Paca Trust Creditors of Lenny Perry's Produce, Inc. v. Genecco Produce Inc.

913 F.3d 268
CourtCourt of Appeals for the Second Circuit
DecidedJanuary 9, 2019
DocketDocket Nos. 17-1949-cv; 17-2051-cv; August Term, 2018
StatusPublished
Cited by13 cases

This text of 913 F.3d 268 (Paca Trust Creditors of Lenny Perry's Produce, Inc. v. Genecco Produce Inc.) is published on Counsel Stack Legal Research, covering Court of Appeals for the Second Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Paca Trust Creditors of Lenny Perry's Produce, Inc. v. Genecco Produce Inc., 913 F.3d 268 (2d Cir. 2019).

Opinion

Sack, Circuit Judge:

The plaintiffs and the defendants are creditors of debtor Lenny Perry's Produce, Inc. ("LPP"). Between 2005 and 2008, defendant Genecco Produce, Inc., ("GPI") and debtor LPP regularly sold produce to one another. Because the goods were perishable agricultural commodities, these transactions were governed by the federal Perishable Agricultural Commodities Act, 7 U.S.C. § 499 ("PACA").

Instead of paying each other after each transaction, GPI and LPP accumulated mutual debts intended to offset one another. By the end of 2008, those debts totaled $204,774.88, owed by GPI to LPP, and $263,061.92, owed by LPP to GPI - a net balance of $58,287.04 in GPI's favor.

On January 27, 2009, LPP filed for bankruptcy protection under Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of New York. The plaintiffs, also unpaid sellers of perishable agricultural commodities to LPP, brought an adversary proceeding against the defendants in the bankruptcy court. They alleged that the $204,774.88 owed by GPI to LPP constituted assets of a trust that arose for their benefit under the terms of PACA ("PACA Trust"). In response, the defendants asserted that federal bankruptcy law, 11 U.S.C. § 553(a), and New York State law, N.Y. Debt. & Cred. L. § 151, entitled them to a complete offset of any amount otherwise due to the PACA Trust *271by amounts that had been due to the defendants from LPP.

On June 7, 2017, the United States District Court for the Western District of New York (William M. Skretny, Judge ) entered a judgment adopting the bankruptcy judge's report and recommendation (Michael J. Kaplan, Bankruptcy Judge ) recommending that summary judgment be granted to the plaintiffs. The district court concluded that the defendants were not entitled to a full offset of their mutual unpaid debts, but only to a pro rata share of the PACA Trust along with other unpaid LPP produce suppliers.

The defendants argue that the district court erred because New York State law and federal bankruptcy law entitle them to a complete offset of any amounts they owed LPP or the PACA Trust; in the alternative, they claim that questions of fact regarding the transfer of accounts receivable into the PACA Trust render the district court's grant of summary judgment improper.

We disagree. Because PACA assets are held in trust for the benefit of unpaid produce suppliers generally and never become part of a bankruptcy estate, and because such PACA creditors enjoy priority over non-PACA creditors, the defendants' offset defense under section 553 of the U.S. Bankruptcy Code and New York State law is unavailing. The district court therefore correctly found that the plaintiffs' claims against the defendants are not subject to the statutory offset sought by the defendants.

Meanwhile, the plaintiffs assert that the district court erred in permitting the defendants to recover even a pro rata share of the PACA Trust. The plaintiffs do not dispute that the defendants, like the plaintiffs, are PACA creditors. Rather, they contend that the defendants are barred from recovery because they did not file a proof of claim pursuant to the district court's claims procedure order ("Claims Procedure Order"), which established deadlines for the plaintiffs' counsel to issue written notice to potential PACA claimants and for prospective claimants to file proofs of claim.

We conclude otherwise. The defendants preserved their PACA claims by providing statutorily required notice to the debtor in each invoice at issue and filed a proof of claim with the bankruptcy court before the district court had issued the PACA Claims Procedure Order. Based at least, in part, on ambiguities in that Order, they reasonably, although mistakenly, thought that they could vindicate their rights as PACA creditors using a bankruptcy offset and elected not to file a PACA proof of claim. Under these circumstances, as the district court correctly concluded, PACA's statutory purpose is best realized if the defendants are permitted to collect pro rata shares of the PACA assets. The district court did not err in allowing the defendants to recover their pro rata share.

The judgment of the district court is therefore affirmed.

BACKGROUND

General Factual Background

At all relevant times, GPI, and LPP before it filed for bankruptcy, were merchants of perishable agricultural commodities operating out of the Niagara Frontier Food Terminal in Buffalo, New York. Between September 2005 and October 2008, LPP and GPI regularly sold produce to one another for resale to their respective customers. In connection with each transaction, the seller-LPP or GPI-issued an invoice to the other with a notice of intent *272to preserve its PACA rights.1

Usually, neither GPI nor LPP would pay the other for the produce they sold to one another. Instead, they maintained open, off-setting accounts. Although GPI and LPP tried "to make sure ... GPI was not sending Lenny Perry's more produce than Lenny Perry's was sending GPI," their efforts were not entirely successful. Report and Recommendation at 4, PACA Trust Creditors of Lenny Perry's Produce, Inc. v. Genecco Produce, Inc. , No. 09-1269-MJK (W.D.N.Y. Feb. 12, 2014), ECF No. 126. By January 2009, LPP owed GPI $263,061.92, and GPI owed LPP $204,774.88, resulting in a net balance of $58,287.04 in GPI's favor.

The plaintiffs2 are also merchants dealing in perishable agricultural commodities. Like GPI, they sold fresh produce to LPP. Those sales for which the plaintiffs were never paid are governed by PACA. When LPP filed for bankruptcy, it owed the plaintiffs an estimated $292,417.39.

Procedural History

On January 27, 2009, LPP and its principal, Leonard R. Perry, filed "Voluntary Petitions" for protection under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the Western District of New York. On February 17, 2009, GPI filed a proof of claim for $263,061.92. On March 9, 2009, the plaintiffs brought an adversary proceeding against LPP and Perry in that court alleging PACA violations and a breach of fiduciary duty owed to the PACA beneficiaries.

The plaintiffs filed a motion to establish a PACA claims procedure, which the bankruptcy court granted on August 7, 2009. Under the Claims Procedure Order, LPP was required, on or before August 12, 2009, to provide the plaintiffs' counsel with names and addresses of all potential PACA claimants not already listed in the bankruptcy petition.

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913 F.3d 268, Counsel Stack Legal Research, https://law.counselstack.com/opinion/paca-trust-creditors-of-lenny-perrys-produce-inc-v-genecco-produce-inc-ca2-2019.