bankers Trust Co.

• Decision Date: 28 March 1991
• Docket Number: No. 88 Civ. 3421 (RPP).,88 Civ. 3421 (RPP).
• Citation: 761 F. Supp. 9
• Parties: LIBERTY MUTUAL INSURANCE COMPANY, as subrogee of Arbogast & Bastian, Inc., and Liberty Mutual Insurance Company, Plaintiffs, v. BANKERS TRUST COMPANY and Rotches Pork Packers, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

761 F. Supp. 9

LIBERTY MUTUAL INSURANCE COMPANY, as subrogee of Arbogast & Bastian, Inc., and Liberty Mutual Insurance Company, Plaintiffs, v. BANKERS TRUST COMPANY and Rotches Pork Packers, Inc., Defendants.

No. 88 Civ. 3421 (RPP).

United States District Court, S.D. New York.

March 28, 1991.

Ballon, Stoll & Itzler, New York City by Richard Weinberger, for plaintiffs.

Kaye, Scholer, Fierman, Hays & Handler, New York City by Robert Fracasso, for defendant Bankers Trust.

OPINION AND ORDER

ROBERT P. PATTERSON, Jr., District Judge.

The Court has reviewed defendant Bankers Trust's memorandum of law dated February 26, 1991 and the letter from defendant's counsel dated March 7, 1991 enclosing a "bench memorandum," as well as the letters from plaintiff Liberty Mutual's counsel dated March 4 and March 18, 1991, respectively, and its "bench memorandum," relating to the Court's invitation for comments contained in its Opinion and Order of February 12, 1991, 758 F.Supp. 890 (S.D.N. Y.). After due consideration, the Court adheres to that Opinion and Order, in which the facts of this case are fully set forth.

I. Review of Parties' Submissions

Arbogast & Bastian ("A & B"), as statutory trustee for the benefit of cash sellers, did not have the power to enter into the Inter-Creditor Agreement which purported to subordinate trust assets.¹ As purchases of livestock were made by A & B from cash sellers, that livestock and the meat products which were created as a result of their purchases became a part of the corpus of the statutory trust, as did the proceeds and accounts receivable attributable to A & B's sale of such products to distributors such as defendant Rotches, Inc. Since at the time of the Inter-Creditor Agreement A & B had a prior security interest in any and all of Rotches, Inc.'s accounts receivable and assets, it could not, as trustee, release the lien on Rotches, Inc.'s assets which lien protected its ability to collect on behalf of the trust beneficiaries on sales to Rotches, Inc..

To hold that A & B as trustee could subordinate the trust's lien on the receivables of a creditor would frustrate the purposes of the Packers and Stockyards Act, 7 U.S.C. § 196 et seq., as set forth in the legislative history of the 1976 amendments which created, inter alia, the provisions for the statutory trust. See, In re Gotham Provision Co., Inc., 669 F.2d 1000, 1009-1010, 1011, 1011, n. 14 (5th Cir.1982). The trust provisions of the Packers and Stockyards Act, added in 1976,

were devised to protect livestock sellers from potentially devastating financial losses of the type many such sellers experienced in the 1970's when a number of major meat packing concerns failed, leaving sellers unpaid. Under the law as it then existed, banks and other lending institutions were able to enforce their priority claims to the inventories and accounts receivables sic of the bankrupt packers, leaving the livestock sellers uncompensated for the products they had sold to the packers but for which they had not yet been paid.

* * * * * *

The statutory trust created by § 206(b) remedies this injustice by unequivocally giving priority to the interests of cash sellers of livestock in packer inventories, accounts receivable, and proceeds derived from the cash seller's livestock over lenders who take security interests in those assets ...

In re G & L Packing Co., 41 B.R. 903, 908-10 (N.D.N.Y.1984). See also, In re Gotham, supra, 669 F.2d at 1009.

Inter-creditor agreements subordinating a packer's rights to collect receivables are little different in effect, as regards cash sellers, from secured loans to packers which give a lending institution priority claims over receivables of the packer. Accordingly, A & B violated its fiduciary duty to the unpaid cash sellers in entering into the Inter-Creditor Agreement and subordinating its security interest in Rotches, Inc.'s accounts receivable and other assets, thus reducing the value of the trust's interest in Rotches, Inc.'s accounts receivable and furthering A & B's individual interests to the detriment of...