Lombardo Fruit and Produce Co., In re

• Decision Date: 04 February 1994
• Docket Number: Nos. 93-1894,93-1897,s. 93-1894
• Citation: 12 F.3d 806
• Parties: In re LOMBARDO FRUIT AND PRODUCE COMPANY, Debtor. TOM LANGE COMPANY, INC. Plaintiff-Appellant, Pupillo Brokerage Company, Plaintiff, v. LOMBARDO FRUIT AND PRODUCE COMPANY; Uni-Fin Corporation; Defendants-Appellees. In re LOMBARDO FRUIT AND PRODUCE COMPANY, Debtor. TOM LANGE COMPANY, INC. Plaintiff-Appellee, Pupillo Brokerage Company, Plaintiff, v. LOMBARDO FRUIT AND PRODUCE COMPANY, Defendant, Uni-Fin Corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 806

12 F.3d 806

In re LOMBARDO FRUIT AND PRODUCE COMPANY, Debtor.

TOM LANGE COMPANY, INC. Plaintiff-Appellant, Pupillo Brokerage Company, Plaintiff, v. LOMBARDO FRUIT AND PRODUCE COMPANY; Uni-Fin Corporation;

Defendants-Appellees.

In re LOMBARDO FRUIT AND PRODUCE COMPANY, Debtor.

TOM LANGE COMPANY, INC. Plaintiff-Appellee, Pupillo Brokerage Company, Plaintiff, v. LOMBARDO FRUIT AND PRODUCE COMPANY, Defendant, Uni-Fin Corporation, Defendant-Appellant.

Nos. 93-1894, 93-1897.

United States Court of Appeals,

Eighth Circuit.

Submitted Sept. 15, 1993.

Decided Dec. 28, 1993.

Rehearing Denied Feb. 4, 1994.

Stephen P. McCarron, Washington, DC, argued, for plaintiff-appellant.

Jeffrey Blumenthal, Chicago, IL, argued, for defendants-appellees.

Before JOHN R. GIBSON, Circuit Judge, FLOYD R. GIBSON, Senior Circuit Judge, and BEAM, Circuit Judge.

FLOYD R. GIBSON, Senior Circuit Judge.

Tom Lange Company ("Lange") appeals the district court's affirmance of the bankruptcy court's judgment denying its claim for trust protection under the Perishable Agricultural Commodities Act ("PACA"). Though judgment in its favor was affirmed by the district court, Uni-Fin cross-appeals the district court's rejection of the bankruptcy court's analysis. We affirm in part, reverse in part, and remand.

I. BACKGROUND

Beginning in 1986, Lange sold Lombardo produce under an account numbered by Lange as 143. In January 1988, the parties entered a written agreement stating that the credit terms for all transactions were net thirty days from the date of shipment. However, all of the invoices stated that invoices were considered overdue if not paid within forty-five days. Lange sent Lombardo statements for account 143 on a weekly basis; the statements, like the invoices, reflected that payment was due within forty-five days. In reality, Lombardo paid only one of the 120 transactions within the thirty days required by the parties' written agreement.

On July 2, 1988, Lange stopped selling produce to Lombardo because Lombardo owed Lange over $400,000. The following October, in an attempt to help Lombardo with its financial difficulties, Lange purchased eleven of Lombardo's produce stalls, then leased them back to Lombardo for three years. One of the lease's provisions gave Lombardo an option to repurchase nine of the stalls, at the same sales price, if its accounts with Lange were current. If it was unable to exercise the option, Lombardo had thirty days to notify Lange of its desire to renew the lease. The parties also agreed in writing to extend the time for payment on account 143 by an additional twenty weeks.

Once the transactions involving the stalls had been executed, Lange resumed selling produce to Lombardo. In order to distinguish future transactions from the ones in account 143, business was conducted under account 466. By this time, however, Lange had changed its invoices and weekly statements to reflect that payment was due within thirty days. Lange supplied Lombardo with sixty-one loads of produce under account 466; over $240,000 remains unpaid.

Lombardo filed for bankruptcy, and Lange filed an adversary complaint seeking to preserve and enforce its PACA trust status. The complaint was opposed by Uni-Fin, which holds a first perfected security interest in Lombardo's accounts receivable. The bankruptcy court rejected Lange's claims of trust protection for both accounts. After a hearing, the court held "that the parties' terms of payment were dictated by the parties' course of dealing rather than their sham written agreement." In re Lombardo Fruit & Produce Co., 107 B.R. 952, 958 (Bankr.E.D.Mo.1989). The terms of the agreement gleaned from the parties' course of dealing did not comply with the requirements of PACA and its regulations, so trust protection was denied. The court further held that the parties' modification extending the payment terms violated PACA. Finally, the court held that "Lange acquired substantial equity through its purchase of the Lombardo stalls" by paying less than the stalls were worth, id. at 955, meaning that "Lange had a line of credit up to $150,000." Id. at 960. It further reasoned that because the option could be exercised only if Lombardo's produce accounts were current, payment for the produce was actually due anytime before the option expired; the option expired in three years, so payment for the produce was due within three years.

The district court rejected the bankruptcy court's reliance on the parties' course of dealing, reasoning that our intervening decision in Hull Co. v. Hauser's Foods, Inc., 924 F.2d 777 (8th Cir.1991), barred consideration of anything other than the written agreements. However, the district court affirmed the bankruptcy court's alternative bases for denying Lange trust protection. Lange appeals the denial of its trust protection, and Uni-Fin cross-appeals the district court's rejection of the course of dealing analysis.

II. DISCUSSION

A. PACA's Provisions

Due to the scarcity of case law on the subject, it is helpful to begin with a brief overview of PACA. PACA was designed to protect small farmers and growers from " 'the sharp practices of financially irresponsible and unscrupulous brokers in perishable commodities.' " Hull Co. v. Hauser's Foods, Inc., 924 F.2d 777, 780 (8th Cir.1991) (quoting Chidsey v. Guerin, 443 F.2d 584, 587 (6th Cir.1971)). In 1984, Congress amended PACA because sellers of fresh produce were unsecured creditors and thus had no protection in light of the produce buyers' practice of granting lending institutions security interests in their accounts receivable. H.R.Rep. No. 543, 98th Cong., 2d Sess. 3 (1983), reprinted in 1984 U.S.Code Cong. & Admin.News 405, 407. Congress declared this practice to be a burden on interstate commerce, 7 U.S.C. Sec. 499e(c)(1) (1988), and decreed that sellers of perishable agricultural commodities were protected by a trust "until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers [or] sellers...." Id. Sec. 499e(c)(2). The trust extends only to the "receivables or proceeds from the sale of such commodities and food or products," and establishes "a Nonsegregated 'floating Trust' "; and, "commingling of trust assets is contemplated." id.; 7 C.F.R. Sec. 46.46(c) (describing trust assets), and proceeds from other sources are not within the trust's rubric. See Six L's Packing Co. v. West Des Moines State Bank, 967 F.2d 256, 258 (8th Cir.1992) (holding that PACA debtor may prove that certain funds are not proceeds from produce sales and hence not part of trust assets).

PACA's trust provision has the precise effect Congress intended; namely, in the event the seller does not receive payment, the seller is elevated to a priority position above that of all the buyer's secured creditors. See Sanzone-Palmisano Co. v. M. Seaman Enters., Inc., 986 F.2d 1010, 1012-13 (6th Cir.1993); C.H. Robinson Co. v. Trust Co. Bank, N.A., 952 F.2d 1311, 1315 (11th Cir.1992). ¹ The trust simply requires the produce buyer to hold the proceeds from its sales of produce and use them to pay suppliers before using those funds to pay its secured creditors or other liabilities. However, the unpaid supplier or seller loses the benefits of the trust protection unless it "has given written notice of intent to preserve the benefits of the trust to the [buyer] and has filed such notice with the Secretary [of Agriculture] within thirty calendar days of" three specified events. Id. Sec. 499e(c)(3). Those events are:

(i) after expiration of the time prescribed by which payment must be made, as set forth in regulations issued by the Secretary, (ii) after expiration of such other time by which payment must be made, as the parties have expressly agreed to in writing before entering into the transaction, or (iii) after the time the supplier, seller, or agent has received notice that the payment instrument promptly presented for payment has been dishonored.

Id. The Secretary's regulations require payment be made within ten days after the produce is accepted, 7 C.F.R. Sec. 46.2(aa)(5), but permit the parties to agree to a longer term provided that term is no longer than thirty days. Id. Sec. 46.46(f)(2).

B. Account 143

We affirm the district court's conclusion that the parties' agreement to extend the payment terms for account 143 beyond the thirty-day maximum allowed by the regulations deprives Lange of trust protection. In conformance with the provisions we outlined above, Lange and Lombardo executed a written agreement that complied with PACA and its regulations. However, they later modified that written agreement with respect to the deliveries under account 143; at that moment, an agreement complying with PACA no longer existed. There being no written agreement complying with PACA, Lange is prohibited from claiming PACA's trust protection. ²

Lange correctly points out that PACA requires a written agreement be executed before the underlying transactions for produce take place. See 7 U.S.C. Sec. 499e(c)(3)(ii). From this, it concludes that any agreements reached after the transactions take place are wholly irrelevant for PACA purposes. We reject this position because it allows the parties to recognize the form of PACA without complying with its substance. PACA imposes a trust upon the funds held by delinquent purchasers if a written agreement required payment within thirty days of delivery. Thus, at the time trust protection is claimed, there must exist a valid written agreement complying with PACA's terms. Though such an agreement once existed, it did not exist at the time trust protection was claimed, having been modified by the parties' subsequent written agreement ³ in such a manner that it no longer complied with PACA.

C. Account 466

1. The Stall Transaction

The district court affirmed the denial of trust protection on account 466 because

the credit extended to Lombardo under Account...