Morris Okun, Inc. v. Harry Zimmerman, Inc.

• Decision Date: 22 February 1993
• Docket Number: No. 91 Civ. 6888 (LBS).,91 Civ. 6888 (LBS).
• Citation: 814 F. Supp. 346
• Parties: MORRIS OKUN, INC. and Finest Fruits, Inc., Plaintiffs, v. HARRY ZIMMERMAN, INC. and Harry Zimmerman, individually, Defendants.
• Court: U.S. District Court — Southern District of New York

814 F. Supp. 346

MORRIS OKUN, INC. and Finest Fruits, Inc., Plaintiffs, v. HARRY ZIMMERMAN, INC. and Harry Zimmerman, individually, Defendants.

No. 91 Civ. 6888 (LBS).

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

February 22, 1993.

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

McCarron & Assoc., Silver Spring, MD, Stephen P. McCarron, of counsel, for defendants.

OPINION

SAND, District Judge.

This case arises under the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. § 499e(c). Plaintiffs, Morris Okun, Inc. ("Okun") and Finest Fruits, Inc. ("Finest"), move for summary judgment against defendants Harry Zimmerman, Inc. ("HZI") and Harry Zimmerman, individually, for monies allegedly to be held in statutory trust on behalf of plaintiffs under PACA for the sale of perishable goods. Plaintiffs also allege breach of contract. These motions raise a novel question regarding individual liability under PACA, a statute which has been litigated only rarely in this Circuit.

Factual Background

Both Okun and Finest are New York corporations engaged in the business of buying and selling wholesale quantities of fresh fruit and vegetables in interstate commerce. Each has its principal place of business in the N.Y.C. Terminal Market, Bronx, New York, and both are duly licensed pursuant to PACA.

Defendant HZI is a New York Corporation, licensed under PACA as a dealer and/or commission merchant of perishable agricultural commodities, with its principal place of business in the N.Y.C. Terminal Market, Bronx, New York. Defendant Harry Zimmerman was the sole officer and 100% stockholder of defendant HZI.

Plaintiff Okun alleges that between June 26, 1991 and August 1, 1991, Okun sold and delivered to defendants, pursuant to oral contracts, perishable agricultural commodities for which defendant HZI was to pay Okun $16,854.00. There is no dispute that Okun delivered these goods and that the defendants accepted them. Furthermore, there is no dispute that defendants did not pay for these goods. Okun filed timely written notice of its intent to preserve trust benefits as required under PACA by sending notice to defendant Zimmerman and the Secretary of Agriculture. Following the receipt of this notice, defendant HZI paid Okun $8,552.00, leaving an unpaid balance of $8,302.00.

Although Okun alleges in the complaint that the purchases were made by "defendants", and alleges that defendant HZI was to pay for the goods, the affidavits in support of the motion submitted by Annabelle Burgess, Okun's credit/accounts receivable manager, and Murray Padover, the Okun salesman who handled the Zimmerman account, allege that the transactions were between Okun and Harry Zimmerman, individually. Defendant Zimmerman seeks to defeat the motion for summary judgment by arguing that a genuine issue of material fact exists as to the identity of the purchaser, stating that he always did business in corporate form as HZI, and not as an individual. Given the Court's interpretation of the law, to be addressed below, this distinction is of little significance, and will not serve as a basis for defeating the summary judgment motion.

Finest alleges that between June 24, 1991 and July 26, 1991, defendant HZI purchased $15,022.50 in fruits and vegetables from Finest. When defendant HZI did not remit payment, Finest filed timely written notice of its intention to preserve trust benefits. Subsequent to that notice, HZI paid $8,167.00, leaving an unpaid balance of $6,855.50. HZI raises a defense which relates to the terms of payment printed on Finest's invoices, which will be discussed below with reference to the notice provisions of PACA.

PACA

The PACA statute regulates trading in agricultural commodities, essentially fruits and vegetables. The Act was amended in 1984 upon a finding by Congress that a burden on commerce in perishable agricultural commodities was caused by certain financial arrangements, whereby dealers would receive goods without having made payment for them. To remedy this burden, Congress provided for a statutory trust on behalf of unpaid suppliers or sellers. The relevant portion of the statute reads as follows:

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.

The statute further provides that to preserve one's rights as a beneficiary of a PACA trust, notice must be given by the seller to the dealer and the Secretary of Agriculture

within thirty calendar days (i) after expiration of the time prescribed by which payment must be made, as set forth in regulations issued by the Secretary which time is ten days from the date of receipt and acceptance of the goods, (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.

The regulations promulgated pursuant to this section provide that the maximum time parties may agree upon for payment is thirty days from the date of receipt and acceptance of the goods. 7 C.F.R. § 46.46(f)(1) & (2).

Discussion

Having set out the facts and the applicable law, we now turn to the motions for summary judgment. Pursuant to Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is appropriate if the supporting evidence demonstrates that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law. The Court does not resolve disputed issues of fact, but rather, resolving any ambiguities and drawing all reasonable inferences against the moving party, assesses whether genuine issues of material fact remain for the jury. See, e.g. Knight v. United States Fire Ins. Co., 804 F.2d 9, 11 (2d Cir.1986), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987).

Pivotal to the decision on both plaintiffs' motions is the question of whether, under PACA, an individual can be held liable to unpaid sellers for a corporation's debts. Resolution of this question in the affirmative also renders immaterial defendant Zimmerman's argument that he never dealt as an individual with Okun, but only in corporate form, as he would be liable either way.

The law in this area is sparse. The plaintiffs have cited only one case to the Court, and we are aware of only one other. Both cases, which will be discussed in more detail below, rely on the same legal theory, which is the following. PACA establishes a statutory trust for the benefit of sellers and suppliers. This trust arises from the moment perishable goods are delivered by the seller. An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for that tortious act. This legal framework is to be distinguished from the piercing the veil doctrine, where the corporate form is disregarded because the individual has either committed a fraud, or because the corporation is a "shell" being used by the individual shareholders to advance their own purely personal rather than corporate ends. Passalacqua Builders v. Resnick Developers, 933 F.2d 131 (2d Cir.1991). We find persuasive the reasoning holding a fiduciary liable for breach of trust under PACA.

We recognize at the outset that a PACA trust in effect imposes liability on a trustee, whether a corporation or a controlling person of that corporation, who uses the trust assets for any purpose other than repayment of the supplier. This includes use of the proceeds from the sale of perishables for legitimate business expenditures, such as the payment of rent, payroll, or utilities. Proceeds from the sales of perishables subject to PACA receive special treatment in other respects as well. Thus, a PACA beneficiary has priority over any secured creditor on the purchaser's commodity-related assets to the extent of the amount of his claim. D'Arrigo Bros. Co. v. Freshville Produce Distributors, 1990 WL 310632 (S.D.N.Y. 1990). Furthermore, trust assets are not part of the estate in bankruptcy. In re Fresh Approach, Inc., 48 B.R. 926 (N.D.Tx.1985). These consequences are attributable to the statute, and it is the responsibility of Congress to revise the statute if these are not the intended results.

In In re Paul Shipton, BAP No. CC-90-1366-OVP,¹ the Bankruptcy Appeal Panel ("BAP") of the Ninth Circuit considered this question, and held the individual, who was the sole shareholder and an officer and director of the produce distributor, personally liable for the corporation's debt. In Shipton, as in this case, the corporation, Sunfresh, was licensed pursuant to PACA, and the individual, Shipton, was not. There was no dispute as to the amount owed by the corporation.

The BAP endorsed the reasoning of In re Baird, 114 B.R. 198 (9th Cir. BAP 1990), a case arising in the contracting field, for the proposition that "without regard to whether the corporate veil may be pierced, an officer who causes a corporate trustee to commit a breach of trust causing loss to the trust administered by the corporation is personally liable to the beneficiaries for the loss". Addendum, p. 7. This principle is equally valid under New York law. See, West Indian Cotton Ass'n v. Threadtex, 761 F.Supp. 1041, 1054 (S.D.N.Y.1991).

The court rejected Shipton's argument that to be held personally liable he must be a dealer or PACA trustee in his own right. Furthermore, the court noted that the statute and the regulations, as well as the case...