Reser's Fine Foods, Inc. v. H.C. Schmieding Produce Company, LLC et al

Filing 42

MEMORANDUM AND ORDER granting 25 Motion for Leave to File Under Seal. Counsel directed to file forthwith requested document(s) with an event from the SEALED DOCUMENTS category. The clerk shall grant access to sealed document(s) to counsel of recor d. Pro hac vice attorneys must obtain sealed document(s) from local counsel; granting 33 Motion for Leave to File surreply; granting 17 Motion for Summary Judgment being treated as a motion to dismiss for failure to state a claim. See order for details. Signed by U.S. District Senior Judge Sam A. Crow on 3/1/17. (msb)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
RESER’S FINE FOODS, INC.,
Plaintiff,
v.

No. 16-4150-SAC

H.C. SCHMIEDING PRODUCE CO., LLC.,
and C & E FARMS, INC.,
Defendants.
____________________________________
H.C. SCHMIEDING PRODUCE CO., LLC.,
Third-party Plaintiff,
v.
MARK A. RESER, PATRICIA J. RESER,
PAUL A. LEAVY, and SUNTERRA PRODUCE
TRADERS, INC.,
Third-party Defendants.
MEMORANDUM AND ORDER
This case comes before the court on the motion for summary
judgment (Dk. 17) filed by the individual third-party defendants, Mark A.
Reser, Patricia J. Reser, and Paul A. Leavy; on the motion for leave to file
two exhibits under seal (Dk. 25) filed by the plaintiff Reser’s Fine Foods, Inc.
(“Reser’s”) and the individual third-party defendants; and on the motion for
leave to file a surreply or conduct oral argument (Dk. 33) filed by the third-

party plaintiff H.C. Schmieding Produce Co., LLC. (“Schmieding”). The court
will take up the motions in reverse order.
In September of 2016, Reser’s filed this declaratory judgment
action asking for an offset of $269,519.87, as the alleged damages incurred
from first a “recall” and then a “hold” being placed on a load of celery
supplied by Schmieding and C & E Farms, Inc. in November of 2015. Reser’s
complaint alleges that it did not receive notice of the recall and hold until
after it had used the celery in fresh food products that were ready for
shipment. Reser’s also alleges it did not receive notice of the hold being
lifted until after it had been required to destroy the finished product
containing the celery and to replace the destroyed product. (Dk. 1).
Schmieding filed an answer and four counterclaims against
Reser’s including two counterclaims for failure to pay trust funds and failure
to make prompt payment pursuant to the Perishable Agricultural
Commodities Act (“PACA”), 7 U.S.C. §§ 499a, et seq. Schmieding also filed a
cross-claim for indemnification against C & E Farms, Inc. Most important to
the summary judgment motion now pending, Schmieding filed third-party
claims against Mark A. Reser, Patricia J. Reser, and Paul A. Leavy for
unlawful dissipation of PACA trust assets. These three individual third-party
defendants are seeking summary judgment arguing that Reser’s has
adequate and readily available trust assets which mean that as a matter of

2

law there has been no dissipation of trust assets and there is no basis for
secondary personal liability.
Motion for Leave to File a Surreply (Dk. 33).
The early filing of a summary judgment motion in this case has
created some unique procedural issues. It also has generated some
evidentiary objections on matters about which discovery has yet to occur. In
response to Schmieding’s memorandum opposing summary judgment, the
individual third party defendants did submit arguments and evidence in their
reply memorandum which the court regards as new even if offered in reply
to Schmieding’s arguments. The court finds these unusual circumstances
justify Schmieding’s filing of its attached surreply. The court has considered
the surreply in its summary judgment ruling.
Motion for Leave to File Exhibits Under Seal (Dk. 25).
Movants seek leave to file under seal two exhibits: Reser’s
consolidated balance sheet that reflects October totals for the years of 2015
and 2016 and the second affidavit of Paul A. Leavy that discusses, in part,
figures from the balance sheet. (Dk. 25-1 and 25-2). As a privately held
corporation, Reser’s submits this balance sheet contains “confidential
business information” that includes sensitive details about its financial
condition which Reser’s retains as private business information. While these
allegations certainly leave room for more detail and explanation in the
future, the court accepts for the limited purpose of these summary judgment
3

proceedings that Reser’s general interest in keeping its financial condition
private currently outweighs the public’s presumed right of access to this
information. This conclusion is largely influenced by Reser’s general financial
condition not having a significant or central issue in these immediate
proceedings. Should this change, the court may invite an additional showing
on confidentiality and reconsider its decision to seal. For now, the court
grants the motion on this condition.
Motion for Summary Judgment (Dk. 17).
“Summary judgment is appropriate only if ‘the movant shows
that there is no genuine issue as to any material fact and the movant is
entitled to judgment as a matter of law.’” Tolan v. Cotton, ___ U.S. ____,
134 S.Ct. 1861, 1866 (2014)(quoting Fed. R. Civ. P. 56(a)). A factual
dispute is “material” only if it “might affect the outcome of the suit under the
governing law.” Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). A
“genuine” factual dispute requires more than a mere scintilla of evidence in
support of a party's position. Id. at 252.
The moving party has the initial burden of showing “the absence
of a genuine issue of material fact,” and, if carried, the non-moving party
then “must bring forward specific facts showing a genuine issue for trial as
to those dispositive matters for which [it] carries the burden of proof.”
National American Ins. Co. v. American Re-Insurance Co., 358 F.3d 736,
739 (10th Cir. 2004) (internal quotation marks and citation omitted). At the
4

summary judgment stage, the court is not to be weighing evidence, crediting
some over other, or determining the truth of disputed matters, but only
deciding if a genuine issue for trial exists. Tolan, 134 S. Ct. at 1866. The
court performs this task with a view of the evidence that favors most the
party opposing summary judgment. Id. Summary judgment may be granted
if the nonmoving party's evidence is merely colorable or is not significantly
probative. Liberty Lobby, 477 U.S. at 250–51. Essentially, the inquiry is
“whether the evidence presents a sufficient disagreement to require
submission to the jury or whether it is so one-sided that one party must
prevail as a matter of law.” Id. at 251–52.
Counsel for Schmieding has filed a declaration which includes a
review of the procedural posture of this case. (Dk. 19-1). The declaration
notes that the movants filed for summary judgment before filing their
answer to the third-party claims. Additionally, there is no scheduling order in
place, and Schmieding has yet to obtain discovery from the movants. At
paragraph ten, Mr. Brown declares:
Without such discovery, Schmieding is unable to test the assertions in
the Leavy Affidavit, including the allegations concerning Reser’s
liquidity, Reser’s preservation of PACA trust assets and its ability to
pay any judgment entered in Schmieding’s favor. As a result,
Schmieding is wholly unable to present facts essential to justify its
opposition on factual grounds. Notwithstanding the foregoing,
Schmieding believes the Motion can and should be dismissed on legal
grounds.
(Dk. 19-1, ¶ 10). Schmeiding opposes summary judgment, in part, by
asking that it “be permitted to engage in discovery to review evidence
5

exclusively in the control of the movant which evidence the movant contends
establishes undisputed material facts. Fed. R. Civ. P. 56(d)(2).” (Dk. 19, p.
7).
The Tenth Circuit recently addressed the operation of Rule
56(d):
Rule 56(d) allows a nonmovant to show by affidavit or declaration
that, for a specified reason, it cannot present facts essential to justify
opposition to a motion for summary judgment. That is, it provides a
means for a nonmovant to “ask the court to refrain from acting on the
summary judgment request until additional discovery can be
conducted.” Been v. O.K. Indus., Inc., 495 F.3d 1217, 1235 (10th Cir.
2007). Thus, Rule 56(d) serves a noticing function that “safeguards
against an improvident or premature grant of summary judgment.”
See 10B Charles Alan Wright, Arthur R. Miller et al., Federal Practice &
Procedure § 2740 (3d ed. & Sept. 2016 Update) (footnote omitted).
Helget v. City of Hays, Kansas, 844 F.3d 1216, 1226 (10th Cir. 2017). When
the non-movant is seeking discovery, the following applies:
In the Tenth Circuit, a non-movant requesting additional discovery
under Rule 56(d) “must specify (1) the probable facts not available,
(2) why those facts cannot be presented currently, (3) what steps
have been taken to obtain these facts, and (4) how additional time will
enable [the party] to obtain those facts and rebut the motion for
summary judgment.” Birch v. Polaris Indus., Inc., 812 F.3d 1238,
1249 (10th Cir. 2015).
Gutierrez v. Cobos, 841 F.3d 895, 908 (10th Cir. 2016).
This Rule 56(d) dispute concerns the movants’ evidence that
Reser’s current financial condition includes freely available and liquid assets
in an amount sufficient to satisfy the trust of $276,519.87, which
Schmieding claims has been created and held for its benefit under PACA. The
movants’ evidence originally consisted of only the affidavit of Paul A. Leavy,
6

Reser’s Chief Financial Officer (“CFO”) and Treasurer. Leavy’s affidavit states
that as CFO and Treasurer, he is “required to know whether Reser’s has
freely available liquid assets in an amount sufficient to satisfy the
$276,519.87.” (Dk. 17-1, ¶ 7). Leavy further avers that Reser’s has had
“freely available liquid assets” in a sufficient amount since November of
2015 and that Reser’s “has made arrangements to maintain freely available
liquid assets in” in a sufficient amount “until such time as a complete and
final resolution is reached for all claims made in this lawsuit.” (Dk. 17-1, ¶
10). For purposes of these proceedings, Schmieding summarily denies
Leavy’s affidavit saying that without discovery it “cannot know what is within
Leavy’s personal knowledge” and that “[b]ecause of the procedural posture
of this case, . . . [it] cannot present facts essential to justify its denial” of
Leavy’s statements.” (Dk. 19, pp. 2-3). Schmieding’s Rule 56(d)
presentation is deficient in not specifying “the probable facts not available”
as to Reser’s liquidity, Reser’s preservation of PACA trust assets, and Reser’s
ability to pay any judgment entered in Schmieding’s favor. Gutierrez, 841
F.3d at 908. Schmieding also objects to Leavy’s affidavit as lacking any
supporting financial documents.
In reply, the movants asked to file under seal Leavy’s second
affidavit as supported by an averred “true and correct copy of the October 1,
2016, Consolidating Balance Sheet for Reser’s Fine Foods, Inc. and
Subsidiaries.” (Dk. 25, Ex. B, and Dk. 29, p. 6). This order grants that
7

motion. Leavy avers that the balance sheet “is a true and correct copy of
the same document submitted to the federal bank with which Reser’s does
business” and “is a true and accurate statement of Reser’s financial condition
as of October 1, 2016.” (Dk. 25, Ex. B, ¶¶ 10 and 11). Leavy’s affidavit
points to the first line item of “cash” on the balance sheet as showing
“Reser’s currently has readily available liquid assets on hand in an amount
more than sufficient to satisfy” Schmieding’s trust claim. (Dk. 29, p. 6). In
its sur-reply, Schmieding objects that the balance sheet is inadmissible
hearsay offered to prove the truth of the amounts found on the document.
Schmieding disputes that movants have laid a sufficient foundation for the
business records exception.1 Even if admissible, Schmieding disputes that
this record alone is enough to show Reser’s current assets or to establish the
availability of such assets to pay Schmieding at the close of the case.
The court will reserve ruling on the rest of these procedural
questions until it has addressed Schmieding’s PACA third-party claims and
the law governing the elements of those claims. This is due to Schmieding
asserting that Reser’s liquidity is not dispositive of its third-party claims:
As CFO, Leavy would know the financial documents prepared and
submitted to the federal bank with which Reser’s does business. Leavy said
the balance sheet was a copy of one of these financial documents impliedly
prepared and used to do business with a federal bank. For purposes of these
summary judgment proceedings, Leavy’s affidavit is undoubtedly succinct,
but it is sufficient in showing the balance sheet was prepared as part of
Reser’s business activities with a federal bank, was kept and submitted as
part of those regular business activities, and was based on information
known by the CFO to be true and accurate. See United States v. Fawaz, 881
F.2d 259, 266 (6th Cir. 1989). Schmieding’s hearsay objection is overruled.
1

8

Even if the pre-answer and pre-discovery Motion was supported by
adequate evidence, Movants could not prove that mere liquidity is
enough to defeat Schmieding’s claims. PACA requires prompt
payment. The decision of Reser’s principals to withhold payment from
Schmieding for produce that was delivered, accepted, processed and
resold by Reser’s is a violation of PACA and is contrary to the
requirements of the Uniform Commercial Code.
(Dk. 19, p. 7). Resolution of this question of law impacts the remaining
procedural questions.
Statement of Undisputed Facts
The court regards the following facts to be undisputed for
purposes of deciding this summary judgment motion. In February of 2015,
Reser’s contracted for Schmieding to sell it 91 truckloads of celery between
February of 2015 and January of 2016 according to a monthly schedule of
deliveries. For November of 2015, Schmieding was obligated to sell six loads
of celery, but Reser’s needed a seventh load delivered. So, Reser’s issued a
purchase order number 838903 to Schmieding for the seventh load which
was delivered on November 11, 2015. On all of its invoices to Reser’s,
Schmieding included language for preserving its PACA trust rights pursuant
to 7 U.S.C. § 499e(c)(4). Reser’s has not paid Schmieding for the celery
delivered on November 11, 2015.
Reser’s alleges it did not make this payment because of the
recall and hold notice on this disputed November load of celery. Reser’s also
alleges it has withheld additional payments as an offset for damages
sustained as a result of this disputed load. It is undisputed that Reser’s has
9

not paid Schmieding for $276,519.97 worth of produce, but Reser’s did
purchase and pay Schmieding for $1,084,396.00 worth of produce in 2015.
According to the affidavit of Reser’s CFO, Paul A. Leavy, and to
the consolidated balance sheet submitted in support of his affidavit, Reser’s
cash asset is more than sufficient to cover Schmieding’s PACA trust claim.
Third-Party Causes of Action
For the three individual third-party defendants, Mark A. Reser,
Patricia J. Reser, and Paul A. Leavy, Schmieding relies on the same central
allegations. Schmieding sub-titles each of these three causes of action in
parentheses as, “(Unlawful Dissipation of Trust Assets by a Corporate
Official).” (Dk. 7, ¶¶ 100, 105, 110). All three causes of action allege the
individual “operated Reser’s during the relevant time period and, upon
information and belief, is and was in a position of control over the PACA trust
assets belonging to Schmieding.” (Dk. 7, ¶¶ 101, 106, and 111). All three
are alleged to have “failed to direct Reser’s to fulfill its statutory duty to
preserve PACA trust assets and timely pay Schmieding for the produce it
supplied.” (Dk. 7, ¶¶ 102, 107, 112). All three causes of action allege the
individual’s “failure to direct Reser’s to maintain PACA trust assets and pay
Schmieding for the produce it supplied was an unlawful dissipation of trust
assets by a corporate official.” (Dk. 7, ¶¶ 103, 108, 113). Finally,
Schmieding concludes all three causes of action with the same allegation of
injury, “As a result of said unlawful dissipation of trust assets, Schmieding
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has been deprived of its right as a beneficiary in the produce trust and has
been denied payment for the produce it supplied.” (Dk. 7, ¶¶ 104, 109,
114).
PACA Law
Understanding the scope, purpose and operation of the relevant
PACA provisions is helpful in interpreting Schmieding’s claims and the
elements of proof. The court has found the following to be a complete and
concise summary:
The Perishable Agriculture Commodities Act, which was enacted
in 1930 to suppress unfair and fraudulent business practices in the
marketing of perishable commodities, was amended in 1984 to provide
unique credit protection to sellers of perishable agricultural
commodities. Because sellers of perishable commodities had a need to
move their inventories quickly, they were often required to become
unsecured creditors of their purchasers, whose credit they were often
unable to verify. . . .
The 1984 amendments create, upon the sale of perishable
agricultural commodities, a trust for the benefit of the unpaid sellers of
the commodities on (1) the commodities, (2) the inventory or products
derived from them, and (3) the proceeds of the inventory or products.
7 U.S.C. § 499e(c)(1)-(2); see also House Report at 3 (recounting
congressional findings); Reaves Brokerage Co. v. Sunbelt Fruit &
Vegetable Co., 336 F.3d 410, 413 (5th Cir.2003) (same). As amended,
PACA requires that purchasers of perishable agricultural commodities
maintain the trust by retaining the commodities or their proceeds until
the commodities sellers are paid, and it makes it unlawful to “fail to
maintain the trust as required.” 7 U.S.C. § 499b(4). PACA confers
jurisdiction on district courts to entertain “actions by trust beneficiaries
to enforce payment from the trust.” Id. § 499e(c)(5).
The trust created by PACA is a “nonsegregated ‘floating’ trust”
on perishable agricultural commodities and their derivatives until all
sellers of such commodities are paid. 7 C.F.R. § 46.46(b). Because the
governing regulations specifically contemplate the commingling of
trust assets without defeating the trust, see id., the trustee of such a
trust is permitted to convert trust assets into other property, provided
that the trustee honors its obligation to “maintain trust assets in a
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manner that such assets are freely available to satisfy outstanding
obligations to sellers of perishable agricultural commodities,” id. §
46.46(d)(1). Any act inconsistent with maintaining the trust, including
“dissipation” of trust assets, is deemed unlawful and a violation of
PACA. See 7 U.S.C. § 499b; 7 C.F.R. § 46.46(d)(1). “Dissipation” is
defined as “any act or failure to act which could result in the diversion
of trust assets or which could prejudice or impair the ability of unpaid
suppliers, sellers, or agents to recover money owed in connection with
produce transactions.” 7 C.F.R. § 46.46(a)(2).
Nickey Gregory Co., LLC v. Agricap, LLC, 597 F.3d 591, 594-95 (4th Cir.
2010). In sum, a commodities purchaser violates PACA by failing to retain in
trust the commodities or their proceeds until the commodities seller is paid.
This trust is a “nonsegretated floating trust” in which the commodities and
their proceeds can be commingled or converted into other assets so long as
the trust assets are maintained to be “freely available to satisfy outstanding
obligations” to the commodities sellers. Id. Acting or failing to act with
respect to the trust assets violates PACA if the assets are not maintained to
be freely available to satisfy obligations but are diverted or if the unpaid
sellers’ recovery of the owed money is prejudiced by the dissipation of
assets.
Schmieding’s third-party claims against the individual third-party
defendants are entitled claims for dissipation of PACA trust assets.
Schmieding alleges the individual defendants failed to direct Reser’s both to
preserve and maintain Schmieding’s PACA trust assets and to pay
Schmieding for the produce. The court regards the following as a relevant

12

summary of individual liability under PACA based on the handling of trust
assets:
The theme of the PACA trust devolves to this: to benefit
producers of perishable agricultural items sold nationally to
consumers, PACA places duties on those entrusted with such items for
sale—the licensed sellers, or “middlemen” between producers and
consumers—to prefer the producers over others. In the event of a
breach of those duties, “liability attaches first to the licensed seller of
perishable agricultural commodities. If the seller's assets are
insufficient to satisfy the liability, others may be found secondarily
liable....” Shepard v. K.B. Fruit & Vegetable, Inc., 868 F.Supp. 703,
706 (E.D.Pa. 1994); see also Golman–Hayden Co. v. Fresh Source
Produce Inc., 217 F.3d 348, 351 (5th Cir. 2000) (same); Sunkist
Growers, Inc. v. Fisher, 104 F.3d 280, 283 (9th Cir.1997) (same).
“Individual liability ... is not derived from the statutory language,
but from common law breach of trust principles.” Weis–Buy [Servs.,
Inc. v. Paglia], 411 F.3d [415] at 421 [(3rd Cir. 2005)]; see also
Nickey Gregory Co., LLC v. AgriCap, LLC, 597 F.3d 591, 595 (4th Cir.
2010) (“General trust principles govern PACA trusts unless the
principle conflicts with PACA.”); Sunkist, 104 F.3d at 282 [(9th Cir.
1997)] (“Ordinary principles of trust law apply to trusts created under
PACA....”). “‘Under the common law, the trustee of a trust is under a
duty to the beneficiary in administering the trust to exercise such care
and skill as a man of ordinary prudence would exercise in dealing with
his own property.’” Weis–Buy, 411 F.3d at 421 (quoting Shepard, 868
F.Supp. at 706). Following these basic trust principles, “ ‘[a]n
individual who is in the position to control the [PACA] trust assets and
who does not preserve them for the beneficiaries has breached a
fiduciary duty, and is personally liable for that tortious act.’“ Id.
(quoting Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F. Supp.
346, 348 (S.D.N.Y. 1993) (second alteration in original)); see also
Austin Wakeman Scott, William Franklin Fratcher & Mark L. Ascher,
Scott and Ascher on Trusts § 24.2.1 (2007) (“[I]f the trustee has
misappropriated trust funds due to a beneficiary, the trustee is liable
in an action at law.”).
Bear Mountain Orchards, Inc. v. Mich-Kim, Inc., 623 F.3d 163, 167-68 (3rd
Cir. 2010). Thus, there may be secondary liability for an individual who is in

13

a position of control and breaches the trustee’s fiduciary duty to preserve
trust assets.
Movants seek summary judgment arguing that Schmieding
cannot prove a breach of trust obligations in the dissipation of trust assets,
as Reser’s currently has freely available, liquid assets in an amount more
than sufficient to satisfy Schmieding’s trust claim. Movants assert there can
be no basis here for asserting secondary liability when there is nothing that
triggers primary liability for dissipation of assets.
Schmieding points to the PACA provisions that make it a
violation for merely failing to make prompt payment for produce received.
See Pacific Intern. Marketing v. A & B Produce, 462 F.3d 279, 282 (3rd Cir.
2006) (PACA makes it “unlawful for buyers of produce . . . to fail to make
prompt payment for a shipment of produce.” (internal citations omitted)). As
the Third Circuit notes, a buyer’s violation of this provision “triggers civil
liability and the possible suspension or revocation of the buyer’s PACA
license.” Id. But, “Congress later amended PACA to provide the additional
remedy of a statutory trust provision for ‘suppliers, sellers, or agents’
against buyers who fail to make prompt payment.” Pacific Intern. Marketing,
462 F.3d at 282 (citations omitted). The court believes this distinction in
understanding the trust provision and associated fiduciary duties as an
additional remedy is significant here.

14

Schmieding argues that individual liability arises, “because PACA
creates a fiduciary relationship between the produce seller and purchaser,”
but it also recognizes these are bases in common law trust principles
regarding fiduciary duties. (Dk. 19, p. 12). Schmieding concludes that courts
have held officers or directors who had control over PACA trust assets
“personally liable for failure to pay trust funds.” (Dk. 19, p. 12). In short,
Schmieding is positing that there is a fiduciary duty to make prompt
payment. The cases cited by Schmieding, however, recognize personal
liability not for failure to make prompt payment but for failure to preserve
trust funds. See Bear Mountain Orchards, 623 F.3d at 169 (“secondarily
liable for breaching the duty to preserve the PACA trust”); Weis-Buy Servs.,
411 F.3d at 420-21 (breach the “fiduciary duty to protect PACA trust
assets”); Golman-Hayden Co. v. Fresh Source Produce, 217 F.3d 348, 351
(5th Cir. 2000) (“who breach their fiduciary duty to preserve those assets,
may be held personally liable under PACA.”); Sunkist Growers, 104 F.3d at
283 (“breach their fiduciary duty to preserve those assets”). In GolmanHayden, the court explained that this liability “is premised on the breach of
one’s fiduciary duty to protect PACA trust assets by an individual who is in a
position to control such assets.” 217 F.3d at 351 n.18. Schmieding’s position
is, “Thus, an individual who controls a produce purchaser’s purse strings can
be liable to produce suppliers for violation of either the prompt payment

15

provisions or the trust provisions of PACA. See, Hiller Cranberry Prods., et
al., supra.” (Dk. 19, p. 12).
The court does not read Schmieding’s cited cases as showing
individual liability for violating PACA’s prompt payment provisions. Those
cases stand for breach of fiduciary duty based upon the failure to preserve
trust assets. See Hiller Cranberry Products, Inc. v. Koplovsky, 165 F.3d 1, 9
(1st Cir. 1999)(quoting Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F.
Supp. 346, 348 (S.D.N.Y. 1993)). Schmieding’s reliance on Bronia, Inc. v.
Ho, 873 F. Supp. 854, 861 (S.D.N.Y. 1995), is also misplaced. The court
there found that the trustee had not maintained the assets as to be freely
available to satisfy obligations but instead had relinquished control of the
commodities without securing payment. The holding in Bronia emphasizes
that the breach of fiduciary duty depends on keeping the trust assets “freely
available.” The Bronia decision does not involve PACA’s prompt payment
provisions. Schmieding’s memorandum fails to provide legal authority for
finding separate individual liability based simply on a violation of PACA’s
prompt payment provisions.
Application and Conclusions
The court concludes that Schmieding’s individual third-party
claims are legally viable only in asserting secondary liability for breach of the
fiduciary duty to preserve trust assets. Schmieding has not come forward
with legal authorities that show individual legal liability exists for violating
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PACA’s prompt payment provisions. Schmieding’s individual third-party
claims depend on liability derived from common law breach of trust
principles and are not derived from the statutory language. Bear Mountain
Orchards, 623 F.3d at 167. Thus, Schmieding must allege and prove that the
individual third parties failed to preserve PACA trust assets for the benefit of
Schmieding. Id.
Schmieding’s third-party claims for breach of fiduciary duties in
failing to preserve PACA trust assets is governed by this law. The
commingling of trust assets is expected. A trustee “is permitted to convert
trust assets into other property, provided that the trustee honors its
obligation to maintain trust assets in a manner that such assets are freely
available to satisfy outstanding obligations to sellers of perishable
agricultural commodities.” Nickey Gregory Co., 597 F.3d at 595. Thus,
Schmieding must allege and prove an “act inconsistent with maintaining the
trust.” Id. at 595; see 7 C.F.R. § 46.46(d)(1)2. “Congress explained that ‘the
purpose of the trust is to increase the legal protection for unpaid sellers and
suppliers . . . until full payment of sums due have been received by them.”
H.C. Schmieding Produce v. Alfa Quality Produce, 597 F. Supp. 2d 313, 31516 (E.D.N.Y. 2009) (quoting “R” Best Produce, Inc. v. Shulman-Rabin
“Commission merchants, dealers and brokers are required to maintain trust
assets in a manner that such assets are freely available to satisfy
outstanding obligations to sellers of perishable agricultural commodities. Any
act or omission which is inconsistent with this responsibility, including
dissipation of trust assets, is unlawful and in violation of section 2 of the Act,
(7 U.S.C. 499b).”

2

17

Marketing Corp., 467 F.3d 238, 241 (2d Cir. 2006)). Thus, Schmieding must
allege and prove that the trustees acted or failed to act inconsistent with
maintaining the trust such that assets are not freely available to satisfy the
outstanding obligations.
The movants seek summary judgment arguing that Reser’s has
maintained liquid assets freely available to satisfy any claim of outstanding
trust obligations to Schmieding. More notable to the court is that
Schmieding’s third-party claims fail to allege the manner in which the
trustees have failed to maintain trust assets such that they are not freely
available to satisfy outstanding obligations to Schmieding. Such an
allegation seems not only appropriate, but also necessary here, particularly
when Schmieding has not alleged any circumstances that question Reser’s
financial solvency or financial ability to maintain trust assets. This is not a
case in which the financial insolvency or incapacity of the purchaser is
accepted, given, questioned, or alleged. Instead, this is a case in which the
unpaid supplier makes no relevant allegations about the purchaser’s financial
capacity or about the purchaser diverting trust assets such that they are not
freely available to satisfy trust obligations. Instead, the supplier appears to
admit that it is not in a position to dispute or even question the purchaser’s
evidence showing it to be financially stable and quite capable of paying
through cash the asserted trust obligations. Thus, the court finds that
Schmieding has failed to allege a viable breach of fiduciary duty claim
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against the individual third-party defendants for failing to maintain trust
assets.
The procedural juncture of this case weighs against granting
summary judgment. The need for discovery certainly depends upon there
being first alleged a viable claim warranted under existing law and based on
factual contentions having or likely to have evidentiary support after a
reasonable chance for investigation or discovery. Therefore, dismissal is
appropriate here for failure to allege a viable claim of breach of fiduciary
duty for failure to maintain or preserve trust assets. The court, however, will
give Schmieding the opportunity to amend its third-party individual claims
on the condition that it first files a separate motion seeking leave to amend
which satisfies the conditions for granting leave and is consistent with Fed.
R. Civ. P. 11(b).
IT IS THEREFORE ORDERED that the motion for leave to file two
exhibits under seal (Dk. 25) filed by Reser’s and the individual third-party
defendants is granted on the condition stated above;
IT IS FURTHER ORDERED that Schmieding’s motion for leave to
file a surreply (Dk. 33) is granted, and the court considered the same in its
ruling here;
IT IS FURTHER ORDERED that the motion for summary
judgment (Dk. 17) filed by the individual third-party defendants is treated as

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a motion to dismiss for failure to state a claim for relief and is granted upon
the conditions stated above.
Dated this 1st day of March, 2017 at Topeka, Kansas.

s/Sam A. Crow
Sam A. Crow, U.S. District Senior Judge

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