Sanzone-Palmisano Co. v. M. Seaman Enterprises, Inc.

• Decision Date: 16 April 1993
• Docket Number: No. 92-3335,SANZONE-PALMISANO,92-3335
• Citation: 986 F.2d 1010
• Parties: COMPANY, Plaintiff-Appellant, v. M. SEAMAN ENTERPRISES, INC., et al., Defendants, Malone & Hyde, Inc., Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1010

986 F.2d 1010

SANZONE-PALMISANO COMPANY, Plaintiff-Appellant, v. M. SEAMAN ENTERPRISES, INC., et al., Defendants Malone & Hyde, Inc., Defendant-Appellee.

No. 92-3335.

United States Court of Appeals, Sixth Circuit.

Argued Jan. 20, 1993.

Decided Feb. 25, 1993.

Rehearing and Rehearing En Banc

Denied April 16, 1993.

Stephen P. McCarron (argued and briefed), Silver Spring, MD, Thomas E. Donnellon, Donnellon, Donnellon & Miller, Cincinnati, OH, Steven A. Rafkin, McCarron, Becker & Kahan, Silver Spring, MD, for plaintiff-appellant.

Edward S. Dorsey (argued and briefed), Lindhorst & Dreidame, Cincinnati, OH, for defendant-appellee.

Before: KEITH and BOGGS, Circuit Judges; and GIBBONS, District Judge. ^*

BOGGS, Circuit Judge.

Plaintiff Sanzone-Palmisano Co. appeals a summary judgment in its favor for less than it sought in an action to recover for unpaid produce under the 1984 Amendments to the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. § 499e. We remand the claim to the district court for proceedings consistent with this opinion.

I

In April 1990, defendant M. Seaman Enterprises, Inc. ("Seaman") bought six grocery stores in the Dayton, Ohio area, which were doing business as "Stump's Markets." The purchase was financed by a loan of approximately $2.5 million from defendant Malone and Hyde ("M & H"), which in turn took a security interest in Seaman's assets as collateral for the loan.

Seaman quickly found itself in financial trouble, and M & H foreclosed on its security interest on November 21, 1990. M & H took over Seaman's assets and operations. The assets included inventory valued at $782,460.69 and cash register receipts from the sale of produce and other inventory on November 21, 1990, totalling $91,369.05. M & H operated the stores until early January 1991, when M & H sold the stores to a third party. M & H lost approximately $275,000 on the entire transaction.

Plaintiff Sanzone-Palmisano ("Palmisano") is a produce supplier who, between October 15, 1990 and November 21, 1990, sold produce to Seaman worth $104,491.15, for which it has never been paid. After the takeover, Palmisano filed a timely complaint ¹ against Seaman and M & H to enforce payment of the money under PACA. Palmisano moved for summary judgment against M & H on the ground that M & H took control of PACA trust assets belonging to Palmisano in the amount of $104,491.15 when it took possession of Seaman's assets, which included all produce-related assets. M & H admitted possession of PACA assets in the amount of $20,503.84, but denied further liability.

The magistrate judge recommended that Palmisano's motion for summary judgment be granted for the balance of $20,503.84. The magistrate judge found that the primary question was what portion of the Seaman assets seized by M & H on November 21, 1990 were subject to the PACA trust. The parties stipulated that the produce portion of the $782,460.69 of inventory seized by M & H had a wholesale value of $15,451.13. Since the cash register tapes for November 21, 1990 were unavailable, the magistrate judge computed the portion of the $91,369.05 of cash receipts that were proceeds from the sale of produce by reference to the percentage of total sales in the four weeks following M & H's takeover that were produce-related. The magistrate judge found that 5.53% of M & H's proceeds were from the sale of produce. Therefore, the magistrate judge found that $5,052.71 (5.53% of $91,369.05) of the cash receipts for November 21, 1990 were from the sale of produce. The magistrate judge concluded that the total value of the PACA trust assets seized by M & H was $20,503.84 ($5,052.71 + $15,451.13) and awarded Palmisano prejudgment interest.

Palmisano claimed that it was entitled to an additional $83,987.31 from the remaining assets seized. The magistrate judge accepted Palmisano's argument that when a retailer commingles produce proceeds with proceeds from other inventory in a single fund, as Seaman did, and then uses that fund to purchase other inventory, that inventory and subsequent proceeds become part of the trust res. However, the magistrate judge rejected Palmisano's contention that it was not required to show the specific remaining assets that were purchased with funds from the sale of produce. Instead, the magistrate judge placed the burden of tracing the use of produce assets on Palmisano and found that Palmisano had failed to carry its burden of proof.

The district court adopted the magistrate judge's report, granted Palmisano's summary judgment in part, and, pursuant to Federal Rule of Civil Procedure 54(b), directed the entry of a final judgment against M & H in favor of Palmisano for $20,503.84 plus interest and costs. ²

II

PACA creates a statutory trust for unpaid sellers of perishable agricultural commodities. PACA provides that:

Perishable agricultural commodities ... 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 ... 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 legislative history to the 1984 amendments explains the need to protect produce suppliers:

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

....

Many [buyers], in the ordinary course of their business transactions, operate on bank loans secured by [their] 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 failed to make payment as required by the contract.

H.R.Rep. No. 98-543, 98th Cong., 1st Sess. 3 (1983).

Under PACA, sellers of produce are protected. A produce buyer's unpaid obligation "becomes a trust obligation ..., prior to and superior to any lien or security interest in inventory held by the [buyer's] secured lender." In re Prange Foods, Corp., 63 B.R. 211, 214 (Bankr.W.D.Mich.1986).

III

We review de novo the district court's partial grant of Palmisano's motion for summary judgment. Baggs v. Eagle-Picher Industries, Inc., 957 F.2d 268, 271 (6th Cir.1992). M & H concedes that it has a trust obligation to Palmisano and that Palmisano provided proper notice of its trust claim. M & H further concedes that Palmisano is entitled to the $20,503.84 that the district court calculated to be the value of the produce inventory and the direct cash proceeds from produce sales on November 21, 1990. Therefore, the issue before the court is a narrow one: Whether Palmisano, as the trust beneficiary, has the burden of proving the specific remaining assets that were acquired by Seaman with funds from the sale of trust assets? It is well settled, and M & H concedes, that the trust is a "floating" trust in that it applies to all of the buyer's produce in inventory and all proceeds from the sale of produce and that therefore the trust beneficiary is not obligated to distinguish the assets to which its trust applies from other produce-related assets. In other words, the trust beneficiary need not prove that it, and not another produce supplier, was the source of the produce or produce-related assets. In re W.L. Bradley Co., 75 B.R. 505, 509 (Bankr.E.D.Pa.1987); see also In re Atlantic Tropical Market Corp., 118 B.R. 139, 142 (Bankr.S.D.Fla.1990); In re Richmond Produce Co., 112 B.R. 364, 368 (Bankr.N.D.Cal.1990) ("The unpaid sellers are not required to trace, and the trust arises immediately upon delivery."); In re Fresh Approach, 51 B.R. 412, 422 (Bankr.N.D.Tex.1985) ("The legislative history emphasizes that no...