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A & J PRODUCE CORP. v. CIT GROUP/FACTORING

August 19, 1993

A & J PRODUCE CORP., et al., Plaintiffs,
v.
CIT GROUP/FACTORING, INC. and ELLIOT MERBERG, Defendants.


Sand


The opinion of the court was delivered by: LEONARD B. SAND

SAND, J.

 This action is brought under the Perishable Agricultural Commodities Act (PACA), 7 U.S.C. § 499, by forty-four dealers in fresh fruits and vegetables against Elliot Merberg, the president of the now bankrupt entities N. Merberg & Son, Inc. and Diversified Food Service Distributors, Inc., ("the Merberg companies") and its secured lender, CIT Group/Factoring, Inc ("CIT"). *fn1" Currently before the Court are a number of motions: (1) plaintiffs' motions to strike defendant CIT's sixth affirmative defense and for a protective order as to certain discovery demands; (2) defendant CIT's motion for summary judgment against certain plaintiffs for failure to comply with PACA's requirements to preserve trust assets; (3) defendant CIT's motion for summary judgment against certain plaintiffs or to reduce the amount of PACA claims; and (4) plaintiffs' motions for summary judgment for the amounts set forth on the list promulgated by the Secretary of Agriculture or in the alternative for summary judgment as to liability only.

 Factual Background

 The predecessor corporation of defendant CIT entered into an accounts receivable financing agreement with the Merberg companies dated January 1, 1985. To secure that arrangement, on March 7, 1989, the parties entered into an inventory security agreement. The accounts receivable agreement evidences an arrangement whereby CIT agreed to advance funds based upon an assignment of the accounts receivable of the Merberg companies.

 The plaintiffs are dealers in perishable agricultural goods which sold produce to the Merberg companies, which in turn sold to restaurants and other facilities. The bulk of the transactions at issue took place between February and May of 1991. The Merberg companies filed for bankruptcy on May 10, 1991. It is undisputed that the plaintiffs were not paid by the Merberg companies, although there are questions regarding the amount that certain plaintiffs are owed. With regard to certain other plaintiffs, a question arises whether the goods sold qualify as "perishable" under the Act. Although the parties disagree as to the proper characterization of the arrangement, the evidence demonstrates that CIT collected the accounts receivable and reduced the amount owed by the Merberg companies to CIT by approximately two million dollars in the period immediately preceding and subsequent to the bankruptcy.

 PACA

 PACA regulates trading in perishable agricultural commodities, essentially fruits and vegetables. The Act was amended in 1984 upon a finding by Congress that a burden on commerce in these goods was caused by certain financial credit arrangements, whereby dealers would receive delivery of goods without having made payment for them. The 1984 amendment provides that upon delivery of goods to the purchaser, a statutory trust automatically arises on behalf of unpaid suppliers or sellers. The relevant portion of the statute, 7 U.S.C. § 499(e)(c)(2), reads as follows:

 
Perishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents.

 PACA imposes a floating non-segregated trust, such that a purchaser is not required to segregate trust assets and a seller is not required to trace the assets specifically to the purchase of the produce. The statute further provides that to preserve one's rights as a beneficiary of a PACA trust, notice must be given by the seller to the dealer and the Secretary of Agriculture

 
within thirty calendar days (1) after expiration of the time prescribed by which payment must be made, as set forth in regulations issued by the Secretary [which time is ten days from the date of receipt of the goods], (ii) after expiration of such other time by which payment must be made, as the parties have expressly agreed to in writing before entering into the transaction.

 7 U.S.C. 499e(c)(3).

 The regulations promulgated pursuant to this section provide that the maximum time upon which parties may agree for payment and still have the benefit of PACA protection is thirty days from the date of receipt and acceptance of the goods. 7 C.F.R. § 46.46(f)(1) & (2). As will be discussed in more detail below, any agreement to extend the terms of payment for more than the ten days allotted in the statute must be in writing--no oral modification is recognized.

 Motion to Strike Sixth Affirmative Defense

 Plaintiffs' initial motion, intended to narrow the discovery and focus the issues, was a motion to strike CIT's Sixth Affirmative Defense. Although we dispose of this action on summary judgment, the questions raised by the motion to strike pertain directly to the subsequent cross-motions for summary judgment.

 CIT's defense is essentially that certain plaintiffs have lost the protection of the PACA trust because over their course of dealing with Merberg, and through oral agreements, they extended the time for payment past the thirty-day maximum allowed by the statute. To support this argument, CIT relies almost entirely on one case, In re Lombardo Fruit & Produce, 107 Bankr. 952 (Bky. E.D.Mo., 1989), a decision which was subsequently reversed, 150 Bankr. 941 (Bky. E.D.Mo. 1993) in light of Hull Co. v. Hauser's Foods, Inc., 924 F.2d 777 (8th Cir. 1991).

 The Eighth Circuit was the first appellate court to rule on the question of the effect of oral agreements on a produce seller's rights to PACA trust protection. In Hull, the parties had entered into oral agreements to pay for perishables not in ten days, but in forty-five and thirty days. The court ruled:

 
oral agreements have no effect on produce sellers' trust protection. The statute and regulations clearly contemplate that the parties must set forth such agreements in writing to be effective . . . Thus, notwithstanding the oral agreements, both sellers retained the right ...

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