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Inc. v. H.C. Schmieding Produce Co., LLC

United States District Court, D. Kansas

September 15, 2017

RESER'S FINE FOODS, INC., Plaintiff,
v.
H.C. SCHMIEDING PRODUCE CO., LLC., and C & E FARMS, INC., Defendants. H.C. SCHMIEDING PRODUCE CO., LLC., Third-party Plaintiff,
v.
RESER'S FINE FOODS, INC., SUNTERRA PRODUCE TRADERS, INC., and C.H. ROBINSON WORLDWIDE, INC., Third-party Defendants.

          MEMORANDUM AND ORDER

          SAM A. CROW, U.S. DISTRICT SENIOR JUDGE.

         This case comes before the court on the motion of H.C. Schmieding Produce Co., LLC (“Schmieding”) for summary judgment (ECF# 75) against the plaintiff Reser's Fine Foods, Inc. (“Reser's”). The parties have filed their respective memoranda, and the movant asks for oral argument. The court does not find oral argument necessary here. The parties have fully briefed the issues, and oral argument would not materially assist the court in deciding the merits of the pending motion.

         BACKGROUND OF ALLEGATIONS

         In September of 2016, Reser's filed this declaratory judgment action asking for an offset of $269, 519.87, as the alleged damages from Schmieding's breach of contract in supplying a load of celery that Reser's had used in its finished food products and was notified later that the celery was the subject of a recall and then a hold. ECF# 1. Reser's had contracted with Schmieding on or about February 19, 2015, for the purchase of 91 truckloads of celery to be delivered between February of 2015 and January of 2016 (“2015 Celery Contract”).

         Reser's alleges the load of celery in dispute was delivered on November 11, 2015, pursuant to invoice #133505[1] and contained long stalk celery, bulk from LUNDY 10b-2. Reser's alleges that by the time Schmieding verbally notified it of the hold being lifted, Reser's had already disposed of the finished product and was in the process of replacing the product due for delivery to its customers. Reser's alleges it “has withheld $269, 519.87 from Defendant Schmieding, as an offset to amounts otherwise due Defendant Schmieding for celery delivered to Plaintiff during 2015.” ECF# 1, ¶ 32. Reser's demands a declaratory judgment that it is entitled to retain this offset as damages and that the defendants are barred from asserting any “further claims by reason of celery Defendants supplied and delivered to Plaintiff in November, 2015, and under the 2015 Celery Contract.” ECF# 1, p. 6.

         Schmieding alleges that pursuant to an asset purchase agreement it acquired all rights and assumed all obligations under the 2015 Celery Contract. ECF# 62 pp. 7-8. This celery contract obligated Reser's to purchase six loads of celery in November of 2015, but Reser's asked Schmieding to locate on the open market a seventh load of celery and sell it to Reser's on the issued purchase order #838903. Schmieding did this and entered into an agreement for the sale and purchase of the celery described in the purchase order. Schmieding delivered this load to Reser's on November 11, 2015, which is the subject of invoice #133505. Over Schmieding's repeated demands, Reser's has failed to pay for the loads of celery delivered between October 12, 2015 and February 22, 2016, and Reser's presently owes Schmieding the amount of $276, 519.87. On these allegations, Schmieding asserts four counterclaims against Reser's for: 1) failure to pay trust funds in violation of the Perishable Agricultural Commodities Act, 7 U.S.C. §§ 499a, et seq. (“PACA”); 2) failure to make prompt and full payment for shipments in violation of PACA; 3) breach of contract and invoices in not timely remitting payment; and 4) recovery of interest and attorney's fees. ECF# 62, pp. 11-13.

         SUMMARY JUDGMENT STANDARDS

         Rule 56 mandates summary judgment “against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). “Of course, a party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of ‘the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, ' which it believes demonstrate the absence of a genuine issue of material fact.” Id. at 323. This does not mean that the moving party must negate the other sides' claims or defenses through affidavits. Id. Upon a properly supported motion for summary judgment, the nonmoving party must go beyond the pleadings, that is, mere allegations or denials, and set forth specific facts showing a genuine issue of material fact for trial, relying upon the types of evidentiary materials contemplated by Rule 56. Id.

         The court decides the motion “through the prism of the substantive evidentiary burden.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254 (1986). Thus, a factual dispute is “material” only if it “might affect the outcome of the suit under the governing law.” Id. at 248. A “genuine” factual dispute requires more than a mere scintilla of evidence in support of a party's position. Id. at 252. The purpose of Rule 56 “is not to replace conclusory allegations of the complaint or answer with conclusory allegations of an affidavit.” Lujan v. Nat'l Wildlife Fed'n, 497 U.S. 871, 888 (1990). At the summary judgment stage, the court is not to be weighing evidence, crediting some over other, or determining the truth of disputed matters, but only deciding if a genuine issue for trial exists. Tolan v. Cotton, ---U.S.---, 134 S.Ct. 1861, 1866 (2014). The court performs this task with a view of the evidence that favors most the party opposing summary judgment. Id. Summary judgment may be granted if the nonmoving party's evidence is merely colorable or is not significantly probative. Liberty Lobby, 477 U.S. at 250-51. Essentially, the inquiry is “whether the evidence presents a sufficient disagreement to require submission to the jury or whether it is so one-sided that one party must prevail as a matter of law.” Id. at 251-52.

         SUMMARY OF POSITIONS AND SUBSTANTIVE LAW

         Schmieding seeks “summary judgment against Reser's on each of its causes of action.” ECF# 76, p. 10. It asks the court to enter judgment against Reser's in the principal amount of $276, 862.39, plus interest at the rate of 18% per annum accrued through the date of judgment, and attorney's fees actually incurred in the amount of $62, 149.94.

         Schmieding's first counterclaim addresses PACA's statutory trust liability. The court's prior order laid out the following as relevant to this claim:

The Perishable Agriculture Commodities Act, which was enacted in 1930 to suppress unfair and fraudulent business practices in the marketing of perishable commodities, was amended in 1984 to provide unique credit protection to sellers of perishable agricultural commodities. Because sellers of perishable commodities had a need to move their inventories quickly, they were often required to become unsecured creditors of their purchasers, whose credit they were often unable to verify. . . .
The 1984 amendments create, upon the sale of perishable agricultural commodities, a trust for the benefit of the unpaid sellers of the commodities on (1) the commodities, (2) the inventory or products derived from them, and (3) the proceeds of the inventory or products. 7 U.S.C. § 499e(c)(1)-(2); see also House Report at 3 (recounting congressional findings); Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336 F.3d 410, 413 (5th Cir.2003) (same). As amended, PACA requires that purchasers of perishable agricultural commodities maintain the trust by retaining the commodities or their proceeds until the commodities sellers are paid, and it makes it unlawful to “fail to maintain the trust as required.” 7 U.S.C. § 499b(4). PACA confers jurisdiction on district courts to entertain “actions by trust beneficiaries to enforce payment from the trust.” Id. § 499e(c)(5).
The trust created by PACA is a “nonsegregated ‘floating' trust” on perishable agricultural commodities and their derivatives until all sellers of such commodities are paid. 7 C.F.R. § 46.46(b). Because the governing regulations specifically contemplate the commingling of trust assets without defeating the trust, see id., the trustee of such a trust 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 sellers of perishable agricultural commodities, ” id. § 46.46(d)(1). Any act inconsistent with maintaining the trust, including “dissipation” of trust assets, is deemed unlawful and a violation of PACA. See 7 U.S.C. § 499b; 7 C.F.R. § 46.46(d)(1). “Dissipation” is defined as “any act or failure to act which could result in the diversion of trust assets or which could prejudice or impair the ability of unpaid suppliers, sellers, or agents to recover money owed in connection with produce transactions.” 7 C.F.R. § 46.46(a)(2).

ECF# 42, pp. 11-12 (quoting Nickey Gregory Co., LLC v. Agricap, LLC, 597 F.3d 591, 594-95 (4th Cir. 2010)). The court's prior order also summarized that a commodities purchaser violates PACA by failing to retain in trust the commodities or their proceeds until the commodities seller is paid. Id. at p. 12. This trust is a “nonsegretated floating trust” in which the commodities and their proceeds can be commingled or converted into other assets so long as the trust assets are maintained to be “freely available to satisfy outstanding obligations” to the commodities sellers. Id. Acting or failing to act with respect to the trust assets violates PACA if the assets are not maintained to be freely available to satisfy obligations but are diverted or if the unpaid sellers' recovery of the owed money is prejudiced by the dissipation of assets.

         Besides the trustee's duty to maintain and ensure sufficient assets, courts have recognized that as a PACA trustee, “a produce buyer is charged with a duty ‘to ensure . . . . that any beneficiary under the trust will receive full payment.'” Coosemans Specialties, Inc. v. Gargiulo, 485 F.3d 701, 705 (2nd Cir. 2007) (quoting D.M. Rothman & Co. v. Korea Commercial Bank of N.Y., 411 F.3d 90, 94 (2d Cir.2005)). This is because:

The buyer has a “fiduciary obligation under PACA to repay the full amount of the debt owed to the PACA beneficiary.” C.H. Robinson Co. v. Alanco Corp., 239 F.3d 483, 488 (2d Cir.2001). Under the statute, the trust is formed at the moment the buyer receives the produce and remains in effect until the seller is paid in full. See 7 C.F.R. § 46.46(c)(1); In re Kornblum & Co., 81 F.3d 280, 286 (2d Cir.1996). However, to establish the existence of a PACA trust, a number of prerequisites must be met:
[T]he seller must demonstrate that: (1) the commodities sold were perishable agricultural commodities; (2) the purchaser of the perishable agricultural commodities was a commission merchant, dealer or broker; (3) the transaction occurred in interstate or foreign commerce; (4) the seller has not received full payment on the transaction; and (5) the seller preserved its trust rights by giving written notice to the purchaser of its intention to do so.
Taylor & Fulton [Packing, LLC v. Marco Intern. Foods, LLC, ] 2011 WL 6329194, at *5 [(E.D.N.Y. ...

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