1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 PRODUCE PAY, INC., Case No.: 3:20-CV-00517-MMA-MDD 11 ORDER DENYING THE VEG- 12 Plaintiff, FRESH DEFENDANTS’ MOTIONS v. TO DISMISS AND STRIKE 13 FVF DISTRIBUTORS INC., VEG- [Doc. Nos. 12, 13] 14 FRESH FARMS, LLC, MARK C. WIDDER, ROBERT L. WHITNEY, JR., 15 LAWRENCE D. CANCELLIERI, JR., RANDY J. CANCELLIERI, ADAM T. 16 CANCELLIERI, and F. DAVID AVILA, individually, 17 18 Defendants. 19 20 On March 19, 2020, Plaintiff Produce Pay, Inc. (“Plaintiff” or “Produce Pay”) filed 21 a Complaint against Defendants FVF Distributors Inc. (“FVF”), Veg-Fresh Farms, LLC 22 (“Veg-Fresh”), Mark C. Widder (“Widder”), Robert L. Whitney (“Whitney”), Lawrence 23 D. Cancellieri, Jr. (“D. Cancellieri”), Randy J. Cancellieri (“J. Cancellieri”), Adam T. 24 Cancellieri (“T. Cancellieri”), and David F. Avila (“Avila”) (collectively, 25 “Defendants”).1 Produce Pay brings claims for violations of the Perishable Agricultural 26
27 1 FVF and Avila are collectively referred to as the “FVF Defendants,” while Veg-Fresh, Widder, 28 1 Commodities Act, 1930, as amended, 7 U.S.C. §§ 499a-499t (2016) (“PACA”), and for 2 breach of contract and conversion. See Doc. No. 1 (“Compl.”). The Veg-Fresh 3 Defendants move to dismiss the Complaint, insofar as it asserts claims against the Veg- 4 Fresh Defendants, for failure to state a claim pursuant to Federal Rule of Civil Procedure 5 12(b)(6), and to strike portions of the Complaint pursuant to Federal Rule of Civil 6 Procedure 12(f). See Doc. Nos. 12, 13. Produce Pay filed oppositions to the motions, to 7 which the Veg-Fresh Defendants replied. See Doc. Nos. 19 (“MTD Opp.”), 20 (“MTS 8 Opp.”), 21 (“MTD Reply”), 22 (“MTS Reply”). The Court found the matters suitable for 9 determination on the papers and without oral argument pursuant to Civil Local Rule 10 7.1.d.1. See Doc. No. 25. For the reasons set forth below, the Court DENIES the Veg- 11 Fresh Defendants’ motion to dismiss and DENIES the Veg-Fresh Defendants’ motion to 12 strike. 13 BACKGROUND2 14 Produce Pay is a Delaware corporation in the business of buying at a discount 15 produce-related accounts receivable that are subject to PACA. FVF is a California 16 corporation in the business of trading fresh fruit and vegetable commodities subject to 17 PACA (“Produce”). Avila is an officer or employee of FVF. Veg-Fresh is a California 18 corporation in the business of buying and selling Produce. Widder, Whitney, L. 19 Cancelleria, R. Cancellieri, and A. Cancellieri allegedly serve in different positions for 20 and are principals of Veg-Fresh. 21 The dispute between the parties pertains to a June 5, 2018 factoring3 agreement, 22 later amended on June 26, 2019 (“Factoring Agreement”), between Produce Pay and 23 24 Defendants.” The Veg-Fresh Defendants also note that Whitney was erroneously sued as Robert L. 25 Whitney, Jr., rather than his correct name, Robert J. Whitney. See Doc. No. 12 at 1. 2 Because this matter is before the Court on a motion to dismiss, the Court must accept as true the 26 allegations set forth in the complaint. See Hosp. Bldg. Co. v. Trs. Of Rex Hosp., 425 U.S. 738, 740 (1976). 27 3 “Factoring” is “[t]he buying of accounts receivable at a discount. The price is discounted because the factor (who buys them) assumes the risk of delay in collection and loss on the accounts receivable.” 28 1 FVF. Pursuant to the Factoring Agreement, FVF sold, conveyed, voluntarily transferred, 2 and assigned all or the entirety of its right, title, and interest in and to its Produce-related 3 accounts receivables, including any and all PACA trust rights appurtenant thereto, to 4 Produce Pay. Between June 5, 2019 and July 8, 2019, FVF and Veg-Fresh entered in a 5 series of eight Produce transactions. Such transactions were memorialized by invoices. 6 Subsequent to Veg-Fresh’s acceptance of the Produce from FVF, FVF assigned all rights, 7 title, and interest in the accounts receivables to Produce Pay as memorialized in bills of 8 sale. 9 On June 25, 2019, Produce Pay and FVF notified Veg-Fresh of FVF’s assignment 10 of its Produce-related accounts receivables to Produce Pay and directed Veg-Fresh to 11 make all payments for the Produce-related accounts receivables payable to Produce Pay. 12 Though its chief financial officer, Whitney, Veg-Fresh agreed to the Notice of 13 Assignment and payment directions by signing and returning a copy of the same to 14 Produce Pay. FVF, through its president, Michael Almanza, also agreed to the notice of 15 assignment by signing and returning a copy of the same to Produce Pay. FVF delivered 16 or otherwise caused certain Produce to be delivered to Veg-Fresh, which received and 17 accepted all of the Produce. Veg-Fresh did not pay Produce Pay for the Produce reflected 18 in the invoices, which have a “current aggregate invoice value of not less than 19 $93,741.60.” Compl. at 9. 20 LEGAL STANDARD 21 A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the 22 sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). 23 Plaintiffs must plead “enough facts to state a claim to relief that is plausible on its face.” 24 Fed. R. Civ. P. 12(b)(6); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). The 25 plausibility standard thus demands more than a formulaic recitation of the elements of a 26 cause of action, or naked assertions devoid of further factual enhancement. Ashcroft v. 27 Iqbal, 556 U.S. 662, 678 (2009). Instead, the complaint “must contain allegations of 28 underlying facts sufficient to give fair notice and to enable the opposing party to defend 1 itself effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011). 2 In reviewing a motion to dismiss under Rule 12(b)(6), courts must accept as true 3 all material allegations in the complaint, as well as reasonable inferences to be drawn 4 from them, and must construe the complaint in the light most favorable to the plaintiff. 5 Cholla Ready Mix, Inc. v. Civish, 382 F.3d 969, 973 (9th Cir. 2004) (citing Karam v. City 6 of Burbank, 352 F.3d 1188, 1192 (9th Cir. 2003)). The court need not take legal 7 conclusions as true merely because they are cast in the form of factual allegations. 8 Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987). Similarly, “conclusory 9 allegations of law and unwarranted inferences are not sufficient to defeat a motion to 10 dismiss.” Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998). 11 Additionally, Federal Rule of Civil Procedure 12(f) empowers the Court to “strike 12 from a pleading an insufficient defense or any redundant, immaterial, impertinent, or 13 scandalous matter.” Fed. R. Civ. P. 12(f). The function of a motion to strike is to avoid 14 the unnecessary expenditures that arise throughout litigation by dispensing of any 15 spurious issues prior to trial. Chong v. State Farm Mut. Auto. Ins. Co., 428 F. Supp. 2d 16 1136, 1139 (S.D. Cal. 2006); Sidney–Vinstein v. A.H. Robins Co., 697 F.2d 880, 885 (9th. 17 Cir. 1983). For purposes of this rule, “[i]mmaterial matter is that which has no essential 18 or important relationship to the claim for relief or the defenses being pleaded.” Fantasy, 19 Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir. 1993) (internal quotations and citations 20 omitted), rev’d on other grounds, 510 U.S. 517 (1994). Impertinent matter consists of 21 statements that do not pertain, and are not necessary, to the issues in question.” Id. 22 (internal quotations and citations omitted). “Motions to strike are generally disfavored, 23 unless it is clear that the matter to be stricken could have no possible bearing on the 24 subject matter of the litigation.” Haghayeghi v. Guess?, Inc., No. 14-CV-00020, 2015 25 WL 1345302, at *5 (S.D. Cal. Mar. 24, 2015) (internal quotations omitted) (quoting 26 LeDuc v. Kentucky Central Life Ins. Co., 814 F. Supp. 820, 830 (N.D. Cal. 1992)); Blair 27 v. CBE Grp. Inc., No. 13-CV-134, 2013 WL 5677026, at *2 (S.D. Cal. Oct. 17, 2013). 28 /// 1 DISCUSSION 2 The Veg-Fresh Defendants move to strike Produce Pay’s allegations of Veg- 3 Fresh’s insolvency, certain invoices attached to the Complaint, and references to the 4 invoices. Doc. No. 13-1 (“MTS”) at 2. The Veg-Fresh Defendants also move to dismiss 5 the Complaint for failure to state a claim, arguing that Produce Pay is not entitled to 6 protection under PACA and cannot enforce a contract by which it is not bound. Doc. No. 7 12-1 (“MTD”) at 1. 8 1. Motion to Strike 9 In its motion to strike, the Veg-Fresh Defendants argue that the Court should strike 10 six invoices attached to the Complaint, and references in the Complaint thereto, as 11 “impertinent, scandalous, and prejudicial.” MTS at 4-6. The Veg-Fresh Defendants also 12 assert that the Court should strike allegations of Veg-Fresh’s insolvency as scandalous 13 and prejudicial. MTS at 7-8. Produce Pay responds that the Veg-Fresh Defendants’ 14 arguments are without merit. First, Produce Pay contends that if Veg-Fresh received 15 invoices different from those attached to the Complaint, “it is due to FVF’s failure to 16 honor its obligations under the Factoring Agreement.” MTS Opp. at 3-4. Second, 17 Produce Pay argues that allegations of Veg-Fresh’s insolvency should not be stricken 18 because they are “centrally materially to the claims asserted” against the Veg-Fresh 19 Defendants under PACA. MTS Opp. at 6. 20 a. Invoices 21 The Court is not persuaded that the Veg-Fresh Defendants have provided sufficient 22 grounds to strike the six invoices or references thereto in the Complaint. Exhibits 23 attached to a complaint are effectively part of the allegations of the Complaint. See Fed. 24 R. Civ. P. 10(c) (“A copy of a written instrument that is an exhibit to a pleading is a part 25 of the pleading for all purposes.”); Stacey v. Peoria Cty., Ill., No. 13-CV-1051, 2013 WL 26 3279997, at *8 (C.D. Ill. June 27, 2013) (photograph exhibits were “effectively part of 27 the allegations of the Complaint”). On a motion to dismiss, the Court is to accept as true 28 all well-pleaded allegations of material fact and construe them in the light most favorable 1 to the non-moving party. Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 2 1031-32 (9th Cir. 2008). While the Veg-Fresh Defendants question the authenticity of 3 the six invoices, Produce Pay explains that FVF should have sent the six invoices to the 4 Veg-Fresh Defendants because Veg-Fresh should have paid Produce Pay for the Produce- 5 related transactions, not FVF. See MTS Opp. at 4-5. The Veg-Fresh Defendants 6 primarily respond that Produce Pay’s arguments ignore that the six invoices attached to 7 the Complaint pre-date FVF’s assignment of rights to Produce Pay. See Doc. No. 22 8 (“MTS Reply”) at 3-4. Therefore, according to the Veg-Fresh Defendants, the six 9 “invoices are falsified, inauthentic, and were never received.” Id. at 5. 10 The Court cannot conclude that it is clear the six invoices attached to the 11 Complaint could have no possible bearing on the subject matter of this litigation. See 12 Haghayeghi, 2015 WL 1345302, at *5. At this stage of the litigation, the Court must 13 accept Produce Pay’s allegations, including the invoices attached to the Complaint, as 14 true absent a showing that the invoices are inauthentic. The parties’ arguments show that 15 the authenticity of the six invoices will be an issue in this litigation. The Court, however, 16 need not decide the issue of authenticity on a motion to strike. The Veg-Fresh 17 Defendants may admit or deny the authenticity or accuracy of the six invoices, and 18 should the parties seek to use their respective invoices as evidence later in the litigation, 19 they will have to establish the authenticity of the documents pursuant to Federal Rule of 20 Evidence 901. 21 b. Insolvency 22 Similarly, the Court cannot conclude that Produce Pay’s allegations of Veg-Fresh’s 23 insolvency could have no possible bearing in this litigation. See Haghayeghi, 2015 WL 24 1345302, at *5. As Produce Pay recognizes, courts may look not only to a corporate 25 trustee that received perishable agricultural commodities subject to a PACA trust, but 26 also an officer who causes a corporate trustee to commit a breach of trust. See MTS Opp. 27 at 6 (citing Shepard v. K.B. Fruit & Vegetable, Inc., 868 F. Supp. 703, 706 (E.D. Pa. 28 1994)). The issue of Veg-Fresh’s ability to pay its debts is therefore relevant in this 1 litigation. Produce Pay is also correct that knowledge of Veg-Fresh’s solvency is 2 peculiarly within the knowledge of the Veg-Fresh Defendants. See MTS Opp. at 7. 3 While the Court agrees with the Veg-Fresh Defendants that Produce Pay’s allegation that 4 Veg-Fresh mistakenly paid FVF is in tension with the allegations of insolvency, the Court 5 is not persuaded that the threat of harm to Veg-Fresh’s reputation warrants striking the 6 allegation. As with the invoice-related allegations, the Veg-Fresh Defendants can deny 7 or otherwise respond appropriately to the allegations of insolvency and demonstrate in 8 this litigation that such allegations have no basis in fact. But at this stage, it cannot be 9 said that the allegations of insolvency “could have no possible bearing on the subject 10 matter of the litigation.” Haghayeghi, 2015 WL 1345302, at *5. 11 2. Motion to Dismiss 12 The Veg-Fresh Defendants move to dismiss the claims asserted against them by 13 Produce Pay primarily on two bases: (1) Produce Pay does not have standing to seek 14 redress for its PACA claims because it is not a produce seller or supplier, see Doc. No. 15 12-1 (“MTD”) at 6-7; and (2) Produce Pay cannot seek redress for its PACA claims 16 because it is undisputed that Veg-Fresh mistakenly paid, but nevertheless satisfied its 17 repayment obligation to, FVF. Id. at 7-14. Produce Pay responds that the Veg-Fresh 18 Defendants’ arguments are without merit because FVF can and did assign its PACA 19 rights to Produce Pay; Veg-Fresh acknowledged the assignment and instruction to send 20 payments to Produce Pay; and Veg-Fresh did not pay Produce Pay as instructed. See 21 MTD Opp. at 2-3. The Court addresses the parties’ arguments in turn. 22 a. Alienability of PACA Rights 23 First, Produce Pay and the Veg-Fresh Defendants seem to disagree on whether the 24 trust rights created by PACA are alienable. Produce Pay argues that “[i]t is well 25 established that PACA trust rights are freely assignable.” MTD Opp. at 5 (citations 26 omitted). The Veg-Fresh Defendants express doubt, pointing out Produce Pay only cites 27 non-binding authority in support of the proposition, and instead frame the issue as 28 “whether a factor assignee can enforce PACA trust rights when the original supplier of 1 produce has been fully paid.” MTD Reply at 2-3. 2 The Court agrees with the non-binding authority cited by Produce Pay finding that 3 trust rights created by PACA are alienable, including by assignment. “Interests in PACA 4 trusts, like interests in contracts, are assignable.” Mastronardi Int’l Ltd. v. SunSelect 5 Produce (California), Inc., No. 18-CV-00737, 2019 WL 3996608, at *3 (E.D. Cal. Aug. 6 23, 2019) (citing All. Shippers, Inc. v. Guarracino, 575 B.R. 298, 310 (Bankr. D.N.J. 7 2017) (“In re Guarracino”)). As the court in In re Guarracino recognized, “general trust 8 law principles govern PACA unless ‘they conflict with the language of [the statute], the 9 clear intent of Congress in enacting the statute, or the accompanying regulations.’” Id. at 10 309 (quoting Pacific Int’l Mktg., Inc. v. A & B Produce, Inc., 462 F.3d 279, 283-85 (3d 11 Cir. 2006)). Here, the Veg-Fresh Defendants, like the defendant in In re Guarracino, 12 “fail[] to point to any provision in PACA or the applicable regulations that prohibit 13 assignment of a producer’s interest in a PACA trust.” Id. Nor does the free assignability 14 of a PACA trust interest “conflict with congressional intent in enacting the statute,” and 15 the Court does not see a conflict with the accompanying regulations. Id. “[T]he 16 overarching goal of PACA . . . is to protect the financial well-being of produce suppliers, 17 who are vulnerable to the practices of financially irresponsible buyers.” Id. (citations 18 omitted); see also MTD at 5 (recognizing this purpose of PACA). This goal supports the 19 ability of produce suppliers to assign their PACA beneficiary interests because an 20 assignment allows them to transfer the risk of delayed payment or non-payment to a 21 factor like Produce Pay. Further support can be found in the Restatement (Third) of 22 Trusts, which provides that beneficiary rights are alienable. See Restatement (Third) of 23 Trusts § 51 (2003) (“[A] beneficiary of a trust can transfer his or her beneficial interest 24 during life to the same extent as a similar legal interest.”). 25 In sum, the Court concludes that FVF was allowed to assign its interest in the 26 PACA trust to Produce Pay. Thus, the Veg-Fresh Defendants’ contention that Produce 27 Pay lacks standing because “[o]nly produce suppliers or sellers are entitled to protection 28 under [PACA],” MTD at 1, is misplaced. The Veg-Fresh Defendants do not argue that 1 the assignment from FVF to Produce Pay was ineffective; rather, they contend that 2 Produce Pay does not have the right to payment from Veg-Fresh because Veg-Fresh’s 3 obligation was satisfied upon its payment to FVF. See MTD Reply at 2-3. Thus, the 4 Court next addresses the effect of the assignment and notice of the same provided to Veg- 5 Fresh. 6 b. Effect of Assignment and Notice Thereof 7 The Veg-Fresh Defendants argue that the Complaint is deficient because by its 8 allegations, Produce Pay admits that Veg-Fresh paid FVF and therefore satisfied its 9 obligations. See MTD Reply at 3. Produce Pay argues that Veg-Fresh’s payments to 10 FVF did not satisfy its debt. See MTD Opp. at 8-9. For the reasons discussed below, the 11 Court agrees with Produce Pay that the allegations plausibly show that Veg-Fresh did not 12 satisfy its debt by mistakenly paying FVF. 13 Under the Factoring Agreement, FVF and Produce Pay agreed that Delaware law 14 will govern the Factoring Agreement in all respects. See Doc. No. 1-2, Ex. E at 8. 15 Article nine of Delaware’s version of the Uniform Commercial Code (“UCC”) applies 16 here because the Factoring Agreement concerns “a sale of accounts . . ..” 6 Del. C. § 9- 17 322(a)(3). The UCC provides in pertinent part:
18 Subject to subsections (b) through (i), an account debtor on an account . . . 19 may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, authenticated by the assignor or the 20 assignee, that the amount due or to become due has been assigned and that 21 payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and 22 may not discharge the obligation by paying the assignor. 23 24 Id. at § 9-406(a). Neither Produce Pay nor the Veg-Fresh Defendants raise issues 25 discussed in subsections (b) through (i). Subsection (i) provides that the “section does 26 not apply to . . . an interest in a trust . . ., arising under a governing instrument (as defined 27 in Section 3301(e) of Title 12), Title 12, or other applicable law, to the extent that 28 Delaware law governs such interest . . ..” The trust here arises under “other applicable 1 law,” that being PACA; however, Delaware law does not speak to the issue presented 2 here: the obligations of a trustee upon the beneficiary’s assignment of its beneficiary 3 interest to a third party. See generally 12 Del. C. cs. 35, 38 (chapters governing 4 Delaware trusts and treatment of Delaware statutory trusts). Therefore, the Court finds 5 that section 9-406(a) of the UCC governs here. 6 Turning to the Complaint’s allegations, the Court finds that under section 9-406(a) 7 of the UCC, Produce Pay plausibly shows that Veg-Fresh did not discharge its obligation. 8 Produce Pay alleges that FVF assigned all of its rights to the “Unpaid Invoices” to 9 Produce Pay, after which they provided Veg-Fresh with notice of the assignment on June 10 25, 2019 and instructed Veg-Fresh to send payments to Produce Pay pursuant to the 11 assignment. Compl. ¶¶ 16-19. Produce Pay further alleges that FVF and Veg-Fresh, 12 through their executives, agreed to and acknowledged the assignment on June 25 and 26, 13 2020, respectively. Compl. ¶¶ 20-21, Ex. H at 2. Finally, Produce Pay alleges that Veg- 14 Fresh wholly failed to pay Veg-Fresh as instructed and “mistakenly paid the proceeds of 15 the Unpaid Invoices” to FVF. Compl. ¶¶ 24, 147. These allegations plausibly raise the 16 inference that even after receiving notice of the assignment, Veg-Fresh paid the assignor, 17 FVF, not the assignee, Produce Pay, inconsistent with section 9-406(a) of the UCC. 18 Therefore, for the foregoing reasons, the Court finds unpersuasive Veg-Fresh’s argument 19 that it satisfied its debt by mistakenly paying FVF. 20 c. Viability of Produce Pay’s Claims 21 Having addressed both sides’ primary arguments, the Court now turns to the 22 viability of Produce Pay’s claims against Veg-Fresh and its principals. 23 PACA protects sellers of perishable agricultural goods by requiring a merchant, 24 dealer, or retailer of perishable produce to hold in trust proceeds from the sale of the 25 perishable produce, and food derived from that produce, for the benefit of all unpaid 26 suppliers. 7 U.S.C. § 499e(c)(2); Royal Foods Co. v. RJR Holdings, Inc., 252 F.3d 1102, 27 1104-05 (9th Cir. 2001). Under PACA, “a produce dealer holds produce-related assets as 28 a fiduciary” in the statutory trust “until full payment is made to the produce seller.” In re 1 San Joaquin Food Serv., Inc., 958 F.2d 938, 939 (9th Cir. 1992). “The trust 2 automatically arises in favor of a produce seller upon delivery of produce and is for the 3 benefit of all unpaid suppliers or sellers involved in the transaction until full payment of 4 the sums owing has been received.” Id.; see also 7 U.S.C. § 499e(c)(2). 5 There are five elements to a PACA cause of action: (1) the commodities sold were 6 perishable agricultural commodities, (2) the purchaser was a commission merchant, 7 dealer, or broker, (3) the transaction occurred in contemplation of interstate or foreign 8 commerce, (4) the seller has not received full payment on the transaction, and (5) the 9 seller preserved its trust rights by including statutory language referencing the trust on its 10 invoices. Tom Ver LLC v. Organic All., Inc, No. 13-CV-03506, 2015 WL 6957483, at *8 11 (N.D. Cal. Nov. 11, 2015) (citing Beachside Produce, LLC v. Flemming Enters., LLC, 12 No. 06-04957, 2007 WL 1655554, at *2 (N.D. Cal. June 6, 2007)); 7 U.S.C. § 499e(c)(3), 13 (4); 7 C.F.R. § 46.46(c), (f). 14 i. Counts I, II, and III 15 The Veg-Fresh Defendants argue that Count I, II, and III should be dismissed 16 because Produce Pay’s allegations regarding Veg-Fresh’s failure to preserve sufficient 17 funds is “demonstrably untrue.” MTD at 7; see also id. at 8-9. In their reply, the Veg- 18 Fresh Defendants assert that Produce Pay has failed to plausibly allege an element 19 necessary to bring a PACA claim—“that the seller has not received full payment on the 20 transaction.” MTD Reply at 4. Produce Pay responds that it has sufficiently pled all the 21 elements of a PACA claim. See MTD Opp. at 10-14. 22 The Court finds that Produce Pay has sufficiently alleged PACA claims for 23 enforcement of a PACA trust, failure to maintain trust assets, and failure to promptly pay. 24 As mentioned above, the only element in dispute is whether “the seller has not received 25 full payment on the transaction.” The Veg-Fresh Defendants essentially argue that these 26 claims fail, since Produce Pay concedes that Veg-Fresh paid FVF. However, by virtue of 27 the assignment, Produce Pay stands in the shoes of the produce supplier, FVF. Thus, 28 because the allegations plausibly demonstrate that Veg-Fresh failed to pay Produce Pay 1 as instructed in the notice of assignment, Produce Pay has sufficiently stated claims for 2 enforcement of a PACA trust, failure to maintain trust assets, and failure to promptly pay. 3 See Tom Ver LLC, 2015 WL 6957483, at *9 (plaintiff sufficiently stated the same claims 4 based on allegations plausibly showing, inter alia, that defendants failed to maintain the 5 trust and pay plaintiff promptly). 6 The Veg-Fresh Defendants also argue that footnote four of the “bills of sale for 7 FVF’s accounts receivable . . . preclude Plaintiff from asserting trust rights against 8 others.” MTD at 7. Produce Pay responds that the “true interpretation . . . is that such 9 Bill of Sale did not create any new trust relationship, and has no bearing on the PACA 10 trust rights being assigned.” MTD Opp. at 13, n. 2. The Court agrees with Produce Pay. 11 Footnote four in the bill of sale provides that “[t]his Bill of Sale constitutes Pro[duce] 12 []Pay’s purchase and [FVF]’s sale of all or the entirety of [FVF]’s Right to receive full 13 payment promptly upon the Accounts or Receivables listed in Exhibit A and does not 14 create either a trust relationship or a fiduciary relationship between [FVF] and Pro[duce] 15 []Pay or between Pro[duce] []Pay and any third party. See Restatement (Third) of Trusts 16 § 5(i)-(j) (2003).” Compl., Ex. G at 50 of 67 (emphasis added). The express language 17 and the footnote’s citation to the Restatement (Third) of Trusts support Produce Pay’s 18 interpretation. The footnote’s use of the word “create” suggests that no new trust 19 relationship was created between Produce Pay and FVF or Veg-Fresh; rather, it suggests 20 that transaction is a transfer of FVF’s PACA rights to Produce Pay. Further, the cited 21 Restatement (Third) of Trusts section provides examples of relationships that are not 22 trusts, including “contracts to convey or certain contracts for the benefit of third parties,” 23 and “assignments or partial assignments of choses in action . . ..” Restatement (Third) of 24 Trusts § 5(i)-(j). Accordingly, the Court DENIES the Veg-Fresh Defendants’ motion to 25 dismiss Counts I, II, and III. 26 ii. Count IV – Breach of Express or Implied Duties 27 The Veg-Fresh Defendants further argue that Produce Pay’s claim for breach of 28 express or implied duty is deficient. The basis for their argument is that their duty to 1 “make full payment promptly” is limited to the seller, FVF, and that they owed no duty to 2 Produce Pay to “exercise reasonable care and diligence in disposing of produce promptly 3 and in [a] fair and reasonable manner.” MTD at 9 (quoting Compl. ¶ 75). It is a violation 4 of 7 U.S.C. § 499(b)(4) for a dealer “to fail, without reasonable cause, to perform any 5 specification or duty, express or implied, arising out of any undertaking in connection 6 with” a PACA transaction. The Veg-Fresh Defendants’ first argument fails for the 7 reasons discussed above, namely, that Produce Pay stands in the place of FVF as the 8 assignee of all of its rights to accounts receivable, including its PACA trust rights. 9 The Veg-Fresh Defendants appear to be correct that the second alleged duty refers 10 to one applicable to a commission merchant under 7 C.F.R. § 46.29. PACA defines a 11 commission merchant as “any person engaged in the business of receiving in interstate or 12 foreign commerce any perishable agricultural commodity for sale, on commission, or for 13 or on behalf of another.” 7 U.S.C. § 499a(b)(5). As the Veg-Fresh Defendants point out, 14 Produce Pay alleges that the transactions between FVF and Veg-Fresh is “a purchase and 15 sale,” which would indicate that Veg-Fresh is a dealer,4 not a commission merchant. In 16 its opposition, Produce Pay primarily argues that Veg-Fresh is a dealer as alleged in the 17 Complaint. MTD Opp. at 11. While Produce Pay makes a passing reference to Veg- 18 Fresh being a commission merchant, see id., it ignores that it failed to allege facts in 19 support of the assertion. Therefore, Produce Pay cannot assert its claim for a breach of 20 express or implied duty based on this second alleged duty, but it may assert such a claim 21 based on Veg-Fresh’s duty to “make full payment promptly” under 7 U.S.C. § 499(b)(4). 22 That stated, the Court DENIES the Veg-Fresh Defendants’ motion to dismiss Count IV. 23 /// 24 /// 25
26 27 4 PACA defines a dealer as “any person involved in the business of buying or selling in wholesale or jobbing quantities, as defined by the Secretary, any perishable agricultural commodity in interstate or 28 1 iii. Counts V and VII – Breach of Good Faith and Fair Dealing and 2 Interference with Receipt of Trust Assets under PACA 3 Next, the Veg-Fresh Defendants argue that Produce Pay’s PACA claims for breach 4 of good faith and fair dealing and interference with receipt of trust assets are deficient as 5 shown by Produce Pay’s admission that Veg-Fresh mistakenly paid FVF. See MTD at 6 10-11.5 Produce Pay argues that it has sufficiently pleaded all elements of its PACA 7 claims, including Count V. See MTD Opp. at 14. 8 Produce Pay has plausibly alleged a breach of good faith and fair dealing and 9 interference with receipt of trust assets under PACA. See Sun Hong Foods, Inc. v. 10 Outstanding Foods, Inc., No. 19-10121, 2020 WL 2527048, at *4 (C.D. Cal. Mar. 26, 11 2020) (“Sun Hong Foods”) (finding plaintiff plausibly stated such claims under PACA 12 where it alleged defendant failed to preserve sufficient trust amounts inconsistent with 13 PACA). The Court is not persuaded that the claims are deficient merely because Produce 14 Pay alleges that Veg-Fresh mistakenly paid FVF. The Veg-Fresh Defendants appear to 15 argue erroneously that the PACA trust assets are limited to the amount it provided to 16 FVF. See MTD at 12 (“Veg-Fresh did not retain or utilize any PACA trust assets, as 17 Veg-Fresh has paid FVF.”). But PACA requires a dealer in Veg-Fresh’s position “to 18 hold in trust proceeds from the sale of the perishable produce, and food derived from that 19 produce, for the benefit of all unpaid suppliers.” Tom Ver LLC, 2015 WL 6957483, at *8 20 (citing 7 U.S.C. § 499e(c)(2); Royal Foods, 252 F.3d at 1104-05). Thus, the Veg-Fresh 21 Defendants’ position is contrary to the express language of PACA. Further, in Sun Hong 22 Foods, the plaintiff alleged the defendant, inconsistent with its PACA obligations, issued 23 payments to entities other than plaintiff during a time when its debt to plaintiff went 24 unpaid and also failed to preserve sufficient trust amounts. Id. Here, Produce Pay 25
26 27 5 The Veg-Fresh Defendants also argue that Produce Pay lacks “standing to claim interference [with] receipt of trust assets” because Produce Pay is a factor, not a supplier. Id. at 11. However, as discussed 28 1 likewise alleges that Veg-Fresh, inconsistent with its PACA obligations, paid FVF and 2 failed to preserve sufficient trust amounts to satisfy its debt to Produce Pay. See Compl. 3 ¶¶ 35-43, 147. Reading these allegations in the light most favorable to Produce Pay, as 4 the Court must do at this stage, Produce Pay has sufficiently alleged that the Veg-Fresh 5 Defendants diverted trust assets prejudicing their ability to pay Produce Pay. 6 Accordingly, the Court DENIES the Veg-Fresh Defendants’ motion to dismiss Counts V 7 and VII. 8 iv. Count VI – Breach of Contract 9 The Veg-Fresh Defendants next argue that Produce Pay’s breach of contract claim 10 is deficient because it does not have standing to sue based on contracts between Veg- 11 Fresh and FVF. See MTD at 10-11. Produce Pay counters that it sufficiently stated a 12 breach of contract claim because “FVF properly assigned all of its right, title, and interest 13 in and to the Unpaid Invoices . . ..” MTD Opp. at 8. 14 The Court finds Produce Pay has sufficiently stated a claim for breach of contract. 15 The Veg-Fresh Defendants do not dispute that a valid contract exists between Veg-Fresh 16 and FVF; rather, it contends that Produce Pay lacks standing since it was not a party to 17 the contracts between FVF and Veg-Fresh. However, the Veg-Fresh Defendants ignore 18 that FVF assigned its contract and trust rights to Produce Pay. As Produce Pay 19 recognizes, as assignee, it obtained FVF’s “right to sue” for breach of contract, with FVF, 20 as assignor, thereafter lacking the right to sue Veg-Fresh for breach of contract arising 21 out of the invoices at issue. See MTD Opp. at 7-8 (citing Searles Valley Minerals 22 Operations Inc. v. Ralph M. Parson Service Co., 191 Cal. App. 4th 1394, 1402-03 (4th 23 Dist. 2011); Johnson v. Cty. of Fresno, 111 Cal. App. 4th 1087, 1096 (2003)); accord 24 Christiana Care Health Servs., Inc. v. PMSLIC Ins. Co., No. 14-1420, 2015 WL 25 6675537, at *5 (D. Del. Nov. 2, 2015) (plaintiff had standing to sue for breach of contract 26 because it, as an assignee of a counterparty’s contract rights, “stands in the shoes of the 27 assignor”). Accordingly, the Court DENIES the Veg-Fresh Defendants’ motion to 28 dismiss Count VI. 1 v. Count VIII – Breach of Fiduciary Duty 2 Finally, the Veg-Fresh principals argue that Produce Pay’s breach of fiduciary duty 3 claim is deficient for four reasons. First, Produce Pay lacks standing to assert the claim 4 because it is a factor, not a supplier. See MTD Opp. at 12-13. Second, Produce Pay’s 5 allegation that the Veg-Fresh principals are in possession of PACA trust assets is 6 purportedly untrue since Produce Pay also alleges that Veg-Fresh paid FVF. See id. at 7 13. Third, Produce Pay’s allegations of the Veg-Fresh principals’ actual or constructive 8 knowledge of an inability to pay are “invalidated by Plaintiff’s own claim that Veg-Fresh 9 made payment to FVF.” Id. Fourth, Produce Pay’s allegation that the Veg-Fresh 10 principals allowed payment to be made to entities other than its produce suppliers is 11 untrue given the allegation that Veg-Fresh did pay its produce supplier, FVF. Id. 12 “[I]ndividual shareholders, officers, or directors of a corporation who are in a 13 position to control PACA trust assets, and who breach their fiduciary duty to preserve 14 those assets, may be held personally liable under the Act.” Sunkist Growers, Inc. v. 15 Fisher, 104 F.3d 280, 283 (9th Cir. 1997). “PACA liability attaches first to the licensed 16 seller of perishable agricultural commodities. If the seller’s assets are insufficient to 17 satisfy the liability, others may be found secondarily liable if they had some role in 18 causing the corporate trustee to commit the breach of trust.” Sunkist Growers, Inc., 104 19 F.3d at 283 (quoting Shepard v. K.B. Fruit & Vegetable, Inc., 868 F. Supp. 703, 706 20 (E.D. Pa. 1994)). In determining secondary liability, courts consider (1) “whether an 21 individual holds a position that suggests a possible fiduciary duty to preserve the PACA 22 trust assets (e.g., officer, director, and/or controlling shareholder),” and (2) “whether that 23 individual’s involvement with the corporation establishes that she was actually able to 24 control the PACA trust assets at issue.” Bear Mountain Orchards, Inc. v. Mich-Kim, Inc., 25 623 F.3d 163, 172 (3d Cir. 2010). “A court considering the liability of the individual 26 may look at ‘the closely-held nature of the corporation, the individual’s active 27 management role’ and any evidence of the individual’s acting for the corporation.” 28 Sunkist Growers, Inc., 104 F.3d at 283. 1 The Court finds that Produce Pay has adequately stated a claim for breach of 2 fiduciary duty by the Veg-Fresh principals. The Court has already rejected essentially the 3 same arguments advanced by the Veg-Fresh principals. First, Produce Pay, as an 4 assignee of FVF’s PACA trust and contract rights, stands in the shoes of FVF. Second, 5 Veg-Fresh’s payment to FVF does not rid it or the principals of possessing PACA trust 6 assets. As discussed above, this position is contrary to the express language of PACA, 7 which provides that a dealer like Veg-Fresh holds in trust “[p]erishable agricultural 8 commodities received by a . . . dealer . . . in all transactions, and all inventories of food or 9 other products derived from perishable agricultural commodities, and any receivables or 10 proceeds from the sale of such commodities or products” for the benefit of the “unpaid 11 suppliers, sellers, or agents.” 7 U.S.C. § 499e(c)(2). Produce Pay has plausibly alleged 12 that it stands in the shoes of FVF, Veg-Fresh’s supplier, and that it has not been paid as 13 Veg-Fresh was instructed in the notice of assignment. See Compl. ¶¶ 13-24. 14 The Veg-Fresh Defendants’ final two arguments are also deficient. Under the case 15 law discussed above, the Veg-Fresh principals’ knowledge is not dispositive. Rather, the 16 focus is on the principals’ position at the trustee company, and whether the principals’ 17 roles demonstrate that they were able to control the PACA trust assets. See Bear 18 Mountain Orchards, Inc., 623 F.3d at 172. Here, Produce Pay’s allegations plausibly 19 demonstrate that they held executive positions at Veg-Fresh and/or were principals listed 20 on Veg-Fresh’s PACA license. See Compl. ¶¶ 3(c)-(g). Further, Produce Pay alleges 21 that these individuals “exercise[d] dominion and control over Veg-Fresh at all times 22 relevant to this action and otherwise participated in the tortious conduct or other wrongs 23 set forth” in the Complaint. Id. Most importantly, Produce Pay alleges that “the Veg- 24 Fresh Principals controlled and managed Veg-Fresh’s operations and had control over 25 Veg-Fresh’s financial dealings, including those involving the PACA Trust Assets.” 26 Compl. ¶ 105; see also id. ¶¶ 106-11 (providing additional allegations that the Veg-Fresh 27 principals were in positions to control the disposition of the PACA trust assets). The 28 Veg-Fresh principals do not assert that these allegations are insufficient to demonstrate 1 || plausibly the required showing of control over PACA trust assets. Rather, their argument 2 Veg-Fresh paid FVF, not Produce Pay, supports Produce Pay’s allegations that the 3 || principals allowed Veg-Fresh to dispose of PACA trust assets in a manner inconsistent 4 || with their PACA obligations. Discovery may paint a different picture, but at this stage, 5 || the allegations are sufficient to state a plausible PACA claim for breach of fiduciary duty 6 against the Veg-Fresh principals. Accordingly, the Court DENIES the Veg-Fresh 7 Defendants’ motion to dismiss Count VII. 8 CONCLUSION 9 Based on the foregoing, the Court DENIES the Veg-Fresh Defendants’ motion to 10 || dismiss for failure to state a claim and DENIES their motion to strike. 11 12 IT IS SO ORDERED. 13 14 || Dated: June 24, 2020 15 Mikel lM 7 fd tolls 16 HON. MICHAEL M. ANELLO United States District Judge 18 19 20 21 22 23 24 25 26 27 28