United States District Court, N.D. Illinois, Eastern Division
OPINION AND ORDER
SARA L. ELLIS, District Judge.
Having been left holding the bag in unpaid produce bills, Plaintiff Anthony Marano Company ("Marano") brought this action against J&S Produce Corp. ("J&S"), its principals, and two banks that serviced J&S. Fourteen additional parties intervened as Plaintiffs. Marano and the Intervening Plaintiffs (collectively, "Plaintiffs") sue Defendants pursuant to the Perishable Agricultural Commodities Act, 7 U.S.C. § 499a et seq. ("PACA"), seeking to recover damages resulting from the approximately $1, 643, 000 in produce Plaintiffs delivered to J&S and for which Plaintiffs were not paid. The parties do not dispute that J&S's failure to pay its PACA creditors constitutes a breach of the PACA trust. As such, Plaintiffs seek to exercise their rights as PACA trust beneficiaries to recover the principal amount owed as well as interest and attorneys' fees. With J&S and its principals no longer parties to this suit,  Plaintiffs seek to disgorge payments that J&S made to Defendants South Central Bank and Belmont Bank.
Now before the Court are five cross-motions for summary judgment. Plaintiffs allege that South Central and Belmont improperly received PACA trust assets when J&S transferred hundreds of thousands of dollars to each bank, mostly in the form of loan payments. As PACA beneficiaries, Plaintiffs are entitled to priority over the PACA trust assets ahead of even secured creditors like South Central and Belmont. Patterson Frozen Foods, Inc. v. Crown Foods Int'l, Inc., 307 F.3d 666, 669 (7th Cir. 2002). Therefore, Plaintiffs seek to disgorge PACA trust funds that South Central and Belmont received from J&S. South Central and Belmont respond by arguing primarily that Plaintiffs cannot disgorge these payments because the banks were bona fide purchasers, as they received the payments for value and without knowledge that J&S had breached its PACA trust obligations. South Central also raises a number of other defenses, including that revolving loan payments cannot be disgorged because Plaintiffs were not harmed by those payments, and that the payments on a loan from J&S's affiliate Reliable Food Distribution Center, Inc. ("Reliable") cannot be disgorged because those payments were never PACA trust assets.
The Court denies Plaintiffs' motions for summary judgment [146, 149, as questions of fact regarding the banks' knowledge of J&S's breach preclude summary judgment. The Court also denies Belmont's motion for summary judgment  because questions of fact regarding Belmont's knowledge of J&S's breach preclude summary judgment. The Court grants South Central's request for summary judgment  only with regard to the payments on the Reliable Loan, as the record shows that these funds came from Reliable and were merely parked in J&S's account for a matter of days before J&S transferred the funds to South Central. The Court denies South Central's motion with regard to all other payments because questions of fact regarding South Central's knowledge of J&S's breach of the PACA trust preclude summary judgment.
Plaintiffs are wholesalers of "perishable agricultural commodities, " commonly known as produce. J&S purchased wholesale quantities of produce from Plaintiffs and sold it to other customers. J&S also sold dry goods, which made up approximately 50% of its business. Plaintiffs are licensed produce dealers under PACA. Plaintiffs delivered millions of dollars' worth of produce to J&S and invoiced J&S for the produce. Plaintiffs included on those invoices language required by 7 U.S.C. § 499e(c)(4) indicating Plaintiffs' intent to preserve their PACA trust benefits. J&S filed for bankruptcy in March of 2012 and has failed to pay Plaintiffs for approximately $1, 643, 000 in produce that Plaintiffs delivered. The vast majority of unpaid invoices were dated between June 24, 2011 and March 21, 2012. However, J&S also failed to pay invoices from Intervening Plaintiff Strube Celery & Vegetable, Co. ("Strube") dated between April 10, 2010 and April 23, 2010.
Defendants South Central Bank and then Belmont Bank were J&S's primary banks during the relevant period. South Central served as J&S's primary bank from 2004 until May of 2010. During this time, South Central provided loans to and housed the accounts of J&S and its affiliates. J&S moved its business to Belmont in May of 2010. Like South Central, Belmont provided multiple loans to J&S and housed J&S's accounts.
Specifically, South Central provided J&S with a line of credit in the amount of $300, 000. South Central also provided J&S with a mortgage loan in the amount of $2.6 million securing the real property at 2300 W. Lake Street in Chicago, from which J&S operated. Both the line of credit and the mortgage loan were secured by all of J&S's assets, including its accounts receivable, inventory, and equipment. The mortgage loan and the line of credit were also cross-collateralized, meaning that the security interest given in the collateral would secure any other liabilities that J&S owed to South Central. The loans also provided South Central with a right of set-off against all of J&S's accounts to the extent permitted by law. J&S's principals James Stamas and Steve Pappas personally guaranteed the loans. The loan agreements entitled South Central to examine and audit J&S's books and records and required J&S to provide South Central with tax returns, quarterly balance sheets, and audited annual balance sheets and income statements.
The revolving line of credit afforded J&S with access to additional cash by automatically transferring money to J&S when the balance in J&S's checking account was low and automatically transferring funds from J&S's checking account back to South Central when the account balance was higher. Plaintiffs seek to disgorge $565, 264 in payments from J&S to South Central on the revolving line of credit between January 4, 2010 and August 31, 2011. Because of the nature of the line, South Central transferred $582, 442 to J&S over that same period of time.
In addition to the line of credit and the mortgage loan, J&S and its affiliate, Reliable, jointly entered into a Small Business Administration Loan with South Central in August of 2008 (the "Reliable Loan"). The Reliable Loan provided J&S and Reliable with $600, 000, which was to be repaid from J&S and Reliable's business operations. The loan was cross-collateralized by a security interest in all assets of J&S and Reliable. The loan document noted that "[p]erishable agricultural commodities are subject to super priority interest under PACA." Doc. 148 ¶ 16 (alteration in original). To repay the loan, Reliable made monthly payments of $8, 900 to J&S from January through July of 2011. Shortly after receiving each payment, J&S transferred $8, 910 to South Central, which included a $10 service fee. J&S transferred a total of $62, 350 to South Central related to the Reliable Loan. Plaintiffs seek to disgorge five of these seven payments, totaling $44, 550.
While doing business with South Central, J&S's financial performance showed signs of strength, while other factors predicted its eventual bankruptcy. For example, prior to the facts that brought about this case, J&S failed to pay its PACA creditors on three separate occasions. First, in August of 2009, a judge in this district entered a temporary restraining order against J&S in response to an unpaid debt J&S owed to Windsor Distributing Inc., one of its suppliers. See Windsor Distributing, Inc. v. J&S Produce Corp., et al, No. 09 C 5122, Doc. 14 (N.D. Ill. Aug. 27, 2009). In response to the Windsor suit, South Central reviewed J&S's accounts receivable, assigned J&S a higher risk code, and temporarily added J&S to a "watch list." Windsor and J&S settled, with J&S paying the $62, 112 it owed to Windsor on August 28, 2009.
In early 2010, Intervening Plaintiff Gourmet's Finest (also known as "Domestic Mushroom Co.") filed a PACA action against J&S in case number 10 C 1435. On March 30, 2010, Gourmet's Finest and J&S entered a stipulation stating that "Gourmet's Finest was an unpaid PACA trust creditor on a debt for produce from October 17, 2009 through March 10, 2010 in the total trust amount of $395, 611.03." Doc. 148 ¶ 25. J&S agreed to pay Gourmet's Finest pursuant to a payment plan. J&S complied with the payment plan until March of 2012, when it became unable to pay. To date, J&S has not fully satisfied its obligation to Gourmet's Finest.
J&S also failed to pay Intervening Plaintiff Strube on invoices dated between April 10, 2010 and April 23, 2010. J&S entered into an informal payment plan with Strube and made some payments, but never completely satisfied its debt to Strube. In addition to the April 2010 debt, J&S also failed to pay Strube invoices dated between March 15, 2012 and March 21, 2012.
In August of 2009, South Central reviewed J&S's income statements, balance sheets, and cash flow statements for 2006 through 2008 and determined that J&S's accounts payable increased from $990, 633 at the end of 2006 to $1, 670, 714 at the end of 2008. South Central informed J&S in early September of 2009 that it would not extend any further credit, including covering checks returned for insufficient funds, until J&S could demonstrate that it had sufficient working capital to ensure that it would not be subject to any further PACA claims. From November of 2009 through October of 2010, J&S's accounts at South Central were regularly overdrawn, resulting in dozens of overdraft charges. Doc. 153 at 38-46.
J&S requested that South Central increase its available line of credit at least twice. First, in June or July of 2009, Steve Pappas of J&S requested that South Central double the amount of J&S's line of credit from $300, 000 to $600, 000. South Central refused to increase the revolving line of credit "because of the special risks commercial banks have in financing produce companies as a result of [PACA]." Doc. 216 ¶ 1. In early 2010, J&S again requested that South Central increase the size of J&S's revolving line of credit, this time to $500, 000. J&S provided South Central with specific financial information concerning its need for additional credit. South Central also declined that request, noting that South Central "is a small bank and did not want to extend significant credit to a produce supplier-any produce supplier-in light of the restrictions on South Central Bank's ability to take security interests under [PACA]." Doc 174-1 ¶ 7. James Stamas, one of J&S's owners, testified that South Central declined to increase the line of credit in part because J&S's accounts payable were outstanding for an average of 68 days, more than double the industry average of approximately 30 days. Doc. 148-5 at 25; Doc. 153-1 at 10.
South Central placed J&S back on its "watch list" in March of 2010. South Central also demanded immediate repayment of the $300, 000 line of credit, plus interest and late charges. In response, J&S paid down some of the balance on the loan and deposited funds into its operating account. In April of 2010, South Central notified J&S that it had defaulted on its line of credit pursuant to the "reasonable insecurity" provision in the loan agreement. J&S remained on South Central's watch list until its loans were completely paid off in September of 2010.
In light of South Central's repeated refusal to increase J&S's line of credit, J&S decided to move its business to Belmont. In May of 2010, Belmont conducted a credit review analysis of J&S, which included reviewing J&S's balance sheet as of December 31, 2009. The balance sheet showed assets of $3.1 million, accounts payable of $1.48 million, and J&S's average "accounts payable days" of 68 days. On May 19, 2010, Belmont extended J&S a revolving line of credit in the amount of $700, 000, cross-collateralized by a security interest in all of J&S's and Reliable's assets. J&S also entered a Business Loan Agreement with Belmont that required J&S to maintain its deposit accounts at Belmont and provided Belmont with access to certain financial information, such as J&S's balance sheets, tax returns, and income statements.
Additionally, Belmont provided a $2.5 million mortgage loan agreement secured by the property at 2300 W. Lake Street. The borrower on the mortgage was listed as "2300 W. Lake Street Unit A, LLC, " while J&S, Reliable, and their individual owners served as guarantors on the mortgage loan. Doc. 163 ¶ 53. The mortgage loan document notes that two of the risks of providing the loan were "Guarantor's lack of liquidity" and "[s]ales of tenant trending downwards due to general economic recession but showing signs of recovery in 2010." Doc. 153-1 at 43. The amount of the mortgage loan was later increased to $2.62 million.
In September of 2010, Belmont paid off the revolving line of credit and the mortgage loan that J&S had taken out from South Central. In November of 2010, Belmont agreed to provide J&S with an additional $70, 000, in the form of a promissory note. Like the loans from South Central, all of Belmont's loans to J&S were personally guaranteed by J&S's principals, cross-collateralized, and included a right of set-off.
J&S paid its PACA creditors on all invoices dated between April 23, 2010 and June 24, 2011, but J&S often paid invoices late. Beginning in the summer of 2010, J&S's demand deposit account at Belmont was regularly overdrawn, including by $44, 000 at the end of September, ...