Kingdom Fresh Products, Inc. et al v. Bexar County, et al

Filing 57

ORDER DENYING WITHOUT PREJUDICE 51 Motion for Reconsideration ; MOOTING 51 Motion to Expedite Hearing. The Court Order Special Counsel to submit under seal affidavits regarding finances,etc. on or before March 27, 2015. Signed by Judge David A. Ezra. (wg)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
KINGDOM FRESH PRODUCE, INC. §
et al.,
§
§
Plaintiffs,
§
§
v.
§
§
DELTA PRODUCE, LP et al.,
§
§
Defendants.
§
________________________________ §

CV NO. 5:12-CV-1127
CV NO. 5:14-CV-22

ORDER DENYING WITHOUT PREJUDICE KINGDOM FRESH’S
MOTION FOR RECONSIDERATION
Before the Court is a Motion for Reconsideration of the Court’s
February 27, 2015 Escrow Order (“February 27 Order”) filed by Kingdom Fresh
Produce, Inc.; I Kunik, Co., Inc.; Rio Bravo Produce, Inc.; GR Produce, Inc.; and
Five Brothers Jalisco Produce, Inc. d/b/a Bonanza 2011 (“Kingdom Fresh”) (Dkt.
# 51 1). On March 24, 2015, the Court held a telephone conference on the motion.
Scott E. Hillison and James Wilkins, Esqs., represented Kingdom Fresh; Maurleen
W. Cobb and Mark C. H. Mandell, Esqs., represented PACA Special Counsel
Craig Stokes (“Special Counsel” or “Stokes”). After careful consideration of the
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The Court refers to the docket numbers in No. 5:12-CV-1127. Identical
documents have been filed in No. 5:14-CV-22. Special Counsel has also filed his
response in 5:14-MC-899.
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memoranda in support of and in opposition to the Motions, and in light of the
parties’ arguments at the conference, the Court, for the reasons that follow,
DENIES WITHOUT PREJUDICE Kingdom Fresh’s Motion for
Reconsideration (Dkt. # 51.)
BACKGROUND
This matter arises out of the enforcement of a trust under the
Perishable Agricultural Commodities Act of 1930 (“PACA”), 7 U.S.C.
§ 499(a)–(t). This matter incorporates three PACA lawsuits that were filed in the
United States District Court for the Western District of Texas against Delta
Produce LP (“Delta Produce”), a local produce company.
On January 3, 2012, Delta Produce filed for Chapter 11 bankruptcy.
That month, the PACA claimants in the three PACA lawsuits consented to referral
to the bankruptcy court for resolution of their PACA claims. The bankruptcy court
then appointed the Special Counsel to adjudicate the PACA claims. Over the next
two years, the Special Counsel submitted three separate applications for fees, all of
which the bankruptcy court granted. Kingdom Fresh appealed the three orders to
this Court.
On September 27, 2013, this Court affirmed in part and vacated in
part the bankruptcy court’s order granting Special Counsel’s First Interim Fee
Application, which, per the parties’ agreement, was also binding on the appeal of
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the Second Interim Fee Application. Order, In re Delta Produce, No. 5:12-CV1127, Dkt. # 23 (W.D. Tex. Sept. 27, 2013); Order, In re Delta Produce, No. 5:13CV-131, Dkt. # 7 (W.D. Tex. Mar. 12, 2013). Special Counsel moved for
reconsideration on October 11, 2013, which this Court denied on September 9,
2014. Motion for Hearing, In re Delta Produce, No. 5:12-CV-1127, Dkt. # 24
(W.D. Tex. Oct. 11, 2013); Order, In re Delta Produce, No. 5:12-CV-1127, Dkt.
# 42 (W.D. Tex. Sept. 9, 2014). On September 22, 2014, this Court vacated the
bankruptcy court’s order granting Special Counsel’s Third and Final Fee
Application. Memorandum Opinion and Order, In re Delta Produce, No. 5:14-CV22, Dkt. # 15 (W.D. Tex. Sept. 22, 2014). Special Counsel has appealed both
rulings to the Fifth Circuit and is currently awaiting a decision. In sum, funds in
the amount of $380,409.99 are in controversy, $15,562.36 of which are deposited
in the registry of the bankruptcy court.
On February 26, 2015, the Court held a hearing on Kingdom Fresh’s
Motion to Withdraw the Reference from Bankruptcy Court, as well as a Motion to
Compel Special Counsel to Deposit the Disputed Funds into the Court’s Registry.
Upon inquiry from the Court, counsel for Special Counsel advised the Court that
the remainder of the funds had been placed by Special Counsel into his 401(K)
account.

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Although the Court denied the Motion to Withdraw Reference, the
Court ordered in its February 27 Order that Special Counsel maintain the disputed
funds in its 401(K) account until such time as the Fifth Circuit renders a final
judgment on the fee awards or this Court or the Fifth Circuit directs otherwise.
(Dkt. # 50.)
On March 4, 2015, Kingdom Fresh filed the instant Motion for
Reconsideration (Dkt. # 51). On March 11, 2015, Special Counsel filed its
Response (Dkt. # 53), and on March 16, 2015, Kingdom Fresh filed its Reply (Dkt.
# 54).
LEGAL STANDARD
Rule 60(b) sets forth six grounds for granting relief from a final
judgment:
(1) mistake, inadvertence, surprise, or excusable neglect; (2) newly
discovered evidence which by due diligence could not have been
discovered in time to move for a new trial under rule 59(b); (3) fraud
(whether heretofore denominated intrinsic or extrinsic),
misrepresentation, or other misconduct of an adverse party; (4) the
judgment is void; (5) the judgment has been satisfied, released, or
discharged, or a prior judgment upon which it is based has been
reversed or otherwise vacated, or it is no longer equitable that the
judgment should have prospective application; or (6) any other reason
justifying relief from operation of the judgment.

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Fed. R. Civ. P. 60(b). The decision “to grant or deny relief under Rule 60(b) lies
within the sound discretion of the district court.” Hesling v. CSX Transp., Inc., 396
F.3d 632, 639 (5th Cir.2005).
DISCUSSION
Kingdom Fresh contends that the Court should reconsider and amend
its February 27 Order pursuant to Rule 60(b)(1) on three bases: (1) mistake of law,
in that the order improperly permits an ongoing violation of Rule 1.14 of the Texas
Disciplinary Rule of Professional Conduct; (2) surprise, in that the order was
changed from the ruling at the conclusion of the hearing based upon an ex parte
communication from Special Counsel’s counsel that deprived Kingdom Fresh
notice and opportunity to be heard in violation of due process; and (3) mistake of
fact, in that Special Counsel “disbursed” the funds to himself and his 401(K)
stands as security, rather than “placing” the funds in his 401(K) account, and that
Stokes Law Office no longer holds the funds as directed. (Dkt. # 51 at 1–2; Dkt.
# 54 at 4–6.)
I.

Mistake of Law
Kingdom Fresh first asserts that the February 27 Order directing that

Special Counsel keep the disputed funds in his 401(K) account is based on a
mistake of law because it permits an ongoing violation of Texas Rule of
Professional Code 1.14. (Dkt. # 51 at 4.) Specifically, Kingdom Fresh relies on
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subsection (c), which provides, in relevant part, “When in the course of
representation a lawyer is in possession of funds . . . in which both the lawyer and
another person claim interests, the property shall be kept separate by the lawyer
until there is an accounting and severance of their interest.” (Id. (citing Tex. Code
of Prof’l Conduct R. 1.14(c)).) Kingdom Fresh maintains that the funds in
question are “disputed funds,” and therefore any commingling with personal funds
violates the Rule. (Id.)
Special Counsel counters that the funds in question are court-ordered
fee awards, which do not constitute property belonging “in whole or in part to third
parties” unless and until the Fifth Circuit rules in favor of Kingdom Fresh Group.
(Dkt. # 53 at 3–6.) In so arguing, Special Counsel relies on subsection (a), which
provides, in relevant part, “A lawyer shall hold funds . . . belonging in whole or in
part to clients or third persons that are in a lawyer’s possession in connection with
a representation separate from the lawyer’s own property.” (Id. (citing Tex. Code
of Prof’l Conduct R. 1.14(a)).) Special Counsel maintains that it reported
Kingdom Fresh’s allegations to the Texas Attorney Ethics Helpline and the Office
of the Chief Disciplinary Counsel (“OCDC”) and the OCDC labeled the
communications a self-report case requiring no need for further investigation. (Id.
at 2.)

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Special Counsel further contends that, regardless, an argument for
commingling only applies to funds that are not held separately from Special
Counsel’s personal funds. (Id. at 4.) Special Counsel clarifies that Kingdom Fresh
is only entitled to $26,853.71 of the full $380,409.99 awarded in this case, and
portion is held with $15,562.71 in the court registry and $11,291.35 in the Stokes
Law Office’s IOLTA account.2 (Id.) Special Counsel argues that, because
Kingdom Fresh does not have standing to receive any more than $26,853.71, it
lacks standing to contest the location of the remaining monies. (Id. at 4–4.)
The Court can find no authority, nor do parties cite to any authority,
that applies Rule 1.14 to the disposition of attorney’s fees whose resolution is
pending appeal. Rule 1.14 governs a lawyer’s fiduciary duties when he is in
possession of funds or property belonging, in whole or in part, to another party in
connection with representation. See Tex. Code of Prof’l Conduct R. 1.14; see also
Fry v. Comm’n for Lawyer Discipline, 979 S.W.2d 331, 333 (Tex. App. 1998) (“In
summary, rule 1.14 requires an attorney who receives funds, which belong in
whole or in part to a client or third person, to deposit them into a trust account and
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Special Counsel continues: “The remaining $353,556.28 was dispersed to the
Stokes Law Office as agreed, without objection or appeal, as Court Ordered fees.
Those additional funds can and will be disbursed when and if a proper court order
is issued detailing how and to whom they should be paid. Mr. Stokes’ 401K
accounts stand as security for his ability to comply with such an order.” (Dkt. # 53
at 4.)
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promptly deliver the appropriate portion to the client or third person. . . . Moreover,
and important to this case, is the requirement that if there is a dispute over the
ownership of the funds, the attorney must keep the funds in the trust account until
the dispute is resolved.”).
In general, courts invoke Rule 1.14 when an attorney improperly deals
with monies that third parties have sent the client via the attorney, fees paid in
advance, or settlement funds. See, e.g., James v. Commission for Lawyer
Discipline, 310 S.W.3d 586, 597 (Tex. Ct. App. 2010) (finding a violation of Rule
1.14(b), even if the attorney did not represent the clients, when the attorney was the
custodian of the clients’ settlement funds and failed to timely communicate with
them and give them their funds); McIntyre v. Comm’n for Lawyer Discipline, 247
S.W.3d 434, 440 (Tex. App. 2008) (finding a Rule 1.14(b) violation when attorney
failed to forward a check in his possession to the IRS); Cluck v. Comm'n for
Lawyer Discipline, 214 S.W.3d 736, 740 (Tex. App. 2007) (finding a Rule 1.14(a)
violation when the attorney deposited an advanced fee which belonged, at least in
part, to his client). This Court can find no case construing funds as “disputed” and
subject to Rule 1.14 when the attorney has taken funds by court order and that
order is pending appeal.
In re Wilkins, No. 09-32188-H3-13, 2010 3834658, at *6 (S.D. Tex.
Sept. 24, 2010), is illustrative of circumstances in bankruptcy context that would
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render Rule 1.14 applicable. There, the Court found the debtor’s attorney had
violated Rule 1.14(c) in handling a portion of his attorney’s fees. Id. As the Court
outlined, “any entity seeking compensation from a chapter 13 bankruptcy estate
must file an application with the Court.” Id. at *4. When the debtor’s attorney
failed to file a fee application for funds and nevertheless received $1,657.50 from
his client, he violated Rule 1.14(c) because he failed to keep the funds separate
from his own “until the fees were allowed by the court.” Id. at *6 (emphasis
added). However, the attorney did not violate Rule 1.14(c) when he commingled
the funds that were properly awarded by the court. See id.
In general, if a party wants to prevent an opposing party from
executing a court’s judgment, it must seek a stay of the order during the pendency
of the appeal. Fed. R. Bankr. P. 8007(a); Fed. R. Civ. P. 62(d). Without the stay,
the judgment is executable, and the attorney is entitled to the funds he has been
awarded. The Court does not find that Rule 1.14 has any bearing on that
framework. Accordingly, there is no mistake of law that warrants reconsideration
of the February 27 Order. See Benson v. St. Joseph Reg’l Health Ctr., 575 F.3d
542, 547 (5th Cir. 2009) (noting that Rule 60(b)(1) is remedy for a legal mistake
only where there is “an obvious error of law, apparent on the legal record” (internal
quotation marks omitted) (quoting Hill v. McDermott, Inc., 827 F.2d 1040, 1043
(5th Cir. 1987))).
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II.

Surprise
Second, Kingdom Fresh asserts that the fact that Special Counsel

commingled the funds in his 401(K) account constituted a surprise, raised in an ex
parte discussion with the Court. (Dkt. # 51 at 6.) Kingdom Fresh contends that,
had it been able to address this issue on the record, it would have raised the
following “serious concerns”: (1) that the 401(K) account is not a trust account and
therefore there are no fiduciary duties owed to the movants; (2) that Special
Counsel can benefit personally from delays in the case by retaining interest
earnings and Texas Access to Justice Foundation will not receive any interest;
(3) that Special Counsel’s spouse has a 50% interest in the 401(K) account because
Texas is a community property state; (4) that the funds in the 401(K) could
constitute a qualified retirement account that is exempt in a personal bankruptcy
proceeding, giving Special Counsel the ability to discharge his obligations to
movants; (5) that the funds in the 401(K) account to be subject to severe tax
penalties if withdrawn before special counsel turns 59½; (6) that it remains unclear
who owns the 401(K) and whether the firm or the individual is obligated to retain
the monies; (7) that funds in a 401(K) account are invested in securities, placing
the funds at risk of loss via market fluctuations; and (8) that the transfers of the
funds from the PACA account to the IOLTA account to the 401(K) constituted
three transfers in violation of Rule 1.14. (Id. at 5–9.)
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Special Counsel counters that administrative or procedural
communications ordered by the Court are exempt from the ban on ex parte
communications per Canon 3(A)(4)(b) of the Code of Conduct for United States
Judges. Special Counsel contends that the Court ordered Special Counsel’s
counsel to notify the Court of the manner in which the funds were being
safeguarded, which the attorneys complied with as a procedural and administrative
formality. (Dkt. # 53 at 2–3.)
Although there is no clear definition of surprise in the federal rules,
the Fifth Circuit has “limited reversible error from unfair surprise” in the appellate
context “to situations where a completely new issue is suddenly raised or a
previously unidentified expert witness is suddenly called to testify.” Genmoora
Corp. v. Moore Business Forms, Inc., 939 F.2d 1149, 1156 (5th Cir. 1991)
(internal quotation marks omitted); see also Manley v. Invesco, No. H-11-2408,
2013 WL 416213, at *3 (S.D. Tex. Jan. 31, 2013) (applying Genmoora in the Rule
60(b)(1) context); Bituminous Cas. Corp. v. Garcia, 223 F.R.D. 308, 312 (N.D.
Tex. 2004) (noting that neither Prof. Moore nor Profs. Wright and Miller provide
any analysis of surprise in their treatises). The precise location of the funds, which
in either case are held in full by Special Counsel, is not a completely new issue: the
issue here is whether Special Counsel can repay the funds if so ordered, which

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Special Counsel maintains that he can and which the February 27 Order requires
him to do if so ordered. (Dkt. # 53, Ex. A at 23:5–24; Dkt. # 50.)
Even under a less stringent, plain meaning of surprise, the
circumstances here are insufficient to warrant reconsideration. At the hearing,
counsel for Special Counsel informed the Court that she did not know “where th[e]
funds [were] being held and in what accounts they [were] being held,” but that “if
the Court said pay the money, the money would be available.” (Dkt. # 53, Ex. A at
25:4–10.) The Court then instructed her to check where exactly the funds were
being held and to advise the Court accordingly. (Id. at 25:11–14.) This is exactly
what occurred. The mere fact that the funds are held in Special Counsel’s 401(K)
account versus a trust account is not a surprise that affects the ruling.
Finally, the Court notes that the correspondence from Special
Counsel’s counsel advising the Court of the location of the funds was a permissible
ex parte communication made for administrative purposes, which was directed in
open court in the presence of Kingdom Fresh. Code of Conduct for U.S. Judges
Canon 3(A)(4)(b). The Court therefore finds Kingdom Fresh’s emphasis on the ex
parte nature of the communication unavailing.
III.

Mistake of Fact
In its Reply, Kingdom Fresh argues that the February 27 Order is

based on a mistake of fact: specifically, that Special Counsel “disbursed” the funds
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to himself and his 401(K) stands as security, rather than “placing” the funds in his
401(K) account, and that Stokes Law Office no longer holds the funds as
directed—instead, Special Counsel personally holds those funds. (Dkt. # 54 at
4–5.)
The Court is unconvinced by Kingdom Fresh’s distinction. Special
Counsel, through Stokes Law Office, was awarded fees for his work on the case.
Upon receiving those fees, Stokes Law Office apparently disbursed the funds
directly to Special Counsel himself, which was well within the Law Office’s
authority as the court-ordered recipient of said fees. It is irrelevant whether Stokes
Law Office or Special Counsel himself is in possession of said fees; all that matters
is that the fees are maintained and can be paid back should the Fifth Circuit affirm
this Court and vacate the fee awards. Special Counsel represents that “[f]unds that
are more than sufficient to meet any Court’s order for repayment are being held in
Mr. Stokes’ 401K accounts.” (Dkt. # 53 at 2.) Accordingly, there is no mistake of
fact that renders the February 27 Order invalid.
CONCLUSION
For the foregoing reasons, the Court DENIES WITHOUT PREJUDICE
Kingdom Fresh’s Motion for Reconsideration (Dkt. # 51.) However, out of an
abundance of caution, the Court ORDERS Special Counsel to submit the
following to the Court no later than Friday, March 27, 2015, at the close of
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business: (1) an affidavit from Special Counsel to be seen only by the Court in
camera, filed ex parte and under seal, outlining his finances and his ability to repay
the funds, if so ordered, and the sources of those funds; and (2) an affidavit from
Special Counsel to be distributed to opposing counsel, filed under seal,
summarizing the ultimate dollar amount and/or percentage that Special Counsel is
able to repay from a) funds outside of his 401(K) account and/or b) his 401(K)
account.
IT IS SO ORDERED.
DATED: San Antonio, Texas, March 25, 2015.

_____________________________________
David Alan Ezra
Senior United States Distict Judge

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