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Bear Mountain Orchards, Inc. v. Mich-Kim

October 13, 2010

BEAR MOUNTAIN ORCHARDS, INC.; DEBRUYN PRODUCE CO.; CALIFORNIA CITRUS SELECTORS INC., D/B/A VOITA WEST; MILLS FAMILY FARMS, INC.; RIGBY PRODUCE, INC.; JERRY SHULMAN PRODUCE SHIPPER, INC.; GF MARKETING, INC.; TAYLOR FARMS MARYLAND, INC.; INTRADE INDUSTRIES.; SUN VALLEY POTATO GROWER; PHILADELPHIA PRODUCE CREDIT BUREAU; FABULOUS FRESH PRODUCE CORP.; HARVEST FOODS CO., LTD.; MADLYN GEORGE PRODUCE; TOM LANGE CO.; PETER RABBIT FARMS; HYT INTERNATIONAL, INC.; MEREX FOOD CORP. TEAMSTERS HEALTH AND WELFARE FUND OF PHILADELPHIA AND VICINITY; TEAMSTERS PENSION TRUST FUND OF PHILADELPHIA AND VICINITY; TEAMSTERS LOCAL 939 SUPPLEMENTAL INCOME FUND; TEAMSTERS LOCAL 929, INTERVENOR PLAINTIFFS IN D.C.
v.
MICH-KIM, INC., T/A ELLIS FLEISHER PRODUCE CO. T/A DICHTER BROS. & GLASS, INC; ELLIS FLEISHER; JACQUELINE FLEISHER; JEROME N. KLINE DEBRUYN PRODUCE CO.; CALIFORNIA CITRUS SELECTORS, INC. D/B/A VOITA WEST; MILLS FAMILY FARMS, INC.; SUN VALLEY POTATO GROWER; PHILADELPHIA PRODUCE CREDIT BUREAU; FABULOUS FRESH PRODUCE CORP.; HARVEST FOODS CO., LTD.; MADLYN GEORGE PRODUCE; TOM LANGE CO.; PETER RABBIT FARMS; HYT INTERNATIONAL, INC.; MEREX FOOD CORP.; JERRY SHULMAN PRODUCE SHIPPER, INC., APPELLANTS



Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil Action No. 2-07-cv-00853) District Judge: Honorable Michael M. Baylson.

The opinion of the court was delivered by: Ambro, Circuit Judge

PRECEDENTIAL

Argued March 11, 2010

Before: AMBRO, SMITH and ALDISERT, Circuit Judges.

We consider the scope of individual liability under the trust provision of the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. § 499e(c)(2). Appellants, producers of perishable agricultural commodities, argue that, as an officer of Ellis Fleisher Produce Co. ("Fleisher Produce"), Jacqueline Fleisher is individually liable to them under PACA for money owed by the corporation.*fn1 The District Court disagreed, holding that Mrs. Fleisher was not secondarily liable to trust creditors under PACA because she was not actively involved in running the corporation. For the reasons that follow, we affirm the judgment of no liability.

I. PACA

In 1930, PACA was enacted "to deter unfair business practices and promote financial responsibility in the perishable agricultural goods market." Weis-Buy Servs., Inc. v. Paglia, 411 F.3d 415, 419 (3d Cir. 2005). It provided that "no person shall at any time carry on the business of a commission merchant, dealer, or broker without a license valid and effective at such time."*fn2 7 U.S.C. § 499c(a). In 1984, PACA was amended "to allow for a non-segregated floating trust for the protection of producers and growers." Id. at 420.*fn3 The trust provision provided as follows:

Perishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents.

7 U.S.C. § 499e(c)(2). This provision seeks to protect "sellers of fresh fruits and vegetables" who were "'unsecured creditors and receive[d] little protection in any suit for recovery of damages where a buyer ha[d] failed to make payment as required by the contract.'" Weis-Buy, 411 F.3d at 420 (quoting H.R. Rep. No. 98-543 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406--07). The 1984 amendment "'provide[d] a remedy by impressing a trust in favor of the unpaid seller . . . on the inventories of commodities and products derived therefrom and on the proceeds of sale of such commodities and products in the hands of the commission merchant, dealer[,] or broker.'" Id. (quoting H.R. Rep. No. 98-543). The produce purchasers are "require[d] . . . to hold sufficient PACA trust assets in trust to pay all suppliers." Consumers Produce Co. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1379 (3d Cir. 1994). In order to preserve trust benefits, "[a]n unpaid produce supplier or seller must give written notice of its intent to preserve . . . to the produce dealer, broker, or commission merchant." Id. at 1378 (citing 7 U.S.C. § 499e(c)(3)).

"[T]he trust provision . . . provides unpaid suppliers with priority over secured lenders with regard to PACA trust assets held in trust by produce purchasers." Id. at 1379 (emphasis in original).Federal district courts 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." 7 U.S.C. § 499e(c)(5).

The theme of the PACA trust devolves to this: to benefit producers of perishable agricultural items sold nationally to consumers, PACA places duties on those entrusted with such items for sale-the licensed sellers, or "middlemen" between producers and consumers-to prefer the producers over others. In the event of a breach of those duties, "liability attaches first to the licensed seller of perishable agricultural commodities. If the seller's assets are insufficient to satisfy the liability, others may be found secondarily liable . . . ." Shepard v. K.B. Fruit & Vegetable, Inc., 868 F. Supp. 703, 706 (E.D. Pa. 1994); see also Golman-Hayden Co. v. Fresh Source Produce Inc., 217 F.3d 348, 351 (5th Cir. 2000) (same); Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 283 (9th Cir. 1997) (same).

"Individual liability . . . is not derived from the statutory language, but from common law breach of trust principles." Weis-Buy, 411 F.3d at 421; see also Nickey Gregory Co., LLC v. Agricap, LLC, 597 F.3d 591, 595 (4th Cir. 2010) ("General trust principles govern PACA trusts unless the principle conflicts with PACA."); Sunkist, 104 F.3d at 282 ("Ordinary principles of trust law apply to trusts created under PACA . . . ."). "'Under the common law, the trustee of a trust is under a duty to the beneficiary in administering the trust to exercise such care and skill as a man of ordinary prudence would exercise in dealing with his own property.'" Weis-Buy, 411 F.3d at 421 (quoting Shepard, 868 F. Supp. at 706). Following these basic trust principles, "'[a]n individual who is in the position to control the [PACA] trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for that tortious act.'" Id. (quoting Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F. Supp. 346, 348 (S.D.N.Y. 1993) (second alteration in original)); see also Austin Wakeman Scott, William Franklin Fratcher & Mark L. Ascher, Scott and Ascher on Trusts § 24.2.1 (2007) ("[I]f the trustee has misappropriated trust funds due to a beneficiary, the trustee is liable in an action at law.").

II. FACTS & PROCEDURAL HISTORY

Fleisher Produce was a wholesale produce dealer in Philadelphia. From 1982 through February 2007, the corporation was operated (at least on paper) by a husband and wife team (Ellis and Jacqueline Fleisher). Fleisher Produce then went out of business. When it did so, it owed ...


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