Jacobs Silver K Farms, Inc. et al v. Taylor Produce, LLC, et al

Filing 197

FINDINGS OF FACT AND CONCLUSIONS OF LAW. Signed by Judge B. Lynn Winmill. Associated Cases: 4:13-cv-00535-BLW, 4:14-cv-00141-BLW, 4:14-cv-00247-BLW(caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (jp)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
JACOBS SILVER K FARMS, INC., et al.,
Plaintiffs,

Case No. 4:13-CV-535-BLW
Consolidated Cases:
4:14-CV-141-BLW
4:14-CV-247-BLW

v.
TAYLOR PRODUCE, LLC, et al.,

FINDINGS OF FACT AND
CONCLUSIONS OF LAW

Defendants.

INTRODUCTION
The Court held a three-day bench trial in this case concluding on November 9,
2016. Thereafter, the parties submitted proposed Findings of Fact and Conclusions of
Law that were received on November 21, 2016. The case is now at issue. For the
reasons explained below, the Court finds that plaintiffs are entitled to a judgment in the
sum of $1,327,478.16 against Idaho Potato Packers Corporation, Nonpareil Corporation,
Nonpareil Farms, Inc., Nonpareil Processing Corporation, and Nonpareil Dehydrated
Potatoes, Inc., jointly and severally

Findings of Fact & Conclusions of Law – Page 1

FINDINGS OF FACT
Plaintiff Jacobs1 shipped $1.5 million worth of potatoes to Taylor Produce in
2013, but was paid only a fraction of that sum. Jacobs brought this lawsuit to recover the
unpaid balance of over $1.3 million.
Jacobs grows potatoes while Taylor Produce packages, sells and ships potatoes to
end-users. The relationship between Jacobs and Taylor Produce began in 2013 when
Jacobs consigned fresh potatoes to Taylor Produce for sale. Their agreement was not a
pure consignment, however, because Alan Taylor, Manager of Taylor Produce, promised
Jacobs a price range that would vary but was most often between $6.50 and $8.00 a
hundredweight. All of Taylor Produce’s expenses – from marketing to packaging – were
factored into the price, except for taxes. This meant that Taylor Produce would remit all
the sales proceeds to Jacobs except for the taxes.
As those potatoes were sold, Taylor Produce sent accountings to Jacobs verifying
that they would receive payment for the sale of their potatoes as follows:
a. Silver K Farms was owed $611,408.44;
b. Kirk Jacobs Farms was owed $719,640.20; and
c. Reynolds Bros. was owed $208,028.71.
See, Defendants’ Exhibit 5008. Those figures add up to $1,539,077.35. Taylor Produce
made some payments but the amount still due and owing is $1,327,478.16.

1

The Court will refer to the plaintiffs – Silver K Farms, Kirk Jacobs Farms, and Reynolds Bros –
as “Jacobs.”
Findings of Fact & Conclusions of Law – Page 2

Taylor Produce did not sell the potatoes itself but entered into a Marketing
Agreement with Idaho Potato Packers Corporation (IPPC) whereby IPPC would market
and sell the potatoes, remitting the sales proceeds to Taylor Produce, who would then
package the potatoes and ship them to the customer. The Marketing Agreement stated
that IPPC could charge Taylor Produce for marketing fees and for commissions for sales
under the Betty Crocker label, but the Agreement did not specify whether IPPC could
deduct those expenses before remitting the proceeds to Taylor Produce or whether IPPC
should remit all the sales proceeds and bill Taylor Produce for those expenses.
Prior to entering into the Marketing Agreement, IPPC invested $5 million in
Taylor Produce, taking a 49% interest in the company. The point of the Marketing
Agreement was to put in writing Taylor Produce’s promise to use IPPC as the exclusive
marketing agent for Taylor Produce’s potatoes and to specify the expenses IPPC could
charge to Taylor Produce.
The arrangement between Taylor Produce and IPPC was strictly between those
two parties, and Jacobs was not a party to their Marketing Agreement. In like fashion,
the arrangement between Taylor Produce and Jacobs was strictly between those two
parties, and IPPC was not a party to their agreement.
Each of the parties did know of the other’s involvement. For example, Jacobs
knew that IPPC was marketing and selling potatoes for Taylor Produce. However, no
evidence was presented that Jacobs had agreed with Taylor Produce to pay IPPC’s
expenses such as those for marketing, freight, packaging materials, or commissions.

Findings of Fact & Conclusions of Law – Page 3

There was no evidence that Jacobs or Taylor Produce contemplated that the sales
proceeds due to Jacobs would be reduced by anything other than taxes.
Between January 1, 2012, and December 31, 2013, IPPC marketed and sold
Taylor Produce’s fresh potatoes that were supplied by multiple farmers. IPPC provided
packaging materials to Taylor Produce, but did not perform any packing services in
connection with its sales of the potatoes. All the potatoes consigned by Jacobs were
packed by Taylor Produce and shipped directly to IPPC’s customers.
Following the sales of Taylor Produce’s potatoes, IPPC collected the gross
proceeds from its customers and deposited them into its operating account, which
included both PACA trust and non-trust assets. Between January 1, 2012, and April
2013, IPPC deducted, before remitting the sales proceeds to Taylor Produce, the
following expenses: (1) freight, (2) Outside Brokerage Fees and (3) commissions for
sales under the Betty Crocker label.
In April, 2013, Alan Taylor complained to IPPC that he was having cash flow
problems, could not pay his growers, and needed IPPC to remit the entire sum of sale
proceeds without taking out deductions. Christopher Abend of IPPC disputes a portion of
Alan Taylor’s account. Abend testified that Alan Taylor only expressed a concern over
cash flow in requesting that no deductions be taken, and never revealed that he was
unable to pay growers. Abend testified that he did not learn that Taylor Produce was
unable to pay growers until November of 2013.
Concerning the conflict in the testimony between Alan Taylor and Christopher
Abend, the Court finds Alan Taylor most credible. But even if Abend’s version is
Findings of Fact & Conclusions of Law – Page 4

accepted, Alan Taylor’s complaint put IPPC on inquiry notice in April of 2013 that
Taylor Produce might be unable to pay growers. What inquiry did IPPC undertake?
Abend testified that he did examine Taylor Produce’s K-1 tax form that showed
the company had $1.4 million in assets, misleading him into believing that Taylor
Produce would have more than enough to pay growers. But IPPC went no further.
IPPC’s Chief Financial Officer Jace Katseaneses testified that IPPC had no access to
Taylor Produce’s financial records in 2012 or 2013. So, IPPC did not know how much
money Taylor Produce had on hand or what it owed at any time in 2013, did not examine
their accounts receivable, and did not even estimate any financial figures for Taylor
Produce from IPPC’s own records.
Nobody from IPPC explained why they – having invested $5 million in Taylor
Produce and taken a 49% ownership share – were unable to access Taylor Produce’s
financial records. There was no testimony from anyone at IPPC that Taylor Produce
rejected or ignored IPPC’s requests for financial information. From this record, it
appears that IPPC simply trusted Alan Taylor based on their long-standing relationship,
and did little to inquire further.
At any rate, in April of 2013, IPPC ceased taking any deductions to accommodate
Alan Taylor’s request. But five months later – in September of 2013 – IPPC began
taking deductions again, and for the first time started taking additional deductions for its
marketing expenses and for the cost of the packaging materials it provided to Taylor
Produce.

Findings of Fact & Conclusions of Law – Page 5

During the entire period from January 1, 2012, through December 31, 2013, IPPC
deducted the following sums from the gross sales proceeds before remitting any sales
proceeds to Taylor Produce:
a. Marketing fees in the amount of $158,441.06;
b. Commissions in the amount of $230,035.21 for sales under the Betty Crocker
label;
c. Packaging materials in the amount of $1,001,313.61;
d. Outside Brokerage Fees in the amount of $211,724.23; and
e. Freight charges.
IPPC offered no documentary proof in the form of invoices or other billing
statements to substantiate that the freight, packaging materials and Outside Brokerage
Fees were actually incurred for the benefit of Taylor Produce. IPPC offered no
documentary proof in the form of cancelled checks or other confirmation that the freight,
packaging materials and Outside Brokerage Fees were actually paid. The Chief Financial
Officer of IPPC, Jace Michael Katseaneses, admitted that IPPC’s records did not reveal
which, if any, of the sums IPPC deducted from the proceeds it remitted to Taylor Produce
were related to the sales of Jacobs’ potatoes.
Facts Concerning Alter Ego Claims
Jacobs claims that five defendant corporate entities are alter egos of each other.
The five defendants are IPPC, Nonpareil Corporation, Nonpareil Farms, Inc., Nonpareil
Processing Corporation, and Nonpareil Dehydrated Potatoes,
Inc. (collectively referred to as the “Nonpareil Defendants”). Each is an Idaho
corporation. All of them share (1) the same corporate address of 40 N 400 W, Blackfoot,

Findings of Fact & Conclusions of Law – Page 6

Idaho; (2) the same corporate President, Christopher T. Abend; (3) the same corporate
Controller and CFO, Katseaneses; and (4) the same corporate Secretary, Eileen Abend,
who is deceased.
CFO Katseaneses performs the same duties for each of the Nonpareil Defendants
and reports directly to Abend for each of the companies. Katseanes testified that as the
Controller and CFO of the Nonpareil Defendants, he oversees a single department that
handles accounts receivable for all the individual companies. He also testified that
Nonpareil Corporation is the “parent” of all the other Nonpareil Defendants, including
IPPC, and has no other business purpose. The Nonpareil Defendants file one
consolidated federal tax return, which is signed by Christopher Abend.
Facts Concerning Segregated Funds
In January of 2014, IPPC deposited $114,798.92 into a segregated account at
Zions Bank, which it admits is owed and belongs to the valid PACA trust beneficiaries of
Taylor Produce. See, Exhibit 5005. Katseanes testified that IPPC is the account holder
and that Christopher Abend is the only person authorized to take withdrawals from the
account.
CONCLUSIONS OF LAW
Background of Litigation
On November 30, 2015, Judge Edward J. Lodge, who was presiding at the time,
granted Jacobs’ motion for summary judgment, finding as a matter of law that Jacobs had
a valid PACA Trust claim over Taylor Produce in the amount of $1,327,478.16. See

Findings of Fact & Conclusions of Law – Page 7

Order (Dkt. No. 136). Judge Lodge held, as a matter of law, that Jacobs complied with
all the notice requirements of PACA.
On December 18, 2015, Judge Lodge issued an Order – pursuant to a stipulation –
that Judgment be entered (1) for $4,620,167.96 to IPPC against Taylor Produce LLC; and
(2) for $1,026,074.75 to Nonpareil Farms, Inc. against Taylor Produce LLC. See Order
(Dkt. No. 143).
Thereafter the case was transferred to this Court and a trial date was set for
November 7, 2016. Pursuant to a stipulation, the Court issued an Order that a Judgment
be entered (1) for $363,225.15 in PACA claims of plaintiff GVO Farm Services, Inc.
against Taylor Produce, LLC, and (2) for the $322,845.30 in PACA claims of VO
Enterprises against Taylor Produce LLC. See Order (Dkt. No. 184).
Prior to trial, Jacobs filed a motion to enter a final Judgment under Rule 54(b)
against Taylor Produce declaring that Jacobs has a valid PACA Trust against Taylor
Produce in the amount of $1,327,478.16. The Court granted that motion and entered a
Judgment against Taylor Produce LLC and Alan Taylor in the sum of $1,327,478.16 plus
prejudgment interest. See Judgment (Dkt. No. 169).
Jacobs’ case against IPPC then proceeded to trial. Jacobs claims that IPPC
improperly deducted $1,327,478.16 prior to remitting the proceeds to Taylor Produce
from the sale of Jacobs’ potatoes.
Governing Legal Standards
Congress enacted PACA with the aim of “preventing unfair business practices and
promoting financial responsibility in the fresh fruit and produce industry.” Sunkist
Findings of Fact & Conclusions of Law – Page 8

Growers, Inc. v. Fisher, 104 F.3d 280, 282 (9th Cir.1997). PACA was “designed in part
to assure that farmers are paid for their produce.” Perfectly Fresh Farms. Inc. v. United
States Dep't of Agric., 692 F.3d 960, 962 (9th Cir.2012). PACA provides protection to
produce sellers by “impress[ing] a trust on the perishable agricultural commodities
received by the purchaser, all inventories of food or other products derived therefrom,
and receivables or proceeds from the same of such commodities and products.” Middle
Mountain Land & Produce Inc. v. Sound Commodities Inc., 307 F.3d 1220, 1223 (9th
Cir.2002).
Under 7 U.S.C. § 499e(c)(2), a trust begins when the dealer receives perishable
agricultural commodities and exists until all unpaid suppliers have been paid in full. The
PACA regulations defining “trust assets” re-enforce this interpretation by specifying that
“[t]rust assets are to be preserved as a non-segregated ‘floating’ trust” and that
“[c]ommingling of trust assets is contemplated.” 7 C.F.R. § 46.46(b). “The concept of a
floating trust means that proceeds from prior produce sales can be used to pay suppliers
in subsequent and unrelated transactions.” Sol Group Marketing Co. v. Producers
Choice, LLC, 2013 WL 5502798 (C.D. Calif. Sept. 30, 2013).
PACA trust beneficiaries are not required to trace their trust assets – the burden is
on the non-trust beneficiary to show that certain sums are not subject to the PACA trust.
Nickey Gregory Co., LLC v. AgriCap, LLC, 2011 WL 1793328 (N.D.Calif. May 11,
2011). PACA trust beneficiaries “are granted statutory priority in repayment, even senior
to secured creditors.” Sysco Food Services of Seattle, Inc. v. Country Harvest Buffet
Restaurants, Inc., 245 B.R. 650, 652 (9th Cir. BAP 2000). Third-parties who collect or
Findings of Fact & Conclusions of Law – Page 9

otherwise receive PACA trust assets, including receivables or assets acquired with the
proceeds from sales of produce, must disgorge those assets to the extent necessary to
satisfy claims of PACA trust beneficiaries. Endico Potatoes, Inc. v. CIT Group
Factoring, Inc., 67 F.3d 1063, 1069 (2nd Cir. 1995).
General principles of trust law govern the PACA trust, unless those principles
directly conflict with PACA. Boulder Fruit Exp. & Heger Organic Farm Sales v. Transp.
Factoring, Inc., 251 F.3d 1268 (9th Cir. 2001). Any act or omission inconsistent with the
duty owed to the PACA Trust Beneficiaries, including dissipation of trust assets, is
unlawful and constitutes a “breach of trust”. See Restatement (Second) of Trusts, §201; 7
C.F.R. §46.46(d)(1).
Analysis
Based on the Findings of Fact set forth above, the Court concludes that all the
proceeds from IPPC’s sales of Taylor Produce’s potatoes were PACA Trust Assets. 7
U.S.C. §499e(c)(2). Hence, IPPC’s deduction of $1,327,478.16 constitutes a wrongful
conversion of PACA assets unless that deduction was taken pursuant to PACA’s statutory
or regulatory provisions.
IPPC argues that the sum withheld was a “contemplated expense” that may be
deducted pursuant to 7 C.F.R. § 46.46(e)(5). That provision is headed “Prompt payment
and eligibility for trust benefits,” and states as follows:
The amount claimable against the trust by a beneficiary or grower will be the
net amount due after allowable deductions of contemplated expenses or
advances made in connection with the transaction by the commission
merchant, dealer, or broker.
Findings of Fact & Conclusions of Law – Page 10

A “contemplated expense” refers to “an expense that is contemplated between the
parties at the time the parties entered into a contract.” In re Veg Liquidation, Inc., 516
B.R. 545 (W.D.Ark. 2014). Here, there is no evidence that Jacobs and Taylor Produce
contemplated that Taylor Produce would deduct anything for IPPC’s expenses before
remitting the sales proceeds to Jacobs. As discussed in the Findings of Fact, the evidence
conclusively shows that Jacobs and Taylor Produce contemplated that the only deduction
would be for taxes.
Similar facts were faced by the Second Circuit in R-Best Produce, Inc. v.
Shulman-Rabin Marketing Corp, 467 F.3d 238 (2nd Cir. 2006). There, growers sold
perishable produce to P.J. Produce for sale in New York City. For several years, P.J.
Produce paid Union Pacific Railroad Company to transport the produce from the growers
to P.J. Produce’s warehouse. When P.J. Produce stopped paying bills, and was sued by
the growers under PACA, Union Pacific sought to intervene, arguing that its
transportation services added value to the PACA trust assets and were “contemplated
expenses” under § 46.46. The Second Circuit noted that in “some abstract sense” the
growers and P. J. Produce certainly contemplated that the produce would need to be
shipped to market, and that transport costs would be incurred. Id. at 243. But to be
consistent with PACA’s policy protecting growers, the Circuit interpreted the term
“contemplated expenses” to apply only to “transactions between buyers and sellers of
produce.” Id. at 243. There was apparently no evidence that the growers and P.J.
Produce contemplated deductions from the PACA trust for Union Pacific’s billings – at
least none was discussed. See also, Pacific Intern. Marketing Inc. v. A& B Produce, Inc.,
Findings of Fact & Conclusions of Law – Page 11

462 F.3d 279, 287 (3rd Cir. 2006) (holding that in passing PACA, “Congress intended to
protect sellers and suppliers of produce, not third-party service providers whose services
are ancillary to the sale of produce”).
Similarly, there is no evidence in this case that Jacobs and Taylor Produce
contemplated that Taylor Produce would deduct IPPC’s expenses before remitting sales
proceeds to Jacobs – the only deduction contemplated was for taxes. Moreover, IPPC has
not established that the various expenses it seeks to recoup can be traced to Jacob’s
potatoes. Finally, IPPC has not shown that its expenses for freight, Outside Brokerage
Fees, and packaging materials were even authorized under the terms of its Marketing
Agreement with Taylor Produce.
The Court therefore rejects IPPC’s argument that its deduction of $1,327,478.16
was authorized by § 46.46(e)(5). Packers’ deduction of its expenses from the PACA trust
assets allowed it to obtain payment for non-PACA trust claims before payment of valid
PACA trust claims, in violation of 7 U.S.C. §499e(c)(2).
Under Idaho law, conversion is a “distinct act of dominion wrongfully asserted
over another’s personal property in denial of or inconsistent with rights therein.” Hunt v.
Team Performance, Inc., 2009 WL 2044682, at *6 (D. Idaho July 8, 2009); Peasley
Transfer & Storage Co. v. Smith, 979 P.2d 605, 616 (Id.Sup.Ct. 1999). IPPC is in
possession of, and withholding, PACA trust assets that rightfully belong to Jacobs.2
2

Two other growers, GVO and VOE, also sued the Nonpareil Defendants and Taylor Produce.
They eventually obtained a Judgment against Taylor Produce, but dismissed their claims against the
Nonpareil Defendants and did not participate in this trial. Consequently, GVO and VOE are foreclosed
from sharing in the recovery of trust assets from the Nonpareil Defendants.
Findings of Fact & Conclusions of Law – Page 12

Therefore, those sums, including the $114,798.92 on deposit at Zions Bank, must be
disgorged to Jacobs.
Alter Ego Claims
Generally, Idaho courts recognize two elements “that warrant casting aside the
legal fiction of distinct corporate existence—first, there must be such a ‘unity of interest’
between the two at-issue corporations such that the separate personalities do not exist;
and, second, the observance of the fiction or separate existence would, under the
circumstances, sanction a fraud or promote injustice.” Gen. Conference of the
Evangelical Methodist Church v. Crossing Church, Inc., 2013 WL 2422748, at *3
(D. Idaho June 3, 2013). Here, the Nonpareil Defendants all share the same corporate
address, the same registered agent, the same corporate President, the same corporate
Director, Randi Phillips; the same Controller and CFO, Katseanes; and, the same
corporate Secretary, Eileen Abend, who is since deceased. The testimony
established that the companies are operated as “family business” and that decisions are
made in furtherance of the interests of the group of companies, rather than one individual
entity. To treat them separately would be to promote an injustice.
The Court therefore finds that the Nonpareil Defendants are alter egos of each
other and that they are liable, jointly and severally, for the unpaid PACA trust claims of
Jacobs.
Conclusion
The Court therefore finds that Jacobs is entitled to a Judgment in the sum of
$1,327,478.16 against Idaho Potato Packers Corporation, Nonpareil Corporation,
Findings of Fact & Conclusions of Law – Page 13

Nonpareil Farms, Inc., Nonpareil Processing Corporation, and Nonpareil Dehydrated
Potatoes, Inc., jointly and severally. This Judgment shall be entered pursuant to the
Perishable Agricultural Commodities Act.
The Court will also enter a final judgment including the other sums previously
awarded in various Orders that all contemplated that a final Judgment be entered. The
Court will enter that Judgment as a separate document pursuant to Rule 58(a).

DATED: December 15, 2016

_________________________
B. Lynn Winmill
Chief Judge
United States District Court

Findings of Fact & Conclusions of Law – Page 14