17‐1949‐(L)
The PACA Trust Creditors v. Genecco Produce Inc.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2018
(Submitted: September 5, 2018 Decided: January 9, 2019)
Docket Nos. 17‐1949‐cv, 17‐2051‐cv
THE PACA TRUST CREDITORS OF LENNY PERRYʹS PRODUCE, INC.,
Plaintiffs‐Appellees‐Cross‐Appellants,
v.
GENECCO PRODUCE INC., DAVID GENECCO,
Defendants‐Appellants‐Cross‐Appellees.*
Before: SACK, RAGGI, AND CHIN, Circuit Judges.
The plaintiffs brought an adversary proceeding in the United States
Bankruptcy Court for the Western District of New York alleging that the
defendants wrongfully failed to pay the debtor Lenny Perryʹs Produce, Inc., for
produce held in trust for the plaintiffs, in violation of the Perishable Agricultural
Commodities Act, 7 U.S.C. § 499. The United States District Court for the
Western District of New York (William M. Skretny, Judge) adopted a bankruptcy
* The Clerk of the Court is directed to amend the official caption to conform to the
listing of the parties above.
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
judgeʹs report and recommendation (Michael J. Kaplan, Bankruptcy Judge) that
summary judgment be granted to the plaintiffs in the proceeding but that the
defendants receive a pro rata share of assets of the trust established under the
Act. We agree with the bankruptcy judge and district court. Because assets
subject to the Act are held in a ʺfloatingʺ trust for the benefit of unpaid produce
suppliers and never become part of a bankruptcy estate, when a purchaser of
produce files for bankruptcy under Chapter 7, a creditor covered by the Actʹs
provisions is entitled to a pro rata share of trust assets, but not to a complete
offset of mutual debts between it and the bankrupt. Here, the defendants elected
not to file a proof of claim after the district court issued a claims process order
under the Act. Nevertheless, they preserved their PACA claims by providing
statutorily required notice to the debtor in connection with each pre‐bankruptcy
sale of fresh produce; filed a proof of claim with the bankruptcy court before the
district court had issued the claims process order; and reasonably, although
mistakenly, thought that they could vindicate their rights as creditors using a
bankruptcy offset. Under those circumstances, we conclude that the district
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
court did not err in awarding the defendants a pro rata share of the PACA trust
assets.
The district courtʹs decision is therefore:
AFFIRMED.
David L. Rasmussen, Mallory Kass Smith,
Davidson Fink LLP, Rochester, New York,
for Defendants‐Appellants‐Cross‐Appellees.
Christopher M. Corrigan, Martyn &
Associates, Cleveland, Ohio, for Plaintiffs‐
Appellees‐Cross‐Appellants.
SACK, Circuit Judge:
The plaintiffs and the defendants are creditors of debtor Lenny Perryʹs
Produce, Inc. (ʺLPPʺ). Between 2005 and 2008, defendant Genecco Produce, Inc.,
(ʺGPIʺ) and debtor LPP regularly sold produce to one another. Because the
goods were perishable agricultural commodities, these transactions were
governed by the federal Perishable Agricultural Commodities Act, 7 U.S.C. § 499
(ʺPACAʺ).
Instead of paying each other after each transaction, GPI and LPP
accumulated mutual debts intended to offset one another. By the end of 2008,
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
those debts totaled $204,774.88, owed by GPI to LPP, and $263,061.92, owed by
LPP to GPI — a net balance of $58,287.04 in GPIʹs favor.
On January 27, 2009, LPP filed for bankruptcy protection under Chapter 7
of the United States Bankruptcy Code in the United States Bankruptcy Court for
the Western District of New York. The plaintiffs, also unpaid sellers of
perishable agricultural commodities to LPP, brought an adversary proceeding
against the defendants in the bankruptcy court. They alleged that the $204,774.88
owed by GPI to LPP constituted assets of a trust that arose for their benefit under
the terms of PACA (ʺPACA Trustʺ). In response, the defendants asserted that
federal bankruptcy law, 11 U.S.C. § 553(a), and New York State law, N.Y. Debt. &
Cred. L. § 151, entitled them to a complete offset of any amount otherwise due to
the PACA Trust by amounts that had been due to the defendants from LPP.
On June 7, 2017, the United States District Court for the Western District of
New York (William M. Skretny, Judge) entered a judgment adopting the
bankruptcy judgeʹs report and recommendation (Michael J. Kaplan, Bankruptcy
Judge) recommending that summary judgment be granted to the plaintiffs. The
district court concluded that the defendants were not entitled to a full offset of
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
their mutual unpaid debts, but only to a pro rata share of the PACA Trust along
with other unpaid LPP produce suppliers.
The defendants argue that the district court erred because New York State
law and federal bankruptcy law entitle them to a complete offset of any amounts
they owed LPP or the PACA Trust; in the alternative, they claim that questions of
fact regarding the transfer of accounts receivable into the PACA Trust render the
district court’s grant of summary judgment improper.
We disagree. Because PACA assets are held in trust for the benefit of
unpaid produce suppliers generally and never become part of a bankruptcy
estate, and because such PACA creditors enjoy priority over non‐PACA
creditors, the defendantsʹ offset defense under section 553 of the U.S. Bankruptcy
Code and New York State law is unavailing. The district court therefore
correctly found that the plaintiffsʹ claims against the defendants are not subject to
the statutory offset sought by the defendants.
Meanwhile, the plaintiffs assert that the district court erred in permitting
the defendants to recover even a pro rata share of the PACA Trust. The plaintiffs
do not dispute that the defendants, like the plaintiffs, are PACA creditors.
Rather, they contend that the defendants are barred from recovery because they
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
did not file a proof of claim pursuant to the district courtʹs claims procedure
order (ʺClaims Procedure Orderʺ), which established deadlines for the plaintiffsʹ
counsel to issue written notice to potential PACA claimants and for prospective
claimants to file proofs of claim.
We conclude otherwise. The defendants preserved their PACA claims by
providing statutorily required notice to the debtor in each invoice at issue and
filed a proof of claim with the bankruptcy court before the district court had
issued the PACA Claims Procedure Order. Based at least, in part, on ambiguities
in that Order, they reasonably, although mistakenly, thought that they could
vindicate their rights as PACA creditors using a bankruptcy offset and elected
not to file a PACA proof of claim. Under these circumstances, as the district
court correctly concluded, PACAʹs statutory purpose is best realized if the
defendants are permitted to collect pro rata shares of the PACA assets. The
district court did not err in allowing the defendants to recover their pro rata
share.
The judgment of the district court is therefore affirmed.
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
BACKGROUND
General Factual Background
At all relevant times, GPI, and LPP before it filed for bankruptcy, were
merchants of perishable agricultural commodities operating out of the Niagara
Frontier Food Terminal in Buffalo, New York. Between September 2005 and
October 2008, LPP and GPI regularly sold produce to one another for resale to
their respective customers. In connection with each transaction, the seller—LPP
or GPI—issued an invoice to the other with a notice of intent to preserve its
PACA rights.1
Usually, neither GPI nor LPP would pay the other for the produce they
sold to one another. Instead, they maintained open, off‐setting accounts.
Although GPI and LPP tried ʺto make sure . . . GPI was not sending Lenny
Perryʹs more produce than Lenny Perryʹs was sending GPI,ʺ their efforts were
not entirely successful. Report and Recommendation at 4, PACA Trust Creditors
The invoices contained the following language, which the Act, at section 499e(c)(4),
1
identifies as sufficient to provide notice of intent to preserve PACA benefits: ʺThe
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.ʺ See LPP Invoices, Appʹx 134‐395.
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., No. 09‐1269‐MJK (W.D.N.Y.
Feb. 12, 2014), ECF No. 126. By January 2009, LPP owed GPI $263,061.92, and
GPI owed LPP $204,774.88, resulting in a net balance of $58,287.04 in GPIʹs favor.
The plaintiffs2 are also merchants dealing in perishable agricultural
commodities. Like GPI, they sold fresh produce to LPP. Those sales for which
the plaintiffs were never paid are governed by PACA. When LPP filed for
bankruptcy, it owed the plaintiffs an estimated $292,417.39.
Procedural History
On January 27, 2009, LPP and its principal, Leonard R. Perry, filed
ʺVoluntary Petitionsʺ for protection under Chapter 7 of the Bankruptcy Code in
the United States Bankruptcy Court for the Western District of New York. On
February 17, 2009, GPI filed a proof of claim for $263,061.92. On March 9, 2009,
the plaintiffs brought an adversary proceeding against LPP and Perry in that
The plaintiffs are Burch Equipment LLC, Jackson’s Farming Co., Pismo Oceano
2
Vegetable Exchange, Wings Landing Farm, Brooks Tropicals LLC, John B. Ordille Inc.,
and Weis‐Buy Farms Inc.
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
court alleging PACA violations and a breach of fiduciary duty owed to the
PACA beneficiaries.
The plaintiffs filed a motion to establish a PACA claims procedure, which
the bankruptcy court granted on August 7, 2009. Under the Claims Procedure
Order, LPP was required, on or before August 12, 2009, to provide the plaintiffsʹ
counsel with names and addresses of all potential PACA claimants not already
listed in the bankruptcy petition. Also by order of the court, the plaintiffsʹ
counsel had until August 17, 2009, to issue written notice of the Claims
Procedure Order to potential PACA claimants, and prospective PACA claimants
had until August 31, 2009, to file complaints in intervention and PACA proofs of
claim. Although the plaintiffs timely served GPI with notice of the Claims
Procedure Order, GPI elected not to file a PACA claim but to pursue its offset
claim instead.
On November 4, 2009, the PACA Trust beneficiaries instituted an
adversary proceeding against the defendants alleging that between September
2005 and October 2008, LPP delivered to GPI fresh produce worth a total of
$204,774.88, for which they were not compensated. The beneficiaries further
alleged that LPPʹs accounts receivable from those sales constituted PACA Trust
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
assets. On December 30, 2009, the defendants filed an answer asserting that they
were ʺentitled to a setoff in the amount of $263,061.92,ʺ owed to them by LPP,
ʺwhich is in excess of the $204,774.88 claimed to be due and owing by [the
plaintiffs].ʺ Appʹx 94.
Motion to Strike
On January 15, 2010, the plaintiffs filed a motion to strike the defendantsʹ
statutory‐offset defense. They argued that the defendantsʹ offset rights, if any,
could only be asserted against LPP, not the PACA Trust or its beneficiaries. On
August 14, 2012, the bankruptcy court recommended that the district court deny
the plaintiffsʹ motion because it would be ʺunfair and inequitableʺ to strike the
offset defense unless the defendants are ʺpermitted a late ʹopt‐inʹ to share as []
beneficiar[ies] of the Trust.ʺ3 PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v.
Genecco Produce, Inc. (In re Lenny Perryʹs Produce), Bankr. No. 09‐10297 K, 2012
WL 7767580, at *4, 2012 Bankr. LEXIS 5440, at *14 (Bankr. W.D.N.Y. Aug. 14,
2012). On November 12, 2012, the district court adopted the bankruptcy courtʹs
Although the district court has jurisdiction over the adversary proceeding between
3
the plaintiffs and the defendants, it entered a Special Order of Reference to the
bankruptcy court. Pursuant to that Special Order, the bankruptcy court presided over
each of the motions filed in this matter and issued reports and recommendations to the
district court.
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
recommendation. John B. Ordille, Inc. v. Lenny Perryʹs Produce, Inc., No. 12‐MC‐
54S, 2012 WL 5499652, 2012 U.S. Dist. LEXIS 161648 (W.D.N.Y. Nov. 12, 2012).
Motion for Summary Judgment
On May 3, 2013, the plaintiffs moved for summary judgment, renewing
their argument that GPI could only bring an offset claim against LPP, not against
the plaintiffs. On February 12, 2014, the bankruptcy court recommended that the
district court grant the plaintiffsʹ motion. Report and Recommendation, PACA
Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., No. 09‐1269‐
MJK (W.D.N.Y. Feb. 12, 2014), ECF No. 126. It rejected the defendantsʹ argument
that a long‐term bartering arrangement had extinguished GPIʹs debts to LPP.
The bankruptcy court noted that GPI had failed to produce any tax documents or
other evidence to substantiate its claim of a bartering arrangement with LPP. To
the contrary, it concluded, ʺthe parties were simply selling commodities to each
other . . . , maintaining open, off‐setting accounts that remained so (meaning
never materially reconciled by off‐set) right up until the [d]ebtor went out of
business.ʺ Id. For that reason, it recommended that the district court enter
judgment in favor of the plaintiffs in the amount that GPI owed to LPP, less GPIʹs
pro rata share of the PACA Trust.
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
On September 4, 2014, the district court remanded the matter to the
bankruptcy court for further proceedings. PACA Trust Creditors of Lenny Perryʹs,
Inc. v. Genecco Produce, Inc., No. 14‐MC‐036S, 2014 WL 4385436, at *1, 2014 U.S.
Dist. LEXIS 123965, at *3 (W.D.N.Y. Sept. 4, 2014). It explained that because
ʺbartering and setoff are different concepts,ʺ the absence of a bartering
relationship does not necessarily defeat an offset defense. Id. at *3‐4; 2014 U.S.
Dist. LEXIS 123965, at *7. The district court directed the bankruptcy court, on
remand, to consider whether (i) GPI’s debt to LPP and LPPʹs debt to GPI
constitute ʺmutual debt[s]ʺ for purposes of section 553 of the Bankruptcy Code,
and (ii) whether any funds due from GPI to LPP are PACA Trust assets not
subject to the defendantsʹ offset claim. Id. at *2‐3; 2014 U.S. Dist. LEXIS 123965, at
*7, 9‐10.
On February 23, 2015, the bankruptcy court issued a ʺClarified Report and
Recommendation,ʺ which explained in greater detail—but did not materially
alter—its February 12, 2014 recommendation. PACA Trust Creditors of Lenny
Perryʹs Produce, Inc. v. Genecco Produce, Inc. (In re Lenny Perryʹs Produce, Inc.),
No. 09‐10297 K, 2015 Bankr. LEXIS 2713 (Bankr. W.D.N.Y. Feb. 23, 2015). On
August 12, 2015, the district court again remanded the matter to the bankruptcy
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
court, explaining that ʺclarification of the issues raised in the partiesʹ submissions
as well as this Courtʹs prior order is warranted.ʺ PACA Trust Creditors of Lenny
Perryʹs Produce v. Genecco Produce, Inc., No. 15‐MC‐028S, 2015 WL 4761627, at *6,
2015 U.S. Dist. LEXIS 105908, at *15 (W.D.N.Y. Aug. 12, 2015).
The bankruptcy court issued what turned out to be its final report and
recommendation on December 28, 2015. PACA Trust Creditors of Lenny Perryʹs
Produce, Inc. v. Genecco Produce, Inc. (In re Lenny Perryʹs Produce, Inc.), No. 09‐
10297 K, 2015 WL 9581383, 2015 Bankr. LEXIS 4371 (Bankr. W.D.N.Y. Dec. 28,
2015). The court concluded that ʺthe Trust’s rights are not now, and never were,
subject to the limitations that [LPP] suffered as to [GPI], or the defenses that
[GPI] had against [LPP].ʺ Id. at *2; 2015 Bankr. LEXIS 4371, at *4‐5. In the
bankruptcy courtʹs view, ʺevery item of perishable commodities [LPP] ever
handled was held by it in trust, as were any proceeds realized from those items,ʺ
so that ʺeverything that [LPP] received from [GPI] or was entitled to receive from
[GPI] on account of perishable commodities delivered to [GPI] was subject to the
statutory PACA Trust in favor of growers, cooperatives, etc.[,] which were owed
money for those commodities.ʺ Id.; 2015 Bankr. LEXIS 4371, at *5. The PACA
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
Trust existed ʺfrom the moment that [LPP] bought or sold commodities subject to
PACA.ʺ Id.; 2015 Bankr. LEXIS 4371, at *5.
The bankruptcy court further decided that LPP and GPIʹs method of doing
business by maintaining mutual debts ʺwas not consistent with PACA,ʺ which
requires timely payments ʺso that all providers of perishable agricultural
commodities to [LPP] had a chance to receive cash payments from [GPI] for what
they provided.ʺ Id. at *4; 2015 Bankr. LEXIS 4371, at *11‐12. It concluded that
ʺequity requires treatment that PACA would seem to require,ʺ id.; 2015 Bankr.
LEXIS 4371, at *12: a judgment against GPI equal to ʺthe difference between what
[GPI] owed [LPP] on the date of the Chapter 7 petition (and therefore owes to the
PACA Trust) and the amount that [GPI] would receive as a PACA Trust
beneficiary,ʺ id. at *6; 2015 Bankr. LEXIS 4371, at *19 (emphasis in original).
On June 7, 2017, the district court adopted the bankruptcy courtʹs
recommendation in full. PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v.
Genecco Produce Inc., No. 16‐MC‐4S, 2017 WL 2462035, 2017 U.S. Dist. LEXIS
87488 (W.D.N.Y. June 7, 2017). The district court rejected the defendantsʹ
argument that they are entitled to a complete offset. It observed that offsets only
apply to mutual debts, and the debts between GPI and LPP are ʺmutual only to
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
the extent [d]efendants are co‐beneficiaries to the PACA Trust. And, to the
extent that they are co‐beneficiaries, [p]laintiffs and [d]efendants owe one
another a fiduciary duty to take no more than their [pro rata] share of trust
assets.ʺ Id. at *2; 2017 U.S. Dist. LEXIS 87488, at *4. The district court also
rejected the plaintiffsʹ argument that the defendantsʹ failure to file a PACA claim
precludes them from recovering a pro rata share of the PACA Trust. Instead, the
district court decided that allowing the defendants limited recovery as PACA
creditors ʺbest furthers the policies of PACA.ʺ Id. at *1; 2017 U.S. Dist. LEXIS
87488, at *4. The district court concluded that although the defendants are not
entitled to an offset under bankruptcy law, they may recover a pro rata share of
the PACA Trust. Id.; 2017 U.S. Dist. LEXIS 87488, at *4‐5.
DISCUSSION
There are two issues raised on appeal: First, whether the district court
erred in concluding that LPPʹs accounts receivable constitute PACA Trust assets
and that the defendants are therefore not entitled to a statutory offset of their
debts to LPP against LPPʹs debts to them; and second, whether the district court
erred in allowing the defendants to recover a pro rata share of the PACA Trust.
The defendants argue that the Bankruptcy Code, 11 U.S. Code § 553, which
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
governs ʺSetoff,ʺ entitles them to a complete offset of any amount otherwise due
to the PACA Trust. The plaintiffs respond that the defendants may not recover
even a pro rata share of the PACA Trust because they elected not to participate in
the PACA claims procedure in the bankruptcy court. For the reasons discussed
below, we affirm the district courtʹs judgment in its entirety.
I. Standard of Review
ʺWe review a grant of summary judgment de novo, examining the
evidence in the light most favorable to, and drawing all inferences in favor of, the
non‐movant.ʺ Blackman v. N.Y. City Transit Auth., 491 F.3d 95, 98 (2d Cir. 2007)
(per curiam) (quoting Sheppard v. Beerman, 317 F.3d 351, 354 (2d Cir. 2003)).
Summary judgment is appropriate only if ʺthe movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as
a matter of law.ʺ Fed. R. Civ. P. 56(a). A genuine dispute exists if ʺthe evidence
is such that a reasonable jury could return a verdict for the nonmoving party.ʺ
Fireman’s Fund Ins. Co. v. Great Am. Ins. Co. of N.Y., 822 F.3d 620, 631 n.12 (2d Cir.
2016) (internal quotation marks omitted). However, ʺa party may not rely on
mere speculation or conjecture as to the true nature of the facts to overcome a
motion for summary judgment.ʺ Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir.
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
1995) (internal quotation marks omitted). The party opposing summary
judgment ʺmust do more than simply show that there is some metaphysical
doubt as to the material facts.ʺ Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 586 (1986).
When a district court interprets its own order, we apply an abuse‐of‐
discretion standard. Garcia v. Yonkers Sch. Dist., 561 F.3d 97, 103 (2d Cir. 2009);
see also United States v. Spallone, 399 F.3d 415, 423 (2d Cir. 2005) (ʺWhen an issuing
judge interprets his own orders, we accord substantial deference to the
draftsman, and we will not reverse the judgeʹs construction of an ambiguity in
his own words except for abuse of discretion.ʺ).
II. Statutory Offset
The defendants advance two arguments challenging the district courtʹs
conclusion that they are not entitled to a complete offset of the debts covered by
PACA from them to LLP against those from LLP to the defendants under New
York State law and federal bankruptcy law. First, they argue that LPPʹs relevant
accounts receivable were transferred to the PACA Trust, if at all, subject to the
defendantsʹ offset rights. Second, they argue that factual disputes exist as to
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
whether LPPʹs accounts receivable constituted PACA Trust assets. We reject
both arguments.
1. Availability of Offset Defense Against the Plaintiffs’ PACA Claim
The defendants claim that ʺ[n]o authority exists,ʺ Defendantsʹ Br. 14, that
would require the defendants to ʺpay [their] debts in full to the bankrupt[], while
allowing the [defendants] to recover only a percentage of the debts owed to
[them] by the bankrupt[, LPP],ʺ id. at 13 (internal quotation marks omitted). Not
so. The statutory language of PACA and section 553 of the U.S. Bankruptcy
Code, as well as this Courtʹs prior decisions, require precisely that.
The PACA trust provision, which Congress enacted in order ʺto make the
sellersʹ interests in the commodities and sales proceeds superior to those of the
buyersʹ creditors,ʺ Am. Banana Co. v. Rep. Natʹl Bank of N.Y., 362 F.3d 33, 37 (2d
Cir. 2004), states in relevant part:
Perishable agricultural commodities received by a
commission merchant, dealer, or broker in all
transactions . . . and any receivables or proceeds from
the sale of such commodities or products, shall be held
by such commission merchant, dealer, or broker in trust
for the benefit of all unpaid suppliers or sellers of such
commodities or agents involved in the transaction, until
full payment of the sums owing in connection with such
transactions has been received by such unpaid
suppliers, sellers, or agents.
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
7 U.S.C. § 499e(c)(2). Under regulations adopted by the U.S. Department of
Agriculture (ʺDOAʺ), PACA assets ʺare to be preserved as a nonsegregated
ʹfloatingʹ trust.ʺ 7 C.F.R. § 46.46(b). PACA and related DOA regulations provide
produce sellers with ʺa self‐help tool enabling them to protect themselves against
the abnormal risk of losses resulting from slow‐pay and no‐pay practices by
buyers or receivers of fruits and vegetables.ʺ Coosemans Specialties, Inc. v.
Gargiulo, 485 F.3d 701, 705 (2d Cir. 2007) (citations omitted).
We have explained that ʺ[o]rdinary principles of trust law apply to the
trusts created by [PACA] . . . so that the Produce Debtor holds the legal title to
the Produce and its derivatives or proceeds but the seller retains an equitable
interest in the trust property pending payment[.]ʺ Tom Lange Co. v. Kornblum &
Co. (In re Kornblum & Co.), 81 F.3d 280, 284 (2d Cir. 1996) (citations omitted).
Because PACA creditors hold an equitable interest in the PACA trust pending
payment, ʺthe Bankruptcy Code excludes PACA trust assets from the bankruptcy
estate.ʺ Id. (citing, inter alia, United States v. Whiting Pools, Inc., 462 U.S. 198, 205
n.10 (1983) (explaining that the Bankruptcy Code ʺplainly exclude[s from the
bankruptcy estate] property of others held by the debtor in trust at the time of
the filing of the [bankruptcy] petitionʺ)). Consequently, PACA ʺgives unpaid
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
[produce] suppliers . . . priority over secured lenders . . . to PACA trust assets.ʺ
Albee Tomato, Inc. v. A.B. Shalom Produce Corp., 155 F.3d 612, 615 (2d Cir. 1998).
The defendantsʹ reliance on bankruptcy law to defend against PACA
claims is misplaced. To the extent the disputed assets represent PACA Trust
assets, they are held outside the bankruptcy estate, and their disposition is,
therefore, governed by trust law rather than bankruptcy law. See Kornblum, 81
F.3d at 284. To permit a bankruptcy offset against PACA Trust assets would be
inconsistent with Congressʹs intent in amending PACA in 1984 to ʺbroaden the
protections afforded to produce suppliersʺ who had previously ʺreceive[d] little
protection in any suit for recovery of damages where a buyer ha[d] failed to
make payment as required by the contract.ʺ Id. at 283 (citation omitted). Because
PACA provides unpaid produce sellers with priority over other creditors and
establishes that the disposition of PACA assets is governed by trust law, see id. at
284, we conclude that the district court did not err in deciding that the
defendants are not entitled to the offset they seek under New York and federal‐
bankruptcy law.4
This conclusion is buttressed by the language in section 553 of the U.S. Bankruptcy
4
Code, which makes offsets available only for ʺmutualʺ debts. 11 U.S.C. § 553(a).
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
2. No Genuine Dispute of Material Fact
The defendants next argue that material factual disputes exist as to
whether LPPʹs accounts receivable for the sale of produce to the defendants,
totaling $204,774.88, constitute PACA Trust assets. The defendants suggest that
because they sought an offset before the district court issued its Claims
Procedure Order, LPPʹs receivables never became PACA Trust assets, or, if they
did, they were transferred subject to the defendantsʹ offset rights.
The defendantsʹ argument misses the mark. We have explained that a
PACA trust ʺis automatically established each time a broker or merchant
purchases perishable commodities.ʺ D.M Rothman & Co., Inc. v. Korea Commercial
Bank of N.Y., 411 F.3d 90, 96 (2d Cir. 2005); accord C&E Enters., Inc. v. Milton
Mutuality exists where debts ʺare due to and from the same persons in the same
capacity.ʺ Westinghouse Credit Corp. v. D’Urso, 278 F.3d 138, 149 (2d Cir. 2002) (citations
omitted). The debts here are not mutual because the defendants and LPP appear in
different capacities: The defendants assert their claim to $263,061.92 in their capacity as
creditors in LPP’s bankruptcy proceeding; LPP, by contrast, does not—and cannot—
assert a claim for $204,774.88 in its capacity as a creditor, but instead pursues those
funds solely on behalf of unpaid suppliers. See 7 U.S.C. § 499e(c)(2) (“Perishable
agricultural commodities received by a . . . merchant, . . . and any receivables or
proceeds from the sale of such commodities . . . , shall be held . . . in trust for the benefit
of all unpaid suppliers . . . until full payment of the sums owing . . . has been received
by such unpaid suppliers[.]”); cf. DʹUrso, 278 F.3d at 149 (ʺ[O]bligations lack mutuality
where one party is a trust beneficiary asserting his or her rights against a trustee, and
the other is a creditor exercising his or her contractual rights[.]ʺ).
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
Poulos, Inc. (In re Milton Poulos, Inc.), 947 F.2d 1351, 1352 (9th Cir. 1991) (ʺThe
[PACA] trust automatically arises in favor of a produce seller upon delivery of
produce[.]ʺ); Patterson Frozen Foods, Inc. v. Crown Foods Int’l, Inc., 307 F.3d 666, 669
(7th Cir. 2002) (ʺTh[e PACA] floating trust is automatically created when the
dealer accepts the goods[.]ʺ). Any factual dispute as to whether the defendants
asserted their offset claim before the district court issued the Claims Procedure
Order is immaterial: Even if the defendantsʹ offset claim predates the Claims
Procedure Order, the PACA Trust arose immediately upon the sale of produce
from the plaintiffs to LPP—long before the defendants asserted their offset
claim—such that the accounts receivable associated with those transactions
would not be subject to that defense.
The defendants further argue that the plaintiffs have failed to establish that
the accounts receivable were PACA Trust assets. This argument, too, fails. It is
the defendants who bear the burden of demonstrating that disputed assets do not
constitute PACA trust assets. Kornblum, 81 F.3d at 287. They have not met that
burden. Nothing in the record suggests that LPP entered into a factoring
agreement with GPI, that LPP and GPI engaged in a bartering relationship, or
that LPP and GPI paid down their mutual debts. Instead, the record establishes
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
that LPP and GPIʹs debts to each other remained outstanding when GPI filed for
bankruptcy.
The defendants thus have failed to identify any genuine dispute of
material fact as to whether LPPʹs accounts receivable constitute PACA Trust
assets.
III. Pro Rata Share
Finally, we address the district courtʹs decision to award the defendants a
pro rata share of the PACA Trust, in light of the defendantsʹ loss on their set‐off
claim and failure to file a proof of claim after the district court issued the Claims
Procedure Order. The bankruptcy court recommended that the district court
allow the defendants to recover a pro rata share, in part because the Claims
Procedure Order did not specify which ʺreceivablesʺ were ʺtrust assetsʺ; it was
therefore ʺnot unreasonable for [GPI] to have relied upon its belief that ordinary
setoff rights as to ʹreceivablesʹ would apply.ʺ In re Lenny Perryʹs Produce, 2012
WL 7767580, at *4, 2012 Bankr. LEXIS 5440, at *14‐15, adopted, John B. Ordille, Inc.
v. Lenny Perryʹs Produce, Inc., No. 12‐MC‐54S, 2012 WL 5499652, 2012 U.S. Dist.
LEXIS 161648 (W.D.N.Y. Nov. 12, 2012).
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
The district court agreed: It noted that the ʺ[d]efendants raised their
defense of offset even before the PACA Claims Procedure was established,ʺ and
concluded that they ʺhad a good faith basis for pursuing their claims through a
bankruptcy offset rather than through the PACA claims process.ʺ PACA Trust
Creditors of Lenny Perryʹs Produce, Inc., 2017 WL 2462035, at *1, 2017 U.S. Dist.
LEXIS 87488, at *4.
The district court did not err in allowing the defendants to recover a pro
rata share of the PACA Trust. It is undisputed that the defendants complied
with all statutory requirements to preserve their PACA claims: In each invoice
that GPI sent to LPP, it provided written notice of intent to preserve its PACA
rights. It is also undisputed that the defendants filed a proof of claim in
bankruptcy court before the Claims Procedure Order was issued, for an offset in
the amount of $263,061.92. Having filed an offset claim, the defendants
reasonably thought that their debt to LPP was not a ʺreceivableʺ under the
Claims Procedure Order and that they were not required to submit a PACA
proof of claim. The bankruptcy court and district court properly concluded that,
in light of ambiguities in the Claims Procedure Order and the novelty of the legal
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The PACA Trust Creditors of Lenny Perryʹs Produce, Inc. v. Genecco Produce, Inc., David Genecco
issues presented, the defendants had a good‐faith basis to pursue their claims
through a bankruptcy offset in lieu of a PACA claim.
Moreover, the statute states, in relevant part, that perishable goods and
any receivables from their sale are held in trust ʺfor the benefit of all unpaid
suppliers or sellers of such commodities or agents involved in the transaction,
until full payment of the sums owing in connection with such transactions has
been received by such unpaid suppliers, sellers, or agents.ʺ 7 U.S.C. § 499e(c)(2)
(emphasis added). The defendants are unpaid suppliers of produce. Denying
them a pro rata share of the PACA Trust, even though they preserved their
PACA claims and filed a proof of claim in bankruptcy court, would be, we think,
inconsistent with the statutory text and the district courtʹs interpretation of its
own Claims Procedure Order. We therefore conclude that the district court did
not err in permitting the defendants to recover a pro rata share of the PACA
Trust.
CONCLUSION
We have considered the partiesʹ other arguments on appeal and conclude
that they are without merit. For the foregoing reasons, we AFFIRM the
judgment of the district court.
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