07-3041-cv
A&J Produce v. Bronx Overall Economic Development Corp.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2007
(Argued June 12, 2008 Decided September 10, 2008)
Docket No. 07–3041–cv (L), 07-3402-cv (Con)
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A&J Produce Corp., J&C Enterprise, Inc., Mercatropic Corp.,
Tarsana Fruit Co., Christopher Ranch, LLC, Dole Fresh Fruit
Co., Naumes, Inc. and Pacific Fruit, Inc.,
Plaintiffs-Appellees,
U.S. Produce Exchange, Cuba Tropical, Inc., Del Monte Fresh
Produce, N.A., Inc., London Fruit Inc., Banacol Marketing
Corp., Florida Fresh, Inc., Stanley Orchard Sales, Inc. and
United Apple Sales, Inc.,
Intervenors-Plaintiffs-Appellees,
v.
Bronx Overall Economic Development Corporation,
Defendant-Appellant.
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Before: POOLER and SOTOMAYOR, Circuit Judges, and RESTANI, *
Judge.
Defendant-Appellant Bronx Overall Economic
Development Corporation (“BOEDC”) appeals from a judgment
and order of the United States District Court for the
Southern District of New York (George Daniels, Judge)
*
The Honorable Jane A. Restani, Chief Judge of the United
States Court of International Trade, sitting by designation.
granting in part Plaintiff-Appellee Tarsana Fruit Company’s
(“Tarsana”) Motion for Turnover of PACA Trust Assets in the
Court’s Registry and denying BOEDC’s Cross-Motion for
Summary Judgment.
Affirmed.
LOUIS W. DIESS, McCarron & Diess,
Washington, DC; Sherylee F. Bauer, Dobbs
Ferry, NY, for Plaintiff-Appellee Tarsana
Fruit Co.
Tom M. Fini, Cadwalader, Wickersham &
Taft LLP, New York, NY, for
Plaintiff-Appellee Pacific Fruit, Inc.
Bruce Levinson, Law Office of Bruce
Levinson, New York, NY, for Plaintiffs-
Appellees Christopher Ranch, LLC, Dole
Fresh Fruit Co., and Naumes, Inc.
Mark Mandell, Law Office of Mark Charles
Hewitt Mandell, Esq., Annandale, NJ, for
Plaintiffs-Appellees A&J Produce Corp.,
J&C Enterprise, Inc., and Mercatropic
Corp.
Mark A. Amendola, Martyn & Associates,
Cleveland, OH; Steve Kasper, New York,
NY, for Intervenors-Plaintiffs-Appellees
Banacol Marketing Corp., Cuba Tropical,
Inc., Del Monte Fresh Produce, N.A.,
Inc., Florida Fresh, Inc., London Fruit
Inc., Stanley Orchard Sales, Inc., and
United Apple Sales, Inc.
Leonard Kreinces, Kreinces & Rosenberg,
Westbury, NY, for Intervenor-Plaintiff-
Appellee U.S. Produce Exchange.
JOHN P. AMATO, Hahn & Hessen, LLP, New
York, NY, for Defendant-Appellant Bronx
Overall Economic Development Corporation.
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PER CURIAM:
This appeal concerns the distribution of proceeds
received from the sale of certain assets in a statutory trust
created pursuant to the Perishable Agricultural Commodities
Act, 7 U.S.C. § 499e(c) (“PACA”). We agree with the district
court that a secured creditor’s lien on PACA trust assets does
not constitute a transfer of the assets beyond the reach of
PACA protected creditors.
BACKGROUND
In 1986, American Banana Company, Inc. (“ABC”), a
perishable agricultural commodities dealer, purchased unit
shares in the Hunts Point Terminal Produce Cooperative
Association (“the Units”). When BOEDC made a one million
dollar loan to American Banana Realty (“ABR”), an affiliate of
ABC, in 1998, 1 the loan was guaranteed by both ABC and ABR and
secured by a first priority interest in the Units.
In 2001 and 2002, Tarsana and other produce sellers
(“Appellees”) filed complaints against ABC for failure to pay
for various deliveries of produce. The complaints were
1
ABC had operated out of the Hunts Point Terminal Market
for a number of years, and purchased the Units when the market
was converted to a cooperative. When ABC considered
relocating to New Jersey in 1998, the BOEDC loans were
extended as part of an economic incentive package to keep ABC
in New York.
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consolidated into the case currently on appeal. ABR defaulted
on the BOEDC loan in 2001, and BOEDC initiated foreclosure
proceedings against ABC seeking recourse to the collateral
units. After plaintiff A&J Produce Corporation (“A&J”) moved
to enjoin the foreclosure action, all parties to the
consolidated case agreed to allow A&J to purchase the Units
and deposit the net proceeds into the court’s registry pending
resolution of the competing claims. 2 In 2005, Tarsana moved
for turnover of the proceeds and other PACA trust assets
allegedly held by ABC to PACA creditors, and BOEDC cross-moved
for summary judgment. 3
The district court found on September 8, 2006, that
the assets were part of a PACA trust in existence when
Appellees brought their claims, and that BOEDC’s security
interest in the Units did not remove the assets from the PACA
trust or give BOEDC priority over the PACA creditors. The
district court therefore granted Tarsana’s motion in part and
denied BOEDC’s cross-motion, (see Order (Sept. 11, 2006)), and
2
In April 2002, the district court ordered all ABC
creditors to intervene to preserve their claims, and several
PACA and non-PACA creditors filed intervenor complaints.
3
Another defendant in some of the consolidated cases,
George Mouyious, also cross-moved for an order directing the
assets to be used to satisfy ABC’s tax obligations and asking
that he not be held personally liable. The motion was granted
in part and denied in part, and the issues are not currently
on appeal.
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ordered the distribution of the trust assets according to the
valid claims of the PACA creditors, (see Order (July 10,
2007)). 4 BOEDC appeals.
DISCUSSION
We review the district court’s grant or denial of
summary judgment de novo. Tasini v. N.Y. Times Co., 206 F.3d
161, 165 (2d Cir. 2000), aff’d, 533 U.S. 482 (2001).
Congress enacted PACA in 1930 to regulate the sale
of perishable agricultural commodities and amended the statute
in 1984 to further strengthen the protections provided to
produce suppliers. Endico Potatoes, Inc. v. CIT
Group/Factoring, Inc., 67 F.3d 1063, 1066–67 (2d Cir. 1995).
The statute provides, in relevant part, that
[p]erishable agricultural commodities received by a
commission merchant, dealer, or broker in all
transactions, and all inventories of food or other
products derived from perishable agricultural
commodities, 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.
7 U.S.C. § 499e(c)(2). This section “imposes a ‘non-
4
Judge Michael B. Mukasey presided over the original
proceedings in this matter, after which the case was
reassigned to Judge George B. Daniels who issued an order
directing the entry of a final judgment.
5
segregated floating trust’ on the commodities and their
derivatives, and permits the commingling of trust assets
without defeating the trust.” Endico Potatoes, 67 F.3d at
1067 (quoting 7 C.F.R. § 46.46(c)). This “highly unusual
trust beneficiary status” permits sellers, in the event of
default, “to trump the buyers’ other creditors, including
secured ones.” Am. Banana Co. v. Republic Nat’l Bank of N.Y.,
N.A., 362 F.3d 33, 38 (2d Cir. 2004).
We previously addressed whether the very type of
trust property at issue here, the Units, could be considered
PACA trust assets in In re Kornblum & Co., 81 F.3d 280 (2d
Cir. 1996). Kornblum determined that the challenging party
bears the burden of proving either that “(1) no PACA trust
existed when the Units were purchased; (2) even though a PACA
trust existed at that time, the Units were not purchased with
trust assets; or (3) although a PACA trust existed when the
Units were purchased and the Units were purchased with trust
assets, [the PACA trust debtor] thereafter paid all unpaid
sellers in full prior to the transactions involving the
Creditors, thereby terminating the trust.” Id. at 287.
Appellees claim that a PACA trust was in existence
when the Units were purchased, that trust proceeds were used
to purchase the Units, and that the trust has remained in
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continuous existence since that date. BOEDC, on the other
hand, contends that the trust terminated when the PACA
creditors with claims as to goods sold prior to BOEDC’s loan
were paid in full. Kornblum rejected this argument, holding
that “a single PACA trust exists for the benefit of all of the
sellers to a Produce Debtor, and continues in existence until
all of the outstanding beneficiaries have been paid in full.”
Id. at 286. There is no evidence in the record indicating
that all PACA creditors were paid between the time the Units
were purchased and the lien was granted to BOEDC, and BOEDC
has therefore not met its burden of demonstrating that the
Units were free of the PACA trust. Accordingly, we affirm the
district court’s finding that the Units are PACA trust assets.
BOEDC further maintains that the grant of a lien on
the Units constituted a transfer of the trust assets such that
they were removed from the PACA trust in favor of BOEDC.
BOEDC asserts that a breach of trust analysis is therefore
warranted to determine if ABC breached its fiduciary duties
under the trust when it granted BOEDC a lien on the Units. It
is necessary, however, to first determine the substance of the
transaction by analyzing the transfer of risk involved, in
order to resolve whether the lien constituted a purchase for
value or merely a security interest. See Endico Potatoes, 67
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F.3d at 1068-69. As we explained in Endico Potatoes,
[w]here the lender has purchased the accounts
receivable, the borrower’s debt is extinguished and
the lender’s risk with regard to the performance of
the accounts is direct, that is, the lender and not
the borrower bears the risk of non-performance by
the account debtor. If the lender holds only a
security interest, however, the lender’s risk is
derivative or secondary, that is, the borrower
remains liable for the debt and bears the risk of
non-payment by the account debtor, while the lender
only bears the risk that the account debtor’s
non-payment will leave the borrower unable to
satisfy the loan.
Id. at 1069. A creditor holding “only a security interest,”
therefore, retains that interest “subject to the rights of the
trust beneficiaries.” Id. at 1068.
Other courts have similarly found that for PACA
purposes, “[l]enders who receive trust assets through
enforcement of a security agreement are not bona fide
purchasers . . . because such transfers are not ‘for value.’”
Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336
F.3d 410, 413–14 (5th Cir. 2003); see also Consumers Produce
Co. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1380 n.3
(3d Cir. 1994)(“[W]hen secured lenders use their security
agreement to foreclose on property or otherwise enforce their
contractual rights, they essentially force the transfer of
trust property in satisfaction of an antecedent debt. Any such
transfer . . . through the exercise of rights under a security
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agreement is not for value.”) (quoting C.H. Robinson Co. v.
Trust Co. Bank, N.A., 952 F.2d 1311, 1315 n.5 (11th Cir.
1992)).
Here, BOEDC’s risk remained secondary, as the possibility
that the Units would change in value would affect BOEDC only
if ABC were unable to satisfy the loan. As BOEDC held only a
security interest in the Units, its claims remain inferior to
the claims of the PACA creditors. Endico Potatoes, 67 F.3d at
1069. Any other result would elevate the rights of secured
creditors above those of PACA creditors, contrary to the
intent of the statute. See id. at 1067. Accordingly, we
affirm the district court’s finding that the Units were not
transferred beyond the reach of the PACA creditors.
CONCLUSION
For the foregoing reasons, we conclude that a secured
creditor’s lien does not constitute a transfer of PACA trust
assets within the terms of the statute, and proceeds generated
from the sale of such assets are therefore properly awarded to
the PACA creditors. Accordingly, we AFFIRM the judgment of
the district court.
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