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In Re: Meadowbrook Farms Cooperative v. Great Lakes Pork

June 9, 2011

IN RE: MEADOWBROOK FARMS COOPERATIVE, DEBTOR. THE CIT GROUP/BUSINESS CREDIT, INC., APPELLANT,
v.
GREAT LAKES PORK, INC., JOHNSON-PATE PORK, INC., AND LEHMANN BROTHERS FARMS, LLC, APPELLEES.



The opinion of the court was delivered by: Murphy, District Judge:

MEMORANDUM AND ORDER

This bankruptcy appeal came before the Court for oral argument on February 28, 2011. Thereafter, the parties supplemented the record as ordered by this Court. Having fully considered all the papers on file and the arguments presented, the Court rules as follows.

FACTUAL BACKGROUND

In March 2009, Meadowbrook Farms Cooperative (MFC or the Debtor) filed a petition for Chapter 7 relief in the United States Bankruptcy Court for the Southern District of Illinois. The Debtor was an agricultural cooperative, or packer, that purchased hogs for slaughtering and processing. It packed and sold pork and pork products subject to the Packers and Stockyard Act of 1921 (PSA), 7 U.S.C. §§ 181 et seq. Laura K. Grandy was appointed Bankruptcy Trustee for the Debtor and later was succeeded by Dana Frazier. In June 2009, the Trustee filed a complaint to determine the validity of claims to a roughly $2.2 million lockbox fund held by the Trustee. The parties stipulated that the entirety of the fund was derived from accounts receivable and proceeds from the sale of livestock inventory and meat and meat food products derived from livestock purchased by the Debtor from certain livestock producers.

Appellant CIT Group/Business Credit, Inc. (CIT) is an undisputed secured creditor of the Debtor pursuant to a November 16, 2007, financing agreement (see Doc. 28-11). In July 2009, CIT answered the Trustee's complaint, filed a counterclaim against the Trustee asserting a first priority security interest in the funds held by the Trustee, and filed a cross-claim for equitable estoppel against other parties claiming an interest in the funds.

Great Lakes Pork, Inc., Johnson-Pate Pork, Inc., and Lehmann Brothers Farms, LLC (PSA Claimants) are livestock producers that sold hogs to the Debtor. PSA Claimants also answered the complaint, filed a counterclaim against the Trustee seeking funds protected under the PSA, and filed a cross-claim against CIT seeking any funds protected by the PSA that had been paid over to CIT. PSA Claimants' claimed interest in the funds held by the Trustee is premised on certain trust protections contained in the PSA.

A recitation of pertinent provisions of the PSA governing statutory trusts is necessary to understand the parties' positions and provide context for their business relationships.

(b) Livestock, inventories, receivables and proceeds held by packer in trust for benefit of unpaid cash sellers; time limitations; exempt packers; effect of dishonored instrument; preservation of trust benefits by seller

All livestock purchased by a packer in cash sales, and all inventories of, or receivables or proceeds from meat, meat food products, or livestock products derived therefrom, shall be held by such packer in trust for the benefit of all unpaid cash sellers of such livestock until full payment has been received by such unpaid sellers: . Provided, That the unpaid seller shall lose the benefit of such trust if, in the event that a payment instrument has not been received, within thirty days of the final date for making a payment under section 228b of this title, or within fifteen business days after the seller has received notice that the payment instrument promptly presented for payment has been dishonored, the seller has not preserved his trust under this subsection. The trust shall be preserved by giving written notice to the packer and by filing such notice with the Secretary.

(c) Definition of Cash Sale

For the purpose of this section, a cash sale means a sale in which the seller does not expressly extend credit to the buyer.

7 U.S.C. § 196.

Each PSA Claimant entered into one or more Uniform Marketing Agreements (UMAs) with the Debtor governing the terms for the sale and delivery of hogs to the Debtor and for the Debtor's payment for those hogs. Prior to 2008, the Debtors and PSA Claimants operated under standard agreements that expressly waived PSA Claimants' rights to a statutory trust under the PSA.

Section 5(c) of the relevant standard agreements governs payment: MFC and Member expressly agree, pursuant to Section 409(b) of the Act, that the sale of animals hereby contemplated and required is a credit sale as defined or contemplated by the terms of Section 206 of the Act, and Member, upon executing this Agreement, knowingly and voluntarily agrees to waive all rights to prompt payment, constructive or statutory trust or ...


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