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In Re Ebro Foods, Inc v. Ebro Foods

June 2, 2011

IN RE EBRO FOODS, INC., DEBTOR.
G&G PEPPERS, LLC, PLAINTIFF-APPELLANT,
v.
EBRO FOODS, INC., DEFENDANT-APPELLEE.



The opinion of the court was delivered by: Judge Feinerman

OPINION

Plaintiff-Appellant G&G Peppers, LLC timely appealed to this court the bankruptcy court's decision in In re Ebro Foods, Inc., 424 B.R. 420 (Bankr. N.D. Ill. 2010). This court has jurisdiction under 28 U.S.C. § 158(a), and reviews the bankruptcy court's factual findings for clear error and conclusions of law de novo. See In re Midway Airlines, Inc., 383 F.3d 663, 668 (7th Cir. 2004); In re Smith, 286 F.3d 461, 465 (7th Cir. 2002). For the reasons that follow, the court affirms the bankruptcy court's ruling that G&G failed to preserve its statutory trust rights under the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. § 499a et seq., which wouldhave granted G&G priority over the other creditors, including secured creditors, of Debtor/Defendant-Appellee Ebro Foods, Inc. See 7 U.S.C. § 499e(c)(2). The court reverses the bankruptcy court's denial of G&G's request for attorney fees, and remands for determination of a reasonable fee award.

Background

At all relevant times, Ebro was a food manufacturer and licensed PACA dealer, and G&G was one of Ebro's suppliers. Between September 26 and October 4, 2007, Ebro sent G&G three purchase orders for jalapeno peppers. Each purchase order indicated the quantity of peppers ordered, the price per pound, a delivery date, and payment terms of "Net 30 Days," and each requested that, "[t]o ensure this order was received and processed, please sign and return via fax." A G&G representative signed the purchase orders and returned them to Ebro. G&G then shipped the peppers, which arrived between October 2 and October 10, 2007.

On or about the date of each shipment, G&G faxed an invoice to Ebro requesting payment. The invoices stated that the payment terms were "PACA 'terms,'" and set forth language intended to preserve G&G's PACA trust rights:

The perishable agricultural commodities listed on this invoice are sold subject to statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. 499e(c)). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.

Ebro did not pay a penny of the $42,920 purchase price of the peppers. On February 27, 2008, pursuant to 7 U.S.C. §§ 499f & 499g(a), G&G filed a complaint with the United States Department of Agriculture ("USDA") seeking reparations for Ebro's non-payment. The USDA entered a reparations order on August 8, 2008, awarding G&G $42,920 for the unpaid peppers, $300 in costs, and annual interest of 2.3 percent from November 1, 2007, until the date of payment.

Pursuant to 7 U.S.C. § 499g(b), G&G filed suit in federal district court to enforce the reparations order. G&G Peppers, LLC v. Ebro Foods, Inc., No. 09 C 489 (N.D. Ill.). That case was stayed when Ebro filed the underlying bankruptcy proceeding in March 2009. On June 19, 2009, G&G commenced an adversary proceeding to enforce the reparations order, to recover its attorney fees, and to obtain a PACA trust and turnover of assets to satisfy its claim. After a trial on stipulated facts, the bankruptcy court held that Ebro owed G&G $43,946.60 ($42,920 for the peppers plus 2.3 percent interest and $300 in costs), but that G&G had failed to preserve its PACA trust rights and thus was not entitled to priority over Ebro's other creditors. 424 B.R. at 426-31. The bankruptcy court also held that G&G was not entitled any attorney fee award under Illinois law. Id. at 424-26.

Discussion

G&G challenges the bankruptcy court's denial of its PACA trust claim and its request for attorney fees. The challenges are considered in turn.

I. G&G Failed To Preserve Its PACA Trust Rights.

Congress enacted PACA in 1930 to promote fair trading practices in the produce industry and to protect small farmers and growers vulnerable to the sharp practices of financially irresponsible buyers. See Consumers Produce Co., Inc. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1377 (3d Cir. 1994); Hull Co. v. Hauser's Foods, Inc., 924 F.2d 777, 780 (8th Cir. 1991). Congress amended PACA in 1984 to provide that perishable agricultural commodities received by a licensed dealer, products derived from those commodities, and proceeds from their sale shall be held in a floating trust for the benefit of unpaid suppliers until full payment has been made. See 7 U.S.C. § 499e(c)(1)-(2); Nickey Gregory Co. v. AgriCap, LLC, 597 F.3d 591, 594-95 (4th Cir. 2010); Scott T. Rodgers, Potatoes and Wild Blueberries: Perfection and Enforcement Under the Perishable Agricultural Commodities Act, 12 Me. B.J. 302 (1997). The statutory trust provision grants unpaid suppliers a priority position over all other creditors, including secured creditors. See Nickey Gregory, 597 F.3d at 594-95; Patterson Frozen Foods, Inc. v. Crown Foods Int'l, Inc., 307 F.3d 666 (7th Cir. 2002).

PACA trust rights are automatically granted when perishable commodities are bought on credit, but can be lost if not preserved by the seller. See D.M. Rothman & Co., Inc. v. Korea Commercial Bank of N.Y., 411 F.3d 90, 96 (2d Cir. 2005). To preserve its PACA trust, a seller must satisfy the statute's strict eligibility requirements. See Patterson Frozen Foods, 307 F.3d at 669; Greg Orchards & Produce, Inc. v. Roncone, 180 F.3d 888, 890-91 (7th Cir. 1999). The statute sets forth two methods of preserving the trust. The first provides:

The unpaid supplier, seller, or agent shall lose the benefits of such trust unless such person has given written notice of intent to preserve the benefits of the trust to the commission merchant, dealer, or broker 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, (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. The written notice to the commission merchant, dealer, or broker shall set forth information in sufficient detail to identify the transaction subject to the trust. When the parties expressly agree to a payment time period different from that ...


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