Reser's Fine Foods, Inc. v. H.C. Schmieding Produce Company, LLC et al
MEMORANDUM AND ORDER granting in part and denying in part 75 Motion for Summary Judgment. See order for details. Signed by U.S. District Senior Judge Sam A. Crow on 9/15/17. (msb)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
RESER’S FINE FOODS, INC.,
H.C. SCHMIEDING PRODUCE CO., LLC.,
and C & E FARMS, INC.,
H.C. SCHMIEDING PRODUCE CO., LLC.,
RESER’S FINE FOODS, INC.,
SUNTERRA PRODUCE TRADERS, INC.,
and C.H. ROBINSON WORLDWIDE, INC.,
MEMORANDUM AND ORDER
This case comes before the court on the motion of H.C.
Schmieding Produce Co., LLC (“Schmieding”) for summary judgment (ECF#
75) against the plaintiff Reser’s Fine Foods, Inc. (“Reser’s”). The parties
have filed their respective memoranda, and the movant asks for oral
argument. The court does not find oral argument necessary here. The
parties have fully briefed the issues, and oral argument would not materially
assist the court in deciding the merits of the pending motion.
BACKGROUND OF ALLEGATIONS
In September of 2016, Reser’s filed this declaratory judgment
action asking for an offset of $269,519.87, as the alleged damages from
Schmieding’s breach of contract in supplying a load of celery that Reser’s
had used in its finished food products and was notified later that the celery
was the subject of a recall and then a hold. ECF# 1. Reser’s had contracted
with Schmieding on or about February 19, 2015, for the purchase of 91
truckloads of celery to be delivered between February of 2015 and January
of 2016 (“2015 Celery Contract”).
Reser’s alleges the load of celery in dispute was delivered on
November 11, 2015, pursuant to invoice #1335051 and contained long stalk
celery, bulk from LUNDY 10b-2. Reser’s alleges that by the time Schmieding
verbally notified it of the hold being lifted, Reser’s had already disposed of
the finished product and was in the process of replacing the product due for
delivery to its customers. Reser’s alleges it “has withheld $269,519.87 from
Defendant Schmieding, as an offset to amounts otherwise due Defendant
Schmieding for celery delivered to Plaintiff during 2015.” ECF# 1, ¶ 32.
Reser’s demands a declaratory judgment that it is entitled to retain this
offset as damages and that the defendants are barred from asserting any
“further claims by reason of celery Defendants supplied and delivered to
This is the number appearing on Schmieding’s invoice that corresponds
with the purchase order #838903 for celery purchased and billed to Reser’s
for delivery on November 11, 2015. ECF# 76-9, p. 19.
Plaintiff in November, 2015, and under the 2015 Celery Contract.” ECF# 1,
Schmieding alleges that pursuant to an asset purchase
agreement it acquired all rights and assumed all obligations under the 2015
Celery Contract. ECF# 62 pp. 7-8. This celery contract obligated Reser’s to
purchase six loads of celery in November of 2015, but Reser’s asked
Schmieding to locate on the open market a seventh load of celery and sell it
to Reser’s on the issued purchase order #838903. Schmieding did this and
entered into an agreement for the sale and purchase of the celery described
in the purchase order. Schmieding delivered this load to Reser’s on
November 11, 2015, which is the subject of invoice #133505. Over
Schmieding’s repeated demands, Reser’s has failed to pay for the loads of
celery delivered between October 12, 2015 and February 22, 2016, and
Reser’s presently owes Schmieding the amount of $276,519.87. On these
allegations, Schmieding asserts four counterclaims against Reser’s for: 1)
failure to pay trust funds in violation of the Perishable Agricultural
Commodities Act, 7 U.S.C. §§ 499a, et seq. (“PACA”); 2) failure to make
prompt and full payment for shipments in violation of PACA; 3) breach of
contract and invoices in not timely remitting payment; and 4) recovery of
interest and attorney’s fees. ECF# 62, pp. 11-13.
SUMMARY JUDGMENT STANDARDS
Rule 56 mandates summary judgment “against a party who fails
to make a showing sufficient to establish the existence of an element
essential to that party's case, and on which that party will bear the burden
of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). “Of
course, a party seeking summary judgment always bears the initial
responsibility of informing the district court of the basis for its motion, and
identifying those portions of ‘the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any,’
which it believes demonstrate the absence of a genuine issue of material
fact.” Id. at 323. This does not mean that the moving party must negate the
other sides’ claims or defenses through affidavits. Id. Upon a properly
supported motion for summary judgment, the nonmoving party must go
beyond the pleadings, that is, mere allegations or denials, and set forth
specific facts showing a genuine issue of material fact for trial, relying upon
the types of evidentiary materials contemplated by Rule 56. Id.
The court decides the motion “through the prism of the
substantive evidentiary burden.” Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 254 (1986). Thus, a factual dispute is “material” only if it “might affect
the outcome of the suit under the governing law.” Id. at 248. A “genuine”
factual dispute requires more than a mere scintilla of evidence in support of
a party's position. Id. at 252. The purpose of Rule 56 “is not to replace
conclusory allegations of the complaint or answer with conclusory allegations
of an affidavit.” Lujan v. Nat'l Wildlife Fed'n, 497 U.S. 871, 888 (1990). At
the 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 v. Cotton, ---U.S.---,
134 S. Ct. 1861, 1866 (2014). 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.
SUMMARY OF POSITIONS AND SUBSTANTIVE LAW
Schmieding seeks “summary judgment against Reser’s on each
of its causes of action.” ECF# 76, p. 10. It asks the court to enter judgment
against Reser’s in the principal amount of $276,862.39, plus interest at the
rate of 18% per annum accrued through the date of judgment, and
attorney’s fees actually incurred in the amount of $62,149.94.
Schmieding’s first counterclaim addresses PACA’s statutory trust
liability. The court’s prior order laid out the following as relevant to this
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
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).
ECF# 42, pp. 11-12 (quoting Nickey Gregory Co., LLC v. Agricap, LLC, 597
F.3d 591, 594-95 (4th Cir. 2010)). The court’s prior order also summarized
that a commodities purchaser violates PACA by failing to retain in trust the
commodities or their proceeds until the commodities seller is paid. Id. at p.
12. 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.
Besides the trustee’s duty to maintain and ensure sufficient
assets, courts have recognized that as a PACA trustee, “a produce buyer is
charged with a duty ‘to ensure . . . . that any beneficiary under the trust will
receive full payment.’” Coosemans Specialties, Inc. v. Gargiulo, 485 F.3d
701, 705 (2nd Cir. 2007) (quoting D.M. Rothman & Co. v. Korea Commercial
Bank of N.Y., 411 F.3d 90, 94 (2d Cir.2005)). This is because:
The buyer has a “fiduciary obligation under PACA to repay the full
amount of the debt owed to the PACA beneficiary.” C.H. Robinson Co.
v. Alanco Corp., 239 F.3d 483, 488 (2d Cir.2001). Under the statute,
the trust is formed at the moment the buyer receives the produce and
remains in effect until the seller is paid in full. See 7 C.F.R. §
46.46(c)(1); In re Kornblum & Co., 81 F.3d 280, 286 (2d Cir.1996).
However, to establish the existence of a PACA trust, a number of
prerequisites must be met:
[T]he seller must demonstrate that: (1) the commodities sold
were perishable agricultural commodities; (2) the purchaser of
the perishable agricultural commodities was a commission
merchant, dealer or broker; (3) the transaction occurred in
interstate or foreign commerce; (4) the seller has not received
full payment on the transaction; and (5) the seller preserved its
trust rights by giving written notice to the purchaser of its
intention to do so.
Taylor & Fulton [Packing, LLC v. Marco Intern. Foods, LLC,] 2011 WL
6329194, at *5 [(E.D.N.Y. 2011)](citations omitted).
Dell's Maraschino Cherries Co., Inc. v. Shoreline Fruit Growers, Inc., 887 F.
Supp. 2d 459, 477 (E.D.N.Y. 2012); see Tom Ver LLC v. Organic Alliance,
Inc, 2015 WL 6957483 at *8 (N.D. Cal. Nov. 11, 2015). In sum,
Schmieding’s first counterclaim addresses the additional remedy of a
statutory trust as expressed in the fifth element stated above, but
Schmieding’s second PACA counterclaim addresses the trustee’s/buyer’s
failure to make prompt payment as expressed in the first four elements:
“Under PACA, it is unlawful for buyers of produce, inter alia, to fail to
make prompt payment for a shipment of produce.” Id. [Idahoan Fresh
v. Advantage Produce, Inc., 157 F.3d 197, 199 (3d Cir. 1998)] (citing
7 U.S.C. § 499b(4)). A buyer's failure to tender prompt payment
triggers civil liability and the possible suspension or revocation of the
buyer's PACA license that 7 U.S.C. § 499c requires. See 7 U.S.C. §
499h(a). The PACA regulations define the time for prompt payment,
which applies unless the parties agree otherwise in writing to different
payment provisions prior to the transaction. See 7 C.F.R. § 46.2(aa).
Pacific Intern. Marketing, Inc. v. A & B Produce, Inc., 462 F.3d 279, 282 (3d
Cir. 2006). Schmieding’s second PACA counterclaim seems to be articulated
within the first four elements expressed above.
The parties’ memoranda show there is no dispute over the first
three elements (perishable commodity, licensed purchaser and interstate
commerce transaction). As to the fourth element, seller’s receipt of full
payment on the transaction, it is uncontroverted that between October 12,
2015 and February 22, 2016, Schmieding sold and delivered to Reser’s in
interstate commerce 25 truckloads of celery worth $276,519.87, that
Schmieding timely invoiced Reser’s for all of these loads, and that Reser’s
has withheld payment on all 25 loads asserting a setoff to recover its costs
and losses resulting from its use of the celery delivered pursuant to invoice
#133505. With respect to this fourth element, the parties dispute the legal
propriety of Reser’s use of a setoff remedy pursuant to custom and practice
as governed by the Uniform Commercial Code provisions. As to the fifth
element, seller’s written notice preserving trust rights, it is uncontroverted
that each of the 25 invoices included the necessary statutory trust language
required by 7 U.S.C. § 499e(c)(4). For both of these counterclaims,
Schmieding is asserting the same actionable wrong by the buyer or trustee
in failing to make timely payment. Reser’s arguments of having maintained
adequate liquid assets for the trust and of having no proceeds from the one
load of celery does not address it’s alternative liability for failure to pay for
all 25 loads of celery.
On its third counterclaim, Schmieding alleges the 2015 Celery
Contract and the invoices are valid and enforceable contracts which Reser’s
breached by failing to make timely payment for the delivered celery. The
parties do not address whether this claim is subject to Arkansas or Kansas
law. The 2015 Celery Contract includes the following provision: “The
contract shall have been deemed to have been made in Washington County,
Arkansas and shall be governed by Arkansas law.” ECF# 76-8, p. 3. For the
elements of proof on its breach of contract action, Schmieding cites a federal
district court opinion applying Kansas law. ECF# 76, p. 19 (citing Britvic Soft
Drinks, Ltd v. ACSIS Technologies, Inc., 265 F. Supp. 2d 1179 (D. Kan.
2003) (“The elements for a breach of contract claim are: (1) the existence
of a contract between the parties; (2) consideration; (3) the plaintiff’s
performance or willingness to perform in compliance with the contract; (4)
defendant’s breach of the contract; and (5) that plaintiff was damaged by
the breach.” (citation omitted)). Schmieding’s apparent position is that
Kansas law would govern its breach of contract claim arising out of its sale
and delivery of the additional celery allegedly not covered by the 2015
Celery Contract. As for the claims of breaching the 2015 Celery Contract, the
parties agree that Arkansas law governs. See Keith Capps Landscaping &
Excavation, Inc. v. Van Horn Const., Inc., 2014 Ark App. 638, 448 S.W.3d
207, 210 (2014) (“In order to prove a breach-of-contract claim, one must
prove the existence of an agreement, breach of the agreement, and
resulting damage.” (internal quotation marks and citation omitted)). As with
the first two counterclaims, what Schmieding is asserting as the actionable
wrong or breach here is the failure to pay for the 25 loads, and the dispute
concerns Reser’s use of a setoff remedy.
RESER’S USE OF SETOFFS TO OFFSET ITS COSTS AND LOSSES
Relying on the affidavit of its Chief Financial Officer (“CFO”) Paul
Leavy, Reser’s position is that, “[a]s of November, 2015, it was the custom
and practice between Reser’s and Schmieding for Reser’s to use setoffs on
future Schmieding invoices to offset costs and losses Reser’s incurred due to
problems with products received from Schmieding.” ECF## 87, pp. 19-20;
87-2, p. 6. CFO Levy avers that based on Reser’s costs and losses incurred
from the recall and hold on the invoiced celery load #133505, Reser’s
followed this custom and practice by not paying Schmieding’s celery invoices
dated from October 27, 2015, through March 11, 2016. Id. Finally, Reser’s
acknowledges that the 2015 Celery Contract is governed by Arkansas law,
that the contract contains no setoff terms, and that “Schmieding correctly
argues that, as the contract is one for a sale of goods between merchants,
the Uniform Commercial Code applies and any right to setoff must arise out
of the UCC.” ECF# 87, p. 20.2 Thus, Reser’s rights to a setoff against the
2015 Celery Contract are governed by the following UCC provision: “The
buyer on notifying the seller of his intention to do so may deduct all or any
part of the damages resulting from any breach of the contract from any part
of the price still due under the same contract.” Ark. Code Ann. § 4-2-717.
“Because § 2-717 authorizes a buyer to deduct damages resulting from the
“A claim to equitable setoff is preempted by U.C.C. § 2-717. Because the
U.C.C. specifically provides for setoffs in particular circumstances, the Code
drafters and the state legislatures that have adopted the Code intended to
displace common-law setoff.” Lawrence’s Anderson on UCC § 2-717:4 (3d.
ed.) (citing AmerisourceBergen Corp. v. Dialysist West, Inc., 465 F.3d 946,
951 (9th Cir. 2006) (which cites Carlisle Corp. v. Uresco Const. Materials,
Inc., 823 F. Supp. 271, 275 (M.D. Pa. 1993) (“Because of that, we must
conclude that the Code drafters, and the state legislatures that have adopted
the Code, meant to displace the common law set-off. See Microsize, Inc. v.
Arkansas Microfilm, Inc., 29 Ark. App. 49, 55, 780 S.W.2d 574, 578
seller’s breach, the buyer does not breach the parties’ contract when it
properly deducts these damages.” Tegrant Alloyd Brands, Inc. v. The
Merchant of Tennis, Inc., 2011 WL 249469, at *6 (N.D. Ill. Jan. 26, 2011). If
there remains a genuine factual issue over Reser’s proper use of the set-off
remedy, then summary judgment must be denied as to Schmieding’s claims
that Reser’s violated PACA and breached the 2015 Celery Contract by failing
to make the required invoice payments. Id.
Schmieding argues that Reser’s position relies on an overbroad
application of 2-717. This provision “’is not a general set-off provision
permitting a buyer of goods to adjust its continuing contract obligations
according to the equities perceived by the buyer.’” ITV Direct, Inc. v.
Healthy Solutions, LLC, 379 F. Supp. 2d 130, 133 (D. Mass. 2005) (quoting
C.R. Bard, Inc. v. Med. Elecs. Corp., 529 F. Supp. 1382, 1387 (D. Mass.
1982)), aff’d, 445 F.3d 66 (1st Cir. 2006). Schmieding contends Reser’s
failed to provide the required notice to Schmieding of its “intention” to
deduct or offset its costs or losses. According to Schmieding, Reser’s only
relevant communication makes no mention of deducting or offsetting losses
from amounts due under the 2015 Celery Contract. Even assuming timely
adequate notice, Schmieding argues invoice #133505 is a separate
transaction not covered by the 2015 Celery Contract and, “therefore Reser’s
cannot withhold every penny due Schmieding based on damages allegedly
incurred in connection with the goods it received only under the Purchase
Order, the value of which was only $15,490.40.” ECF# 76, p. 18.
Notice of Intention to Deduct
It is uncontroverted that Reser’s sent Schmieding a letter dated
December 2, 2015, that listed the kinds of costs incurred as a result of the
recall and hold order placed on the invoiced load #133505. This letter
concluded with the following:
For all of the above reasons, there may be causes of action and claims
against all parties in the supply chain to Reser’s Fine Foods, Inc.
Costs are being accumulated and tracked by our accounting
department. We will be in contact with you to discuss the result of
their review and the impending consequences of the hold order.
Please let me know when you and/or the appropriate representative(s)
from H.C. Schmieding would be available for a conference call.
ECF# 76-11, p. 2. Then on December 22, 2015, a Reser’s representative
sent to a Schmieding representative an email stating that, “attached is a
copy of the credit for the celery issue. I will call to discuss.” ECF# 87-14.
The official UCC comment on the notice requirement of 2-717
The buyer, however, must give notice of his intention to withhold all or
part of the price if he wishes to avoid a default within the meaning of
the section on insecurity and right to assurances. In conformity with
the general policies of this Article, no formality of notice is required
and any language which reasonably indicates the buyer's reason for
holding up his payment is sufficient.
Ark. Code Ann. § 4-2-717. The Arkansas Supreme Court calls this “a
sensible requirement, for the seller should be apprised of the buyer’s
intentions in withholding the price.” Jones v. Atkins, 254 Ark. 472, 477, 494
S.W.2d 448, 451 (1973). Because there is no required formality with this
notice, it can be done through telephone conversations, meetings, letters
and other communications. Sencon Systems, Inc. v. W.R. Bonsal Co., 1986
WL 10989 at *3 (N.D. Ill. Sept. 29, 1986). Reser’s has come forward with
evidence that it used letters, emails and conversations to communicate
about its losses and its calculation of the same in arriving at a “credit.” A
reasonable jury could find that these communications “reasonably indicate”
Reser’s intention to assert a “credit” against future dealings/payments and
its reason for the same. The court is satisfied that there is evidence of a
sufficient disagreement over the nature and timing of the notice as to create
genuine issues of material fact.
Upon notifying the seller, the buyer “may deduct all or any part
of the damages resulting from any breach of the contract from any part of
the price still due under the same contract.” Ark. Code Ann. § 4-2-717.
The official UCC comment emphasizes this same contract requirement, “To
bring this provision into application the breach involved must be of the same
contract under which the price in question is claimed to have been earned.”
Id. Thus, courts reject setoff defenses based on damages arising from
breaches of different contracts. See, e.g.,AmerisourceBergen Corp. v.
Dialysist West, Inc., 465 F.3d 946, 950 (9th Cir. 2006)(“A plain reading of
the statute [§ 2-717] indicates that a party may not set-off a contractual
claim against a debt on a separate contract.”); ECHO, Inc. v. Whitson CO.,
Inc., 52 F.3d 702, 705-06, 708 (7th Cir. 1995)(Distributorship agreements
are different contracts from the purchase orders that arise under them,
because the source of rights related to price, type and quantity of goods
arise under the purchase order, not the distributorship agreement. “Each
party’s rights have their origins in different contracts, and we have
determined that such a state of affairs precludes set-off.” (citations
omitted)); ITV Direct, Inc. v. Healthy Solutions, LLC, 379 F. Supp. 2d 130,
133 (D. Mass. 2005)(“[I]t is well established that the buyer’s obligation to
pay for goods tendered and accepted does not arise under the same contract
as the alleged breach of an exclusive dealing or distributorship agreement by
the seller.” (internal quotation marks and citation omitted). The distribution
agreement contemplated sales, but the purchase orders controlled the price,
type, and quantity of goods.); GFSI, Inc. v. J-Loong Trading, Ltd., 2006 WL
3523782, at *3 (D. Kan. Dec. 6, 2006)(“Based on the general terms of the
Requirements Manual and absent price or quantity terms and the signatures
of the parties, each purchase order (after acceptance by J-Loong)
constituted a separate and distinct contract.”); 1 Roy Ryden Anderson,
Damages Under the Uniform Commercial Code, § 7.3 (2016)(“Section 2-717
does not authorize deductions for breaches of separate contracts.” (Footnote
of supporting citations omitted)); 4A David Frisch, Lawrence’s Anderson on
the Uniform Commercial Code, § 2-717:18 (2016)(“While a buyer has the
right to deduct breach of contract damages from the purchase price of
delivered goods, he must show that the breach was under the same contract
that obligated payment.” (citation omitted)); c.f. J-B Marketing, Inc. v.
Golden County Foods, Inc., 2013 WL 12109102, at *4 (W.D. Wis. Jan. 13,
2013)(“If an initial agreement contains only general terms and separate
purchase orders or invoices contain the specific terms or relate to different
goods, the agreements are more likely to be considered separate contracts
under the law.” The court recognized a question of fact when the initial
agreement included details on price, type and quantity of goods as to show
the later purchase orders are related.)
Simply put, “in order for a buyer to invoke § 2-717, the asserted
breach must go to the essence of the transaction under which the seller
seeks to recover his price.” ITV Direct, 379 F. Supp. 2d at 133 (internal
quotation marks and citation omitted). “’The purpose of § 2-717 is to enable
business-persons to dispute a particular transaction while carrying on their
business otherwise.’” Rebaque v. Forsythe Racing Inc., 134 Ill. App. 3d 778,
480 N.E.2d 1338, 1341 (1985) (quoting Artmark Associates, Inc. v. Allied
Tube & Conduit Corp., 32 UCC Reporting Service 454, 456 (N.D. Ill. 1981)).
Thus, mindful that UCC provisions are to offer uniformity, these decisions
and the prevailing interpretations of 2-717 offer “a rule which furthers the
values of certainty and predictability, and is thus consistent with the public
interest, i.e., that a seller be entitled to the price of goods accepted,
regardless of the buyer’s claim under some remote transaction.” Id. (citation
In discussing Arkansas law on 2-717, Reser’s cites Mountain
Pure, L.L.C. v. Affiliated Foods Southwest, Inc., 96 Ark. App. 346, 241
S.W.3d 774 (2006), and argues that this decision recognizes applying this
setoff provision “liberally” in a debt-defense context and that this includes
setting off its damages from a contract with Affiliated against amounts due
under contracts with other packaging suppliers. The court will not follow
Reser’s reading of Mountain Pure. First, the Arkansas Court of Appeals in this
decision notes that the Arkansas statute calling for liberal application of
remedies was repealed in 2005. 241 S.W.3d at 778 n.4. Second, the
Arkansas court discussed using 2-717 to deduct damages caused by vendors
against amounts owed to the same vendors under the same contracts. Thus,
the court finds nothing in Mountain Pure or in any other Arkansas case law
to suggest that Arkansas courts would interpret or apply 2-717 in a manner
that differs substantially from the prevalent interpretation and application
followed by other courts.
Schmieding first contends that for each load of celery delivered
under the 2015 Celery Contract, a separate purchase order and invoice was
issued thereby making each load a separate or divisible contract. ECF#76, p.
18. Under Arkansas law, “the test for determining whether a contract is
entire or severable is the intention of the parties to the contract,” and this
intention is learned “from the language used, the subject matter of the
contract and circumstances of the particular transaction.” Elder Const. Co. v.
Ivey Lane, LLC, 2010 Ark. App. 10, 370 S.W.3d 861, 864 (2010) (citing
Jones v. Gregg, 226 Ark. 595, 604-05, 293 S.W.2d 545, 550 (1956)). The
court’s determination involves applying this rule:
As a general rule it may be said that a contract is entire when, by its
terms, nature, and purpose, it contemplates that each and all of its
parts are interdependent and common to one another and to the
consideration, and that it is severable when, in its nature and purpose,
it is susceptible of division and apportionment. Acts of the parties in
treating the contract as entire or severable have an important bearing
on its construction.
Elder Const. Co. v. Ivey Lane, LLC, 370 S.W.3d at 864 (quoting Jones, 226
Ark. at 605). (Ark. App. 2010). The UCC treats installment contracts calling
for installment deliveries as generally a single contract rather than separate
contracts. See Ark. Code Ann. § 4-2-612. The parties’ 2015 Celery Contract
detailed the number of truckloads to be delivered for a particular year, it
scheduled the number of truckloads per month, and it established the price
for each truckload based on the month of delivery. The contract laid out the
parties’ rights and obligations for the sale, delivery and purchase of all 91
truckloads of celery. There is sufficient evidence here that a reasonable jury
could find that the parties’ intention was for the sale and purchase of all 91
truckloads of celery to be governed by the single 2015 Celery Contract. See
Sencon Systems, Inc., 1986 WL 10989 at *2-*3.
Schmieding alternatively argues that even if the 2015 Celery
Contract is construed as covering all 91 truckloads of celery regardless of
the separate purchase orders and invoices, the invoiced load #133505
delivered on November 11, 2015, is “expressly outside” the 2015 Celery
Contract. ECF# 76, p. 18. In short, Schmieding contends that the invoiced
load #133505 is not one of the 91 truckloads of celery under the 2015
Celery Contract. It is uncontroverted that the 2015 Celery Contract called for
six truckloads of celery in November to be sold and delivered at the price of
$26.50. ECF# 76-8, p. 4. Schmieding asserts that the invoiced load
#133505 is not one of these six contract loads, that Reser’s asked for a
seventh load in November, and that #133505 is this seventh load, openmarket sale made under a separate contract at a different price. Thus,
Schmieding argues that Reser’s claimed losses from #133505 are from a
different contract. This means that in defending against its liability under
PACA law or under common-law breach of contract law, Reser’s may not rely
on having withheld payments through a setoff of its losses under the
#133505 contract against the other celery loads delivered under the
separate 2015 Celery Contract.
Reser’s argues the “facts belie” Schmieding’s position that
#133505 is a separate contract from the 2015 Celery Contract. ECF# 87,
pp. 27-28. Specifically, Reser’s lines itself behind the following points:
The parties are in agreement that the February 19 Contract of Sale
called for delivery of 91 loads of celery during its one-year term . . .
and called for delivery of six loads during November. . . . However, the
February 19 Contract of Sale did not specify the dates in November on
which the six deliveries would be made, it merely specified that six
deliveries would be made during November. . . . The load of celery
delivered on November 11, 2015 was the fourth load delivered in
November 2015, and the 77th load delivered during the term of the
Contract of Sale. . . . Thus, it clearly fell within the six loads to be
delivered in November 2015 and the 91 loads to be delivered during
the term of the February 19 Contract.
. . . Neither AmerisourceBergen [Corp. v. Dialysist W., Inc., 465
F.3d 946 (9th Cir. 2006)] nor Berdex[, Inc. v. Milfico Prepared Foods,
Inc., 258 Ill. App. 3d 738, 630 N.E. 2d 998 (1994)] asked the question
whether a seventh shipment of a single commodity ordered during a
month in which a pre-existing written contract calls for only six
shipments is sold under the pre-existing contract or a different
contract. Neither did either opinion reach the holding Schmieding
would need to make its case on this point—namely, that where a preexisting contract calls for six shipments during a month, without
specifying dates, and the buyer orders seven shipments, the order for
the seventh shipment renders all of the shipments received during that
month shipments received under separate contracts. The November
11, 2015 load of celery was the fourth load received during November,
not the seventh. . . .
ECF# 87, pp. 28-29. For its evidence on this point, Reser’s relies principally
on the affidavit of its Chief Financial officer, Paul Leavy, which states at ¶¶ 5
and 6 that:
5. As shown by Exhibit 2, the load of celery received by Reser’s
Topeka facility on November 11, 2015, was the fourth load of celery
received that month from H.C. Schmieding Produce Co., LLC
(“Schmieding”). The previous loads were received on November 2, 4
6. As shown by Exhibit 2, the load of celery received by Reser’s
Topeka facility on November 11, 2015, was the 77th of 91 loads of
celery called for under the February 19, 2015, Contract of Sale
between Reser’s and Schmieding, 76 loads having previously been
received during the contract period.
ECF# 87-2, p. 2. As CFO Leavy avers, Exhibit 2 is a table prepared by
Reser’s to “reflect the number of celery loads Reser’s received from
Schmieding pursuant to the February 19, 2015, Contract for Sale.” Id. ¶ 4.
Simply put, Reser’s argues that #133505 is part of the 91 loads under the
2015 Celery Contract because it was the fourth load of celery delivered in
November and it was the 77th load of celery delivered during the contract
year. Other than the timing of when the invoiced load #133505 was
delivered and CFO Leavy’s related conclusory statements that the load was
therefore part of the 2015 Celery Contract, Reser’s offers no other facts to
refute Schmieding’s position that #133505 was for a load of celery
separately contracted and was not part of the 2015 Celery Contract.
In reply, Schmieding submits the affidavit of Gary Owens who
has been its sales manager on Reser’s account for approximately 20 years
and is the sales manager who handled all the transactions involved in this
action. ECF# 92-5. In his affidavit, Owens explains that Schmieding does not
grow its own celery but contracts with growers to supply a volume of celery
that will meet Schmieding’s customers’ needs for celery as scheduled in the
customer contracts. So, when a customer wants more celery than has been
scheduled in a contract, Schmieding’s growers/suppliers may be unable to
supply the additional celery. Owens further avers that Reser’s sent two
purchase orders for celery to be delivered on November 9 and 11, 2015,
which meant that with the two loads already delivered in November, Reser’s
would be receiving two-thirds of its contract loads within the first part of
November. Owens informed Dean Bowhay3 of Reser’s that Schmieding’s
could not fill the purchase order for November 11th as the contract celery
supplier could not provide this much celery so early in November. Bowhay
told Owens to look on the open market to fill this order. Owens avers:
9. My supplier at Sunterra Produce Traders, Inc. (“Sunterra”) told me
that he could get a load of celery from C & E Farms, Inc. (“C&E”), but
that it was “long stalk celery,” a different variety from the kind
Schmieding supplied under the Contract. I had never sold this type of
celery before, so I called Bowhay to see if he would be interested.
Bowhay told me he was familiar with this variety of celery and that it
was acceptable. We discussed open market pricing, and Bowhay
instructed me to ship the load at an agreed off-contract price. I
modified the second purchase order, changing the contract price from
$26.50 to $38.00 and noting “change to per Dean [Bowhay] open mkt
load,” and faxed the modified purchase order to Justin Elmore, Reser’s
buyer. Reser’s never disputed the revised terms of the purchase order.
A copy of the modified purchase order I faxed to Elmore was included
in Schmieding’s motion papers as Exhibit J. [ECF# 76-10].
10. C&E loaded the celery on November 7 and we delivered it to
Reser’s on November 11, 2015. The load arrived and was unloaded
without any issues and we issued invoice 133505 at the off-contract
price of $38.00 per unit. Reser’s never disputed the invoice. . . .
11. During the term of the Contract, Schmieding shipped 96 loads of
celery to Reser’s—five more than were called for under the Contract.
Reser’s has paid for four of the off-contract loads, and is withholding
payment only for the off-contract load that is at issue in this lawsuit. .
. . Notably, invoice 133505 was for $38.00 per hundredweight, far
more than Contract pricing for November.
ECF# 92-5, pp. 5-6. Schmieding did not come forward with this affidavit
until it was attached to its reply memorandum, but it was offered in
response to Reser’s position that invoice #133505 was part of the 2015
Celery Contract based on the timing of the purchase order and delivery.
Bowhay’s name appears on the 2015 Celery Contract as the signing
representative on behalf of Reser’s. ECF# 76-8, p. 2.
ECF#92. It is noteworthy that Reser’s has not sought to leave to file a surreply to address the specifics of Owens’ affidavit concerning invoice
Reser’s bears the burden of establishing its authority to set-off
its damages from invoice #133505 against the payments owed for
installment deliveries under the 2015 Celery Contract. See
AmerisourceBergen Corp. v. Dialysist West, Inc., 465 F.3d 946, 950 (9th Cir.
2006). Thus, it falls on Reser’s to demonstrate there is a genuine issue of
material fact that might affect the outcome of a trial on its defense of setoff.
As noted above, Reser’s efforts rely principally on CFO Leavy’s affidavit
which offers no more than conclusions based exclusively on the timing of
invoice #133505. Evidence of timing alone is not a significant factor under
all the circumstances to create a “genuine” factual dispute over whether
invoice #133505 is part of the 2015 Celery Contract. First, the 2015 Celery
Contract is not drafted to cover all loads of celery sold during a period of
time. Instead of encompassing all loads of celery that happen to be delivered
over a period of time, it specifically addresses only the 91 contracted loads.4
The 2015 contract provides:
It is understood and agreed that in the event the crop or crops of
celery being grown and/or contracted for by the Seller and from which
Seller is to supply Buyer under this Agreement, hereafter “contract
celery,” does not produce sufficient quantity of celery to fulfill terms of
his written Agreement, Seller shall then prorate such supplies as he
has available to him from the contract celery among his contract
Second, the celery price on invoice #133505 is much higher than the price
of celery set by the 2015 Celery Contract for the six loads of celery to be
delivered in November. Third, the purchase order #838903 associated with
invoice #133505 bears handwritten terms indicating the price was a
separate arrangement based on the open market. Fourth, the 2015 Celery
Contract does not obligate the sale and delivery of celery loads beyond the
91 called for in the contract, and it does not have terms that address the
delivery, origin, or price of additional loads of celery beyond the 91
contracted. The mere fact that the invoice #133505 was negotiated and
performed during the life of the 2015 Celery Contract does not make it a
part of the same contract. See Cliffstar Corp. v. Riverbend Products, Inc.,
750 F. Supp. 81, 89 (W.D.N.Y. 1990). As the official UCC comment to Ark.
Code Ann. § 4-2-717 states, the setoff provision is not applicable unless the
breach involves the “same contract under which the price in question is
claimed to have been earned.” This is the not case here.
From these circumstances alone, the court can find no genuine
factual dispute that invoice #133505 is a separate contract of purchase for
customers and Buyer shall receive his pro rata share thereof, which
will fully discharge Seller’s obligation under this agreement.
ECF# 76-8, p. 3. Thus, the celery to be supplied under the 2015 Celery
Contract is the “contract celery” described as one of the 91 truckloads of
U.S. #1 celery to be delivered during the shipment period and subject to the
price specified in the attached 2015 Celery Contract Schedule details per
month the number of loads, the state of origin, and the delivered price. ECF
#76-8, p. 4.
an additional load of celery based on a separately arranged price and
acquired on the open market. All of these circumstances are evident from
the documents originally submitted in support of Schmieding’s summary
judgment motion. The affidavit of Schmieding’s sales manager, Gary Owens,
explains away any possible significance in the timing of invoice #133505.
Reser’s has chosen not to contest Owens’ explanation. For all these reasons,
the court concludes that Reser’s has not come forward with a genuine issue
of material fact on its setoff defense as to avoid summary judgment for its
liability under PACA and breach of contract in failing to pay Schmieding for
the loads of celery delivered under the 2015 Celery Contract. Of course, this
holding does not preclude Reser’s from going forward with its setoff defense
against its debt under the separate contract in invoice #133505.
DAMAGES, INTEREST AND ATTORNEYS’ FEES
Schmieding moves for summary judgment on the principal
amount of $276,862.39, plus accrued interest at the rate of 18% per annum
through May 16, 2017, (the date of its motion), and continuing thereafter
until paid in full, plus attorney’s fees in the amount of $62,149.94 for a final
judgment against Reser’s in the amount of $408,627.44. ECF# 76, p. 9-10.
Schmieding sets forth the damage, interest and fee totals in its statement of
uncontroverted facts and supports them with invoices, schedules, attorney
fee statements, and the declaration of Gregory Brown. Id. at pp. 9-10, ¶ 16.
In saying it controverts this statement of fact, Reser’s denies its liability
because of its losses from invoice #133505, but it does not controvert any of
the totals as calculated and admits, “the only way Schmieding would be
entitled to interest and attorney fees from Reser’s would be if it is
determined that Reser’s is obligated to pay the amount [of] Schmieding
claims.” ECF#87, p. 7, ¶ 16.
Schmieding’s damage (invoice amounts), interest and fee totals
are calculated in its Exhibit M, (ECF# 76-13, p.2). This exhibit, however,
includes invoice #133505 in the amount due and interested owed. Because
Reser’s has avoided summary judgment on its setoff defense against its debt
for the separate contract of invoice #133505, the court cannot make a final
determination for an award of damages, interest and attorney’s fees. The
court does hereby find that Reser’s has failed to controvert the invoice
amounts and the interest due on those amounts for the 24 loads under the
2015 Celery Contract and has failed to controvert Schmieding’s reasonable
attorneys’ fees to date.
IT IS THEREFORE ORDERED that Schmieding’s motion for
summary judgment (ECF# 75) is granted insofar as it is determined as a
matter of law that Reser’s may not setoff under § 2-717 any of its losses
related to invoice #133505 against its liability for the 24 loads under the
2015 Celery Contract and that Reser’s is liable for the invoice amounts,
interest and fee totals as calculated in Exhibit M for these 24 loads, but
Schmieding’s motion is denied insofar as Reser’s use of the setoff against its
liability for invoice #133505.
Dated this 15th day of September, 2017 at Topeka, Kansas.
s/Sam A. Crow
Sam A. Crow, U.S. District Senior Judge
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