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Patterson Frozen Foods, Inc. v. Crown Foods International

October 15, 2002

PATTERSON FROZEN FOODS, INC., PLAINTIFF-APPELLEE,
v.
CROWN FOODS INTERNATIONAL, INC., A CORPORATION F/K/A CROWN FOODSERVICE GROUP, INC., AND PHILIP H. ECKERT, DEFENDANTS-APPELLANTS.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 7305--John C. O'Meara, Judge.*fn1

Before Coffey, Easterbrook, and Diane P. Wood, Circuit Judges.

The opinion of the court was delivered by: Diane P. Wood, Circuit Judge.

ARGUED FEBRUARY 19, 2002

In May and June of 1998, plaintiff Patterson Frozen Foods sold seven bulk shipments of frozen peas to Crown Foodservice Group, a predecessor of defendant Crown Foods International. Crown, owned by co-defendant Philip H. Eckert, defaulted on the purchases. The sale of frozen peas and other perishable goods is regulated by the Perishable Agricultural Commodities Act, 7 U.S.C. § 499 et seq. (PACA), a law enacted to protect produce sellers during the Great Depression and modified from time to time since then. Under certain circumstances, PACA allows produce sellers to establish a constructive trust over funds owed for sales on short-term credit and to recover against a responsible shareholder of the debtor company. Because we find that Patterson failed to observe the formalities necessary to preserve its PACA trust rights by agreeing in writing to extend time for payment, we reverse the judgment of the district court.

I.

Crown is a defunct Illinois corporation that once operated as a federally licensed produce dealer. Eckert was Crown's president and had check-signing authority. In May and June of 1998, Patterson, a produce wholesaler, sold Crown $58,600 worth of frozen peas. All of Patterson's invoices contained the statutory language required to preserve PACA trust rights and a payment term of net 30 days. Crown failed to pay. On December 21, 1998, after informal attempts to collect its debt proved fruitless, Patterson filed an administrative reparation claim pursuant to 7 U.S.C. § 499f with the United States Department of Agriculture (USDA). The USDA responded with a form letter stating the prerequisites to an investigation of the complaint and indicating its willingness to help the parties reach an acceptable settlement.

Negotiations continued between Neil Morosa, Patterson's Vice-President of Finance, and Eckert's son, Jason. On January 8, 1999, Jason faxed Morosa a proposed repayment plan providing for eight monthly payments of $8,356.46 plus 8.5% interest on the outstanding balance, with the first payment due February 8. Morosa faxed a reply that afternoon in which he moved the payment dates to the twentieth of each month beginning January 20 and adjusted the interest accordingly. Morosa's signature appears at the bottom of the fax.

On January 11, Morosa informed the USDA of this development. He stated that Crown "has proposed to pay the remaining invoices totaling $66,851.65 with interest at 8.5% over an eight month period, per the following schedule." After setting out a schedule identical to the one he had faxed Jason, Morosa wrote, "We are agreeable to this providing PACA will still be in force in case the respondent defaults on its plan." The next day, Morosa faxed Jason a copy of the letter and indicated a bank account to which he should wire the January 20 payment.

Crown made its first payment, but its financial troubles worsened and it sent only $2,000 on February 20. Three days later Morosa wrote the USDA, stating that Patterson "did enter into the proposed agreement with respondent to pay the outstanding invoices," but that, as Crown had failed to make its second payment, Patterson now considered the agreement void. Crown made further proposals to work out a revised payment plan, which Patterson rejected. On April 1, Patterson faxed a "Balance Due" schedule with a revised listing of payment due dates (through December 1999) and a place for Eckert to sign, but Eckert refused. On April 29, 1999, the USDA issued a reparation order in favor of Patterson for the amount due plus interest at 10%. Two months later it suspended Crown's PACA license, causing Crown to cease operations.

Patterson then filed a four-count complaint seeking enforcement of the reparation order against Crown under 7 U.S.C. § 499g(b) (Count I), alleging a breach of contract (Count II) and failure to account for assets under § 499b(4) (Count IV) against Crown, and alleging that Eckert breached his fiduciary duties as trustee of a statutory trust under § 499e(c) (Count III). The parties stipulated to judgment against Crown on Counts I and II. After a bench trial, the district court found in favor of Patterson on the two remaining counts, entering judgment against both Crown and Eckert in the amount of $55,995. It also awarded attorneys' fees of $45,410 against both defendants.

II.

PACA comprehensively regulates the nation's produce industry. It authorizes the Secretary of Agriculture to license those who deal in "[f]resh fruits and fresh vegetables of every kind and character." 7 U.S.C. § 499a(b)(4)(A). (We do not know why frozen peas should be considered fresh or perishable, but as the parties have not made a point about this, we do not either.) Among its many provisions, PACA provides that perishable agricultural commodities received by a licensed dealer, as well as the proceeds from sales of those commodities, are held in trust for the benefit of unpaid suppliers until full payment has been made. 7 U.S.C. § 499e(c)(2). This floating trust is automatically created when the dealer accepts the goods so long as the supplier complies with the specific notice requirements set out in 7 U.S.C. § 499e(c) and 7 C.F.R. § 46.46(f). Greg Orchards & Produce, Inc. v. Roncone, 180 F.3d 888, 890-91 (7th Cir. 1999). PACA trust rights take priority over the interests of all other creditors, including secured creditors. C.H. Robinson Co. v. Trust Co. Bank, N.A., 952 F.2d 1311, 1315 (11th Cir. 1992). Thus, PACA gives sellers of perishable goods a superior secured interest, just as a seller of durable goods may perfect an interest in its property. (A perishable goods dealer could of course take an Article 9 secured interest in its produce, but as these items are usually sold and consumed rapidly and spoil quickly, that interest would not really be worth the bother.)

PACA trust rights may be enforced either through a reparation order issued by the Secretary of Agriculture and subsequent judicial enforcement, 7 U.S.C. § 499f & g, or through a court action for breach of fiduciary trust, 7 U.S.C. § 499e(c)(5). The latter remedy permits recovery against both the corporation and its controlling officers. Golman-Hayden Co. v. Fresh Source Produce, Inc., 217 F.3d 348, 351 (5th Cir. 2000). The principal justifications Congress has given for granting such generous protection for sellers of produce are (1) the need to protect small dealers who require prompt payment to survive and (2) the importance of ensuring the financial stability of the entire produce industry. In re Magic Rests., Inc., 205 F.3d 108, 111 (3d Cir. 2000).

In return for its protections, PACA establishes strict eligibility requirements. A PACA supplier must be selling produce on a cash or short-term credit basis. Greg Orchards, 180 F.3d at 891. The Secretary of Agriculture has determined that "the maximum time for payment for a shipment to which [parties] can agree and still qualify for coverage under the trust is 30 days after receipt and acceptance." 7 C.F.R. § 46.46(e)(2). If a produce supplier enters a written post-default agreement with a dealer that extends the dealer's time for payment beyond 30 days, the supplier becomes ineligible to assert its trust rights. Greg Orchards, 180 F.3d at 892; In re Lombardo Fruit and Produce Co., 12 F.3d 806, 809 (8th Cir. 1993). On the other hand, an oral agreement for an extension or a course of dealing allowing ...


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