CONSUMERS PRODUCE COMPANY, INC. OF PITTSBURGH et al v. FREDERICKTOWN PRODUCE CO., INC. et al
ORDER denying Defendant Northwest Savings Bank 39 Motion for Summary Judgment; granting Plaintiffs Consumers Produce Company, Inc. of Pittsburgh, Premier Produce Co., Inc., J.E. Corcoran Company 40 Motion for Summary Judgment. Signed by Magistrate Judge Maureen P. Kelly on 2/19/2014. (ndf )
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
CONSUMERS PRODUCE COMPANY,
INC. OF PITTSBURGH; PREMIER
PRODUCE CO., INC.; J.E. CORCORAN
Fredericktown PRODUCE CO., INC.;
DONNA M. GILES EXECUTRIX OF THE )
ESTATE OF GENE M. GILES; and
NORTHWEST SAVINGS BANK,
DONNA M. GILES EXECUTRIX OF THE )
ESTATE OF GENE M. GILES,
Civil Action No. 14-314
Chief Magistrate Judge Maureen P. Kelly
Re: ECF Nos. 39, 40
KELLY, Chief Magistrate Judge
Pending before the Court are cross-motions for summary judgment (ECF Nos. 39 and
40), which seek to determine first, whether, as a matter of law, the proceeds of a life insurance
policy purchased and paid for by Fredericktown Produce Co., Inc. (“Fredericktown”) are an asset
of a statutory trust created by the Perishable Agricultural Commodities Act (“PACA”), 1930, § 1
et seq., 7 U.S.C. § 499a et seq, and, second, if so, whether Defendant Northwest Savings Bank
(“NSB”) must disgorge policy proceeds received by it after the death of the named insured. For
the following reasons, the Court finds that the policy was a PACA asset and that NSB is not
entitled to retain the proceeds. Accordingly, the Motion for Summary Judgment filed on behalf
of Plaintiffs Consumer Produce Company, Inc. of Pittsburgh, Premier Produce Co., Inc. and
Coface North America, Inc. as assignee of J.E. Corcoran Company (collectively, “Plaintiffs” or
“CP”), (ECF No. 40), is granted, and the Motion for Summary Judgment filed on behalf of NSB,
(ECF No. 39), is denied.
FACTUAL AND PROCEDURAL BACKGROUND
The parties have filed a Stipulation of Undisputed Facts, (ECF No. 38), from which all
facts necessary for the disposition of the pending motions can be drawn.
From its inception, Defendant Fredericktown was a business engaged in buying and
selling wholesale quantities of produce. Gene Michael Giles (“Mike Giles”) was
Fredericktown’s sole owner and principal. Fredericktown operated subject to and licensed under
PACA, and was a trustee thereunder with an obligation to pay its produce suppliers pursuant to
the PACA trust provisions set forth at 7 U.S.C. § 499e(c). Plaintiffs are licensed produce
suppliers under PACA, and acted to preserve their trust rights by including the required statutory
language on all invoices.
Between May 31, 2013, and January 24, 2014, Plaintiffs sold to Fredericktown wholesale
quantities of produce worth $361,992.57, an amount which remains unpaid. In attempting to
recoup the debt owed, Plaintiffs seek to recover $200,000, paid to NSB through the proceeds of a
life insurance policy purchased by Fredericktown from Valley Forge Life Insurance Company, 1
on March 28, 1997.
As initially issued in 1997, Fredericktown was the designated beneficiary of the policy,
which insured the life of Mike Giles, with a total death benefit of $250,000. In 2007, NSB
Valley Forge Life Insurance Company later merged with or otherwise changed its name to
Jackson National Life Insurance Company (“Jackson National”).
received an assignment of the policy in conjunction with a mortgage transaction between NSB,
Mike Giles and his wife, Donna Giles.
In the course of the 2007 transaction, NSB provided a mortgage loan to Mike and Donna
Giles in the amount of $1,135,000 (the “Giles Mortgage”). The funds were used for the
acquisition of property in their names, as tenants in the entirety, and for the construction of a
commercial building on the property, also owned by them. Since its construction, the building
has housed Fredericktown’s business operation as well as those of an affiliated business known
as Country Fresh Market. Fredericktown does not own the property or the building, and has paid
rent directly to NSB for its use of the building.
In accordance with the terms of the mortgage transaction, Mike Giles signed a guaranty
for the mortgage and granted NSB a security interest in Fredericktown’s assets as collateral for
the loan. As additional collateral, NSB required and received an assignment of the 1997 life
insurance policy owned and paid for by Fredericktown, insuring the life of Mike Giles. The
assignment was executed by Mike Giles, acting in his capacity as Fredericktown’s President, and
Donna Giles, as the “Policyowner’s Spouse.” (ECF No. 38-2). Under the assignment, $200,000
of the policy’s total death benefit of $250,000 would be paid to NSB if owed at the time of death,
or upon default on the loan. Id. Fredericktown reserved its right to the remaining $50,000, to be
paid in accordance with the terms of the policy as issued Id.,
Fredericktown and NSB notified the insurer of the assignment and submitted the
appropriate documentation to Jackson National. The documentation does not reflect that NSB’s
recovery under the policy is limited to $200,000, but this recovery limitation was an
acknowledged part of the agreement between NSB and Mike Giles, on behalf of Fredericktown.
Pursuant to the agreement, NSB was not required to make premium payments on the policy, and
none were made by it. Rather, all premiums were paid by Fredericktown on a quarterly basis,
from an account into which proceeds from the sale of agricultural products were placed.
Fredericktown also remitted monthly payments for the Giles’ mortgage to NSB, and listed the
payments on its books as “rent.”
Mike Giles passed away on January 21, 2014. In response to NSB’s demand for payment
dated February 25, 2014, Jackson National forwarded $200,000 directly to NSB. The remaining
$50,000 was sent by Jackson National to Fredericktown, and was ultimately deposited in
Fredericktown’s bank account. In April 2014, after this lawsuit was filed, NSB received a
payment from Fredericktown in the total amount of $55,672.17. As of May 31, 2014,
Fredericktown had $52,293 in its NSB accounts.
NSB does not dispute that pursuant to PACA, Plaintiffs have a superior right to the sums
received by NSB from Fredericktown in April 2014 and to any sums remaining in
Fredericktown’s accounts. The parties further agree that the first notice NSB had that
Fredericktown failed to pay produce suppliers occurred when NSB was served with this lawsuit
on March 15, 2014. There is no evidence that NSB knew or should have known of any breach
by Fredericktown of its obligations under PACA prior to that date.
As of the filing of the parties’ cross-motions for summary judgment, all substantial assets
of Fredericktown have been liquated and it is no longer operating as a wholesale produce
business. The property, purchased by Donna Giles and her deceased husband as tenants in the
entirety, is presumed to now be the exclusive property of Donna Giles, subject to the NSB
STANDARD OF REVIEW
Pursuant to Federal Rule of Civil Procedure 56(a), “[t]he court shall grant summary
judgment if the movant shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Celotex Corp. v.
Catrett, 477 U.S. 317, 322 (1986). “[T]his standard provides that the mere existence of some
alleged factual dispute between the parties will not defeat an otherwise properly supported
motion for summary judgment; the requirement is that there be no genuine issue of material
fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986) (emphasis in original).
A disputed fact is “material” if proof of its existence or nonexistence would affect the
outcome of the case under applicable substantive law. Id. at 248; Gray v. York Newspapers, Inc.,
957 F.2d 1070, 1078 (3d Cir. 1992). An issue of material fact is “genuine” if the evidence is
such that a reasonable jury could return a verdict for the nonmoving party. Anderson, 477 U.S. at
257; Brenner v. Local 514, United Brotherhood of Carpenters and Joiners of America, 927 F.2d
1283, 1287–88 (3d Cir. 1991).
When determining whether there is a genuine issue of material fact, the court must view
the facts and all reasonable inferences in favor of the nonmoving party. Moore v. Tartler, 986
F.2d 682 (3d Cir. 1993); Clement v. Consolidated Rail Corporation, 963 F.2d 599, 600 (3d Cir.
1992). In order to avoid summary judgment, however, parties may not rely on unsubstantiated
allegations. Parties seeking to establish that a fact is or is not genuinely disputed must support
such an assertion by “citing to particular parts of materials in the record,” by showing that an
adverse party’s factual assertion lacks support from cited materials, or by demonstrating that a
factual assertion is unsupportable by admissible evidence. Fed. R. Civ. P. 56(c)(1); see Celotex,
477 U.S. at 324 (requiring evidentiary support for factual assertions made in response to
summary judgment). The party opposing the motion “must do more than simply show that there
is some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith
Radio, 475 U.S. 574, 586 (1986). Parties must produce evidence to show the existence of every
element essential to its case that they bear the burden of proving at trial, for “a complete failure
of proof concerning an essential element of the nonmoving party's case necessarily renders all
other facts immaterial.” Celotex, 477 U.S. at 323; see Harter v. G.A.F. Corp., 967 F.2d 846, 851
(3d Cir. 1992). Failure to properly support or contest an assertion of fact may result in the fact
being considered undisputed for the purpose of the motion, although a court may also give
parties an opportunity to properly provide support or opposition. Fed. R. Civ. P. 56(e).
This dispute is governed by the trust provision of PACA, 7 U.S.C. § 499e(c)(2). Plaintiffs
are producers of perishable agricultural commodities and contend that pursuant to PACA, they
are entitled to disgorge the proceeds of the subject life insurance policy from NSB. Plaintiffs
argue that the insurance policy, having been purchased with Fredericktown’s produce earnings,
is a PACA trust asset that should have been held for the benefit of unpaid produce suppliers.
NSB counters that Plaintiffs are not entitled to disgorge these proceeds, first, because the 2007
assignment of the life insurance policy to NSB removed the policy and any proceeds from the
trust and, second, because NSB is a “bona fide purchaser,” having received the proceeds for
“value.” For the following reasons, the Court finds that the policy and proceeds are PACA trust
assets and, further, that NSB does not qualify as a bona fide purchaser “for value.” Therefore,
NSB is not entitled to retain the amounts received.
The United States Court of Appeals for the Third Circuit in Weis-Buy Services, Inc. v.
Paglia, 411 F.3d 415, 419-20 (3d Cir. 2005), explained the purpose of PACA is “to deter unfair
business practices and promote financial responsibility in the perishable agricultural goods
The Act was ‘designed primarily for the protection of the producers of perishable
agricultural products—most of whom must entrust their products to a buyer or
commission merchant who may be thousands of miles away, and depend for their
payment upon his business acumen and fair dealing.’
In 1984 Congress amended PACA to allow for a non-segregated floating trust for
the protection of producers and growers. Congress recognized that these
producers and growers tend to be small businesses in a high cost/high risk
industry. They generally have capital tied up in land and machinery and their
survival depends on timely returns on the sale of their products. Congress
Many commission merchants, dealers, or brokers, in the normal
course of their business transactions, operate on bank loans secured
by the 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.
Id. To remedy the economically fragile and unsecured status of produce sellers, the trust
provision of PACA provides as follows:
Perishable agricultural commodities received by a commission merchant, dealer,
or broker in all transactions, and all inventories of food or other products derived
from perishable agricultural commodities, and any receivables or proceeds from
the sale of such commodities or products, shall be held by such commission
merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers
of such commodities or agents involved in the transaction, until full payment of
the sums owing in connection with such transactions has been received by such
unpaid suppliers, sellers, or agents.
7 U.S.C. § 499e(c)(2). The United States Court of Appeals for the Third Circuit, in Bear
Mountain Orchards, Inc. v. Mich-Kim, Inc., 623 F.3d 163, 166-67 (3d Cir. 2010), further
explained that “[t]he 1984 amendment “‘provide[d] a remedy by impressing a trust in favor of
the unpaid seller ... on the inventories of commodities and products derived therefrom and on the
proceeds of sale of such commodities and products in the hands of the commission merchant,
dealer[,] or broker.’” [Weis–Buy, 411 F.3d at 420] (quoting H.R.Rep. No. 98–543, 1984
U.S.C.C.A.N. 405, 407). The produce purchasers are ‘require[d] ... to hold sufficient PACA trust
assets in trust to pay all suppliers.’ Consumers Produce Co. v. Volante Wholesale Produce, Inc.,
16 F.3d 1374, 1379 (3d Cir. 1994).” Bear Mountain Orchards, 623 F.3d at 167. Unpaid suppliers
are granted priority over secured lenders with regard to PACA trust assets held in trust by
produce purchasers. Id., citing Volante, 16 F.3d at 1379. To enforce the rights of unpaid
suppliers, federal district courts are “vested with jurisdiction specifically to entertain actions by
trust beneficiaries to enforce payment from the trust.” 7 U.S.C. § 499e(c)(5).
Collateral for the NSB/Giles Mortgage Loan
The parties agree that NSB was granted a security interest in Fredericktown’s assets as
collateral for the Giles Mortgage, to include “all cash, furniture, fixtures, equipment, accounts
receivable, inventory and contract rights, and the proceeds (cash and non-cash) of all of the
foregoing used in the operation of its business, … including the proceeds or returned or unearned
premiums of insurance, and the proceeds of all the foregoing property.” (ECF No. 38, ¶ 11). It
appears undisputed that with the exception of the life insurance policy at issue, PACA creditors
are presumed to have priority to these assets, which are subject to existing PACA trust liabilities.
However, with regard to the 1997 life insurance policy and the proceeds at issue, the parties
contest the effect of Fredericktown’s assignment of the life insurance policy to NSB as additional
collateral for the Giles Mortgage. The “Assignment of Life Insurance Policy as Collateral,” (ECF
No. 38-2), provides, inter alia, as follows:
A. For Value Received the undersigned hereby assign transfer and set over to
Northwest Savings Bank of Warren, PA, its successors and assigns, (hereinafter
called the “Assignee”) Policy No. TRAC 000748 issued by Valley Forge Life
Insurance Company … upon the life of Gene M. Giles and all claims, options,
privileges, rights, title and interest therein and thereunder (except as provided in
Paragraph C hereof) [related to the right to collect any disability payments that do
not reduce the amount of insurance, the right to designate and change the
beneficiary, and the right to elect an optional mode of settlement] subject to all
the terms and conditions of the Policy and to all superior liens, if any, which the
Insurer may have against the Policy…..
B. It is expressly agreed that, without detracting from the generality of the foregoing,
the following specific rights are included in this assignment and pass by virtue
1. The sole right to collect from the Insurer the net proceeds of the Policy when
it becomes a claim by death or maturity;
2. The sole right to surrender the Policy and received the surrender value thereof
at any time provided by the terms of the Policy and at such other times as the
Insurer may allow;
3. The sole right to obtain one or more loans or advances on the Policy, either
from the Insurer or, at any time, from other persons, and to pledge or assign
the Policy as security for such loans or advances;
4. The sole right to collect and receive all distributions or shares of surplus,
dividend deposits or additions to the Policy now or hereafter made or
apportioned thereto, and to exercise any and all options contained in the
Policy with respect thereto; provided, that unless and until the Assignee shall
notify the Insurer in writing to the contrary, the distributions or shares of
surplus, divided deposits and additions shall continue on the plan in force at
the time of this assignment; and
5. The sole right to exercise all nonforfeiture rights permitted by the term of the
Policy or allowed by the Insurer and to receive all benefits derived therefrom.
E. This assignment is made and the Policy is to be held as collateral security for any
and all liabilities of the undersigned, or any of them, to the Assignee, either now
existing or that may hereafter arise in the ordinary course of business between any
of the undersigned and the Assignee (all of which liabilities secured or to become
secured are herein called “Liabilities”).
F. The Assignee covenants and agrees with the undersigned as follow[s]:
That any balance of sums received hereunder from the Insurer remaining after
payment of the then existing Liabilities, matured or un-matured, shall be paid
by the Assignee to the person entitled thereto under the terms of the Policy
had this assignment not been executed;
That the Assignee will not exercise either the right to surrender the Policy or
(except for the purpose of paying premiums) the right to obtain policy loans
from the Insurer, until there has been default in any of the Liabilities or a
failure to pay any premium when due, nor until twenty days after the Assignee
shall have mailed, by first-class mail, to the undersigned at the address last
supplied in writing to the Assignee specifically referring to this assignment,
notice of intention to exercise such right and
That the Assignee will upon request forward without unreasonable delay to
the Insurer the Policy for endorsement of any designation of change of
beneficiary or any election of an optional mode of settlement.
(ECF No. 38-2).
Assignment of the Life Insurance Policy
The threshold issue to be resolved is whether the proceeds of the life insurance policy,
purchased in 1997, and paid for with Fredericktown earnings from the agricultural goods market,
are an asset of the PACA trust, subject to Fredericktown’s PACA liabilities.
In construing PACA, this Court is mindful of the broad interpretation of the statute
afforded by the United States Court of Appeals for the Third Circuit, in furtherance of
Congress’s specific intent to protect produce suppliers ahead of other secured and unsecured
In Pac. Int’l Mktg., Inc. v. A & B Produce, Inc., 462 F.3d 279 (3d Cir. 2006), the United
States Court of Appeals for the Third Circuit rejected the application of common law trust
principles which would have permitted a non-PACA beneficiary to recover amounts associated
with providing transportation of produce for sale. In reaching its decision, the Court indicated
that any attempt to circumvent the clear intent of Congress would be scrutinized. “Indeed, ‘[t]he
applicability of any principle of trust law to a PACA trust must be tested against the language
and purpose of the statute and the accompanying regulations.’ PACA expressly protects unpaid
sellers, suppliers, and agents as trust beneficiaries, see 7 U.S.C. § 499e(c)(2), and ‘entitles the
trust beneficiary to a sum certain.’ ‘PACA’s purpose, as Congress has crystallized, is to ensure
payment to the unpaid seller in the perishable agricultural commodities industry.’ Accordingly,
‘[i]f PACA’s trust is to have any meaning, and Congress’s intent is to be effectuated in any way,
trust assets must be preserved and not dissipated,’ and ‘PACA trust beneficiaries are entitled to
full payment before trustees may lawfully use trust funds to pay other creditors.’” Id., at 285
(citations omitted). The Court of Appeals thus indicated that it will closely examine attempts to
seize trust assets ahead of unpaid PACA trust beneficiaries.
NSB argues that these principles are not implicated by its retention of the life insurance
policy proceeds because upon assignment, the policy no longer belonged to Fredericktown as a
trust asset. (ECF No. 41, p. 5). In support of their allocation of trust assets, NSB cites Estate of
Lellock v. Prudential Ins. Co. of America, 811 F.2d 186 (3d Cir. 1987), a non-PACA postbankruptcy action resolving entitlement to the proceeds of a life insurance policy assigned
through a mortgage loan transaction. In Lellock, the assignment at issue “was absolute and
transferred ‘all rights, benefits, and advantages to be had or derived therefrom including, without
limiting the generality of the foregoing, the right at any time to exercise the loan provisions
thereof or to surrender the same for its case value even though the assignment may be for
collateral security only.’” Id. at 187.
The primary issue before the Court was whether the lien
created by the assignment of the policy survived bankruptcy proceedings. The Court held that
the Bankruptcy Code and its legislative history establish that even though the underlying
mortgage debt was extinguished in bankruptcy, a preexisting security lien against the policy
survives and remains valid. Id. at 188. In addition, and with relevance to this action, the Court
held that because the assignment of the policy was “absolute,” title passed to the lienholder,
“obviating the need for the policy to pass through the Lellock’s bankruptcy at all. Consequently,
we find that as of the date of the filing … the Lellocks had no interest – contingent or otherwise
– in the life insurance policy. Because the policy was never reassigned to them, they never
reacquired an interest in it.” Id. at 190.
In a footnote, however, the Court observed that “[i]f the debtors had listed the life
insurance policy as collateral for the loan or as an asset of their estate in bankruptcy, the policy
would not have been considered exempt property. Further, the Lellocks did not pursue the
appropriate remedy in bankruptcy. They failed to seek a disallowance of the SBA’s claim to the
policy during their bankruptcy proceeding. To rule that the Estate is now entitled to the proceeds
of the insurance policy would allow the Lellocks to achieve by omission what they failed to
pursue in bankruptcy-the conversion of the non-exempt policy to themselves.” Id. at 189 n.3. The
Court did not reconcile its stated treatment of the policy as removed from the bankruptcy estate
on assignment with its conclusion that the policy would not have been exempt had it been
NSB argues that Lellock supports its position that ownership of the policy transferred at
the time of assignment and, accordingly, the policy is not a trust asset. Plaintiffs respond that
unlike bankruptcy, “[a]ny asset purchased with a produce dollar is presumed a PACA trust
asset,” for the duration of the trust, and in accordance with PACA case law applying common
law trust principles, the transfer was not “for value.” (ECF No. 46, pp. 2, 3).
This Court finds that the policy at issue, having been purchased and maintained through
quarterly premium payments from the proceeds of agricultural products, is a PACA trust asset,
and remained a trust asset after the purported assignment. This conclusion finds support in Bear
Mountain Orchards, 623 F.3d at 168, where the Court was asked to determine whether the
spouse of a PACA trustee could be held individually liable when PACA assets, including the
proceeds from the sale of real estate purchased with PACA proceeds, were insufficient to meet
all outstanding PACA trust claims. In resolving the issue, the Court implicitly recognized that
real estate assets purchased with PACA proceeds are subject to trust claims, even after sale. 2 Id.
This is consistent with cases broadly construing the intent of PACA to ensure the availability of
assets for unpaid produce suppliers. See, e.g., In re Kornblum & Co., Inc. 81 F.3d 280 (2d Cir.
1996)(proceeds from the sale of cooperative membership interests and leases on real property,
paid for with PACA proceeds, were subject to outstanding PACA claims); A&J Produce Corp. v.
Bronx Overall Economic Development Corporation, 542 F.3d 54 (2d Cir. 2008) (same).
Construing the policy as a trust asset recognizes that until full payment is made to all
sellers, a “nonsegregated ‘floating’ trust” is created which flows to all inventory and any
derivatives or “proceeds thereof.” Weis-Buy, 411 F.3d at 419. This prevents circumvention of
the intent of the PACA statute by simply converting cash proceeds into other property to be sold
The Court of Appeals specifically included the proceeds of the sale of the produce dealer’s
warehouse in the assets designated to meet trust claims. “In October 2007, the Court ordered pro
rata distribution of the available trust assets to the valid PACA trust creditors. It found that
Fleisher Produce (jointly and severally with other responsible parties) owed appellants
approximately $800,000. At the same time, Fleisher Produce had only $27,500 in trust assets
remaining. It then sold its warehouse, which netted around $80,000. There was thus no dispute
that Fleisher Produce's corporate assets were insufficient to meet all outstanding PACA trust
claims.” Bear Mountain Orchards, 623 F.3d at 168.
by the trustee or, as in this case, assigning an asset, paid for with agricultural proceeds, to a
secured lender and leaving produce sellers unprotected.
In Kornblum, the United States Court of Appeals for the Second Circuit set forth a test to
determine whether proceeds from the sale of real estate assets were subject to the PACA trust.
Under the test, assets are presumed to be subject to the PACA trust unless it is shown that: (1) no
PACA trust existed when the asset in question was purchased; (2) the asset was not purchased
with PACA trust assets; or (3) subsequent to purchasing the asset, the buyer paid in full all
suppliers, thereby terminating the trust. See In re Kornblum, 81 F.3d at 287. See also Sam Wang
Produce, Inc. v. EE Mart FC, LLC, No. 1:09-CV-12, 2010 WL 605082, at *3 (E.D. Va. Feb. 16,
2010), adopting test and noting adoption in J.A. Besteman Co. v. Carter’s, Inc., 439 F. Supp.2d
774, 778 (W.D. Mich. 2006); Atl. Coast Produce, Inc. v. McDonald Farms, Inc., 2004 WL
1381165 (W.D. Va. 2004).
This Court also adopts the Kornblum test and, in applying it to the facts of the present
case, it is apparent that the life insurance policy at issue and all subsequent quarterly premiums
before and after the assignment were paid for with proceeds from the sale of produce. Further,
after the purchase and payment of premiums, certain suppliers, including Plaintiffs, remained
unpaid. Accordingly, under Kornblum, the life insurance policy and proceeds are trust assets,
which Fredericktown was required to hold for the benefit of PACA creditors. See, Volante, 16
F.3d at 1379 (“The [PACA] trust provision requires produce purchasers to hold sufficient PACA
trust assets in trust to pay all suppliers. Read in light of the legislative finding, the trust provision
also straightforwardly provides unpaid suppliers with priority over secured lenders with regard to
PACA trust assets held in trust by produce purchasers. It effectively vitiates a lender’s security
interest in trust assets held by produce purchasers vis a vis unpaid produce suppliers.”). 3
4. Bona Fide Purchaser Defense
It follows that once an asset is purchased from the proceeds of the sale of agricultural
commodities, the asset must “be maintained to pay the sellers … before payment of any other
loan, whether secured or not.” Nickey Gregory Co., LLC v. Agricap, LLC, 597 F.3d 591, 599
(4th Cir. 2010). Failure to do so constitutes breach of the trust, and subjects third parties to an
action to disgorge any proceeds received.
This is not to say, however, that a trust asset can never be sold or assigned. Rather.
“third-party transferees, like [NSB] may retain PACA trust assets without liability to trust
beneficiaries if they are bona fide purchasers for value and without notice of the breach of trust.”
NSB cites to In re United Fruit & Produce Co., Inc., 242 B.R. 295 (W.D. Pa. 1999) as support
for the proposition that PACA reaches only cash proceeds or pending inventories and
receivables, and not to assets such proceeds are used to purchase, such as the insurance policy at
issue. ECF No. 41, pp. 9-10. The Bankruptcy Court in United Fruit, while acknowledging that
“PACA ‘is remedial legislation which a court should construe broadly to effectuate its purpose,’”
interpreted the language of the statute to exclude vehicles and equipment owned by the trustee
but secured by lenders who provided purchase money financing. Id., at 301-02. Citing
Consumers Produce Co., Inc. v. Volante Wholesale Produce, Inc., 16 F.3d 1374 (3d Cir. 1994),
the Bankruptcy Court concluded that because “PACA assets are available for uses other than to
pay PACA Suppliers,” trust assets may therefore be used to pay other creditors. United Fruit,
242 B.R. at 302. However, the Volante Court assumed without deciding that real estate
purchased with PACA proceeds was a PACA trust asset and, further, that the trust was breached
when loan payments were made to the lienholder. Volante, 16 F.3d at 1379. The Volante Court
then applied common law trust principles to determine whether any defenses were available.
The Court determined that the bank would not be required to disgorge trust assets received,
because it received the payments in “money” and so qualified as a “bona fide purchaser for value
and without notice of the breach of trust.” Id. at 1380. Given the Court’s holding regarding the
reach of PACA as including realty purchased with produce proceeds, NSB’s reliance on United
Fruit for the proposition that PACA assets are limited to inventories and receivables therefore is
not well supported.
Volante, 16 F.3d at 1380 (italics added). NSB contends that if the policy is deemed a trust asset,
the proceeds may be retained because NSB qualifies as a bona fide purchaser for value.
In Volante, the United States Court of Appeals for the Third Circuit held that the bona
fide purchaser defense was available to a lender who had received term and credit-line loan
repayments ahead of PACA creditors. The term loan was provided by the lender to Jeffrey
Robinson to purchase the Volante business, and the line of credit was issued to Volante for shortterm working capital needs after Robinson took over the business. The unpaid PACA creditors
sought to disgorge all loan repayments received.
The bona fide purchaser defense is defined by the Restatement (Second) of Trusts
(1) If the trustee in breach of trust transfers trust property to, or
creates a legal interest in the subject matter of the trust in, a person
who takes for value and without notice of the breach of trust, and
who is not knowingly taking part in an illegal transaction, the latter
holds the interest so transferred or created free of the trust, and is
under no liability to the beneficiary. (2) In the Restatement of this
Subject such a transferee is called a “bona fide purchaser.”
Id. citing Restatement (Second) of Trusts § 284 (1959). To determine whether loan payments
are for “value,” the Court of Appeals observed, “[t]he transfer of trust assets in satisfaction of a
pre-existing debt is normally not for value; however, an exception exists where the trust property
transferred is a negotiable instrument or money. Restatement (Second) of Trusts § 304 (1959).
This exception arises from the necessity ‘for practical business transactions that the payee of
money in due course of business shall not be put upon inquiry at his peril as to the title of the
payor.’ 4 Austin W. Scott & William F. Fratcher, The Law of Trusts § 304.” Volante, 16 F.3d at
1380. The Court held that because the lender received PACA trust assets in the ordinary course
of business as monetary loan repayments, the transfer was “for value.” This is in keeping with
Section 298 of the Restatement (Second) of Trusts, which provides that a transfer is for value
“[i]f money is paid or other property is transferred or services are rendered as consideration for
the transfer of trust property.”
NSB contends that at the time of the assignment, there was no “antecedent debt,” such
that the Court must find that the assignment was “for value.” NSB further argues the transfer was
“part of the same [loan] transaction,” through which “NSB unquestionably provided value for the
Assignment it received.” (ECF No. 45, p. 3).
NSB’s argument is similar to that advanced by lienholders in A & J Produce Corp. v.
Bronx Overall Econ. Dev. Corp., 542 F.3d 54, 58 (2d Cir. 2008), and Endico Potatoes, Inc. v.
CIT Grp./Factoring, Inc., 67 F.3d 1063, 1068 (2d Cir. 1995). In both cases, the lienholders
contended that pursuant to the financing agreements at issue, value was provided for interests in
specified PACA trust assets; thus, the lienholders were not merely creditors holding a security
interest subordinate to outstanding PACA creditors.
In Endico, the United States Court of Appeals for the Second Circuit rejected the
lienholder’s position. The Court examined the underlying transaction to determine if there had
been a reduction in the debt owed at the time of the transaction, or a transfer of risk with regard
to the underlying debt, so as to permit the transaction to be classified as a “purchase” for value.
Resolution of whether the “contemporaneous transfer,” as CIT describes
Merberg’s assignment of accounts receivable to CIT and CIT’s loan advances to
Merberg, constitutes a purchase for value or whether the exchange provides CIT
with no more than a security interest, depends on the substance of the relationship
between CIT and Merberg, and not simply the label attached to the transaction. In
determining the substance of the transaction, the Court may look to a number of
factors, including the right of the creditor to recover from the debtor any
deficiency if the assets assigned are not sufficient to satisfy the debt, the effect on
the creditor’s right to the assets assigned if the debtor were to pay the debt from
independent funds, whether the debtor has a right to any funds recovered from the
sale of assets above that necessary to satisfy the debt, and whether the assignment
itself reduces the debt. The root of all of these factors is the transfer of risk.
Where the lender has purchased the accounts receivable, the borrower’s debt is
extinguished and the lender’s risk with regard to the performance of the accounts
is direct, that is, the lender and not the borrower bears the risk of non-performance
by the account debtor. If the lender holds only a security interest, however, the
lender’s risk is derivative or secondary, that is, the borrower remains liable for the
debt and bears the risk of non-payment by the account debtor, while the lender
only bears the risk that the account debtor's non-payment will leave the borrower
unable to satisfy the loan.
Id. at 1068-69 (citations omitted). The Court went on to examine the financing agreement and
determined that the assignment did not contemporaneously reduce the trustee’s indebtedness of
the lienholder and so the assignment was not a purchase for value.
The first sentence of the financing agreement belies the contention that CIT
purchased the accounts receivable. As the agreement states, CIT is “pleased to
confirm the terms and conditions under which we shall make loans and advances
to you upon the security of your accounts receivable.” Just as important, the terms
of the agreement make clear that what CIT held was no more than a security
interest. Merberg’s assignment of accounts receivable had no effect on the
outstanding balance of Merberg’s indebtedness. Instead, Merberg’s loan balance
was reduced only upon receipt of payment, whether such payments arose from the
accounts receivable or from any other source. Moreover, CIT could demand
payment directly from Merberg at any time for the entire outstanding loan balance
notwithstanding that CIT held what it termed an assignment of Merberg’s
accounts receivable. Finally, in the event that Merberg paid all outstanding
obligations to CIT, CIT would no longer hold an interest in Merberg's outstanding
accounts receivable. Each of these provisions indicates that the primary risk of a
customer’s non-payment remained at all times with Merberg and that the
assignment alone did not reduce Merberg’s obligations to CIT.
Id. Accordingly, in the absence of a transfer of risk or a contemporaneous reduction in the debt
owed, the Court required the lienholder to disgorge amounts collected on the assigned accounts
to the extent necessary to satisfy the claims of the PACA trust beneficiaries.
Similarly, in A & J Produce Corp, a PACA dealer purchased unit shares in a cooperative
with a loan provided by the defendant, secured by the units. Subsequently, PACA creditors filed
claims against the produce dealer for failure to pay. The dealer defaulted on its purchase loan
and the defendant lienholder instituted foreclosure proceedings. The PACA creditors moved to
enjoin the foreclosure action, contending that the units were a trust asset. The defendant
lienholder argued that its lien was provided in exchange for purchase financing and as such the
property was removed from the PACA trust. The Court of Appeals reiterated the need to
examine the transaction to analyze the transfer of risk involved. The Court determined that
because the dealer continued to bear the risk of loss, the lien was not a transfer for value, and any
proceeds from the sale of the property were properly awarded to PACA creditors. 542 F.3d at
The evidence before the Court in this action establishes that NSB loaned funds to Mr. and
Mrs. Giles, and that Mr. and Mrs. Giles held title in the purchased property as tenants in the
entirety. To the extent Fredericktown received “value” for its assignment of the policy proceeds,
it was, as noted by NSB, the ability to lease the premises from the Giles family, to share with
another Giles entity, County Fresh Market, LLC. (ECF No. 41, p.7 n4). NSB posits that this
contemporaneous exchange renders the policy assignment for value, sufficient to trump all
PACA creditors. However, it is clear that at the time of assignment, there was no
contemporaneous reduction in the amount of the mortgage to effectuate a “purchase,” nor did the
assignment eliminate NSB’s right to recover from other Fredericktown assets any deficiency still
owed if the proceeds of the policy were insufficient to satisfy the debt. Pursuant to its terms, the
assignment is identified as “collateral,” and Fredericktown retained ownership of at least $50,000
of the policy proceeds, or more, depending upon the amount outstanding in the event of default.
Under these circumstances, the assignment did not divest all of Fredericktown’s interest in the
proceeds of the policy, nor did it effectuate a change in risk as to the underlying debt.
Accordingly, the assignment was not “for value.”
PACA does not prohibit the granting of a security interest in trust assets to collateralize a
loan, nor does PACA impose strict liability on secured lenders by making them trustees or
guarantors of the PACA trust. Volante, 16 F.3d at 1381 PACA, however, does prohibit a
secured lender such as NSB from using its position to place its own interests ahead of those of
unpaid produce sellers. See, Nickey Gregory Company, LLC v. ArgiCap, LLC, 597 F.3d 591,
603-04 (4th Cir 2010). Because the assignment of Fredericktown’s life insurance policy as
collateral for the Giles Mortgage granted NSB only a security interest in a Fredericktown trust
asset, the policy and its proceeds are subject to the rights of the PACA trust beneficiaries. NSB
must, therefore, disgorge the $200,000 it has collected and remit payment to Plaintiffs.
For the foregoing reasons, the Motion for Summary Judgment filed on behalf of Plaintiffs
Consumer Produce Company, Inc. of Pittsburgh, Premier Produce Co., Inc. and Coface North
America, Inc. as assignee of J.E. Corcoran Company (collectively, “Plaintiffs” or “CP”), (ECF
No. 40), is granted and the Motion for Summary Judgment filed on behalf of NSB, (ECF No.
39), is denied. An appropriate Order follows.
Upon consideration of the , the Motion for Summary Judgment filed on behalf of
Plaintiffs Consumer Produce Company, Inc. of Pittsburgh, Premier Produce Co., Inc. and Coface
North America, Inc. as assignee of J.E. Corcoran Company (collectively, “Plaintiffs” or “CP”),
(ECF No. 40), and the Motion for Summary Judgment filed on behalf of NSB, (ECF No. 39),
and the briefs and exhibits filed in support and opposition thereto, and for the reasons set forth in
the accompanying Opinion, IT IS HEREBY ORDERED that the Motion for Summary Judgment
filed on behalf of Plaintiffs Consumer Produce Company, Inc. of Pittsburgh, Premier Produce
Co., Inc. and Coface North America, Inc. as assignee of J.E. Corcoran Company (collectively,
“Plaintiffs” or “CP”), (ECF No. 40), is granted and the Motion for Summary Judgment filed on
behalf of NSB, (ECF No. 39), is denied.
IT IS FURTHER ORDERED that, pursuant to Rule 4(a)(1) of the Federal Rules of
Appellate Procedure, if the Plaintiffs wish to appeal from this Order they must do so within thirty
(30) days by filing a notice of appeal as provided in Rule 3, Fed. R. App. P.
BY THE COURT:
/s/ Maureen P. Kelly
MAUREEN P. KELLY
CHIEF UNITED STATES MAGISTRATE JUDGE
Dated: February 19, 2015
All Counsel of Record via CM-ECF
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