United States District Court, Southern District of New York
March 28, 1991
LIBERTY MUTUAL INSURANCE COMPANY, AS SUBROGEE OF ARBOGAST & BASTIAN, INC., AND LIBERTY MUTUAL INSURANCE COMPANY, PLAINTIFFS,
BANKERS TRUST COMPANY AND ROTCHES PORK PACKERS, INC., DEFENDANTS.
The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.
OPINION AND ORDER
The Court has reviewed defendant Bankers Trust's memorandum
of law dated February 26, 1991 and the letter from defendant's
counsel dated March 7, 1991 enclosing a "bench memorandum," as
well as the letters from plaintiff Liberty Mutual's counsel
dated March 4 and March 18, 1991, respectively, and its "bench
memorandum," relating to the Court's invitation for comments
contained in its Opinion and Order of February 12, 1991,
758 F. Supp. 890 (S.D.N. Y.). After due consideration, the Court
adheres to that Opinion and Order, in which the facts of this
case are fully set forth.
I. Review of Parties' Submissions
Arbogast & Bastian ("A & B"), as statutory trustee for the
benefit of cash sellers, did not have the power to enter into
the Inter-Creditor Agreement which purported to subordinate
trust assets.*fn1 As
purchases of livestock were made by A & B from cash sellers,
that livestock and the meat products which were created as a
result of their purchases became a part of the corpus of the
statutory trust, as did the proceeds and accounts receivable
attributable to A & B's sale of such products to distributors
such as defendant Rotches, Inc. Since at the time of the
Inter-Creditor Agreement A & B had a prior security interest in
any and all of Rotches, Inc.'s accounts receivable and assets,
it could not, as trustee, release the lien on Rotches, Inc.'s
assets which lien protected its ability to collect on behalf of
the trust beneficiaries on sales to Rotches, Inc..
To hold that A & B as trustee could subordinate the trust's
lien on the receivables of a creditor would frustrate the
purposes of the Packers and Stockyards Act, 7 U.S.C. § 196 et
seq., as set forth in the legislative history of the 1976
amendments which created, inter alia, the provisions for the
statutory trust. See, In re Gotham Provision Co., Inc.,
669 F.2d 1000, 1009-1010, 1011, 1011 n. 14 (5th Cir.1982). The
trust provisions of the Packers and Stockyards Act, added in
were devised to protect livestock sellers from
potentially devastating financial losses of the
type many such sellers experienced in the 1970's
when a number of major meat packing concerns
failed, leaving sellers unpaid. Under the law as
it then existed, banks and other lending
institutions were able to enforce their priority
claims to the inventories and accounts receivables
[sic] of the bankrupt packers, leaving the
livestock sellers uncompensated for the products
they had sold to the packers but for which they
had not yet been paid.
The statutory trust created by § 206(b) remedies
this injustice by unequivocally giving priority to
the interests of cash sellers of livestock in
packer inventories, accounts receivable, and
proceeds derived from the cash seller's livestock
over lenders who take security interests in those
assets . . .
In re G & L Packing Co., 41 B.R. 903, 908-10 (N.D.N.Y.1984).
See also, In re Gotham, supra, 669 F.2d at 1009.
Inter-creditor agreements subordinating a packer's rights to
collect receivables are little different in effect, as regards
cash sellers, from secured loans to packers which give a
lending institution priority claims over receivables of the
packer. Accordingly, A & B violated its fiduciary duty to the
unpaid cash sellers in entering into the Inter-Creditor
Agreement and subordinating its security interest in Rotches,
Inc.'s accounts receivable and other assets, thus reducing the
value of the trust's interest in Rotches, Inc.'s accounts
receivable and furthering A & B's individual interests to the
detriment of the trust's interests and those of the trust
beneficiaries. Bankers Trust as a commercial lender is deemed
to be aware of the trustee status of A & B and the violation of
fiduciary duty which was occurring.
Bankers Trust argues that the actions of A & B as trustee in
subordinating its security interest are valid, as long as they
are consistent with the duty to exercise reasonable care, and
that A & B exercised reasonable care in administering the
statutory trust property because the Inter-Creditor Agreement
was beneficial to the cash sellers. It argues that the benefit
consisted of allowing for prompt payment and financing of
increased purchases from A & B by Rotches, Inc., which in turn
would mean more purchases of livestock from the cash sellers.
This argument would be equally applicable to secured loans by
banking institutions to A & B, the very practice at which the
Packers and Stockyards Act was aimed. Bankers Trust's argument
only highlights the similarity of the two transactions in terms
of effect on the cash sellers.
Bankers Trust has also argued that the Court's prior ruling
will impose a severe burden on financing in the packing
industry. Such an argument is better addressed to Congress, if
indeed it was not already raised in the debates surrounding the
1976 amendments. The Court's Opinion and Order of February 12,
1991 as supplemented by this Opinion stands.
II. Prejudgment Interest and Attorneys' Fees
At the March 14, 1991 court conference, the parties indicated
that they could agree on the amount of damages exclusive of
interest and attorneys' fees but were uncertain as to
defendants' liability as to interest and attorneys' fees. The
Releases and Assignments provided by the cash sellers to
Liberty Mutual assign all of the assignors' rights or causes of
action, without limitation, under the Packers and Stockyards
Act. Plaintiff's Notice of Motion for Summary Judgment,
Exhibits 13, 18. With respect to prejudgment interest, the cash
sellers are entitled to prejudgment interest on the amount due
so that they receive "full payment." Pennsylvania Agricultural
Cooperative Marketing Assn. v. Ezra Martin Co., 495 F. Supp. 565,
570-71 (M.D.Pa.1980). Prejudgment interest is requested at
the rate of 9% per annum from May 18, 1984, the date on which
the Bankruptcy Court for the Eastern District of Pennsylvania
temporarily enjoined Rotches, Inc. and Bankers Trust from
diverting the proceeds of sales of livestock and Rotches,
Inc.'s accounts receivable. Bankers Trust has not objected to
the rate of interest or the date requested. Accordingly,
plaintiff's motion for prejudgment interest is granted.
With respect to the propriety of an award of attorneys' fees,
the Court's review of the briefs indicates the parties have not
briefed the issue with sufficient detail for a court
determination of this issue. Briefs on the issue of attorneys'
fees, with reference to the legislative history and applicable
law should be filed no later than April 12, 1991.
IT IS SO ORDERED.