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Epic Fresh Produce, LLC v. Olympic Wholesale Produce, Inc.

United States District Court, N.D. Illinois, Eastern Division

December 7, 2017

EPIC FRESH PRODUCE, LLC, Plaintiff,
v.
OLYMPIC WHOLESALE PRODUCE, INC., and NICHOLAS DOUMOURAS, Defendants.

          MEMORANDUM OPINION AND ORDER

          Robert M. Dow, Jr., United States District Judge

         This matter is before the Court on the motion for a temporary restraining order (“TRO”) [6] filed by Plaintiff Epic Fresh Produce, LLC (“Plaintiff”). Also before the Court are motions for a stay of proceedings [28], a motion for extension of time to file an answer to the complaint [29], and a motion for extension of time to provide the Court with information about financial status [34] filed by Defendants Olympic Wholesale Produce, Inc. (“Olympic”) and Nicholas Doumouras (together, “Defendants”). For the reasons stated below, the Court grants Plaintiff's motion for a TRO [6], denies Defendants' stay motion [28], and grants Defendants' motions for extensions of time [29, 34]. The terms of the TRO are set out at the end of this opinion. The time for Defendants to answer or otherwise plead is extended to January 8, 2018; the time for Defendants to provide a full and complete accounting is extended to December 21, 2017. The parties are directed to confer on a proposed protective order and to transmit to the Court's Proposed Order Box (ProposedOrderDow@ilnd.uscourts.gov) an agreed protective order (preferred) or their respective proposed orders (if agreement is not reached) no later than December 11, 2017.[1] Once a protective order is in place, Defendant Olympic must provide all of the financial information that it wishes to submit in compliance with the Court's order for an accounting to Plaintiff, subject to the terms of the protective order. The case is set for a preliminary injunction hearing on January 3, 2018 at 10:30 a.m. If the parties wish to extend the TRO by agreement, they may do so and request a later date for the preliminary injunction hearing.[2] Any supplemental briefs in support of or in opposition to Plaintiff's motion for a preliminary injunction must be filed by December 28, 2017, as this schedule (1) allows the parties time to assess the accounting information that Defendants have provided to date and the more robust information that they must provide by December 21 and (2) allows the Court time for review of the additional filings in advance of the hearing date. Given that the legal standards for a TRO and a preliminary injunction are essentially the same and the schedule set out above provides ample time to present both the relevant facts and law, it may be that the January 3 hearing will take the form of an oral argument on the motion without any live witnesses. To the extent that either side wishes to present live testimony-as opposed to using affidavits to submit their factual contentions-the parties must file a joint status report no later than noon on January 2, 2018, identifying any witnesses they propose to call, the subject matter of the witness' testimony, and an estimate of the length of the direct examination.

         I. Background[3]

         Plaintiff filed this action against Defendants to address Defendants' alleged violations of the Perishable Agricultural Commodities Act, 7 U.S.C. § 499a et seq. (the “PACA”), along with the PACA's implementing regulations promulgated by the Secretary of Agriculture, 7 C.F.R. § 46.1 et seq. Specifically, Plaintiff alleges that it is the beneficiary of a floating, non-segregated PACA statutory trust (“PACA Trust”), it is entitled to the protection of the PACA Trust, and Defendants have not maintained the PACA Trust as required by federal law. [1 ¶¶ 24-28.]

         Plaintiff is a dealer in wholesale and jobbing quantities of perishable agricultural commodities (“produce”) and is licensed as such under the PACA. [1 ¶¶ 6-7.] Mario Cardenas is a principal of Plaintiff. [8 (Cardenas Declaration), ¶ 5.] Defendant Olympic is also a PACA-licensed dealer of produce. [1 ¶¶ 8-10.] Defendant Doumouras is President of Defendant Olympic. [17 Exhibit 2 (Doumouras Declaration), ¶ 3.] Plaintiff alleges that Defendant Doumouras is in a position to control the business, finances, and assets of Olympic. [1 ¶ 12.]

         Between March 21, 2017 and September 8, 2017, Plaintiff sold to Olympic fresh honeydew melons, cantaloupe melons, and watermelons at an invoiced price of $312, 035.00. [1 ¶ 13.] Cardenas and Doumouras negotiated these sales for their respective companies over the telephone and via e-mail. [17 Exhibit 2 (Doumouras Declaration), ¶ 6]; [30-1 (Supplemental Doumouras Declaration), ¶ 6]. Plaintiff sent an invoice to Defendant Olympic for each produce shipment.[4] [1, Exhibit A (Epic Invoices).] Each invoice states that the “Sale Terms” for the shipments are “PACA 10.” [Id.] Each invoice also contains the following language:

The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by Section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. Sec. 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.

[Id.] Plaintiff alleges that Olympic has not paid $180, 705.90 of the amount owed to it for these shipments. [1 ¶ 17.] Plaintiff also alleges that, as recently as October 2017, Defendants have intentionally issued bad checks to Plaintiff. [7 at 2.] According to Plaintiff, the evidence of Defendants' non-payment combined with signs of financial distress demonstrate that Defendants are dissipating trust assets. [17 at 12]; [23 at 10-11]. In this action, Plaintiff brings claims for failure to maintain and not dissipate the PACA trust assets of Olympic (Counts I and II); conversion of PACA Trust assets (Count III); failure to make full payment promptly in violation of PACA (Count IV); common law breach of contract (Count V); and common law intentional breach of fiduciary duty (Count VI).[5]

         On November 20, 2017, Plaintiff moved for entry of a TRO and a preliminary injunction. [6], [9]. After counsel for Defendants appeared at the hearing, the Court set an expedited briefing schedule on the TRO motion. Defendants filed an opposition [17], and Plaintiff filed a reply [23]. Defendants also filed a variety of other motions, including a motion to strike several of Plaintiff's filings [27], a motion to stay proceedings [28], and a motion for extension of time to answer the complaint [29]. The Court addressed some of the parties' arguments in a previous order [32] and requested supplemental briefing on the issues raised by the parties in their numerous filings. The parties provided this supplemental briefing on December 5, 2017. See [35], [36]. Defendants also moved [34] for an extension of time to provide the Court with the necessary information to assess Olympic's financial status, which Plaintiff has opposed [38].

         II. Plaintiff's Motion for a Temporary Restraining Order

         A. Legal Standard

         The Seventh Circuit uses a two-step analysis to assess whether preliminary injunctive relief is warranted. See Girl Scouts of Manitou Council, Inc. v. Girl Scouts of USA, Inc., 549 F.3d 1079, 1085-86 (7th Cir. 2008). This analysis is the same one that is used to determine if a TRO is warranted. Gray v. Orr, 4 F.Supp.3d 984, 989 n.2 (N.D. Ill. 2013). “In the first phase, the party seeking a preliminary injunction must make a threshold showing that: (1) absent preliminary injunctive relief, he will suffer irreparable harm in the interim prior to a final resolution; (2) there is no adequate remedy at law; and (3) he has a reasonable likelihood of success on the merits.” Turnell v. CentiMark Corp., 796 F.3d 656, 661-62 (7th Cir. 2015). If the movant makes the required threshold showing, then the court moves on to the second stage and considers: “(4) the irreparable harm the moving party will endure if the preliminary injunction is wrongfully denied versus the irreparable harm to the nonmoving party if it is wrongfully granted; and (5) the effects, if any, that the grant or denial of the preliminary injunction would have on nonparties, ” i.e. the public interest. Id. at 662. The Court balances the potential harms on a sliding scale against the movant's likelihood of success. The greater the movant's likelihood of success, “the less strong a showing” the movant “must make that the balance of harm is in its favor.” Foodcomm Int'l v. Barry, 328 F.3d 300, 303 (7th Cir. 2003).

         B. Analysis

         For the reasons explained in this section, the Court concludes that the requirements for entry of a TRO have been satisfied.

         1. Reasonable Likelihood of Success on the Merits

         “At the preliminary injunction stage, the plaintiff must show that ‘it has a better than negligible chance of succeeding on the merits so that injunctive relief would be justified.'” Personeta, Inc. v. Persona Software, Inc., 418 F.Supp.2d 1013, 1016 (N.D. Ill. 2005) (quoting Ty, Inc. v. Jones Grp., Inc., 237 F.3d 891, 897 (7th Cir. 2001)).

         Plaintiff's likelihood of success depends upon its rights under the PACA. Congress enacted the PACA to regulate the nation's produce industry and protect sellers of perishable agricultural commodities from unfair conduct by buyers of such commodities, including failure to pay promptly and fully for produce ordered. See In re Ebro Foods, Inc., 449 B.R. 759, 762 (N.D. Ill. 2011). Under the PACA, it is unlawful for any PACA-licensed dealer to fail to make “full payment promptly” in respect of any transaction in a perishable agricultural commodity in interstate commerce. 7 U.S.C. § 499b(4); see also 7 C.F.R. § 46.2(aa)(5), (10) (“Full payment promptly” means, for “[p]ayment for produce purchased by a buyer, within 10 days after the day on which the produce is accepted” when parties have not contracted for different terms). As a further protection for sellers, the PACA also creates a non-segregated, floating statutory trust in favor of sellers in produce sold to buyers under which the buyer holds the produce and any proceeds and receivables from the produce in trust for the benefit of the seller. 7 U.S.C. § 499e(c)(2); 7 C.F.R. § 46.46(b); see also Am. Banana Co., Inc. v. Republic Nat'l Bank of N.Y., N.A., 362 F.3d 33, 37 (2d Cir. 2004) (the purpose of the statutory trust is to provide “greater protection” to sellers in the face of “the exigencies of the perishable commodities business”).

         This PACA Trust arises automatically by operation of law once the buyer accepts the produce from the seller in an interstate commerce transaction. See Patterson Frozen Foods, Inc. v. Crown Foods Int'l, Inc., 307 F.3d 666, 669 (7th Cir. 2002); Spada Properties, Inc. v. Unified Grocers, Inc., 121 F.Supp.3d 1070, 1075 (D. Or. 2015) (“The trust comes into existence when produce is delivered, and remains in effect until payment is received.”); Ebro Foods, 449 B.R. at 762 (“PACA trust rights are automatically granted when perishable commodities are bought on credit, but can be lost if not preserved by the seller.”). Suppliers that properly preserve their rights remain trust beneficiaries until they are paid in full. 7 U.S.C. § 499e(c)(2). Dealers subject to the PACA Trust provisions are required to maintain trust assets so that they are available to satisfy outstanding obligations to produce sellers, 7 U.S.C. § 499b(4), and “[a]ny act or omission which is inconsistent with this responsibility, including dissipation of trust assets, is unlawful and in violation of [the PACA].” 7 C.F.R. § 46.46(d)(1). Unpaid suppliers who perfect their trust rights gain a priority position over all other creditors, including secured creditors. Patterson, 307 F.3d at 669 (citing C.H. Robinson Co. v. Trust Co. Bank, N.A., 952 F.2d 1311, 1315 (11th Cir. 1992)).

         “In return for its protections, PACA establishes strict eligibility requirements.” Patterson, 307 F.3d at 669. First, in order to be eligible for PACA protection, a seller must be selling its produce on a short-term credit basis. See 7 C.F.R. § 46.46(e)(2); see also Am. Banana Co., 362 F.3d at 38; Patterson, 307 F.3d at 669. Under the applicable regulations, the default period of time for making payment under the PACA is within 10 days of the buyer's acceptance of the produce. 7 C.F.R. § 46.2(aa)(5). Parties may agree to payment terms other than that default 10-day period, but the maximum time for payment to which a seller can agree without losing eligibility for trust benefits is 30 days after receipt and acceptance of the produce. 7 C.F.R. § 46.46(e)(2); Ebro Foods, 449 B.R. at 763. Any agreement to different payment terms must be reduced to writing, and it must be entered into prior to the transaction. 7 C.F.R. § 46.46(e)(1); see also Patterson, 307 F.3d at 669; Sutherland Produce Sales, Inc. v. High Country Distrib. LLC, 2017 WL 782281, at *9 (D. Utah Feb. 28, 2017). A seller that has preserved its trust benefits may also enter into a post-default payment schedule with the defaulting buyer, or accept a partial payment from the defaulting buyer, without forefeiting its eligibility under the PACA Trust. See 7 C.F.R. § 46.46(e)(3); see also Spada Properties, Inc. v. Unified Grocers, Inc., 38 F.Supp.3d 1223, 1231 (D. Or. 2014).

         Second, in order to be eligible for PACA protection, a seller must file a written notice of intent to preserve trust benefits. 7 U.S.C. § 499e(c)(3); 7 C.F.R. § 46.46(f). See also Ebro Foods, 449 B.R. at 762-63; P.L.U.S. Brokerage, Inc. v. Kim, 908 F.Supp.2d 711, 715 (D. Md. 2012). There are two methods of achieving this notice. The unpaid seller can give written notice of intent to preserve the benefits of the trust in the manner outlined in 7 U.S.C. § 499e(c)(3). PACA licensees may also follow the “invoice method” notice procedure outlined in 7 U.S.C. § 499e(c)(4). Under this subsection, a licensee may preserve its PACA Trust benefits through its “ordinary and usual billing or invoice statements” if those statements include (1) the time period for payment if the parties expressly agree to a different period from that established by the Secretary of Agriculture; and (2) the following text: “The perishable agricultural commodities listed on this invoice are sold subject to the 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.” 7 U.S.C. § 499e(c)(3), (4); see also Ebro Foods, 449 B.R. at 763.

         a. The Court's Jurisdiction to Issue Injunctive Relief

         The Court will first take a moment to address Defendants' initial argument that the Court lacks jurisdiction over an action by a private party to prevent and restrain dissipation of a PACA Trust. [17 at 5.] As the Court stated in its December 1, 2017 order [32], this argument is a non-starter. The PACA states that “[t]he several district courts of the United States are vested with jurisdiction specifically to entertain actions by trust beneficiaries to enforce payment from the trust.” 7 U.S.C. § 499e(c)(5)(i). Defendants themselves have pointed out that the only two circuit courts to address the question of whether this provision includes jurisdiction over actions for injunctive relief by private parties have answered in the affirmative. See Tanimura & Antle, Inc. v. Packed Fresh Produce, Inc., 222 F.3d 132, 138 (3d Cir. 2000) (“[D]istrict courts clearly have jurisdiction over actions by private parties seeking to enforce payment from the trust.”); Frio Ice, S.A. v. Sunfruit, Inc., 918 F.2d 154, 157 (11th Cir. 1990) (“[N]either Section 499e(c)(4) nor PACA's legislative history directly or inferentially restricts the district court's jurisdiction to entertain injunctive suits by trust beneficiaries.”). Moreover, courts in this district and beyond routinely exercise jurisdiction to entertain actions for injunctive relief by trust beneficiaries. See, e.g., Circus Fruits Wholesale Corp. v. Farmer Joen Produce Corp., 2017 WL 1397950, at *1 (D.N.J. Apr. 18, 2017); Uesugi Farms, Inc. v. Michael J. Navilio & Son, Inc., 2015 WL 3962007, at *1 (N.D. Ill. June 25, 2015); Anthony Marano Co. v. J & S Produce Corp., 2014 WL 4922324, at *5 (N.D. Ill. Sept. 30, 2014); Midwest Mktg. Co., Inc. v. Quality Produce Suppliers, Inc., 6 F.Supp.3d 843, 846 (N.D. Ill. 2013); Superior Sales, Inc. v. Bakker Produce, Inc., 2013 WL 214251, at *2-3 (N.D. Ind. Jan. 18, 2013); Sato & Co., LLC v. S & M Produce, Inc., 2010 WL 431599, at *1 (N.D. Ill. Feb. 2, 2010); Harvest Sensations, LLC v. Evergreen Produce Imports, Inc., 2009 WL 10667728, at *1-2 (S.D. Fla. July 15, 2009); Continental Fruit Co. v. Thomas J. Gatziolis & Co., Inc., 774 F.Supp. 449, 454 (N.D. Ill. 1991). The Court therefore finds that it has jurisdiction to consider Plaintiff's motion for injunctive relief.

         b. Claim Against Defendant Olympic

         The Court also concludes that Plaintiff has shown a high likelihood of success on the merits of its PACA Trust claim against Defendant Olympic.

         In order to assert a valid PACA trust claim against Defendant Olympic, Plaintiff must establish that: “(1) it qualifies for protection under PACA as a produce supplier; (2) it provided the requisite notice of intent to preserve its interest in the statutory trust; and (3) the defendant acted inconsistent with its duty to maintain the trust and ensure any assets held in trust were freely available to fulfill any outstanding obligations to trust beneficiaries.” Midwest Mktg., 6 F.Supp.3d at 848 (citing 7 U.S.C. § 499 et seq.); see also Anthony Marano Co. v. MS-Grand Bridgeview, Inc., 2010 WL 5419057, at *5 (N.D. Ill.Dec. 23, 2010).

         i. Plaintiff is a Produce Supplier

         Plaintiff has demonstrated that it is a PACA-licensed supplier of produce. [See 8, Exhibit E (Epic PACA License).] Plaintiff has also demonstrated that the transactions set out the complaint fall within the purview of the PACA because they involve perishable agricultural commodities that traveled through interstate commerce. See 7 U.S.C. § 499b; see also Spada Properties, 121 F.Supp.3d at 1077 n.2 (noting that a valid PACA Trust claim must relate to perishable agricultural commodities that traveled through interstate commerce).

         ii. Plaintiff Provided the Requisite Notice of Intent

         Plaintiff has also made a sufficient showing that it provided the requisite notice of intent to preserve its interest in the PACA Trust. As a licensee under the PACA, Plaintiff is eligible to use the invoice method set out in 7 U.S.C. § 499e(c)(4) to provide this notice. See Ebro Foods, 449 B.R. at 763. Plaintiff has provided its invoices for each of the sales it made to Defendant Olympic. [1, Exhibit A (Epic Invoices)]. Nothing indicates that these invoices are not Plaintiff's “ordinary and usual” invoices. See 7 C.F.R. § 46.46(a)(5) (defining “ordinary and usual billing or invoice statements” as “communications customarily used between parties to a transaction in perishable agricultural commodities in whatever form, documentary or electronic, for billing or invoicing purposes”). Each invoice contains the necessary language set out in 7 U.S.C. § 499e(c)(4) to preserve Plaintiff's trust eligibility. [See 1, Exhibit A (Epic Invoices).] Each invoice also states that the “Sale Terms” are “PACA 10, ” [see id.], which represents Plaintiff's sale of produce to Defendant Olympic on 10-day payment terms. [See 7 at 7.] This fulfills the other requirement to retain eligibility as a PACA Trust beneficiary, namely, to sell produce to a buyer on a short-term credit basis. See 7 C.F.R. § 46.46(e)(2); P.L.U.S. Brokerage, 908 F.Supp.2d at 715.

         Defendants heavily dispute Plaintiff's position as a PACA Trust beneficiary. The lynchpin of Defendants' position is that all of the sales Plaintiff made to Olympic are subject to contractual terms, completely separate and apart from anything listed on Plaintiff's invoices, that do not implicate the PACA. Specifically, Defendants contend that the terms of the parties' agreement are those agreed to between Cardenas and Doumouras when they negotiated these transactions over the telephone and sent price quotes via e-mail. According to Defendants, none of the e-mails between the parties include payment terms because the parties previously agreed that Plaintiff would be paid as payments from Defendant Olympic's customers were collected. [30-1 (Supplemental Doumouras Declaration), ¶ 6.] Defendants also contend that these e-mails are “evidence of pre-sale written agreements, whereby the parties agreed to indefinite and uncertain payment terms exceeding ten days.” [30]; see also [30-1 (Supplemental Doumouras Declaration)]. Finally, Defendants argue that the invoices that Plaintiff sent could not govern these transactions because they are unenforceable under state contract law. None of Defendants' arguments in support of their position overcome Plaintiff's showing of a reasonable likelihood of success on the merits of its PACA claim against Olympic.

         The PACA unquestionably applies to the transactions between the parties. Because this case is premised on the Court's federal question jurisdiction, federal law controls. See 7 U.S.C. § 499e(b), (c)(5); Mrs. Condies Salad Co., Inc. v. Colorado Blue Ribbon Foods, LLC, 858 F.Supp.2d 1212, 1216-17 (D. Colo. 2012). Therefore, “the validity of contracts to sell perishable agricultural commodities in interstate commerce is to be determined by the federal act and the regulations issued under it to the extent that they are applicable.” Rothenberg v. H. Rothstein & Sons, 183 F.2d 524, 526 (3d Cir. 1950); see also S & S Packing, Inc. v. ...


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