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Classic Harvest LLC v. Freshworks LLC

United States District Court, N.D. Georgia, Atlanta Division

May 31, 2017

CLASSIC HARVEST LLC, Plaintiff,
v.
FRESHWORKS LLC, et al., Defendants.

          OPINION AND ORDER

          WILLIAM S. DUFFEY, JR. UNITED STATES DISTRICT JUDGE

         This matter is before the Court to evaluate claims filed in this action under the Perishable Agricultural Commodities Act (“PACA”), 7 U.S.C. §§ 499a, et seq., by creditors of Crisp Holdings, LLC d/b/a Fresh Roots (“Crisp”), who claim that they delivered, but were not paid for, produce they sold to Crisp.

         The following sixteen (16) creditors have filed Proofs of Claim in this action: Market Express, Inc. (“Market Express”) [158]; Williams Farms [157]; Classic Harvest, LLC (“Classic Harvest”) [168]; Sunkist [169], [170]; Vaughn Foods [181]; Taylor Farms California, Inc. (“Taylor Farms”) [175]; Bengard Ranch [177]; Pacific Sales Company (“Pacific Sales”) [173]; D'Arrigo Brothers Company of California (“D'Arrigo”) [179]; Tanimura & Antle Fresh Foods (“Tanimura”) [174]; Mann Packing [176]; Church Brothers [178]; West Pak Avocado (“West Pak”) [176]; Eureka Specialties (“Eureka”) [172]; Calvo Growers [80]; and Railex [182], [184].[1] Defendant AgriFact Capital, LLC (“AgriFact”) filed Objections [226], [227], [234]-[237], [244], [245], [256]-[258], [260], [261], [264]-[266], and Motions to Sustain its Objections [346]-[351], [353], [357], to each Proof of Claim.[2]

         I. BACKGROUND

         When perishable agricultural commodities (“Produce”) are sold, PACA imposes a nonsegregated, “floating” trust, in favor of Produce sellers, on the Produce sold, products derived from the Produce, “and any receivables or proceeds from the sale of such” Produce or product derived from it. 7 U.S.C. § 499e(c)(2). PACA requires the buyer to hold trust assets, including funds a buyer receives from the sale of Produce, “in trust for the benefit of all unpaid suppliers or sellers of such [Produce], ” “until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers . . . .” Id. A trust beneficiary may bring an action in federal court “to enforce payment from the trust.” 7 U.S.C. § 499e(c)(5).

         Crisp bought Produce on credit from wholesale Produce suppliers, including Plaintiff Classic Harvest. Under PACA, Crisp was required to hold in trust (the “PACA Trust”) the Produce, products derived from the Produce, and the proceeds from the sale of the Produce (the “Trust Assets”). These Trust Assets were required to be held for the benefit of Crisp's unpaid Produce suppliers, including Classic Harvest (all together, the “PACA creditors”).

         From June 15, 2015, to August 14, 2015, Classic Harvest sold Produce to Crisp, for which Classic Harvest has not been paid. To collect the amounts owed to it, on August 25, 2015, Classic Harvest filed its Complaint [1] asserting claims against Crisp and its principals for breach of their duties under PACA and to enforce the PACA Trust. Plaintiff also asserted a claim against AgriFact for conversion and unlawful retention of PACA Trust Assets.[3]

         On September 4, 2015, the Court entered the “Consent Injunction and Agreed Order Establishing PACA Claims Procedure” [24] (the “September 4th Order”). The September 4th Order provides for the Court to exercise exclusive in rem jurisdiction over Crisp's PACA Trust Assets, and further provides that any creditor who seeks to assert a claim to the Trust Assets must assert its claim in this action.

         On January 14, 2016, the Court confirmed the PACA claims procedure proposed in the September 4th Order, as modified by the Court's October 23, 2015, Scheduling Order. ([115]). The Court's September 4th Order sets out the procedure for (i) submitting claims in this litigation and (ii) objecting to the claims submitted:

27. Each creditor of [Crisp] holding a claim and alleging rights under the PACA trust, shall file with the Clerk of Court . . . on or before [March 1, 2016], a PACA Proof of Claim . . . together with any and all documents supporting its claim.
. . .
31. Any objections to any PACA claims must be filed with the Clerk of Court. Any and all such objections must be filed and served on or before [April 11, 2016]. The Objection must set forth in detail all legal and factual grounds in support of . . . the objection.
32. On or before [June 13, 2016], any PACA claimant whose claim is subject to an objection may file with the Court a detailed response to any objection received. The response may include rebuttal evidence that the responding party wishes the Court to consider, if any. A claim, or any portion subject to an objection, will be disallowed if a valid objection is timely filed and the claimant fails to file a timely response.
33. The claimant and the objecting party shall thereafter exercise best efforts to resolve any Objections. In the event the claimant and the objecting party are unable to resolve such dispute or the objection is not withdrawn, the parties shall submit such dispute to the Court for summary resolution, on or before [September 8, 2016].

         (September 4th Order ¶¶ 27, 31-32; October 23rd Scheduling Order [42] at 1-2; August 8, 2016, Order [329] granting motion for extension of time).

         As of the date of this Order, the total principal amount of alleged PACA claims asserted in this case is $1, 819, 639.88. (See PACA Trust Chart [321]; Withdrawal of Claim by Eclipse Berry Farm [333]; Stipulation of Dismissal by Beaumont Juice, Inc. d/b/a Perricone Juices [359]).

         Additional facts related to the parties' claims and objections are set out below.

         II. LEGAL STANDARD

         The parties requested, and the Court permitted, limited discovery on the PACA creditors' Proofs of Claim. The Court thus applies the summary judgment standard to evaluate AgriFact's objections and whether each PACA creditor has a valid PACA claim and may recover the amount of its claim from the PACA Trust Assets. (See September 4th Order at ¶ 33).

         Summary judgment is appropriate where the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56. The party seeking summary judgment bears the burden of demonstrating the absence of a genuine dispute as to any material fact. Herzog v. Castle Rock Entm't, 193 F.3d 1241, 1246 (11th Cir. 1999). Once the moving party has met this burden, the nonmoving party must demonstrate that summary judgment is inappropriate by designating specific facts showing a genuine issue for trial. Graham v. State Farm Mut. Ins. Co., 193 F.3d 1274, 1282 (11th Cir. 1999). The nonmoving party “need not present evidence in a form necessary for admission at trial; however, he may not merely rest on his pleadings.” Id.

         “At the summary judgment stage, facts must be viewed in the light most favorable to the nonmoving party only if there is a ‘genuine' dispute as to those facts.” Scott v. Harris, 550 U.S. 372, 380 (2007). Where the record tells two different stories, one blatantly contradicted by the evidence, the Court is not required to adopt that version of the facts when ruling on summary judgment. Id. “[C]redibility determinations, the weighing of evidence, and the drawing of inferences from the facts are the function of the jury . . . .” Graham, 193 F.3d at 1282. “If the record presents factual issues, the court must not decide them; it must deny the motion and proceed to trial.” Herzog, 193 F.3d at 1246. The party opposing summary judgment “‘must do more than simply show that there is some metaphysical doubt as to the material facts . . . . Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial.'” Scott, 550 U.S. at 380 (quoting Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986)). A party is entitled to summary judgment if “the facts and inferences point overwhelmingly in favor of the moving party, such that reasonable people could not arrive at a contrary verdict.” Miller v. Kenworth of Dothan, Inc., 277 F.3d 1269, 1275 (11th Cir. 2002) (quotations omitted).

         III. AGRIFACT'S OBJECTIONS

         A. Failure to Comply with the September 4th Order

         1. Calavo Growers

         On November 24, 2015, Calavo Growers (“Calavo”) filed its Declaration in Support of the PACA Trust [80]. Calavo asserts that the current total amount past due and unpaid from Crisp is $373.50. (Id.). Calavo attaches an invoice, dated August 13, 2015, for “UHP F/S CHUNKY PULP DEL PASADO, ” in the amount of $373.50. (Id. at 7).[4]

         On April 11, 2016, AgriFact objected to Calavo's claim, including because “depending on the processing activities involved, this produce may not [be] subject to the PACA.” (Obj. [227] at 8) (citing 7 U.S.C. § 499a(b)(4)(A) and 7 C.F.R. § 46.2(u)).[5] Calavo did not respond to AgriFact's objection.

         On September 9, 2016, AgriFact moved to sustain its objection to Calavo's claim [357]. Calavo did not respond to AgriFact's motion, and the motion is thus deemed unopposed. See LR 7.1B, NDGa.

         Calavo has not shown on the record here that the product sold-“ UHP F/S CHUNKY PULP DEL PASADO”-is a “perishable agricultural commodity” the sale of which qualifies for PACA trust protection. See 7 U.S.C. § 499a(b)(4)(A) (defining “perishable agricultural commodity” as “fresh fruits and fresh vegetables of every kind and character”); 7 C.F.R. § 46.2(u) (excluding from “fresh fruits and fresh vegetables” “those perishable fruits and vegetables which have been manufactured into articles of food of a different kind of character”); Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063 (2d Cir. 1995) (PACA covers fresh fruits and fresh vegetables “that are in their natural form or are subject to a change in form which does not change the essential nature of the item, such as slicing, or a change which is meant only to temporarily preserve the fruit or vegetable, such as freezing or adding a preservative chemical;” frozen onion rings, breaded cauliflower, zucchini sticks, pickles, coleslaw, potato salad and other salads that contained less than 90% fresh ingredients did not qualify as “perishable agricultural commodities” under PACA; potatoes that were steam peeled, sliced and blanched to prevent discoloration qualified for PACA protection, but lost trust protection when they were sprayed with oil to prepare them for certain types of cooking, thus changing their character). Calavo failed to respond to the objection or submit any facts showing that the product that is the subject of its claim qualifies for PACA Trust protection and AgriFact's objection is sustained. (See Sept. 4th Order at ¶ 32) (“A claim, or any portion subject to an objection, will be disallowed if a valid objection is timely filed and the claimant fails to file a timely response.”). Calavo's claim is denied.

         2. Railex

         On March 1, 2016, [6] Railex filed its Proof of Claim [182], using Official Bankruptcy Form 410. Railex states that the amount of its claim is $16, 000, the basis for which is “services performed.” (Id.). On March 2, 2016, Railex supplemented its Proof of Claim with a copy of the Stipulated Judgment that it asserts is the basis for its claim. ([184]). The Stipulated Judgment was entered on November 25, 2015, by the Superior Court of California, in Railex, LLC v. Fresh Roots, LLC, No. M130351. (Id.).[7] Railex does not provide any other information regarding that action, or the “services performed.”

         On April 11, 2016, AgriFact filed its Objection [236] to Railex's claim. AgriFact argues, among others, that “[u]pon information and belief, [Railex] is in the business of providing transportation services. However, such services do not qualify for PACA trust protection.” (Obj. [236] at 2) (citing “R” Best Produce, Inc. v. Shulman-Rabin Mktg. Corp., 467 F.3d 238, 243 (2d Cir. 2005) & 7 U.S.C. § 499e(c)(2)). Railex did not respond to AgriFact's objection.

         On September 9, 2016, AgriFact moved to sustain its objection to Railex's claim [357]. Railex did not respond to AgriFact's motion, and the motion is deemed unopposed. See LR 7.1B, NDGa.

         Railex does not assert, and there is no evidence to support, that Railex sold Produce to Crisp.[8] Accordingly, Railex does not have a right to recover under PACA in this action. See, e.g., Pacific Intern. Mktg. v. A & B Produce, 462 F.3d 279 (3d Cir. 2006) (denying transportation company's claim for costs incurred in arranging shipment of Produce to buyer; transportation company did not have a right to recover its freight charges under PACA, including because it was not a “seller, supplier or agent” who qualified for trust protection, and transaction with Produce buyer for transportation of Produce was not made “in connection with” a covered Produce transaction). Under Paragraph 32 of the Court's September 4th Order, and in the absence of any facts to show that Railex's claim is a qualified PACA claim, AgriFact's objection is sustained. (See Sept. 4th Order at ¶ 32) (“A claim, or any portion subject to an objection, will be disallowed if a valid objection is timely filed and the claimant fails to file a timely response.”). Railex's claim is denied.

         B. Extension of Payment Terms

         PACA makes it unlawful for any Produce buyer “to fail or refuse truly and correctly to account and make full payment promptly in respect of any transaction in [Produce] to the person with whom such transaction is had . . . .” 7 U.S.C. § 499b(4). “Full payment promptly” means payment within ten (10) days after the buyer accepts the Produce, unless the parties agreed to extend the time for payment. 7 C.F.R. § 46.2(aa). Under 7 C.F.R. § 46.2(aa)(11),

Parties who elect to use different times of payment . . . must reduce their agreement to writing before entering into the transaction and maintain a copy of the agreement in their records. If they have so agreed, then payment within the agreed upon time shall constitute “full payment promptly”: Provided, That the party claiming the existence of such an agreement for time of payment shall have the burden of proving it.

7 C.F.R. § 46.2(aa)(11); see also 7 C.F.R. § 46.46(e)(1) (“The times for prompt accounting and prompt payment are set out in § 46.2(z) and (aa). Parties who elect to use different times for payment must reduce their agreement to writing before entering into the transaction and maintain a copy of their agreement in their records, and the times of payment must be disclosed on invoices, accountings, and other documents relating to the transaction.”).[9] However, “[t]he maximum time for payment for a shipment to which a seller, supplier, or agent can agree, prior to the transaction, and still be eligible for benefits under the trust is 30 days after receipt and acceptance of the [Produce] . . . .” 7 C.F.R. § 46.46(e)(2). After the transaction, a seller who “has met the eligibility requirements . . . will not forfeit eligibility under the trust by agreeing in any manner to a schedule for payment of the past due amount or by accepting a partial payment.” 7 C.F.R. § 46.46(e)(3).

         “Strict compliance with PACA is required to preserve one's rights in a PACA statutory trust.” Paris Foods Corp. v. Foresite Foods, Inc., 278 F. App'x 873, 874 n.1 (2008) (citing Am. Banana Co., Inc. v. Rep. Nat'l Bank of New York, N.A., 362 F.3d 33, 42 (2d Cir. 2004)). Sellers who offer, prior to the transaction, payment periods longer than thirty days, are not entitled to PACA trust protection. “If the supplier extends more generous payment terms, the underlying debt may not be affected, but the security interest in the buyer's assets is lost.” Id.

         In summary, PACA and its regulations “require a buyer to pay the seller within ten days after the buyer accepts the Produce, but permit the parties to agree in writing before the transaction to other payment periods that do not exceed thirty days. Sellers who offer payment periods longer than thirty days are not entitled to PACA trust protection.” Am. Banana, 362 F.3d at 43.

         AgriFact argues that certain of the PACA creditors are not entitled to trust protection because, based on their pre-default course of dealing, they agreed to extend payment terms beyond the 30-day limit. The Court disagrees. The regulations clearly state that “[p]arties who elect to use different times for payment must reduce their agreement to writing before entering into the transaction.” 7 C.F.R. §§ 46.2(aa)(11), 46.46(e)(1); cf. 7 U.S.C. § 499e(c)(3). In Hull Co. v. Hauser's Foods, Inc., 924 F.2d 777, 781 (8th Cir. 1991), the Eighth Circuit held that, based on the clear language of the regulations, only written extensions of payment terms, and not oral agreements, could extend payment terms beyond those specified in the parties' written agreement. The Court stated: “oral agreements have no effect on produce sellers' trust protection.” Id.

         In In re Lombardo Fruit & Produce, 12 F.3d 806 (8th Cir. 1993), the Eighth Circuit, applying Hull, held that the parties' course of dealing is not relevant in determining PACA trust eligibility. The Court reasoned that “[i]f an express, oral agreement cannot be deemed to extend payment terms, we fail to see how something less than an express oral agreement-namely, the parties' course of dealing-can.” Lombardo, 12 F.3d at 811. In Lombardo, the buyer argued that the parties' written agreement requiring payment within thirty days was a sham because, throughout their relationship, the buyer paid within the thirty day period only once. Id. at 810. The Court found that the parties' agreement met the requirements of PACA and it was valid and enforceable under contract law. That the seller did not demand payment on time did not invalidate the contract. The Court noted that, “[i]f [the buyer] sued [the seller] for making a late payment, [the buyer's] past failures to insist upon its rights under the contract would not be a defense to late payment. Similarly, PACA does not impose an obligation on the seller to diligently enforce the agreement by, for instance, filing suit, filing for trust protection, or terminating business relations.” Id.

         The Third, Fifth and Seventh Circuits have also held that oral agreements or the parties' course of dealing are not effective to extend payment terms under PACA. Patterson Frozen Foods, Inc. v. Crown Foods Int'l, Inc., 307 F.3d 666, 671 (7th Cir. 2002) (“[A]n oral agreement for an extension or a course of dealing allowing more than 30 days for payment will not abrogate a PACA trust.”) (citations omitted); Bocchi Ams. Assocs., Inc. v. Commerce Fresh Mktg., Inc., 515 F.3d 383, 390 (5th Cir. 2008) (“We agree with the majority of circuits and adopt the rule that waiver or forfeiture of PACA trust rights by entering into an extension agreement requires an agreement in writing;” holding that “an oral agreement will not suffice.”) (citations omitted); Idahoan Fresh v. Advantage Produce, Inc., 157 F.3d 197, 204-205 (3d Cir. 1998) (The parties' “failure to reduce their oral agreements with respect to the payment term to writing does not disqualify them, and they therefore are entitled to share in a pro-rata distribution of the statutory trust res until they receive payment in full.”); see also Sutherland Produce Sales, Inc. v. High Country Distr. LLC, 2017 WL 782281, *6-9 (PACA and its regulations “go out of their way to make clear that a seller will be eligible for trust protection only if it uses the 10-day default term or modifies that term in writing to some other term of 30 days or fewer. . . . Because [buyer] has provided no evidence of a written agreement to extend the payment term beyond the 30-day limit, it has not raised a triable issue of fact on [seller's] PACA eligibility.”).[10]

         The Eleventh Circuit has not considered if a pre-transaction oral agreement or the parties' course of dealing affects PACA trust eligibility. In In re Gotham Provision Co., 669 F.2d 1000 (5th Cir. Unit B 1982), [11] our Circuit considered the issue under the Packers and Stockyards Act (“PSA”), 7 U.S.C. § 181, et seq. “The PACA trust provisions were modeled after those in the PSA, and Congress specifically intended that established precedents under the PSA be used to interpret PACA.” C.H. Robinson Co. v. Trust Co. Bank, N.A., 952 F.2d 1311, 1315 & n.2 (citing In re Fresh Approach, 48 B.R. 926, 931 (Bankr. N.D. Tex. 1985)). Gotham is instructive here.

         In Gotham, the Court rejected the appellant's reliance on the parties' course of dealing and held that a livestock purchase is not exempt from the trust provisions of the PSA unless the buyer obtains from the seller a writing which clearly indicates that the seller has extended credit to the buyer and thereby waived trust protection. Gotham, 669 F.2d at 1007. Under the PSA, a livestock buyer is required to hold in trust for the benefit of unpaid cash sellers any livestock purchased in cash sales, inventories of meat or other products derived from such livestock, and accounts receivable or proceeds obtained through the sale of those items. Id. at 1004 (citing 7 U.S.C. § 196). Trust protection is limited to “cash sale” transactions, which the PSA defines as sales “in which the seller does not expressly extend credit to the buyer.” Id. Because the PSA does not define an “express extension of credit, ” the Court looked to the prompt payment requirements in Section 409 of the PSA, 7 U.S.C. § 228b. Id. at 1004-1005. Under Section 409, buyers are required to pay the seller the full amount of the purchase price before the close of the next business day following the purchase and transfer of possession of livestock, unless the parties “expressly agree in writing, before such purchase or sale, to effect payment in a[nother] manner . . . .” Id. Based on the plain language of Section 409, the Court concluded that the PSA presumes that all livestock sales are cash sales unless the parties expressly agree in writing to make the transaction a credit sale. Id. at 1005. The Court rejected the appellant's argument that the cash or credit nature of a sale could be determined based on the parties' course of dealing, including where the parties expected that payment would occur after the end of the two-day period established by Section 409. Id. at 1007. The Court reasoned that, “[a]lthough in the abstract such a rule might have some appeal, it is not the rule that Congress selected. To adopt the [appellant's] view would do violence to the wording of the statute.” Id.

         In view of Gotham, and the well-reasoned decisions of the Fifth, Seventh and Eighth Circuits, the Court concludes an agreement to extend time for payment beyond ten days is required to be in writing and entered into before the transaction. See 7 U.S.C. §§ 46.2(aa)(11), 46.46(e)(1), (2); cf. 7 U.S.C. § 499e(c)(3). In other words, an agreement to extend payment terms, even if to extend payment terms beyond the allowed 30-day period, is only effective if it is in writing.[12] Oral agreements and the parties' course of dealing are not sufficient to modify payment terms. To the extent AgriFact argues that certain PACA creditors are not entitled to trust protection because they agreed, orally or based on their course of dealing, to extend payment terms beyond the permitted 30-day limit, AgriFact's objection to the claims asserted by Classic Harvest, Market Express, Williams Farms, Vaughan Foods, Taylor Farms, Bengard Ranch, Pacific Sales and West Pak is overruled.

         The Court next considers AgriFact's objections to the PACA creditors' claims based upon having agreed, in writing and before the transaction, to extend payment terms beyond the permissible 30-day period under PACA. AgriFact contends a claim is not PACA protected if a PACA creditor entered into an impermissible agreement.

         1. Classic Harvest

         AgriFact relies on a March 26, 2015, email conversation between Crisp and Classic Harvest to meet its burden to show an impermissible pre-transaction written agreement between Crisp and Classic Harvest to modify payment terms. ([348] at 12). In the email, the parties discussed amounts owed by Crisp to Classic Harvest. Linda Cunningham, President of Classic Harvest, told Crisp:

We applied the check for $71k
Attached is a summary outstanding - please note your credit limit is set to $200k.
We need you to please stay under $200k and within 35 days We need $94, 007.70 next week to get you on track - this will still put you over limits, but will get it [sic] you closer
$52, 294.30 by next Monday
$41, 713.40 by next Wednesday
This follows the same payment schedule you did ...

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