The PACA Trust Creditors of Lenny Perry's Produce, Inc. v. Genecco Produce, Inc. et al
Filing
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DECISION AND ORDER REMANDING this case to the Bankruptcy Court for proceedings consistent with this Decision and Order. Signed by William M. Skretny, Chief Judge on 8/29/2014. (MEAL) - CLERK TO FOLLOW UP -
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
THE PACA TRUST CREDITORS OF
LENNY PERRY’S, INC.
Appellant/Appellee
v.
DECISION AND ORDER
14-MC-036S
GENECCO PRODUCE, INC.
Appellee/Appellant.
I. INTRODUCTION
Lenny Perry's Produce, Inc., a defunct corporation based in Buffalo, New York,
filed for Chapter 7 bankruptcy in 2009. Because Lenny Perry’s was a produce distributor
and seller, its bankruptcy implicates the Perishable Agricultural Commodities Act of
1930, 7 U.S.C. § 499a. et seq., commonly referred to by the acronym “PACA.” In 1984,
Congress, concerned that bankruptcy proceedings often left produce-selling creditors
with nothing, amended PACA to include certain statutory trust provisions. 1 Simply put,
PACA creates a trust in favor of unpaid suppliers or sellers of such commodities; it
provides suppliers with a right to payment before all other creditors, including secured
lenders. See 7 U.S.C. § 499e(c).
In this bankruptcy case, the PACA Trust Creditors of Lenny Perry’s Produce Inc.,
– i.e., the beneficiaries of the statutory trust created by the Perishable Agricultural
Commodities Act – initiated an adversary proceeding against Genecco Produce Inc.,
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In passing the law, Congress noted that “[m]any [buyers], in the ordinary course of their business
transactions, operate on bank loans secured by [their] inventories, proceeds or assigned receivables from
sales of perishable agricultural commodities, giving the lender a secured position in the case of
insolvency. Under present law, sellers of fresh fruits and vegetables are unsecured creditors and
receive little protection in any suit for recovery of damages where a buyer has failed to make
payment as required by the contract.” H.R.Rep. No. 98–543, at 3 (1983), reprinted in 1984
U.S.C.C.A.N. 405, 406 (emphasis added).
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and its principal, David Genecco (collectively “Genecco”). The PACA trust argues that
Genecco, a fellow dealer of perishable agricultural commodities, owes it over $200,000.
In a Report and Recommendation issued on February 12, 2014, Bankruptcy Judge
Michael J. Kaplan advised this Court to grant the motion. Both sides filed objections,
and this Court must now undertake a de novo review of the summary-judgment motion.
See 28 U.S.C. § 157(c)(1) and (2).
For the following reasons, the case is remanded for further proceedings.
II. BACKGROUND
Genecco and Lenny Perry’s frequently bought, sold or traded produce from, to,
or with each other. There is no real dispute that Lenny Perry’s sold Genecco
$204,778.88 of fresh produce from 2005 to 2008. The PACA Trust alleges that under
the Perishable Agricultural Commodities Act “a statutory trust arose in favor of Lenny
Perry’s as to all [p]roduce received by Defendants, all inventories of food or other
products derived from said Produce, and the proceeds from the sale of such Produce
until full payment is made by [Genecco] to Lenny Perry’s.” (Compl., ¶ 11.) The PACA
Trust alleges that Genecco “failed and refused to pay Lenny Perry’s the principal sum of
$204,778.88 from the statutory trust plus accrued interest and fees.” (Id., ¶ 26.)
Genecco sees it differently. There is no dispute that, in addition to the
$204,778.88 in produce Lenny Perry’s sold Genecco, Genecco also sold or provided
$263,056.92 in produce to Lenny Perry’s, resulting in a difference of $58,278.04. It
appears that the parties simply recorded the value of the produce each had provided to
the other, potentially with the intent to settle any balance later. Some money, however
did exchange hands in the course of their dealings.
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Genecco, which chose not to become a member of the PACA trust, asserted at
an earlier stage of this litigation that it was entitled to a setoff. Genecco hoped to chalkup the difference after the setoff – $58,278.04 – as “cost of doing business” and move
on. It represented that it would assert no claim for those funds.
On August 14, 2012, in a Report and Recommendation that was ultimately
adopted by this Court, Judge Kaplan agreed that, despite the presence of the PACA
Trust, Genecco retained the right to seek a setoff. Specifically, Judge Kaplan found (and
this Court ordered) that the defense “shall [not] be stricken as a matter of law.” (Report
and Recommendation, at 10; Docket No. 1 of 12-MC-055).
The case proceeded, and eventually the PACA Trust moved for summary
judgment. In a Report and Recommendation addressing this motion, Judge Kaplan,
focusing solely on one argument concerning whether the parties had a bartering
relationship, found that Genecco “ha[d] failed to provide sufficient evidence to get to trial
as to whether there was or was not a ‘bartering relationship.’” (Report and
Recommendation, at 5; Docket No. 1.) The court continued by noting that it was
“satisfied that the parties were simply selling commodities to each other . . . maintaining
open, off-setting accounts that remained so (meaning never materially reconciled by set
off) right up until [Lenny Perry’s] went out of business.” (Id.) It found this sufficient to
grant the PACA Trust’s motion for summary judgment. The court concluded that the
PACA Trust should have a money judgment against Genecco in an amount that is “the
difference between the dollar amount owed by [Genecco] to [Lenny Perry’s] (on the one
hand) and the dollar amount (on the other hand) to which [Genecco] would be entitled
as a PACA Trust beneficiary if [Genecco] were to pay to the PACA Trust all of the
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money that it owed Lenny Perry’s and then await distribution.” (Id., at 6) (parenthesis in
original; brackets supplied). In other words, the Bankruptcy Court found that Genecco
had failed to raise a triable issue of fact concerning whether it was entitled to setoff the
amount Lenny Perry’s owed it. It further found that Genecco should effectively pay the
PACA Trust the $204,778.88 it owed Lenny Perry’s.
And last, it found – without
elaboration – that Genecco could become a beneficiary of the PACA trust and thus
receive a pro rata share of the Trust’s assets. 2
III. DISCUSSION
The central issue before this Court concerns the affirmative defense of setoff,
which is also sometimes called “offset.” “Setoff is an established creditor's right to
cancel out mutual debts against one another in full or in part.” In re Patterson, 967 F.2d
505, 508 (11th Cir. 1992). Its purpose is to avoid “the absurdity of making A pay B when
B owes A.” Studley v. Boylston Nat'l Bank, 229 U.S. 523, 528, 33 S. Ct. 806, 57 L. Ed.
1313 (1913)).
Section 553 of the Bankruptcy Code preserves the right of a “creditor to offset a
mutual debt owing by such creditor to the debtor that arose before the commencement
of the case.” 11 U.S.C. §553(a). The requisite elements of a §553 setoff are that: (1) the
creditor holds a claim against the debtor that arose before the commencement of the
case; (2) the creditor owes a debt to the debtor that also arose before the
commencement of the case; (3) the claim and debt are mutual; and (4) the claim and
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At oral argument before this Court, the PACA Trust repeatedly maintained that Judge Kaplan found that
Genecco was indeed entitled to a setoff. It argued that “the setoff amount is what [Genecco] owe[s] the
PACA Trust minus what [Genecco] would take [as its] pro rata share of trust assets.” (Oral Arg. Tr.,
13:18–21). But this is not what Judge Kaplan found. Instead, Judge Kaplan found that Genecco could
become a beneficiary of the Trust – that it could, in other words, receive a pro rata share of the estate
after it paid into the estate. In this scenario, Genecco gets no setoff as to what Lenny Perry’s owed it.
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debt are each valid and enforceable. In re Steines, 285 B.R. 360, 362 (Bankr. D. N.J.
2002).
As noted above, the Bankruptcy Court found that Genecco was not entitled to a
setoff because it failed to prove that it and Lenny Perry’s had a bartering relationship.
But even the PACA Trust agrees that “[w]hether Defendants ‘bartered’ or sold produce
is irrelevant.” (PACA Trust Br., at 3; Docket No. 93 of 09-01269-MJK.) As noted by
Genecco at oral argument before this Court, bartering and setoff are different concepts.
If the parties were truly bartering there would be no debt to setoff. Two tomatoes might
be traded for four apples, and that would end the matter.
Instead, there appears to be no dispute in this case that “A owed B and B owed
A.” Specifically, Genecco owed $204,778.88 to Lenny Perry’s, and Lenny Perry’s owed
$263,056.92 to Genecco. There further appears to be no dispute that these debts arose
pre-petition. For its part, the PACA Trust argues that 11 U.S.C. §553 does not permit a
setoff because the third element is not met: there is not (and never was) a “mutuality of
obligations.” It argues that an unsecured debt cannot offset a trust debt. The PACA
Trust, quoting the Bankruptcy Court in the Southern District of New York, maintains that
“[w]here the liability of a the party claiming the right of offset arises from a fiduciary duty
or is in the nature of a trust, the requisite mutability of debts or credits does not exist, so
that such party may not offset against such liability a debt owing from the debtor
stemming from a different relationship.” Ross-Viking Merchandise Corp. v. Am.
Cyanamid Co., Lederle Div., 151 B.R. 71, 74 (Bankr. S.D.N.Y. 1993).
Genecco counters that the right to setoff emerged before the proceeds became
assets of the PACA Trust. And, therefore, when those assets became property of the
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trust, they remained encumbered with the defense of setoff. “Due to the fluidic nature of
the asserts making up a PACA trust,” argues Genecco, “once assets are subject to a
defense like setoff, they are no longer legitimate assets to which PACA trust
beneficiaries are entitled.” (Genecco Br. at 14; Docket No. 1.)
Undeterred, the PACA Trust contends that Lenny Perry’s receivables from
Genecco were, by virtue of the Perishable Agricultural Commodities Act, always trust
assets. At no point, then, could the right to setoff have attached.
The Bankruptcy Court, finding dispositive the lack of evidence regarding
bartering, did not address any of these contentions.
Nor did it fully address the
implications of its earlier finding and this Court’s ruling that “it is not unreasonable for
[Genecco] to have relied upon its belief that ordinary setoff rights as to ‘receivables’
would apply.” (Report and Recommendation, at 10; Docket No. 1 of 12-MC-055.) This
finding may preclude the PACA Trust’s argument that receivables were always PACA
Trust assets.
Although this Court agrees with the Bankruptcy Court that there is insufficient
evidence to establish that Genecco and Lenny Perry’s engaged in a bartering
relationship, it cannot agree that this finding alone resolves the motion for summary
judgment. For that reason, this Court will remand this action back to the Bankruptcy
Court for further proceedings consistent with this opinion. On remand, the Bankruptcy
Court should address whether the mutuality-of-obligations prong has been met, and,
relatedly, whether the lack of “running setoffs” or a pre-petition “setoff agreement”
means that any debt Genecco owes Lenny Perry’s is, statutorily, a PACA Trust asset,
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and thus not eligible for setoff under § 553. It should also address whether the earlier
ruling in this case forecloses the PACA Trust’s mutuality-of-obligations argument.
IV. CONCLUSION
The Bankruptcy Court rested its decision on the lack of a bartering relationship
between Genecco and Lenny Perry’s. But this Court finds that that conclusion does not
entirely resolve the matter. In particular, it remains unclear whether the claim and the
debt are “mutual.” Accordingly, the case is remanded for further proceedings.
V. ORDERS
IT HEREBY IS ORDERED that this case is REMANDED to the Bankruptcy Court
for proceedings consistent with this Decision and Order.
SO ORDERED.
Dated: August 29, 2014
Buffalo, NY
/s/William M. Skretny
WILLIAM M. SKRETNY
Chief Judge
United States District Court
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