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Classic Harvest LLC v. Freshworks LLC

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

September 7, 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 on Plaintiff Classic Harvest, LLC's (“Classic Harvest”) Motion for Partial Summary Judgment [395] against Defendant AgriFact Capital, LLC (“AgriFact”), and AgriFact's Motion for Summary Judgment [430]. Intervening Plaintiffs Bengard Ranch, Church Brothers, LLC, D'Arrigo Bros. Co. of California, Eureka Specialties, Inc., Mann Packing Co. Inc., Pacific Sales Company, Tanimura & Antle, Taylor Farms California, Vaughan Foods, Inc., West Pak Avocado, Sunkist Growers, Inc., Market Express, Inc., and Williams Farms, LLC (collectively, the “Intervening Plaintiffs”) (together with Classic Harvest, the “PACA Creditors”) join in Classic Harvest's Motion for Partial Summary Judgment. ([399], [400], [405]).[1] Also before the Court are Classic Harvest's Motion to Strike AgriFact's Response to Classic Harvest's Statement of Material Facts [416] (“First Motion to Strike”), AgriFact's Motion for Leave to File a Corrected Response to Plaintiff's Statement of Uncontested Fact [426] (“Motion for Leave”), and Classic Harvest's Motion to Strike AgriFact's Untimely Filed Evidentiary Submissions and Response in Opposition to AgriFact's Motion for Leave [429] (“Second Motion to Strike”).[2]

         Also before the Court is Classic Harvest's Motion for Reconsideration [361] of the Court's September 6, 2016, Order [342], which required AgriFact to maintain in a separate, segregated account, funds in the amount of identifiable Crisp PACA Trust Assets in AgriFact's possession. Resolution of the parties' motions for summary judgment will ultimately address AgriFact's liability, and Classic Harvest's Motion for Reconsideration is denied as moot.

         I. BACKGROUND

         This is an action under the Perishable Agricultural Commodities Act (“PACA”), 7 U.S.C. §§ 499a, et seq. 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 the trust assets “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 Classic Harvest and the Intervening Plaintiffs. Crisp then resold the Produce to its customers (“Account Debtors”), on credit, generating accounts receivable (“Receivables”). Under PACA, Crisp was required to hold, in trust (the “PACA Trust”), the Produce, products derived from the Produce, and the Receivables (the “Trust Assets”). These Trust Assets were required to be held for the benefit of Crisp's unpaid Produce suppliers, including Classic Harvest and the Intervening Plaintiffs.

         On January 19, 2015, Crisp and AgriFact entered into a Factoring Agreement (the “Factoring Agreement”), under which Crisp “factored” to AgriFact certain of its Receivables in exchange for an immediate payment of 80%[3] of the face value of the Receivable, plus another payment after AgriFact collected on the Receivable, less AgriFact's fees and expenses, and other adjustments.

         The Factoring Agreement functioned, in general, as follows: Crisp offers for “sale” to AgriFact a Receivable that meets certain pre-established requirements. (Factoring Agreement § 1.10). If AgriFact chooses to “purchase” the Receivable, Crisp “sells, transfers, and assigns, ” to AgriFact, Crisp's “right, title and interest in” the Receivable, and AgriFact pays to Crisp an “Advance, ” equal to 80% of the face value of the Receivable. (Id. §§ 2.2.2, 2.3). At the time a Receivable is factored, AgriFact also establishes a “Reserve”-that is, approximately 20% of the face value of each Receivable. The Reserve generally consists of “all unfunded purchase amounts, ”[4] plus any outstanding fees and expenses Crisp owes to AgriFact. (Id. § 2.4). AgriFact collects payment on the Receivable from the Account Debtor and applies these payments first to amounts Crisp owes to AgriFact under the Factoring Agreement, and then pays the remaining funds, if any, to Crisp. (Id. § 3.1). In sum, after AgriFact collects on a Receivable, AgriFact pays to Crisp a further amount based on the face value of the Receivable, after deduction of AgriFact's fees, and, subject to limited exceptions, the amounts AgriFact was unable to collect from the Account Debtor. (See id. § 3.5).[5]

         From June 15, 2015, to August 14, 2015, Classic Harvest sold Produce to Crisp, for which Classic Harvest has not been paid.

         Crisp closed its business on August 17, 2015. ([411.8] at ¶ 21).[6] On August 24, 2015, Classic Harvest sent a letter to AgriFact (“Demand Letter”) which states that Crisp has breached its PACA trust obligations, including because Crisp “failed to pay invoices relating to qualified produce transactions in the current amount of $354, 121.99” owed to Classic Harvest, and that Crisp likely “owes significantly more (i.e. in excess of $1.3M) to the holders of other properly preserved PACA trust claims.” ([79.5] at 2). The Demand Letter states further that Crisp's Receivables are Trust Assets, and, until Classic Harvest and other PACA Creditors “are paid in full, the receipt of any PACA Trust assets by AgriFact [ ] is in violation of the PACA and such assets must be returned to the trust beneficiaries. . . . This written notice of breach of trust is sufficient to undermine AgriFact's status as a bona fide purchaser for value, the only defense to liability for either the receipt of, or participation in the dissipation of, a collection of funds which are now known to be PACA trust assets.” (Id. at 3).

         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, including to recover Trust Assets held by AgriFact. Classic Harvest also asserted a claim against AgriFact for conversion and unlawful retention of Trust Assets.[7] Classic Harvest claims that, under the Factoring Agreement, AgriFact improperly held and collected proceeds from the Receivables which, Classic Harvest claims, were subject to the PACA Trust and should have been used to pay the priority claims of Crisp's PACA creditors.

         On August 26, 2015, Classic Harvest moved for a preliminary injunction to enjoin Defendants from using, consuming, or otherwise dissipating the Trust Assets. (Mot. Prelim. Inj. [5]). Classic Harvest also requested that the Court exercise in rem jurisdiction over the Trust Assets and establish a framework for potential PACA creditors to submit their claims and share, on a pro rata basis, in the recovery of Trust Assets. (Id.).

         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. The September 4th Order also provides: “Pending further orders of this Court, no banking institution . . . or other organization/entity (including, without limitation, AgriFact [ ]) holding funds for [Crisp] shall pay, transfer, or permit assignment or withdrawal of any existing PACA trust assets held on behalf of [Crisp].” (Sept. 4th Order ¶ 5). The September 4th Order set a hearing for October 22, 2015, to finalize and resolve any objections to the proposed PACA claims procedure.

         On October 13, 2015, AgriFact filed its objections to the September 4th Order. AgriFact argued, among other things, that Paragraph 5 of the September 4th Order does not apply to the Receivables, and their proceeds, that were “factored” to AgriFact.

         On October 22, 2015, the Court conducted a hearing to confirm the proposed PACA claims procedure. At the hearing, the Court considered AgriFact's objections and clarified that, under the terms of the September 4th Order, AgriFact is enjoined from transferring or otherwise expending any funds that it received from invoices it obtained from Crisp pursuant to the Factoring Agreement (the “Injunction”). The Court permitted AgriFact to file a motion to modify the Injunction, including to determine whether the Receivables are Trust Assets. The Court continued the hearing to January 14, 2016, to finalize and resolve objections to the proposed PACA claims procedure.[8]

         On October 28 and November 13, 2015, AgriFact moved for reconsideration of the Injunction. ([54], [72]). On December 31, 2015, the Court denied in part and granted in part AgriFact's Motions for Reconsideration of the Injunction. The Court found that the Factoring Agreement did not function as a true sale of the Receivables to AgriFact, and because they remained Trust Assets, the Receivables and their proceeds were required to be made available for payment first to Crisp's unpaid PACA Creditors, including Plaintiff. (Dec. 31st Order at 25-26). The Court thus concluded that Plaintiff showed a substantial likelihood of success on the merits of its claim to recover Trust Assets from AgriFact.[9] The Court denied AgriFact's motions to the extent AgriFact sought to dissolve the Injunction against it. The Court, however, modified the Injunction to reflect only the amount of funds that AgriFact may be required to disgorge-that is, the amount of funds necessary to satisfy in full the unpaid PACA Creditors' claims, up to the limit of Trust Assets AgriFact held while the PACA Creditors remained unpaid. (Id. at 27-28). The Court required AgriFact “to maintain funds in a separate, segregated account, sufficient to satisfy in full the unpaid PACA creditors' claims.” (Id. at 29). The Court later modified the Injunction further “to reflect that AgriFact is required to maintain funds in a separate, segregated account, in the amount of identifiable Crisp PACA Trust Assets in AgriFact's possession. (September 6, 2016, Order [342]). The Court specified, however, that the modification of the Injunction “does not affect the amount for which AgriFact may be liable if Plaintiff, and the other PACA creditors, are successful on the claims they have asserted against AgriFact.” (Id. at 16).

         On May 31, 2017, the Court entered its order [436] evaluating the claims filed by the PACA Creditors in this case. The total amount of claims approved by the May 31st Order is $1, 860, 344.02.[10] (See Updated PACA Trust Chart [439.1]).

         The parties filed cross-motions for summary judgment on the PACA Creditors' claim to recover Trust Assets from AgriFact.[11] The PACA Creditors argue that the Receivables were not sold to AgriFact and thus they remained Trust Assets, subject to the PACA Creditors' priority claims. The PACA Creditors assert that AgriFact is thus required to disgorge all Trust Assets up to the amount of the PACA claims asserted in this case. AgriFact argues that it is entitled to keep the Receivables, and their proceeds, because it purchased the Receivables from Crisp and the purchase did not breach the PACA Trust. AgriFact thus contended that the Receivables, and any amounts collected from them, are not Trust Assets. AgriFact argues further that, even if the Receivables, and cash collected from them, remained Trust Assets, AgriFact is not required to return them because AgriFact is as a bona fide purchaser for value, and without notice of the breach of trust.

         II. DISCUSSION

         A. Legal Standard

         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).

         B. PACA Framework

         PACA was enacted to regulate and “promote fair dealing” in the sale of Produce. See Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable, 336 F.3d 410, 413 (5th Cir. 2003). Produce sellers, “because of the need to sell their products quickly, were often unsecured creditors of buyers whose creditworthiness they were unable to evaluate before the sale.” Id. (citing Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1067 (2d Cir. 1995)). “Due to a large number of defaults by the purchasers, and the sellers' status as unsecured creditors, the sellers recover, if at all, only after banks and other lenders who have obtained security interests in the defaulting purchaser's inventories, proceeds, and receivables.” Endico Potatoes, 67 F.3d at 1067 (citing JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 77 (2d Cir. 1990); H.R. Rep. No. 543, at 3). To “remedy such burden on commerce in [Produce] and to protect the public interest, ” PACA was amended to create a statutory trust for the benefit of unpaid Produce sellers. See id.; 7 U.S.C. § 499e(c)(1).[12]

         Section 499e(c)(2) imposes a nonsegreated “floating” trust on the Produce sold, products derived from the Produce, “and any receivables or proceeds from the sale of such [Produce] or product.” 7 U.S.C. § 499e(c)(2). PACA requires the Produce buyer to hold the trust assets “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. The trust allows Produce sellers “to recover against the purchasers and puts the sellers in a position superior to all other creditors, ” including secured creditors. See Gargiulo v. G.M. Sales, Inc., 131 F.3d 995, 999 (11th Cir. 1997) (citing Endico Potatoes, 67 F.3d at 1067).

         The primary duty of a PACA trustee is to “maintain trust assets in a manner that such assets are freely available to satisfy outstanding obligations to [Produce] sellers . . . . Any act or omission which is inconsistent with this responsibility, including dissipation of trust assets, is unlawful and in violation of [PACA].” See D.M. Rothman & Co., Inc. v. Korea Commercial Bank of N.Y., 411 F.3d 90, 94 (2d Cir. 2005) (quoting 7 C.F.R. § 46.46(d)(1)). “PACA regulations define ‘dissipation' as ‘any act or failure to act which would 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. (quoting 7 C.F.R. § 46.46(a)(2)). “Thus, to determine whether a PACA trustee's actions or omissions constitute a breach of fiduciary duty, [a court should] examine whether the trustee ‘in any way encumbered the funds or rendered them less freely available to PACA creditors.'” Coosemans Specialties, Inc. v. Gargiulo, 485 F.3d 701, 706 (2d Cir. 2007) (quoting D.M. Rothman, 411 F.3d at 99)).

         General principles of trust law govern the PACA trust. C.H. Robinson Co. v. Trust Co. Bank, N.A., 952 F.2d 1311, 1316 (11th Cir. 1992). A trustee may sell trust assets unless the sale breaches the trust. See, e.g., Boulder Fruit Exp. & Heger Organic Farm Sales v. Transp. Factoring, Inc., 251 F.3d 1268, 1272 (9th Cir. 2001) (citing Restatement (Second) Of Trusts § 190). Because a PACA trust is a nonsegregated, “floating” trust, a trustee “is permitted to convert trust assets into other property, provided that the trustee honors its obligation to ‘maintain trust assets in a manner that such assets are freely available to satisfy outstanding obligations to [Produce] sellers.'” Nickey Gregory Co., LLC v. AgriCap, LLC, 597 F.3d 591, 595-96 (4th Cir. 2010) (citing 7 C.F.R. § 46.46(b); quoting 7 C.F.R. § 46.46(d)(1)); see also Boulder Fruit, 251 F.3d at 1271 (“[N]othing in PACA or the regulations prohibits PACA trustees from attempting to turn receivables into cash by factoring.”). Thus, “a commercially reasonable sale of accounts for fair value is entirely consistent with the trustee's primary duty under PACA and 7 C.F.R. § 46.46(d)(1)-to maintain trust assets so that they are freely available to satisfy outstanding obligations to [Produce] sellers.” Boulder Fruit, 251 F.3d at 1271; see also Nickey Gregory, 597 F.3d at 595-96. When a trust asset is sold, the trustee necessarily relinquishes its interest in the asset and receives cash in return for it-that is, the asset sold is converted into cash and the asset itself is no longer a trust asset. The sale is not a breach of trust because the trust asset-now the cash-is “freely available” to satisfy the trustee's outstanding obligations to its PACA creditors.

         Whether there was a true sale of the Receivables to AgriFact is the core issue here. Whether the Factoring Agreement constitutes a true sale of the Receivables determines whether AgriFact held the Receivables, and the proceeds collected from them, as Trust Assets subject to the priority interest of the PACA Creditors. See Nickey Gregory, 597 F.3d at 603.

         C. Whether the Receivables Remained Trust Assets

         AgriFact and Crisp included in the Factoring Agreement language characterizing the transaction as a sale by Crisp of the Receivables to AgriFact. These characterizing terms are mainly stated in the Factoring Agreement's recitals:

Whereas; [AgriFact] intends to enter into a Factoring Agreement in order to execute true purchases of [Crisp's] accounts receivable at a discount;[13] and Whereas; under the Factoring Agreement, [AgriFact] intends to assume the Credit Risk associated with any Purchased Receivables; and
Whereas; [Crisp] intends to enter into a Factoring Agreement with [AgriFact] in order to relieve itself of Credit Risk to fully and timely comply with all of its payment obligations under [PACA] and, if any funds thereafter remain available, to be used to reduce overhead through outsourcing of accounts receivable related ...

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