Kingdom Fresh Produce, Inc. et al v. Delta Produce, L.P. et al
Filing
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***DOCUMENT HAS BEEN VACATED PURSUANT TO AN ORDER FILED ON JULY 25, 2017, DOCUMENT #48***MEMORANDUM OPINION and ORDER Vacating the Bankruptcy Court's Order Granting Special PACA Trust Counsel's Third Interim Application for Attorney's Fees. Signed by Judge David A. Ezra. (rg) Modified on 7/25/2017 (rg).
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
In re:
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DELTA PRODUCE, LP, et al.,
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Debtors,
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________________________________ )
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KINGDOM FRESH PRODUCE, et al., )
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Appellants,
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vs.
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BEXAR COUNTY, et al.,
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Appellees.
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________________________________ )
CV. NO. 5:14-CV-000022-DAE
Bankr. No. 12-50073-a998
MEMORANDUM OPINION AND ORDER VACATING THE BANKRUPTCY
COURT’S ORDER GRANTING SPECIAL PACA TRUST COUNSEL’S THIRD
INTERIM APPLICATION FOR ATTORNEY’S FEES
Before the Court is an appeal from the bankruptcy court’s order
granting Special PACA Counsel Craig A. Stokes (“Special Counsel”) his Third
and Final Fee Application brought by Appellants Kingdom Fresh Produce, Inc., I.
Kunik Company, Inc., Five Brothers Jalisco Produce Co. Inc. d/b/a Bonanza 2001,
Rio Bravo Produce Limited, LLC, and G.R. Produce, Inc. (collectively, “Kingdom
1
Fresh”). For the reasons that follow, the Court VACATES the bankruptcy court’s
order granting Special Counsel’s Third and Final Fee Application.
BACKGROUND
This matter arises from the appointment of a Special Counsel to
adjudicate claims made pursuant to 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 Courts for the Western District
of Texas against Delta Produce LP (“Delta Produce”), a local produce company.
On January 3, 2012, Delta Produce filed for bankruptcy under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court for
the Western District of Texas. (Bankr. Dkt. # 1.)1 Delta then moved to impose an
automatic stay of the three lawsuits pending in district court under 11 U.S.C.
§ 362. (Case No. 1:11-cv-01114-SS, Dkt. ## 24, 26.) Two days later, Delta
Produce asked the district court to abate its proceedings and allow various
creditors, including PACA creditors, to assert their claims before the Bankruptcy
Court in San Antonio. (Id.) Upon receipt of Delta Produce’s motion and several
PACA claimants consent, the district court referred the case to the bankruptcy
court in San Antonio, noting that “the parties apparently agree that the Bankruptcy
1
Except as otherwise noted, all citations are to the bankruptcy docket in Case No.
SA:12-BK-50073-LMC.
2
Court would be the appropriate and preferable place to adjudicate the claims
presented in this case.” (Case No. 5:12-cv-00046-XR, Dkt. # 28.)
After the PACA claims were referred to the bankruptcy court, Delta
Produce filed a proposed PACA Claim Procedure in bankruptcy court on January
19, 2012, which included the appointment of Special Counsel Craig A. Stokes
(“Special Counsel”) to adjudicate PACA claims. (Bankr. Dkt. # 31.) Several
PACA claimants—but not Appellants Kingdom Fresh—agreed to the motion.2 On
January 24, 2012, the bankruptcy court held a hearing to consider a Motion for
Orders Establishing a Deadline to File PACA Trust Claims and for Procedures to
Resolve those Claims and for the Appointment of Special Counsel. (See Special
Counsel Appointment Hr’g, Jan. 24, 2012, Bankr. Dkt. # 31.) Kingdom Fresh was
present at that hearing, but did not address the bankruptcy court.
The following day on January 25, 2012, the bankruptcy court issued
an order establishing a deadline to file PACA trust claims, for procedures to
resolve those claims, and for the appointment of Special PACA Counsel (the
“PACA Order”). (Bankr. Dkt. # 52.) The PACA Order specifically directing
Special Counsel to inform all of Delta Produce’s creditors that had not already
joined the litigation of the PACA claims procedure. (Id. at 2 (“On or before
2
The PACA Claimants that did agree to the motion include: Wilson Davis Co.;
Averrit Brokerage Co., Inc.; A&A concepts, LLC; Greenhouse Produce Company,
LLC; Juniper Tomato Grower, Inc.; Mecca Family Farms, Ltd.; London Fruit, Inc.;
Triple H Produce, LLC; and The Pumpkin Patch, LLP. (Bankr. Dkt. # 31 at 9.)
3
February 11, 2012, the Court-appointed Special PACA Counsel for the Debtor,
Craig A. Stokes (‘Special PACA Counsel’), shall mail a copy of this Order by
certified mail, return receipt requested, to all entities listed on DELTA’s Accounts
payable schedule.”).) Special Counsel was also tasked with preserving and
collecting PACA trust assets, negotiating and compromising debts owed by an
account holder of Delta Produce, considering and reviewing claims asserted under
the PACA trust, and providing status reports to PACA creditors. (Id. at 8–10.)
With regard to Paragraph 15(b) of the order specified:
Special PACA Counsel shall be “entitled” to paid attorney’s fees and
costs from the PACA trust funds for the services rendered pursuant to
this Order. The Court will determine the reasonable “amount” of such
attorney’s fees and costs. To be paid, Special PACA Counsel shall
file a motion(s) for attorney’s fees and costs, [and] should attach time
sheets that have reasonably detailed time entries and which reflect
time in increments of “.1” of an hour. Stokes may file interim
motions for attorney’s fees and costs.
(Id. at 10–11 (emphasis added).) No party objected to the PACA Order.
After the PACA Order established the timeline for adjudicating
PACA claims, Delta Produce informed potential PACA creditors of the pending
PACA claim procedure. From January to March 2012, PACA Creditors filed
claims against Delta Produce totaling $1,676,015.25. Special Counsel negotiated
PACA claims with Delta Produce and its PACA creditors.
On August 14, 2012, Special Counsel filed its First Interim
Application for attorney fees. (Bankr. Dkt. # 284.) He sought $95,978.00 in
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attorney fees and $2,492.97 in expenses for work completed between January 3,
2012, and August 7, 2012, to be paid from the PACA trust. (Id.)
PACA Claimant Kingdom Fresh objected to Special Counsel’s First
Interim Application on the ground that the PACA trust funds should not be used to
pay Special Counsel’s fees. (Bankr. Dkt. # 294.) Kingdom Fresh argued that
(1) the Bankruptcy Court lacked subject-matter jurisdiction to use non-estate assets
beyond the reach of bankruptcy powers to satisfy the administrative expense
claims against the bankruptcy estate, (2) the PACA trust assets that Delta Produce
held could not be used to pay Special Counsel’s fees (nor Delta Produce’s
attorney’s fees), and (3) Delta Produce’s Counsel already had a pre-existing duty to
collect the Debtors’ accounts receivable and thus Special Counsel could not be
paid with PACA trust funds. (Id.)
On September 21, 2012, the bankruptcy court held a hearing to
consider Special Counsel’s First Interim Application for attorney fees. (See “First
Interim Fee Hr’g, Sept. 21, 2012,” Bankr. Dkt. # 381.) Over Kingdom Fresh’s
objections, the bankruptcy court granted Special Counsel’s First Interim
Application for attorney fees on September 25, 2012. (Bankr. Dkt. # 320.) On
October 9, 2012, Kingdom Fresh timely filed an appeal, arguing that the
bankruptcy court lacked jurisdiction to award such fees and PACA forbid paying
Special Counsel’s fees. (Bankr. Dkt. # 340; Case No. 5:12-cv-1127, Dkt. # 1.)
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On November 14, 2012, Special Counsel filed his Second Interim
Application for Fees. (Bankr. Dkt. # 404.) Kingdom Fresh objected again for the
same reasons as their objection to Special Counsel’s First Interim Fee Application.
(Bankr. Dkt. # 427.) On December 13, 2012, the bankruptcy court granted Special
Counsel’s Second Interim Fee Application. (Bankr. Dkt. # 443.) On December
21, 2012, Kingdom Fresh filed their Notice of Appeal. (Bankr. Dkt. # 449.)
Kingdom Fresh and Special Counsel subsequently agreed that the outcome of the
First Appeal would be binding on the second appeal, and on March 12, 2013, this
Court signed an agreed order consolidating the appeal of the First Interim Fee
Application with the appeal for the Second Interim Fee Application. (Case No.
5:13-cv-131, Dkt. # 7.)
On August 30, 2013, Special Counsel filed his Third and Final Fee
Application. (Bankr. Dkt. # 575.) On September 20, 2013, Kingdom Fresh
objected to Special Counsel’s Third and Final Fee Application, arguing that in
addition to the reasons enumerated in their earlier appeals, Special Counsel had an
actual conflict of interest under 11 U.S.C. § 328(c). (Bankr. Dkt. # 586.)
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.3 (Case No. 5:12-cv-1127, Dkt. # 23.) The court held that the
3
Per the parties’ agreement, this Order was also binding on Kingdom Fresh’s
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bankruptcy court did have jurisdiction and adjudicative authority to award Special
Counsel his attorney’s fees. (Id. at 9–19.) However, the bankruptcy court erred in
granting his fees because PACA does not authorize paying such fees until all
PACA trust beneficiaries, as holders of a “superpriority” status, have been paid.
(Id. at 21–26.) 4
On November 18, 2013, Kingdom Fresh filed a notice of appeal of the
bankruptcy court’s order granting Special Counsel his Third and Final Fee
Application. (Bankr. Dkt. # 616.) On January 27, 2014, Kingdom Fresh filed its
briefing. (“Opening Br.,” Dkt. # 10.) On February 10, 2014, Special Counsel filed
his brief. (“Answering Br.,” Dkt. # 11.) On February 24, 2014, Kingdom Fresh
filed its Reply Brief. (“Reply Br.,” Dkt. # 12.) On May 21, 2014, Amicus Curiae
Randolph N. Osherow (“Amicus”) submitted an Amicus Brief in support of
Special PACA Counsel’s Third and Final Fee Application. (“Amicus Br.,” Dkt.
# 14.)
appeal of Special Counsel’s Second Interim Fee Application. (See Case No. 5:13cv-131, Dkt. # 7.)
4
Special Counsel subsequently filed a Motion for Reconsideration of the Court’s
ruling. (Case No. 5:12-cv-1127, Dkt. # 24.) For the same reasons as expressed
infra, the Court denied the Motion for Reconsideration. (Case No. 5:12-cv-1127,
Dkt. # 42.)
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DISCUSSION
Kingdom Fresh advances two arguments in support of its appeal:
(1) for the reasons enumerated in this Court’s earlier Order denying Special
Counsel’s First (and Second) Interim Fee Applications, PACA does not permit
PACA trust assets to satisfy Special Counsel’s fees, and (2) Special Counsel’s
actions created an actual conflict of interest against the debtor’s estates sufficient
to deny any and all compensation under 11 U.S.C. § 328(c).
This Court has already issued two orders explaining how and why
PACA does not authorize payment of Special Counsel’s fees at this time (see Case
No. 5:12-cv-1127 Dkt. ## 23, 42); however, in the interest of clarity and
thoroughness, the Court will endeavor to comprehensively explain why PACA
forbids such a payment until the satisfaction of the PACA beneficiaries’ claims.
I.
PACA’s Background
The Court begins by setting out the legal landscape for PACA claims
generally. In 1930, Congress enacted PACA to regulate the produce industry and
promote fair dealings in transactions involving fruits and vegetables. GolmanHayden Co. v. Fresh Source Produce Inc., 217 F.3d 348, 350 (5th Cir. 2000). As
stated in the House Report to the 1984 amendments to the Act, PACA was enacted
to encourage fair trading practices in the marketing of perishable
commodities by suppressing unfair and fraudulent business practices
in marking of fresh and frozen fruits and vegetables . . . and providing
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for collecting damages from any buyer or seller who fails to live up to
his contractual obligations.
H.R. Rep. No. 543, 98th Cong., 2d Sess. 3 (1983); see also Pac. Intern. Mktg., Inc.
v. A & B Produce, Inc., 462 F.3d 279, 282 (3d Cir. 2006) (“Congress intended
PACA to protect small farmers and growers who were vulnerable to the practices
of financially irresponsible buyers.”).
To this end, PACA requires buyers of produce to make “full payment
promptly,” Bocchi Americas Assocs. Inc. v. Commerce Fresh Mktg. Inc., 515 F.3d
383, 387–88 (5th Cir. 2008) (quoting 7 U.S.C. § 499b(4)), and if a buyer fails to
tender prompt payment, the seller may file a complaint with the United States
Department of Agriculture or file a civil suit against the buyer, id. (citing 7 U.S.C.
§ 499e(a)–(b)). In other words, “[u]nder PACA, it is unlawful for buyers of
produce, inter alia, to fail to make prompt payment for a shipment of produce.”
Pac. Intern. Mktg, Inc., 462 F.3d at 282 (quoting Idahoan Fresh v. Advantage
Produce, Inc., 157 F.3d 197, 199 (3d Cir. 1998)).
Congress later amended PACA to add two powerful tools to address
buyers’ proclivity to default before tendering full payment to sellers. First, PACA
established a scheme in which a buyer of produce on credit is required to hold the
produce and its derivatives and/or proceeds in trust for the unpaid seller. 7 U.S.C.
§ 499e(c)(2); Endico Potatoes v. CIT Group/Factoring, 67 F.3d 1063, 1067 (2d Cir.
1995) (holding that PACA incorporates ordinary principles of trust law so that a
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buyer holds legal title to the produce and its derivatives, but the seller retains an
equitable interest in the trust property pending payment); see also Reaves
Brokerage Co., Inc. v. Sunbelt Fruit & Vegetable Co., Inc., 336 F.3d 410, 413 (5th
Cir. 2003) (holding that § 499e(c)(2) creates, “immediately upon delivery, a
nonsegregated ‘floating’ trust in favor of sellers on the perishable commodities
sold and the products and proceeds derived from the commodities”). “Congress
provided this remedy because ‘prior to this amendment, unpaid produce suppliers
were unsecured creditors vulnerable to the buyers’ practice of granting other
creditors a security interest in their inventory and accounts receivable.” Pac.
Intern. Mktg., 462 F.3d at 282 (quoting Idahoan Fresh, 157 F.3d at 199).
Thereafter, the buyer becomes the seller’s trustee and holds the assets in trust for
the seller.
Second, “if the seller is not paid promptly, the buyer must preserve
trust assets, and the seller has a ‘superpriority’ right that trumps the rights of the
buyer’s other secured and unsecured creditors.” Bocchi Americas Assocs. Inc.,
515 F.3d at 388; accord 7 U.S.C. § 499e(c)(1); see also Gargiulo v. G.M. Sales,
Inc., 131 F.3d 995, 999 (11th Cir. 1997) (“The PACA grants the sellers of such
commodities the right to recover against the purchasers and puts the sellers in a
position superior to all other creditors.”). 5
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Sellers are only entitled to the trust assets and “superpriority” status if they
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“General trust principles govern PACA trusts unless the principle
conflicts with PACA.” Nickey Gregory Co., LLC v. AgriCap, LLC, 597 F.3d 591,
595 (4th Cir. 2010); accord C.H. Robinson v. Alanco Corp., 239 F.3d 483, 487 (2d
Cir. 2001) (“Trusts created under PACA are statutory trusts, and common law trust
principles are not applicable if they conflict with the language of the statute, the
clear intent of Congress in enacting the statute, or the accompanying regulations.”);
Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 282 (9th Cir. 1997). Because trust
principles apply and the debtor only holds legal—not equitable—title, if the debtor
files for bankruptcy, the PACA trust assets are excluded from the bankruptcy
estate. See, e.g., 11 U.S.C. § 541(d) (“Property in which the debtor holds, as of the
commencement of the case, only legal title and not an equitable interest, . . .
becomes property of the estate . . . only to the extent of the debtor’s legal title to
comply with certain procedural requirements. An unpaid 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 within the time provided by law.
7 U.S.C. § 499e. If a seller satisfies § 499e’s requirements, however, a trust
automatically arises in favor of the seller until full payment has been received. Id.
§ 499e(c)(2); see also In Re Milton Poulos, Inc., 947 F.2d 1351, 1352 (9th Cir.
1991).
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such property, but not to the extent of any equitable interest in such property that
the debtor does not hold.”); Ruby Robinson Co., Inc. v. Herr, 453 F. App’x 463,
465 (5th Cir. 2011) (“Ordinary principles of trust law apply to trusts created under
PACA, so that for instance the trust assets are excluded from the estate should the
dealer go bankrupt.” (quoting Sunkist Growers, Inc., 104 F.3d at 282)).
II.
Special Counsel is Not Entitled to Attorney’s Fees Until Satisfaction of the
PACA beneficiaries’ claims
i.
PACA Statute entitles PACA Beneficiaries to a Sum Certain
The trust provision of PACA requires a produce buyer to hold the
produce and its proceeds and derivatives in trust for the benefit of the seller “until
full payment of the sums owing in connection with such transactions has been
received” by the unpaid seller. 7 U.S.C. § 499e(c)(2). As the Second Circuit
noted, “[i]t is clear from the language of PACA that beneficiaries are entitled to
full payment of the contract price for the sale of produce.” C.H. Robinson Co.,
239 F.3d at 487; accord Anthony Marano Co. v. MS-Grand Bridgeview, Inc., 08 C
4244, 2010 WL 5419057 (N.D. Ill. Dec. 23, 2010); Pac. Intern. Mktg., 462 F.3d at
285.
In fact, a “trust created by PACA exists until a seller [i.e., PACA
beneficiary] is paid in full.” Weis-Buy Servs. v. Paglia, 411 F.3d 415, 423 (3d Cir.
2005) (citing 7 C.F.R. § 46.46(c)(2)); see also In re Kornblum & Co., Inc., 81 F.3d
280, 285 (2d Cir. 1996) (“Only when every existing beneficiary has been paid in
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full does the PACA trust cease to exist and the Produce Debtor become the
equitable owner of any remaining trust assets.”).
In C.H. Robinson, the Second Circuit seized upon the aforementioned
language of the PACA statute to hold that an PACA did not authorize payment of a
PACA trustee’s attorney’s fees because “PACA trust beneficiaries are entitled to
full payment before trustees may lawfully use trust funds to pay other creditors,”
like the trustee’s attorney’s fees. 239 F.3d at 488. There, Robinson, a produce
seller, filed a PACA claim to recover more than $200,000 in unpaid produce
purchases from the bankrupt Alanco Corp., a produce buyer. Id. at 485. When
Robinson settled his PACA trust claim with Alanco, Mark Mandell, acting as
trustee for the PACA trust, turned over the remaining proceeds Alanco had left to
Robinson, but withheld $18,960.57. Id. Mandell then applied to the district court
to enforce an attorney’s lien on the $18,960.57. Id. The district court denied
Mandell’s motion. Id.
On appeal to the Second Circuit, Mandell argued that he was entitled
to the $18,960.57 sum as payment for fees he earned performing necessary
services to collect Alanco’s accounts receivable, which had been held in trust for
the benefit of Robinson under PACA. Id. at 486. He also contended that his
services were in fulfillment of Alanco’s duty to the PACA trust beneficiaries and
solely for their benefit and that therefore he was entitled to be paid out of the trust
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res under general principles of trust law. Id.
The Second Circuit disagreed. The court acknowledged that “blackletter trust law” provides that a “trustee can properly incur expenses which are
necessary and appropriate to carry out the purposes of the trust and are not
forbidden by the terms of the trust.” Id. (quoting Restatement of Trusts (Second)
§ 188 (1957)). But the court considered PACA meaningfully different, finding that
“[t]rusts created under PACA are statutory trusts, and common law trust principles
are not applicable if they conflict with the language of the statute, the clear intent
of Congress in enacting the statute, or the accompanying regulations.” Id. at 487.
In fact, the only reason Congress labeled PACA claims as “trusts,” the court
reminded, was to strengthen a produce seller’s contractual rights in a defunct
buyer’s bankruptcy proceeding. Id. (citing H.R. Rep. No. 543, 98th Cong. 2d Sess.
3 (1983) (explaining that given the proclivity for buyers to enter bankruptcy,
PACA was intended to “increase the legal protection for unpaid sellers and
suppliers of perishable agricultural commodities” in bankruptcy proceedings)).
The court also relied on PACA’s accompanying regulations, which
directed that PACA trustees have a duty under PACA to pay the full amount of the
debt owed to PACA claimants before paying any other creditors (i.e., attorneys).
Id. at 487–88. The court first referenced 7 C.F.R. § 46.46(a)(2), which defined
“dissipation” of trust assets as “any act or failure to act which could result in the
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diversion of trust assets or which could prejudice or impair the ability of unpaid
[sellers] to recover money owed in connection with produce transactions.” Id. The
court then cited 7 C.F.R. § 46.46(d), which stated that “[c]omission merchants,
dealers, and brokers are required to maintain trust assets in a manner that such
assets are freely available to satisfy outstanding obligations of perishable
agricultural commodities.” Id. at 488.
The court concluded that because Mandell’s withholding of the
$18,690.57 in attorney’s fees left Alanco unable to satisfy the remainder of
Robinson’s PACA claim, he impaired Robinson’s ability to recover the money
owed under PACA. Id. In other words, the court explained, “[a]llowing a defunct
PACA trustee to pay other creditors [i.e., their attorneys] with PACA funds before
the seller [PACA claimant] is paid in full would frustrate [Congress’s] purpose,
and would be contrary to the language of PACA and its accompanying
regulations.” Id. Mandell, as the PACA trustee, was not able to use PACA funds
to pay himself his earned attorney fees incurred in collecting accounts receivable
held in trust for Robinson. Id. at 488–89.
Although Special Counsel Stokes is not a PACA trustee like
Mandell,6 the logic of C.H. Robinson equally applies. The Second Circuit’s
6
Special Counsel is correct that he was not technically the PACA Trustee because
7 U.S.C. § 499e(c)(2) provides that the defunct buyer, Delta Produce, is the trustee,
and therefore Delta Produce’s lawyer functions as the “trustee” by holding legal
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reasoning did not rely on Mandell’s trustee-status. Rather, the court looked to “the
language of the [PACA] statute itself,” noting:
The trust provision of PACA requires a produce buyer to hold the
produce and its proceeds and derivatives in trust for the benefit of the
seller “until full payment of the sums owing in connection with such
transactions has been received” by the unpaid seller. 7 U.S.C.
§ 499e(c)(2). It is clear from the language of PACA that beneficiaries
are entitled to full payment of the contract price for the sale of
produce. Unlike most common law trusts, a PACA trust entitles the
trust beneficiary to a sum certain. The trust requirement is intended to
supplement the seller’s contract rights.
239 F.3d at 487 (emphases added). Mandell’s trustee-status was not dispositive.
The court made clear that PACA intended the beneficiaries (or sellers) to fully
recover before the debtor (buyer), as the PACA trustee, paid any other creditors.
See id. at 488 (“Allowing a defunct PACA trustee to pay other creditors with
PACA funds before the seller is paid in full would frustrate this purpose, and
would be contrary to the language of PACA and its accompanying regulations.
PACA trust beneficiaries are entitled to full payment before trustees may lawfully
use trust funds to pay other creditors.”). In other words, the status of any other
individual seeking PACA trust funds is irrelevant; PACA trust beneficiaries must
be paid first before any other creditors can be paid because they are entitled to “full
payment.” And because paying Mandell’s attorney’s fees would not have allowed
the PACA trust beneficiaries to receive full payment, Mandell was not entitled to
title to the goods for the benefit of the sellers, like Kingdom Fresh and other PACA
Claimants.
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such fees from PACA trust funds.
Other courts share C.H. Robinson’s reading, namely that PACA trust
beneficiaries are entitled to full payment. See, e.g., Chiquita Fresh N. Am., LLC v.
Long Island Banana Corp., 14-CV-982 ADS AKT, 2014 WL 2854483, at *3
(E.D.N.Y. June 23, 2014) (holding that a PACA trust “is continuous and exists
from the moment produce is received until all suppliers are paid in full” (emphasis
added) (quoting Ger–Nis Int’l, LLC v. FJB, Inc., 07–cv–898 (CM), 2008 WL
2600074, at *4 (S.D.N.Y. June 25, 2008))); J.A. Besteman Co. v. Carter’s, Inc.,
439 F. Supp. 2d 774, 778 (W.D. Mich. 2006) (“[A] PACA trust arises when the
first PACA debt is incurred and continues thereafter until all sellers are paid in
full.” (emphasis added)).
While § 499e(b)(2)’s “full payment” requirement may seem
unforgiving, it was purposeful. In the early 1980s, Congress recognized a more
significant payment problem in the produce industry. 1984 U.S.C.C.A.N. at 406;
see also Frio Ice, S.A. v. Sunfruit, Inc., 918 F.2d 154, 156 (11th Cir. 1990) (“In the
early 1980s, Congress determined that the increase in non-payment and delinquent
payment by produce dealers threatened the financial stability of produce
growers.”). Congress recognized that “due to the need to sell perishable
commodities quickly, sellers of perishable commodities are often placed in the
position of being unsecured creditors of companies whose creditworthiness the
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seller is unable to verify.” Endico Potatoes, 67 F.3d at 1067; see also Middle
Mountain Land and Produce Inc. v. Sound Commodities Inc., 307 F.3d 1220, 1223
(9th Cir. 2002) (“Unfortunately, PACA as originally drafted was unable to provide
complete protection to sellers. . . . If the buyer then declared bankruptcy, the seller
would have ‘no meaningful possibility’ of receiving its contractual right to
payment.”).
To remedy this problem, in 1984, Congress amended PACA by
creating a statutory trust “to increase the legal protection for unpaid sellers and
suppliers of perishable agricultural commodities until full payment of sums due
have been received by them.” 1984 U.S.C.C.A.N. at 406. The 1984 PACA
Amendments further provided that the failure to maintain the PACA Trust and
make full payment promptly to the trust beneficiary is unlawful, 7 U.S.C.
§ 499b(4), and PACA buyers were then “required to maintain trust assets in a
manner that such assets are freely available to satisfy outstanding obligations to
sellers of perishable agricultural commodities,” and any act or omission
inconsistent with this responsibility, including dissipation of trust assets, is
proscribed, 7 C.F.R. § 46.46(d)(1). In short, PACA’s statutory text unequivocally
requires that PACA trust assets must be used to pay the sellers of PACA goods
ahead of all other creditors.
Turning to the instant facts, it is undisputed that Special Counsel’s
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fees would be paid by PACA trust assets, thus diminishing the amount of the trust
assets to the detriment of the PACA beneficiaries like Kingdom Fresh. Because
the bankruptcy court granted Special Counsel’s Third and Final Fee Application
and the PACA beneficiaries had not received “full payment of the sums owning in
connection with such [PACA] transactions,” 7 U.S.C. § 499e(c)(2), the bankruptcy
court’s order violated the terms of the PACA.
However, to be clear, Special Counsel could be entitled to payment of
his fees—but only after the PACA beneficiaries, like Kingdom Fresh, received
“full payment.” Any action before PACA trust beneficiaries receive full payment
would directly violate the language of PACA and its regulations. See C.H.
Robinson, 239 F.3d at 488.
Special Counsel argues that C.H. Robinson is distinguishable because
unlike Mandell, he was appointed by the bankruptcy court. (Answering Br. at 22–
23.) Special Counsel cites the trial court order in C.H. Robinson, as that court
noted the possibility of compensating Mandell if Robinson had agreed:
Mandell’s claim that Robinson’s counsel did not seek to take over the
representation of Alanco and did not object to Mandell’s statement
that he would take his fee from the PACA trust assets, are insufficient
to overcome the policies behind the PACA trust. Mandell is now
asking that Robinson’s money be spent on his fee; but if Robinson
wanted to retain him to collect Alanco’s PACA funds for Robinson’s
benefit, it would have done so. Robinson’s counsel silence did not
amount to a promise to allow Mandell to recover his fees from the
Robinson’s PACA trust. Moreover, if Mandell really had been
concerned at whether he would be paid from Alanco’s PACA trust
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funds, he could have moved early in these cases, rather than at their
conclusion for a ruling on the attorney fee lien issue.
(Id. at 27 (emphasis in Motion) (citing C.H. Robinson Co. v. Alanco Corp., 97
CIV. 6018 (AJP), 2000 WL 101238, at *4 (S.D.N.Y. Jan. 28, 2000), aff’d, 239
F.3d 483 (2d Cir. 2001)).) Special Counsel asserts that he (as well as Debtor’s
counsel and PACA trust creditors) did exactly what the district court in C.H.
Robinson said must be done to avoid loss of counsel fees, namely filing a motion
for appointment of Special PACA Trust Counsel, giving notice to “all creditors,”
and obtaining a court order approving the appointment and payment of such
counsel from PACA trust funds. (Id. at 23.)
There are several problems with Special Counsel’s argument. First,
and most obviously, the trial court in C.H. Robinson did not hold that if Mandell
would have moved early on in the case, he would have been entitled to attorney’s
fees. Quite the contrary, the passage Special Counsel cites makes clear that the
trial court only suggested that Mandell could have moved earlier to assuage his
concerns over his fees. See C.H. Robinson Co., 2000 WL 101238, at *4
(“Moreover, if Mandell really had been concerned at whether he would be paid
from Alanco’s PACA trust funds, he could have moved early in these cases, rather
than at their conclusion for a ruling on the attorney fee lien issue.” (emphases
added)). Special Counsel is essentially extrapolating one sentence from the trial
court’s opinion to mean that moving for attorney’s fees early in the case ensures
20
payment; such a reading, however, is overly generous.
Second, although the Second Circuit affirmed the trial court’s denial
of fees to Mandell, the Second Circuit did not credit the passage cited by Special
Counsel, nor did the circuit court even hint at the possibility of an early motion to
secure attorney’s fees. Instead, the court explained why the statute’s text, purpose,
and accompanying regulations prohibited using PACA trust funds to pay attorney’s
fees incurred in the collective accounts receivable held in trust for the beneficiary
sellers. See C.H. Robinson, 239 F.3d at 488 (“Allowing a defunct PACA trustee to
pay other creditors with PACA funds before the seller is paid in full would
frustrate [Congress’s] purpose.”).
In an effort to nullify this Court’s reliance on C.H. Robinson, Special
Counsel alternatively asserts that the Second Circuit later held that its decision in
C.H. Robinson v. Alanco Corp. does not apply to payments from PACA trust
assets that are authorized by the court. (Answering Br. at 23 (citing “R” Best
Produce, Inc. v. Shulman-Rabin Mktg., Corp., 467 F.3d 238 (2d Cir. 2006)).) He
posits that “R” Best “noted that counsel who was court-appointed, and acting for
the benefit of PACA trust creditors, unlike a trustee, can be paid by PACA trust
assets.” (Id. at 23 (citing “R” Best, 467 F.3d at 243).) There are serious flaws in
Special Counsel’s arguments with respect to “R” Best. Chief among the flaws is
the contention that “R” Best held that a court-appointed “special counsel” or
21
“special master” can be paid by PACA trust assets. Once again, Special Counsel’s
argument wholly misconstrues a court’s opinion.
In “R” Best, a railroad company transported perishable agricultural
goods from various suppliers to P.J. Produce. 467 F.3d at 240. P.J. Produce
eventually defaulted on payments to suppliers and the railroad. Id. As a result, the
railroad sued P.J. Produce to attempt to enforce the trust provisions of PACA. Id.
The Second Circuit first found that the railroad did not qualify as a PACA trust
beneficiary because it was not a “seller of perishable agricultural commodities,”
only a transporter. Id. at 241–42. The court next considered the railroad’s
common-law trust argument that administrative expenses should be paid from
PACA trust funds:
Union Pacific primarily relies on two lower court decisions that
allowed certain administrative expenses to be paid from PACA trust
funds. See Six L’s Packing Co., Inc. v. Post & Taback, Inc., 132 F.
Supp. 2d 306, 309 (S.D.N.Y. 2001) (allowing a court-appointed
Special Master’s fees and expenses to be paid out of PACA trust
funds).
Id. at 242–43. The court held that the railroad could not rely on Six L’s Packing
because it was not performing quasi-judicial duties. Id. at 243. The court noted
that “[t]he trust funds could be used to pay the Special Master’s fees [in Six L’s
Packing], in contrast, because the Special Master would be ‘acting on the Court’s
behalf in performing quasi-judicial duties and for the joint benefit of all . . . PACA
creditors.” Id. The court found that “Union Pacific’s position does not resemble
22
that of a Special Master or a trustee in bankruptcy. It provided its services directly
to P.J. Produce, and did not act at the court’s direction or for the exclusive benefit
of the PACA beneficiaries.” Id. (internal citations omitted)).
While the “R” Best court did hint at the approval of Six L’s Packing’s
decision to allow a Special Master to be paid with PACA trust funds, the court’s
distinguishing treatment of Six L’s Packing is a far cry from the wholesale
adoption that Special Counsel advances. 7 Instead, the court went to great lengths
to emphasize “Congress’s intent to protect sellers as the exclusive beneficiaries of
the PACA trust.” Id.; see also id. at 242 (“[T]he legislative history and the text of
the statute as well as the implementing regulations all make clear that trust assets
are intended exclusively to benefit produce suppliers.”).
And even if “R” Best did rely on Six L’s Packing, such reliance would
be highly suspect because Six L’s Packing did not give any reasoned opinion as to
how or why the court allowed a special master to be paid from PACA trust funds.
There, the Southern District of New York appointed James Niss, Esq., as a
“Special Master” to assist the court in evaluating the PACA claims. 132 F. Supp.
2d at 309. The court only stated that “[b]ecause the Special Master will be acting
on the Court’s behalf in performing quasi-judicial duties and for the joint benefit of
all Post & Taback PACA creditors, his reasonable fees and expenses shall be paid
7
Even West Publishing notes that “R” Best distinguished Six L’s Packing.
23
from Post & Taback’s PACA trust funds.” Id. The court did not provide any legal
authority for authorizing such compensation from PACA trust funds. 8
Accordingly, neither the trial court order in C.H. Robinson, nor the
Second Circuit’s opinion in “R” Best warrants a different decision.
ii.
Common Law Trust Principles Do Not Apply
Admittedly, there are several courts that have not followed C.H.
Robinson’s reasoning and have instead relied on common law trust principles to
allow for the payment of certain administrative expenses, such as attorneys’ fees or
fees for services rendered in collecting receivables for the benefit of the PACA
trust, to be paid from the corpus of the PACA trust prior to its distribution to the
statutory beneficiaries. See, e.g., In re Milton Poulos, Inc., 947 F.2d 1351, 1353
(9th Cir. 1991); In re Southland + Keystone, 132 B.R. 632, 643 (9th Cir. BAP
1991); In re United Fruit & Produce Co., 119 B.R. 10, 13 (Bankr. D. Conn. 1990)
(“[W]ell-settled trust law furnishes the basis for compensating a trustee, unless
[PACA] otherwise provides.”). These cases generally require the claimant to
demonstrate that its efforts and resultant expenses were “directly responsible for
the availability of the funds from the [PACA] trust.” See, e.g., Milton Poulos, 947
F.2d at 1353.
8
The Six L’s Packing court only cited to Federal Rule of Civil Procedure 53(a),
which authorizes a court to appoint a special master. The court did not discuss any
authority for compensating the special master with PACA trust funds.
24
For example, in Milton Poulos the Court of Appeals for the Ninth
Circuit awarded attorneys’ fees to the attorneys for a produce supplier because,
“[t]hrough their efforts, the bankruptcy court declared the trust valid and
enforceable, thereby permitting the funds to be [disbursed] among the trust
[beneficiaries.]” Id. at 1353. The court further explained that “the efforts of these
attorneys resulted in a common fund for the group.” Id.
Similarly, in United Fruit the bankruptcy court relied on common law
trust principles as well as 11 U.S.C. § 506, in compensating a bankruptcy trustee
for its “necessary” services from the PACA trust funds prior to their distribution.
119 B.R. at 13 & n.5. The court explained that “[t]he bankruptcy trustee of the
debtor’s estate . . . rendered substantial services in collecting the PACA receivable
for the benefit of the PACA beneficiaries and in contesting [a seller’s] claim that it
is entitled to a priority payment from [the PACA trust.]” Id. at 13. The court
further explained that “[t]he non-PACA creditors should not pay for these services
and the trustee should not be forced to donate them.” Id.
The court in Southland + Keystone, in harmony with the court in
United Fruit, similarly allowed the trustee “to offset [from PACA trust fund
monies] its collection costs.” 132 B.R. at 643. The court, however, limited the
amount of the offset “to the ‘hard’ costs of collection such as outside attorney’s
fees and expenses that were necessary to the collection effort,” and stated that costs
25
such as “overhead expenses are not recoverable.” Id.
The Fifth Circuit has not yet decided whether or not the common law
trust principles would permit the recovery of attorney’s fees as in the
aforementioned three cases. See Golman-Hayden Co., 217 F.3d at 353. There, the
court noted that “[a] party may be entitled to attorney’s fees from a common fund
when acting to either protect the trust from destruction or to restore it to its
purpose.” Id. at 352. However, because the litigation did not result in the
establishment of a common fund, the Fifth Circuit concluded that the district court
erred in awarding attorney’s fees under the common fund exception. The court
“expressed no opinion as to whether the common fund exception would permit the
recovery of attorney’s fees under PACA if a common fund was established. That
decision remains for another day.” Id. at 353.
But even in the absence of any Fifth Circuit explicit guidance, the
aforementioned three cases permitting a special counsel’s attorney’s fees are easily
distinguishable in light of the fact that PACA is a statutory trust, and as such,
common law trust principles, like those relied upon in United Fruit, are not
applicable if they conflict with the language of the statute. C.H. Robinson, 239
F.3d at 487 (“[C]ommon law trust principles are not applicable if they conflict with
the language of the statute, the clear intent of Congress in enacting the statute, or
the accompanying regulations.”); accord “R” Best Produce, Inc., 467 F.3d at 242;
26
Pac. Intern. Mktg, Inc., 462 F.3d at 285; Boulder Fruit Exp. & Heger Organic Farm
Sales v. Trans. Factoring, Inc., 251 F.3d 1268, 1271 (9th Cir. 2001). Here, because
PACA’s § 499e(c)(2) unambiguously entitles PACA beneficiaries to full payment
(i.e., a sum certain) before payment of any other creditor, United Fruit’s reliance
on common law trust principles to pay the individual charged with administering
the PACA trust funds ahead of the PACA beneficiaries is misplaced. While it is
understandable that “non-PACA creditors of the estate should not pay for [PACA
administration] services” and individuals adjudicating such claims “should not be
forced to donate them,” United Fruit, 119 B.R. at 10, the language of PACA
unequivocally requires tendering “full payment” to PACA beneficiaries before
paying any other creditor, even a creditor charged with administering the PACA
trust like Special Counsel, see C.H. Robinson, 239 F.3d at 488 (“PACA trust
beneficiaries are entitled to full payment before trustees may lawfully use trust
funds to pay other creditors.”).
iii.
No Distinction Between Litigating PACA Claims in
Bankruptcy Court and in District Court
Amicus argues that this Court’s previous Order vacating the
bankruptcy court’s grant of Special Counsel’s First Interim Application for Fees
(Case No. 5:12-cv-1127, Dkt. # 23) has “real and serious consequences for the
administration of these cases resulting in losses for PACA trust creditors.”
(Amicus Br. at 1.) Essentially Amicus posits that because the Court prohibits
27
trustees and/or special counsels from receiving any payment in PACA cases and in
most cases the PACA trust payables exceed the PACA trust receivables, trustees
and/or special counsels are left between “a rock and a hard place”: he or she can
either “abandon the PACA trust assets, thereby leaving each creditor to fend for
itself and creating a multiplicity of litigation or attempt to collect the PACA
receivables with the attendant risk that the attorney’s fees and expenses expended
may be unrecoverable.” (Id. at 3.) Amicus then provides a “parade of horribles”
that will result if this Court does not vacate its earlier opinion:
Instead of protecting PACA trust creditors, the Order has resulted in a
paralysis of the collection efforts in these bankruptcy proceedings to
the detriment of both the PACA debtors and their PACA creditors.
By making the PACA receivables of a Debtor uncollectable, it
prevents the PACA creditors from realizing any value from the
collection of their PACA trust receivables because even a court
authorized collector acts at his financial peril. This enables
unscrupulous downstream parties to slow pay the PACA debtor,
possibly even create or force the debtor into bankruptcy and reap a
windfall because there is no ability of the debtor to collect its
receivables.
(Id.)
However, Amicus’ argument is not new. In In re Super Spud, Inc., 77
B.R. 930 (Bankr. M.D. Fla. 1987), the court considered a nearly identical
contention:
Because the claims of PACA creditors far exceed the amount of assets
in the estate, the trustee has argued that the position this court has
taken is unfair in that it fails to compensate the trustee for his efforts
in collecting the estate’s assets. This, he argues, obligates him to
28
collect the estate’s assets for the benefit of the PACA trust
beneficiaries with no reimbursement for his own expenses.
Id. at 932. In rejecting the trustee’s argument, the court acknowledged the
perceived “injustice,” but reminded that it is bound by the law as written:
“While this result is unfortunate, this court can find no support for the trustee’s
argument that the PACA claims be subordinated to that of the trustee. Perhaps this
is something Congress should address in the future.” Id.
Moreover, given Congress’s unmistakable mandate that buyers must
tender “full payment” to PACA beneficiaries and that PACA is not a bankruptcy
statute, the fact that a buyer has ended up in bankruptcy (and perhaps in need of an
individual to resolve the arduous PACA collection efforts) does not change the
“full payment” directive. In fact, “[u]nder PACA, it is unlawful for buyers of
produce, inter alia, to fail to make prompt payment for a shipment of produce.”
Idahoan Fresh, 157 F.3d at 199. While it is unfortunate that Delta Produce
accumulated numerous PACA claims (by not tendering full payment that was
owed to the PACA beneficiaries in a timely fashion) and was compelled to declare
bankruptcy, Delta Produce’s misfortune does not necessitate appointing a special
counsel to adjudicate the numerous PACA claims and then charging the PACA
beneficiaries for the special counsel’s services before satisfying their claims.
“Courts have recognized that the intent to Congress in enacting PACA’s trust
provision was to provide unpaid produce sellers with greater protection from the
29
risk of default buyers.” C.H. Robinson, 239 F.3d at 488 (emphasis added)
(citations omitted); accord In re Kornblum, 81 F.3d at 283 (holding that Congress
enacted the trust provision “to broaden the protection afforded to produce
suppliers”). Solely because Delta Produce has many PACA claims to pay out does
not mean that the PACA beneficiaries should have to pay for Delta Produce’s lack
of timely payment before receiving what is owed to them.
iv.
Paying to Adjudicate PACA claims
The logical question that likely follows is: who should pay to
adjudicate the PACA claims? Again, admittedly there is some logic in United
Fruit’s equitable holding that “[t]he non-PACA creditors of [the bankruptcy] estate
should not pay for these services and the trustee should not be forced to donate
them.” 119 B.R. at 13. At first blush, it does seem inequitable to make non-PACA
creditors of the estate “pay” for legal services rendered in adjudicating PACA
claims. However, if the buyer was not in bankruptcy, the buyer would certainly
use its own assets to pay for the services rendered in adjudicating PACA claims
and tendering full payment to the sellers (PACA beneficiaries)—assets of which
could have been used to pay bankruptcy estate creditors. Given that PACA is not a
bankruptcy statute, and indeed functions as the controlling statute should there be a
conflict with the Bankruptcy Code, see In re Superior Tomato-Avocado, 481 B.R.
866, 872 (Bankr. W.D. Tex. 2012), it makes little sense to change how buyers pay
30
for services rendered in paying out PACA claims simply because the buyer is in
bankruptcy.
The Court also emphasizes that Special Counsel can be paid from the
PACA trust res, but only after PACA trust beneficiaries receive full payment. See
C.H. Robinson, 239 F.3d at 488 (“PACA trust beneficiaries are entitled to full
payment before trustees may lawfully use trust funds to pay other creditors.”); see
also id. (“A PACA trustee may use trust assets to pay ordinary business expenses
as long as it does not do so at the expense of its PACA beneficiaries, or in any way
impair the ability of the beneficiaries to collect money owed in connection with
produce sales.”).
Accordingly, PACA contemplates two options for Special Counsel to
receive payment (or for a PACA trustee to receive payment): (1) he can seek
payment from the buyer/debtor, or (2) he can seek payment from the PACA trust,
but only after all PACA beneficiaries have received full payment.
In this case, Special Counsel could seek his attorney’s fees from Delta
Produce because it was Delta Produce’s task, as the PACA trustee, to tender “full
payment” to the PACA beneficiaries. The fact that Special Counsel assumed Delta
Produce’s role and expended valuable time and resources to do so warrants Delta
Produce paying for Special Counsel’s services. Alternatively, assuming there are
additional funds in the PACA trust res, an unlikely but not impossible scenario,
31
Special Counsel could receive his payment from those excess funds.
v.
Appointment of Special Counsel
The Court appreciates why the bankruptcy court found it efficacious
to appoint a special counsel in the instant litigation; indeed, there were a large
number of PACA beneficiaries that Delta Produce held trust assets for, and
adjudicating each PACA claim would be been a time-intensive effort. However,
PACA and its accompanying regulations likely did not envision the appointment of
a “special counsel” or “special master” for PACA claims because PACA imposes a
fiduciary obligation on the trustee in maintaining and paying out PACA claims—
an obligation that a special counsel or special master does not have.
To illustrate, PACA imposes fiduciary duties on the buyer. See
Matter of Snyder, 184 B.R. 473, 475 (Bankr. D. Md. 1995) (“PACA, then, imposes
fiduciary duties on the buyer.”). This is because the buyer holds the produce and
its assets and derivatives in trust:
An individual who is in the position to control the trust assets and who
does not preserve them for the beneficiaries has breached a fiduciary
duty, and is personally liable for that tortious act . . . [A] PACA trust
in effect imposes liability on a trustee, whether a corporation or a
controlling person of that corporation, who uses the trust assets for
any purpose other than repayment of the supplier.
Id. (quoting Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F. Supp. 346, 348
(S.D.N.Y. 1993)). The fiduciary duties arise “immediately upon delivery of the
produce,” in which a “nonsegregated ‘floating’ trust [arises] in favor of unpaid
32
sellers, which attaches to the products themselves and any proceeds.” Bocchi
Americas Assocs. Inc., 515 F.3d at 388. The fiduciary duties remain “until full
payment of the sums owning in connection with such transactions has been
received” by the unpaid seller (i.e., the PACA beneficiary). 7 U.S.C. § 499e(c)(2).
During the course of the fiduciary relationship, “the buyer must ‘maintain trust
assets in a manner that such assets are freely available to satisfy outstanding
obligations to the sellers’ and ‘dissipation of trust assets is unlawful.’” Matter of
Snyder, 184 B.R. at 475 (quoting 7 C.F.R. § 46.46(e)).
These fiduciary duties include paying PACA beneficiaries the full
payment of their PACA claim. See C.H. Robinson, 239 F.3d at 488 (“[A] PACA
trustee has a fiduciary obligation to repay the full amount of the debt owed to a
PACA beneficiary.”); see also In re Watford, 374 B.R. 184, 191 (Bankr. M.D.N.C.
2007) (“Pursuant to the statutory trust imposed by PACA, Southern Solutions had a
fiduciary duty to preserve the PACA Trust Assets for the benefit of its unpaid
produce suppliers until they were paid in full.”). “The accompanying regulations
also indicate that PACA trustee have a duty under PACA to pay the full amount of
the debt owed to their produce suppliers.” C.H. Robinson, 239 F.3d at 487. For
example, the regulations mandate that buyers are required to maintain trust assets
in a manner that such assets are freely available to satisfy outstanding obligations
to sellers. 7 C.F.R. § 46.46(d). Additionally, the regulations proscribe
33
“dissipating” trust assets by acting or failing to act in any way “which could result
in the diversion of trust assets or which could prejudice or impair the ability of
unpaid [sellers] to recover money owed in connection with produce transactions.”
Id. § 46.46(a)(2).
However, a “special counsel” or “special master” does not have those
same fiduciary obligations as a trustee would have. In fact, in the absence of those
obligations, it is conceivable that a special counsel or special master could
improperly dissipate trust assets—an action that would make a PACA trustee
personally liable, see Morris Okun, 814 F. Supp. at 348 (“An individual who is in
the position to control the trust assets and who does not preserve them for the
beneficiaries has breached a fiduciary duty, and is personally liable for the tortious
act.”)—but would not make a special counsel or special master liable.
Moreover, Congress intended that maintaining and paying out PACA
claims would be subject to such fiduciary obligations. The statutory text clearly
states that the trust relationship (with the corresponding fiduciary obligations)
arises as soon as the produce is tendered and remains until the seller receives full
payment. 7 U.S.C. §499e(c)(2). Appointing a special counsel or special master to
34
essentially fulfill the role of the buyer/trustee seems perverse in light of
§ 499e(c)(2)’s fiduciary obligations.9
III.
No Express or Implied Consent
Special Counsel next argues that because Kingdom Fresh was “served
with the motion to establish the PACA Order via ECF,” “participated in the
negotiations of the PACA Order,” and “made an appearance at the hearing on the
PACA Order,” it expressly consented to the use of PACA trust funds to pay
Special Counsel. (Answering Br. at 16.)
Special Counsel’s argument suffers from several flaws. Express
consent is “consent that is clearly and unmistakably stated.” Black’s Law
Dictionary (9th ed. 2009). The three situations Special Counsel advances fall short
of express consent. First, being served with a motion plainly does not constitute
express consent. Second, although Special Counsel contends that Kingdom Fresh
“participated in the negotiations of the PACA Order,” this statement is an
inaccurate reflection of the record. Kingdom Fresh and the other PACA claimant
9
Here, Special Counsel was tasked with many of the same duties that a trustee
would perform, including: “tak[ing] those steps reasonably necessary to preserve
and collect the PACA trust assets” and “facilitat[ing] the distribution of the
collected PACA trust assets” by “(a) attempting to determine the extent to which
assets are PACA trust assets, including filing or defending adversary proceedings
including declaratory judgment actions, (b) examining PACA trust claims filed by
alleged PACA trust beneficiaries, and objecting to those claims where appropriate,
(c) collecting the Debtors’ accounts receivables, including filing adversary actions,
and (d) liquidating PACA trust assets other than the accounts receivables into
cash.” (Bankr. Dkt. # 52 at 8–9.)
35
Appellants were not parties to Delta Produce’s Motion to Appoint Special Counsel
and did not affirmatively state their consent to the PACA Order authorizing the
payment of Special Counsel’s fees from PACA trust funds during the January 24,
2012 hearing. Third, making an appearance at the hearing and failing to object
does not equate to express consent. See C.H. Robinson Co., 2000 WL 101238, at
*6 (“Robinson’s counsel’s silence did not amount to a promise to allow [debtor’s
counsel as trustee] to recover his fees from the PACA trust.”).
Special Counsel otherwise argues that Kingdom Fresh impliedly
consented to paying his fees from PACA trust funds. (Answering Br. at 16–18.)
He relies on the bankruptcy court’s comments that it would have expected
“vociferous objection” and “relief from this appellate court” if Kingdom Fresh had
opposed the PACA Order. (Id. at 17 (citing First Interim Fee Hr’g 40:17–19
(September 21, 2012 transcript)).) He also relies on the court stating, “[I]f there
were aggr[eived] parties . . . it was incumbent on those parties to speak up . . . .”
(Id. (citing First Interim Fee Hr’g 41:11–14))
First, even when these comments were made at the September 21,
2012 hearing, they do not appear to be directed at whether Kingdom Fresh had
impliedly consented to Special Counsel’s appointment or paying his fees from
PACA trust funds. Rather, they reflect the bankruptcy court’s concern regarding
whether Kingdom Fresh had impliedly consented to the bankruptcy court’s
36
adjudicative authority. The entire passage containing Special Counsel’s cited
provisions reads:
Similarly, this Court entered an order, pursuant to the district court’s
order of reference, believing itself duly entrusted with the necessary
judicial power to do so by the district court’s orders of reference. And
this Court, in reliance on those orders, said, well, then it’s my job, and
as I say, I don’t have the authority to say no, so I’m going to do my
job. And once again, if there were aggrieved parties who believed
that, in doing my job, I was doing something wrong, once again, I
think it was incumbent on those parties to speak up and say so, lest we
get down the road and find, after we’d done all that work and spent all
that time and money, that we’d have to do it all over again, in another
court.
(First Interim Fee Hr’g 41:4–18 (emphasis added).)
Second, Special Counsel incorrectly characterizes these statements as
having occurred “at the time of the [PACA] Order”—implying that the bankruptcy
court made these caveats before Special Counsel’s initial appointment and
Kingdom Fresh must have impliedly consented by not objecting to paying Special
Counsel’s fees with PACA trust funds. (Answering Br. at 17–18.) However, the
passages that Special Counsel cites are from the September 21, 2012 hearing on his
First Interim Application for Fees—not the original January 24, 2012 hearing on
the PACA Order authorizing his appointment and fee structure. The transcript for
the January 24, 2012 hearing does not contain any affirmative warning to Kingdom
Fresh’s counsel regarding Special Counsel’s appointment or his fee structure.
Therefore, Special Counsel’s arguments that Kingdom Fresh impliedly consented
37
to paying his fees out of the PACA trust and that the bankruptcy court must have
accepted such implied consent are unpersuasive, if not entirely misleading.
But even if the bankruptcy court had suggested that PACA claimants,
such as Kingdom Fresh, should “speak up or forever hold their peace” before
equitably estopping Kingdom Fresh from challenging Special Counsel’s fees, that
admonition is irrelevant in the context of PACA because Kingdom Fresh’s
attorneys could not have waived Kingdom Fresh’s PACA “sum certain” trust rights
without Kingdom Fresh’s express written consent. To illustrate, Congress enacted
PACA to “provide unpaid produce sellers with greater protection from the risk of
default by buyers.” C.H. Robinson, 239 F.3d at 488. PACA “was established by
Congress to protect sellers and suppliers of perishable agricultural commodities
until full payment of sums due have been received.” In re Southland + Keystone,
132 B.R. at 639. Because PACA claimants maintain a “superpriority” status, an
agent for a PACA claimant cannot waive a PACA claimant’s rights absent an
express written waiver by the PACA claimant clearly showing the PACA claimant
intended to waive its rights under the PACA. See In re Cafeteria Operators, L.P.,
299 B.R. 411, 419 (N.D. Tex. 2003) (“The regulations under PACA are clearly
intended to prevent an agent from doing any act that would waive its principal’s
rights under PACA without an express written waiver by the principal clearly
showing the principal’s intent to waive its rights under PACA.”). As § 46.46(c)(2)
38
makes clear,
Persons acting as agents also have the responsibility to negotiate
contracts which entitle their principals to the protection of the trust
provisions: Provided, That a principal may elect to waive its right to
trust protection. To be effective, the waiver must be in writing and
separate and distinct from any agency contract, must be signed by the
principal prior to the time affected transactions occur, must clearly
state the principal’s intent to waive its right to become a trust
beneficiary on a given transaction, or a series of transactions, and
must include the date the agent’s authority to act on the principal’s
behalf expires.
7 C.F.R. § 46.46(c)(2). Further, under § 46.46(d)(2),
Agents who sell perishable agricultural commodities on behalf of a
principal are required to preserve the principal’s rights as a trust
beneficiary as set forth in § 46.2(z), (aa) and paragraphs (d), (f), and
(g) of this section. Any act or omission which is inconsistent with this
responsibility, including failure to give timely notice of intent to
preserve trust benefits, is unlawful and in violation of Section 2 of the
Act, (7 U.S.C. § 499b).
Id. § 46.46(d)(2).
Pursuant to these regulations, any “implied consent” that Kingdom
Fresh’s attorneys gave by failing to object to the bankruptcy court’s order
authorizing payment of Special Counsel’s fees from PACA trust funds is irrelevant
because the regulations clearly require PACA claimants to give express, written
consent before abdicating PACA trust rights to full payment. In the absence of
written consent from PACA claimants themselves, their agents and/or attorneys
were unable to waive PACA claimants’ “sum certain” trust rights by impliedly
agreeing to pay Special Counsel’s fees out of PACA trust funds.
39
IV.
No Waiver of Objection
Special Counsel alternatively argues that Kingdom Fresh should be
estopped from challenging Special Counsel’s Third and Final Fee Application
because “Kingdom Fresh Group has never made an objection or reference to the
propriety of the underlying fees and costs contained in any of Special Counsel’s
three fee applications.” (Answering Br. at 14.) Essentially, Special Counsel
argues that Kingdom Fresh should not be permitted to file the instant appeal
challenging his Third and Final Fee Application because Kingdom Fresh truly
attacks the substance of the PACA Order authorizing Special Counsel’s fees,
which was filed on January 25, 2012, well before the instant appeal was filed.
Again, at first blush, Special Counsel’s argument appears logical. He
takes issue with Kingdom Fresh’s receipt of the benefits of his work as Special
Counsel and then its perceived “attempt[] to get out of paying for its agreed share
of Special PACA Counsel’s fees.” (Id. at 13.) However, Special Counsel’s waiver
argument still fails for several reasons.
First, and perhaps most importantly, Kingdom Fresh did not join in
the proposed PACA Claim Procedure filed in bankruptcy court on January 19,
2012, which included the appointment of Special Counsel Craig A. Stokes
40
(“Special Counsel”) to adjudicate PACA claims. (Bankr. Dkt. # 31.) Several
PACA claimants—but not Kingdom Fresh—agreed to the motion. 10
Second, while Kingdom Fresh did appear at the expedited hearing set
only five days after the proposed PACA Claim Procedure motion was filed, it only
had two days to prepare for the expedited hearing. (See Bankr. Dkt. # 44 (Notice
of Expedited Hearing sent to PACA Trust Beneficiaries of Delta Produce on
January 22, 2012).) The fact that Special Counsel now argues that it was
incumbent upon Kingdom Fresh to affirmatively raise objections to the PACA
claims procedure at the hearing after only receiving two-days’ notice strains
credulity. 11
Third, Kingdom Fresh did take issue with Special Counsel’s First
Interim Fee Application and timely filed objections and an appeal to Special
Counsel’s first request for fees. (See Bankr. Dkt. ## 294, 340; Case No. 5:12-cv1127, Dkt. # 13.) Kingdom Fresh made such objection less than eight months after
Special Counsel had been appointed by the bankruptcy court. (Compare Bankr.
Dkt. # 56 (PACA Order issued on January 25, 2012), with Bankr. Dkt. # 294
10
The PACA Claimants that did agree to the motion include: Wilson Davis Co.;
Averrit Brokerage Co., Inc.; A&A concepts, LLC; Greenhouse Produce Company,
LLC; Juniper Tomato Grower, Inc.; Mecca Family Farms, Ltd.; London Fruit, Inc.;
Triple H Produce, LLC; and The Pumpkin Patch, LLP. (Bankr. Dkt. # 31 at 9.)
11
In fact, it appears that Kingdom Fresh did not formally appear in the litigation
until February 23, 2012—nearly a month after the PACA Order was filed. (See
Bankr. Dkt. # 113 (Motion to Admission Pro Hac Vice for Kingdom Fresh).)
41
(Kingdom Fresh’s Objections to Special Counsel’s First Interim Application for
Fees filed on September 4, 2012).)
Accordingly, the Court is unpersuaded by Special Counsel’s
arguments that Kingdom Fresh waived any objection to the payment of PACA
trust funds to pay Special Counsel’s fees. Kingdom Fresh challenged Special
Counsel’s fees at an appropriate time.
V.
Conflict of Interest
Kingdom Fresh contends that this Court should not only vacate the
bankruptcy court’s order granting Special Counsel his request for fees, but should
also require Special Counsel to disgorge all of the fees he has been paid to date by
the other PACA beneficiaries that did not object to his fees. (Opening Br. at 18–
24.) It asserts that because Special Counsel created an actual conflict of interest
pursuant to 11 U.S.C. § 328(c), he should be denied all compensation. (Id. at 18.)
Special Counsel counters that his appointment under 11 U.S.C. § 327(e) is an
exception to 11 U.S.C. § 328(c). (Answering Br. at 22.)
Section 328(c) provides:
(c) Except as provided in section 327(c), 327(e), or 1107(b) of this
title, the court may deny allowance of compensation for services and
reimbursement of expenses of a professional person employed under
section 327 or 1103 of this title if, at any time during such
professional person's employment under section 327 or 1103 of this
title, such professional person is not a disinterested person, or
represents or holds an interest adverse to the interest of the estate with
respect to the matter on which such professional person is employed.
42
11 U.S.C. § 328(c). As this section makes clear, appointments under Section
327(e) are excepted. Here, Special Counsel was appointed to serve as Delta
Produce’s § 327(e) counsel.12 (See Bankr. Dkt. ## 118, 176.) Therefore, the
prohibition in § 328(c) does not apply.
Kingdom Fresh next contends that because Special Counsel
represented Debtors (as their § 327(e) counsel) and represented PACA
beneficiaries at a settlement mediation, his “conflict of interest” warrants denying
his attorney’s fees. (Opening Br. at 19–21.) Special Counsel argues that because
the bankruptcy court specifically found that he did not have a conflict of interest,
Kingdom Fresh’s argument is without merit. (Answering Br. at 21.)
“There is a general consensus that existence of an ‘actual’ conflict of
interest between an attorney’s clients requires denial of all of the professional’s
legal fees because of the improper dual representation.” In re Howell, 148 B.R.
269, 270 (Bankr. S.D. Tex. 1992) (citing Woods v. City Nat’l Bank & Trust, 312
12
Section 327(e) provides for appointment of special counsel under certain criteria:
The trustee, with the court’s approval, may employ, for a specified
special purpose, other than to represent the trustee in conducting the
case, an attorney that has represented the debtor, if in the best interest
of the estate, and if such an attorney does not represent or hold any
interest adverse to the debtor or to the debtor’s estate with respect to
the matter on which such attorney is to be employed.
11 U.S.C. § 327(e).
43
U.S. 262, 267 (1941); In re EWC, Inc., 138 B.R. 276, 281–83 (Bankr. W.D. Okla.
1992)); see also In re Land, 116 B.R. 798, 803 (D. Colo. 1990); BH & P, Inc., 103
B.R. 556 (Bankr. N.J. 1989). An attorney who fails to remain free of conflicts, or
one who serves conflicting interests during a case may be denied all compensation.
“A conflict exists when an attorney represents both a creditor and debtor.” In re
Wilde Horse Enters., 136 B.R. 830, 843 (Bankr. C.D. Cal. 1991) (citing In re
Roberts, 46 B.R. 815, 823 (Bankr. Utah 1985)).
Here, however, PACA contemplates a mingling of interests. If in
bankruptcy, the debtor holds the trust assets for the benefit of its creditors: the
PACA beneficiaries. See, e.g., In re Kornblum, 81 F.3d at 284–95 (describing how
a debtor holds equitable title to the PACA trust res for the benefit of a creditor);
see also In re Bartlett, 397 B.R. 610, 623 (Bankr. D. Mass. 2008) (describing how
the debtor had a duty to preserve the PACA trust for the benefit of the PACA
beneficiaries). Naturally, the debtor—though it holds a fiduciary obligation to the
PACA beneficiaries as the PACA trustee—retains at least some adverse interests
by virtue of the fact that it is the debtor and owes money (that it does not have) to
various creditors. However, any perceived “conflict” was purposeful—Congress
intended to provide the trust remedy as a means to prevent buyers from granting
non-PACA creditors a security interest in their inventory. Pac. Intern. Mktg., 462
F.3d at 282. By making the buyer/debtor the trustee of the PACA trust (and thus
44
necessitating the fiduciary obligation), Congress fulfilled its intent to “protect
small farmers and growers who were vulnerable to the practices of financially
irresponsible buyers.” Id.
Kingdom Fresh essentially takes issue with how Special Counsel was
charged with effectively representing Debtor Delta Produce’s interests at times and
PACA beneficiaries at other times. (Opening Br. at 20.) It emphasizes that it is
absurd to have PACA beneficiaries pay for Special Counsel’s efforts in
adjudicating the PACA claims because Special Counsel filed objections to the
PACA beneficiaries’ claims, which clearly constitute adverse efforts. (Id.)
However, the Court need not substantively address Kingdom Fresh’s
conflict argument because as the Court has outlined extensively above, PACA does
not authorize the payment of Special Counsel’s—or a trustee’s—fees out of PACA
trust funds prior to the satisfaction of the PACA beneficiaries’ claims. Therefore,
Kingdom Fresh’s concern is allayed by PACA’s mandate that all PACA
beneficiaries are entitled to “full payment” before payment can be made to any
other creditor, and here it is undisputed that the PACA beneficiaries would not
have received full payment if Special Counsel’s fees were paid.
45
CONCLUSION
For the aforementioned reasons, the Court VACATES the bankruptcy
court’s order granting Special Counsel’s Third and Final Fee Application.
IT IS SO ORDERED.
DATED: San Antonio, Texas, September 22, 2014.
_____________________________________
David Alan Ezra
Senior United States Distict Judge
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