Mid-Valley Produce Corp. v. 4-XXX Produce Corp., CV 92-0331.

• Decision Date: 22 April 1993
• Docket Number: No. CV 92-0331.,CV 92-0331.
• Citation: 819 F. Supp. 209
• Parties: MID-VALLEY PRODUCE CORP., etc., Plaintiffs, v. 4-XXX PRODUCE CORP., et al., Defendants/Third-Party Plaintiffs, v. Herbert O. CASSIDY, et al., Third-Party Defendants.
• Court: U.S. District Court — Eastern District of New York

819 F. Supp. 209

MID-VALLEY PRODUCE CORP., etc., Plaintiffs, v. 4-XXX PRODUCE CORP., et al., Defendants/Third-Party Plaintiffs, v. Herbert O. CASSIDY, et al., Third-Party Defendants.

No. CV 92-0331.

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

April 22, 1993.

Mark C.H. Mandell, New York City, for plaintiffs.

Richard A. Miller, Islandia, NY, for defendants/third-party plaintiffs.

John J. McNulty, Riverhead, NY, for third-party defendant Cassidy.

Jakubowski, Robertson & Goldsmith, Hauppauge, NY, for third-party defendant Ludlum.

MEMORANDUM AND ORDER

WEXLER, District Judge.

Mid-Valley Sales Corp. (also referred to as Mid-Valley Produce Corp.) ("MVS") and Probiotic Marketing of Idaho, Inc. ("PMI") ("plaintiffs") bring the instant suit against 4-XXX Produce Corp. ("4-XXX"), Philip Melfi and Alice Melfi (collectively, "defendants") pursuant to the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. § 499a, et seq., seeking payment for $185,012.32 of potatoes sold to 4-XXX in 1991. Defendants have impleaded Herbert O. Cassidy ("Cassidy") and Harry D. Ludlum ("Ludlum") ("third-party defendants"), former officers of 4-XXX, seeking indemnification and or contribution as to any sums for which defendants are found liable. Now before the Court are cross-motions for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure between plaintiffs and defendants and between third-party plaintiffs and third-party defendants. For the reasons stated below, plaintiffs' motion is granted in part and denied in part; all other motions are denied.

I. BACKGROUND

The following material facts are not disputed by the parties. Alice Melfi was the sole shareholder of 4-XXX during 1991, but she was never an officer, director or employee of the company and she did not participate in its management. Her husband, Philip Melfi, was president of 4-XXX since June 1991, had authority to sign checks for the corporation since 1990, and earned approximately $150,000 in salary and commissions from 4-XXX in 1991.

On or about August 31, 1989, Philip Melfi gave his wife a 4-XXX check for $250,000 made out to her name. Alice Melfi deposited this check in her personal checking account and then returned the proceeds to her husband. The money, which was apparently intended as a loan to Philip and/or Alice Melfi to finance the construction of their private house, was allegedly given to Philip Melfi to induce him to work for 4-XXX. It was to be repaid when the Melfis obtained a mortgage on the house. Although they subsequently did obtain such a mortgage, the loan was never repaid in full. The Melfis' house is held solely in Alice Melfi's name.

In 1991, Philip Melfi wrote two 4-XXX checks totalling $113,000 to Nick Melfi Enterprises, allegedly in partial repayment of a loan that Nick Melfi Enterprises had made to 4-XXX. Nick Melfi Enterprises, whose address is Philip and Alice Melfi's home address, is a corporation wholly owned by Philip Melfi and his sister, and was apparently formed solely for the purpose of distributing property from their father's estate.

Plaintiff MVS is owed $56,375 for various truck loads of fresh Maine potatoes sold to 4-XXX in the Spring of 1991. Within the 30-day period after 4-XXX failed to pay for the commodities, MVS filed timely written notices with 4-XXX and with the Secretary of Agriculture indicating its intent to preserve its rights under the PACA trust provisions.¹

Similarly, PMI is owed $128,637.32 for shipments of fresh Idaho potatoes sold to 4-XXX during the later half of 1991. PMI also filed timely PACA trust notices regarding its transactions.

On numerous occasions, MVS and PMI delivered perishable goods to 4-XXX and received payment well beyond the period of time when such payment was due pursuant to the written agreements between the parties. Defendants contend that as a result of this "course of dealing," the PACA trust provisions are not applicable to this case.

II. DISCUSSION

A. "Course of Dealing" Defense Under PACA

In 1984, Congress amended PACA by creating a statutory trust which must be maintained by purchasers of fresh produce who are licensed under PACA in favor of unpaid suppliers and sellers of such commodities. The trust attaches to all commodities, assets and inventories, including receivables and proceeds derived from the sale of such commodities by the PACA licensees. 7 U.S.C. § 499e(c). It is undisputed that 4-XXX was a PACA licensee. It is also undisputed that plaintiffs have not been paid for their produce and that they have filed timely written notices to preserve their rights as PACA trustees.

PACA establishes a 10-day time period within which a PACA seller must be paid. 7 C.F.R. § 46.2(aa)(5). However, before entering a transaction, the parties, by written agreement, can extend this time period up to 30 days without negating the PACA trust provisions. 7 C.F.R. § 46.46(1) & (2). Any written agreement extending the payment period beyond 30 days would negate those provisions. In the instant case, MVS and PMI had entered into written agreements with 4-XXX, extending the period for payment to 30 days and 20 days respectively.

Defendants have shown, however, that on numerous occasions, 4-XXX paid plaintiffs for their produce well beyond the time provided for in their written agreements. Defendants contend that by allowing 4-XXX, through the course of their dealings, to extend payment terms beyond the statutory time period, plaintiffs have waived the protection of the PACA trust provisions. They rely entirely on In re Lombardo Fruit & Produce, 107 B.R. 952 (Bkrtcy.E.D.Mo.1989), aff'd in part and rev'd in part, 1993 WL 34648, 150 B.R. 941 (E.D.Mo.1993).²

In Lombardo, the bankruptcy court found that in the course of a 29 year business relationship, only 1 of 122 transactions was paid for on time and in accordance with the terms of the parties' written agreement. The Lombardo court held that by engaging in such a course of conduct, the written agreement was a sham and the seller waived its PACA trust benefits. Lombardo, 107 B.R. at 958-59. Defendants urge this court to apply that reasoning to the instant case.

Plaintiffs respond by noting that similar "course of dealing" defenses have been rejected by every other court that has examined the issue. See Hull Co. v. Hauser's Foods, Inc., 924 F.2d 777, 782-83 (8th Cir. 1991) (in order to give effect to the legislative intent and remedial purposes of PACA, "oral agreements have no effect on produce sellers' PACA trust protection"); Continental Fruit v. Thomas J. Gatziolis & Co., 774 F.Supp. 449, 452 (N.D.Ill.1991); see also In re Gotham Provision Co., Inc., 669 F.2d 1000, 1007 (5th Cir.), cert. denied, 459 U.S. 858, 103 S.Ct. 129, 74 L.Ed.2d 111 (1982) (denying a course of dealing defense under the Packers & Stockyard Act, the statute on which PACA is modeled); In re G & L Packing Co., Inc., 41 B.R. 903, 914, n. 8 (N.D.N.Y.1984) (same); Hedrick v. S. Bonaccurso & Sons, Inc., 466 F.Supp. 1025 (E.D.Pa.1978) (same). Most significantly, the Eighth Circuit recently rejected the bankruptcy court's reasoning in Lombardo, finding that "in light of the Hull court's implicit rejection of the course of dealing argument and its emphasis upon the necessity of written agreements to protect the interests of produce sellers, this Court concludes that neither plaintiff waived its right to demand payment within thirty days of delivery as a result of its course of dealing under the written agreements." In re Lombardo, at 946. This Court, agreeing with the Eighth Circuit decisions in Hull and Lombardo, holds that where, as in the instant case, plaintiffs comply with the written requirements of PACA's trust provisions, defendants' "course of dealing" defense must be rejected. Consequently, summary judgment is granted against defendant 4-XXX.

B. Personal Liability of Philip and Alice Melfi

Plaintiffs seek to hold Philip and Alice Melfi personally liable for their losses. In general, individuals are not personally liable for a corporation's torts solely on the basis of their position as a corporate stockholder, officer or director. However, an officer who causes a corporate trustee to commit a breach of trust which causes a loss to the trust is personally liable to the beneficiaries for that loss. West Indian Sea Island Cotton Ass'n v. Threadtex, Inc., 761 F.Supp. 1041, 1054 (S.D.N.Y.1991); In re Baird, 114 B.R. 198, 204 (9th Cir. BAP 1990).

In the instant case, it is clear that Philip Melfi was the president of 4-XXX since at least June 1991³; that he drew a salary from 4-XXX of approximately $150,000 in 1991; and that he signed checks totalling $113,000, representing a loan repayment by 4-XXX to Nick Melfi Enterprises, a company controlled by Philip Melfi.

The use of PACA trust funds by 4-XXX for such items as salary and loan payments constitutes a dissipation of PACA trust funds and a breach of 4-XXX's fiduciary duties as trustee. See C.H. Robinson Co. v. Trust Co. Bank, N.A., 952 F.2d 1311, 1314-15 (11th Cir.1992) (bank would be required to refund PACA trust funds it received as loan payments if it had notice of a breach of trust); In re Richmond Produce Co., Inc., 112 B.R. 364, 376-78 (Bkrtcy. N.D.Cal.1990) (same); Morris Okun, Inc. and Finest Fruits, Inc. v. Harry Zimmerman, Inc. and Harry Zimmerman, 814 F.Supp. 346, 348-49 (S.D.N.Y.1993) (salary paid from PACA trust fund is dissipation of trust assets). Because Philip Melfi, as a corporate officer, knowingly caused 4-XXX to breach its duty as a trustee, he is personally responsible for the ensuing loss to the trust beneficiaries for those sums which he dissipated. Id. See also In re Nix, 1992 WL 119143 (M.D.Ga., April 10, 1992) (same). Thus, plaintiff's motion for summary judgment must be granted against Philip Melfi.

Although Alice Melfi owned 100% of the 4-XXX stock in 1991, she was never an officer, director, or employee of the company. Furthermore, in 1989, when the...