United States District Court, District of New Jersey
May 14, 1991
DRISCOLL POTATOES, INC., PLAINTIFF,
N.A. PRODUCE CO., INC., AND NESTOR BALOCOS, A/K/A, NESTOR BALOCO, DEFENDANTS.
The opinion of the court was delivered by: Lechner, District Judge.
Currently before the court is the application of plaintiff
Driscoll Potatoes, Inc. ("Driscoll") for a preliminary
injunction pursuant to Fed.R.Civ.P. 65.*fn1 Driscoll seeks a
preliminary injunction directing defendants N.A. Produce, Inc.
("N.A. Produce") and Nestor Balocos, also known as Nestor
Baloco, ("Balocos") (collectively, "Defendants"), to comply
with the statutory trust provision of the Perishable
Agricultural Commodities Act ("PACA"), 7 U.S.C. § 499a, et seq.
Specifically, Driscoll seeks an order directing Defendants to
place in an interest-bearing account at a particular nationally
chartered banking institution the amount of $11,068.50. For the
reasons set forth below, Driscoll's application is denied.
Because no opposition has been received, the facts as alleged
by Driscoll are not disputed. Driscoll, located in Idaho, is a
dealer, broker and/or commission merchant of fresh potatoes.
Davis Affidavit at ¶ 2. N.A. Produce, located in New Jersey, is
a dealer, broker and/or commission merchant licensed under
PACA. Id. at ¶ 3. Balocos is an officer, director and
shareholder of N.A. Produce. Id. at ¶ 4.
On 18 January 1991, Driscoll sold N.A. Produce a wholesale
lot of potatoes, a perishable agricultural commodity, for the
price of $11,068.50. Id. at ¶ 5. This transaction, involving
interstate commerce, is apparently governed by certain
provisions of PACA, namely 7 U.S.C. § 499e(c).*fn2
Under PACA, a dealer, broker or commission merchant of
perishable agricultural commodities must hold all proceeds from
the sale of such commodities in trust for the unpaid suppliers
of the commodities. 7 U.S.C. § 499e(c)(2). The unpaid supplier
will be entitled to the benefit of the trust only if it
provides written notice of its intent to preserve the benefits
of the trust to the dealer, broker or commission merchant who
sold the commodities. Id. at § 499e(c)(3). Furthermore, the
notice of intent must be filed with the Secretary of
Agriculture. Id. Assuming the notice of intent has been
properly given and filed, PACA provides "[t]he several district
courts of the United States are vested with jurisdiction
specifically to entertain (i) actions by trust beneficiaries to
enforce payment from the trust, and (ii) actions by the
Secretary [of Agriculture] to prevent and restrain dissipation
of the trust." Id. at § 499e(c)(4).
Driscoll has not been paid for the potatoes sold to N.A.
Produce. Davis Affidavit at ¶ 9. Therefore, under PACA,
Defendants are required to hold any proceeds from the sale of
potatoes supplied by Driscoll in trust for Driscoll. On 27
February 1991, and pursuant to PACA, Driscoll filed a notice of
intent to preserve its rights in the trust with the Secretary
of Agriculture. Davis Affidavit at ¶ 7. On the same day,
Driscoll sent a copy of its notice of intent to Defendants. Id.
On 11 April 1991, Driscoll filed a complaint against
Defendants. By its complaint, Driscoll seeks to enforce the
trust provisions of PACA and to recover the $11,068.50 owed to
Driscoll for the potatoes sold to N.A. Produce. The summons and
complaint was served on 15 April 1991. No answer has yet been
On 19 April 1991, Driscoll filed a motion for a preliminary
injunction directing Defendants to place the price of the
potatoes in trust, pursuant to PACA. Driscoll believes
Defendants have been dissipating the assets of the trust.
Id. at ¶ 10. Driscoll also contends Defendants have been using
the proceeds from the sale of the potatoes to pay other
creditors and suppliers of N.A. Produce. Id. at ¶¶ 8 & 10. As
noted above, no opposition to this motion has been received.
A. Standard of Review
To prevail on its application for a preliminary injunction,
the moving party must show:
(1) the probability of irreparable injury to the
moving party in the absence of relief; (2) the
possibility of harm to the nonmoving party if
relief were granted; (3) the likelihood of success
on the merits; and (4) the public interest [in
granting preliminary relief].
Alessi v. Pennsylvania, Dept. of Pub. Welfare, 893 F.2d 1444
1447 (3d Cir. 1990); see Instant Air Freight Co. v. C.F. Air
Freight, Inc., 882 F.2d 797
, 800 (3d Cir. 1989); Fechter v. HMW
Indus., Inc., 879 F.2d 1111
, 1116 (3d Cir. 1989); CPC Int'l,
Inc. v. Caribe Food Distrib., 731 F. Supp. 660, 664 (D.N.J.
1990); Bascom Food Prod. Corp. v. Reese Finer Foods, Inc.,
715 F. Supp. 616, 624 (D.N.J. 1989). Significantly, a "grant of
injunctive relief is an extraordinary remedy which should be
granted only in limited circumstances." Frank's GMC Truck
Center, Inc. v. General Motors Corp., 847 F.2d 100
, 102 (3d
B. Driscoll's Application
As Driscoll points out, other courts have granted preliminary
injunctions directing compliance with the trust provisions of
Brief at 5-6. A salient factor in several of these
cases was that the trust assets were being dissipated by the
defendants. See Korean Produce, No. 87-6579; Edward Boker, No.
86-3903; Chiquita Brands, No. 89-1951.
Based upon the submissions, a preliminary injunction is not
warranted in this case. The Third Circuit has repeatedly stated
an injunction will not be granted when there is an adequate
remedy at law. Instant Air Freight, 882 F.2d at 801; Frank's
GMC, 847 F.2d at 102. In other words, there will be no
irreparable injury if money damages will be sufficient to
provide redress. Instant Air Freight, 882 F.2d at 801; Frank's
GMC, 847 F.2d at 102.
There is an adequate remedy at law in this case. PACA
explicitly provides a trust beneficiary can commence suit in
federal court to enforce payment of amounts owing from a trust.
7 U.S.C. § 499e(c)(4). Therefore, Driscoll can commence, and
indeed has commenced, a suit to recover the price of the
potatoes supplied to N.A. Produce. The remedy at law is
adequate because Driscoll may recover all amounts owed by
Defendants in a suit for money damages.
C. Dissipation and Segregation of PACA Trust Assets
Driscoll asserts that because Defendants are in the process
of dissipating the assets of the trust, any remedy at law would
be inadequate. Davis Affidavit at ¶¶ 8 & 10. Consequently,
Driscoll seeks a preliminary injunction directing Defendants to
segregate funds equivalent to the amount of its debt to
Driscoll and place them in an interest bearing account at a
particular depository institution. See Proposed Order. It does
not appear, however, that dissipation justifies the sort of
injunctive relief Driscoll seeks under PACA and section 499e.
Other courts have struggled with the issue of whether PACA
permits a court to order the segregation of PACA trust assets
and, if so, what circumstances justify segregation. Some courts
have held PACA does not permit the segregation of trust assets.
See, e.g., JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75,
78 (2d Cir. 1990); DeBruyn Produce Co. v. Victor Foods, Inc.,
674 F. Supp. 1405, 1407-09 (E.D.Mo. 1987); C & E Enterprises,
Inc. v. Milton Poulos, Inc., 107 B.R. 715, 718 (9th Cir. 1989);
see also Fresh Western Marketing v. M & L Food Center, Inc.,
707 F. Supp. 515, 516 (S.D.Fla. 1989) (noting PACA does not
appear to allow segregation and movant failed to show
dissipation).*fn4 In contrast, other courts have permitted
segregation upon a showing of dissipation of trust assets or
the financial instability
of the debtor. See, e.g., Frio Ice, S.A. v. Sunfruit, Inc.,
918 F.2d 154, 159 (11th Cir. 1990) (dissipation shown); DeBruyn
Produce Co. v. Olympia Produce Co., 734 F. Supp. 483, 486
(N.D.Ga. 1989) (debtor financially troubled); J.R. Brooks &
Son, Inc. v. Norman's Country Market, Inc., 98 B.R. 47, 50
(N.D.Fla. 1989) (dissipation shown); see also Dole Fresh Fruit
Co. v. United Banana Co., 821 F.2d 106, 108 (2d Cir. 1987)
(noting district court ordered segregation to prevent
dissipation). An examination of the relevant cases and
legislative history indicates segregation is appropriate only
when dissipation is shown and only when the Secretary of
Agriculture seeks an injunction of the dissipation.
The legislative history of PACA indicates Congress did not
contemplate the segregation of trust assets upon the motion of
an unpaid supplier. PACA was originally enacted to "encourage
fair trading practices in the marketing of perishable
commodities by . . . providing for collecting damages from any
buyer or seller who fails to live up to his contractual
obligations." H.R. Rep. No. 98-543, 98th Cong., 2d Sess. 3,
reprinted in 1984 U.S.Code Cong. & Admin.News 405, 406.
Congress noted, however, that "[u]nder present law, sellers of
fresh fruits and vegetables are unsecured creditors and receive
little protection in any suit for recovery of damages where a
buyer has failed to make payment as required by the contract."
H.R.Rep. at 3; 1984 U.S.Code Cong. & Admin.News at 407.
Consequently, Congress amended PACA. In amending PACA, Congress
This legislation would provide a remedy by
impressing a trust in favor of the unpaid seller
or supplier on the inventories of commodities and
products derived from and on the proceeds of sale
of such commodities and products in the hands of
the commission merchant, dealer or broker. . . .
H.R.Rep. at 4; 1984 U.S.Code Cong. & Admin.News at 407.
Significantly, Congress stated the PACA trust would be "a
nonsegregated `floating trust' made up of all of a firm's
commodity related liquid assets, under which there may be a
commingling of trust assets. H.R.Rep. at 4; 1984 U.S.Code Cong.
& Admin.News at 407. Under PACA, there is "no necessity to
specifically identify all of the trust assets through each step
of the asset accrual and disposal process." H.R. Rep. at 5;
1984 U.S.Code Cong. & Admin. News at 409. The Department of
Agriculture, in recommending the adoption of the PACA
amendments, noted that "in the event of business failures,
trust funds would be applied to produce accounts and not
distributed to other creditors."*fn5 H.R. Rep. at 14; 1984
U.S.Code Cong. & Admin. News at 417.
The legislative history of PACA suggests segregation is an
inappropriate remedy. C & E Enterprises, 107 B.R. at 717-18.
Under the statutory scheme described above, the trust is, in a
sense, a legal fiction. Congress specifically provided the
trust is nonsegregated and floating. H.R.Rep. at 4; 1984
U.S.Code Cong. & Admin.News at 407; see JSG Trading, 917 F.2d
at 78. In addition, Congress allowed for the commingling of
trust assets. In other words, the trust is nothing more than
that portion of the debtor's assets which may be traced to the
disposition of perishable agricultural commodities. Nothing in
the legislative history indicates Congress intended unpaid
suppliers to have the ability to compel debtors to segregate
trust assets. See Victor Foods, 674 F. Supp. at 1407.
Nonetheless, in Frio Ice, the Eleventh Circuit held PACA
permitted the segregation of trust assets. 918 F.2d at 159. The
Circuit noted the legislative history indicated PACA was
designed to protect unpaid suppliers of commodities from the
dissipation of trust assets. Id. ("[P]reventing dissipation of
the trust is a key purpose of PACA."). Consequently, the
Circuit held injunctive relief in the form of segregation of
trust assets was proper. Id.
The Eleventh Circuit, however, ignored the specific provision
in PACA relating to dissipation of trust assets. When Congress
specifically addressed the dissipation of trust assets, it did
not provide that suppliers of commodities have a right to seek
segregation of trust assets upon a showing of dissipation.
Rather, Congress expressly vested the Secretary of Agriculture
with the obligation to prevent dissipation of trust assets:
If an investigation reveals the trust is being
dissipated, each unpaid supplier-seller should be
informed so that it will be able to protect it
statutory trust rights. Except where violations
are repeated or flagrant, the firm should be given
a written warning and an opportunity to bring
itself into compliance. . . . If a firm persists
in trust dissipation, the Secretary [of
Agriculture] can initiate an injunctive proceeding
in the U.S. district court. . . .
H.R.Rep. at 8; 1984 U.S.Code Cong. & Admin.News at 411; see JSG
Trading, 917 F.2d at 78 (noting Secretary of Agriculture may
seek to enjoin dissipation but not segregation); Victor Foods,
674 F. Supp. at 1409 (noting unpaid supplier may be entitled to
injunction against dissipation, but injunction imposing
segregation). In light of the legislative history, it appears
the Eleventh Circuit misinterpreted the intent of Congress to
vest the Secretary of Agriculture with power to prevent
dissipation for the intent to vest unpaid suppliers with the
right to seek segregation.*fn6
Dissipation of trust assets is a legitimate concern under
PACA. PACA, however, is accurately construed to restrict the
unpaid supplier's ability to segregate trust assets. This
construction is supported by both the legislative history and
the language of section 499e, which provide the Secretary of
Agriculture has the authority to seek an injunction of
dissipation. 7 U.S.C. § 499e(c)(4)(ii); H.R.Rep. at 8; 1984
U.S. Code Cong. & Admin.News at 411. Moreover, PACA
specifically provides unpaid sellers with their own remedy:
they may bring an action to compel payment of trust proceeds.
7 U.S.C. § 499e(c)(4)(i); see Victor Foods, 674 F. Supp. at 1409.
Under these circumstances, it does not appear PACA allows for
the relief Driscoll seeks in this motion.
1. Proof Required for Segregation
All of the cases allowing segregation upon the motion of the
unpaid seller involved clear showings of either dissipation of
trusts or general financial instability of the debtors.
Frio Ice, 918 F.2d at 159 (dissipation); Olympia Produce, 734
F. Supp. at 486 (debtor financially troubled); J.R. Brooks, 98
B.R. at 50 (dissipation); Dole Fresh Fruit, 821 F.2d at 108
(dissipation). It may be argued, however, that mere dissipation
is insufficient to justify injunctive relief in the form of
In JSG Trading, the Second Circuit held an injunction could
not issue under section 499e when there was no showing that the
debtor's use of trust assets would so deplete the trust that
the unpaid supplier would have an inadequate remedy at law. Id.
at 80. The Circuit therefore reversed the grant of a
preliminary injunction directing the debtor to segregate a
portion of its assets equal to its debt to the unpaid supplier
from its other assets and place the segregated assets in a
separate PACA trust account. JSG Trading, 917 F.2d at 79-80.
The unpaid supplier in JSG Trading had made an allegation
similar to the one Driscoll makes: the debtor was dissipating
trust assets by using them to pay other creditors. Id. at 78.
The Circuit rejected the argument that dissipation would
require segregation of trust assets from other assets of the
debtor on the ground the legislative history of PACA indicated
it was intended, in part, to protect the suppliers of
perishable commodities from the bankruptcies of their buyers.
JSG Trading, 917 F.2d at 77. Accord Victor Foods, 674 F. Supp.
at 1409. Because the debtor
was financially healthy, the Circuit in JSG Trading declined to
uphold the injunction. 917 F.2d at 80. The ruling in JSG
Trading may be interpreted to mean PACA allows a debtor to
dissipate trust assets or use them for purposes other than
paying the unpaid supplier so long as the debtor retains
sufficient other assets to satisfy its obligations to the
creditor.*fn7 See id.
In any event, even if it is assumed segregation upon an
unpaid supplier's motion is appropriate, Driscoll has not shown
it is entitled to this relief. Driscoll has not substantiated
its conclusory allegation that Defendants are dissipating trust
assets. Moreover, there is no indication Defendants are either
in bankruptcy or have insufficient assets to satisfy its
obligation to Driscoll. Under these circumstances, Driscoll has
not shown the irreparable injury required for an injunction to
D. Separate Bank Accounts Under PACA
There is an additional reason to deny Driscoll the relief
sought. It has been held that PACA does not authorize a court
to direct a debtor to deposit any amounts held in trust under
section 499e into a separate bank account. Victor Foods, 674
F. Supp. at 1409. But see Six L's, No. 88-1998. In DeBruyn, the
supplier of an agricultural commodity sought preliminary relief
in the form of an order directing the debtor to establish a
separate bank account representing the amounts held in trust.
The court first noted there was no need for the court to order
segregation of the trust assets from other assets of the debtor
because the statutory scheme of PACA essentially contemplates a
continuously existing trust. Id. at 1407. In other words, the
court interpreted the trust requirement to be nothing more than
a bookkeeping procedure. Id. With this in mind, the court then
examined the legislative history of PACA to determine if
Congress intended PACA to require the maintenance of separate
bank accounts for trust assets.
The court held that nothing in PACA's legislative history
created a requirement for separate accounts. Id. at 1408-09.
Indeed, the court analogized section 499e to Article 9 of the
Uniform Commercial Code, governing security interests. Id. In
essence, the court reasoned, PACA did not require separate bank
accounts because the trust provision did nothing more than
create what is tantamount to a security interest in certain
assets of the debtor. Id. at 1409.
Driscoll has moved for an order directing Defendants to
establish a separate bank account for trust assets. Under the
reasoning in DeBruyn, however, PACA neither authorizes nor
requires the creation of such an account. Consequently, it is
questionable whether Driscoll would be entitled to this relief
even if irreparable harm were shown. Accordingly, Driscoll's
application is denied.
For the reasons set forth above, Driscoll's application for
a preliminary injunction is denied.