United States District Court, S.D. New York
November 9, 2005.
DAYOUB MARKETING, INC., Plaintiff,
S.K. PRODUCE CORP., SHERYL KANOWITZ, in her individual capacity, and STEVEN KANOWITZ, in his individual capacity, Defendants.
The opinion of the court was delivered by: WILLIAM PAULEY III, District Judge
OPINION AND ORDER
Plaintiff Dayoub Marketing, Inc. ("Dayoub Marketing" or
"Plaintiff") brings this action against S.K. Produce Corp. ("SK
Produce"), Steven Kanowitz and Sheryl Kanowitz (collectively,
"Defendants") under the Perishable Agricultural Commodities Act,
1930 ("PACA"), as amended, 7 U.S.C. §§ 499a-499t. Plaintiff
alleges that SK Produce failed to pay for large quantities of
cabbage delivered on credit and that Defendants failed to
preserve the proceeds SK Produce derived from those goods, in
violation of PACA and in breach of contract. Dayoub Marketing
claims that Defendants are liable for the amount of the unpaid
invoices, plus interest and collection costs. This Court has
jurisdiction pursuant to 7 U.S.C. § 499e(c)(5), 28 U.S.C. § 1331
and 28 U.S.C. § 1367(a) and conducted a bench trial.
Insofar as the Court exercises its prerogative as finder of
fact to determine the weight and credibility of the evidence, the
discussion below is limited to the evidence that this Court
credits. FINDINGS OF FACT
Until approximately 1999, Steven Kanowitz operated his family
business, Kanowitz Fruit & Produce Company ("KFP"). (Trial
Transcript ("Tr.") at 32-33, 42-43.) The company was licensed by
the United States Department of Agriculture ("USDA") under PACA
to conduct business as a produce dealer. (Tr. at 33-34.) KFP did
business with Dayoub Marketing, which sells wholesale quantities
of produce and is also licensed as a PACA dealer. (Tr. at 15,
46.) However, after finding that KFP repeatedly failed to make
prompt payment on produce that it accepted, the USDA permanently
revoked KFP's PACA license in 1997 and barred Steven Kanowitz
from working in the produce industry for one year. (Tr. at 33-34,
53-54, 56-57.) See In re Kanowitz Fruit & Produce Co., PACA
Docket No. D-95-504, 56 Agric. Dec. 917 (U.S.D.A. 1997), aff'd,
Kanowitz Fruit & Produce Co. v. United States, 166 F.3d 1200
(2d Cir. 1998). In June 2000, after pleading guilty to criminal
charges of bid-rigging and tax evasion, Steven Kanowitz was
sentenced to five months in jail and ordered to pay restitution
in the amount of $2.27 million. (Tr. at 33, 43, 50-51,
56.)*fn1 See United States v. Kanowitz, 00 Cr. 0595
Sheryl Kanowitz, Steven's wife, is a secretary for the Baldwin
Union Free School District on Long Island. (Tr. at 28.) She was
not employed by KFP and has never been involved in wholesale
produce transactions. (Tr. at 29, 38, 43.) However, she knew of
her husband's criminal case and the USDA's prohibitions on him
and his company. (Tr. at 30, 33-34, 40.)
In June 1998, Steven Kanowitz formed SK Produce which operated
out of KFP's former office with KFP's personnel. (Tr. at 43-44,
49, 56.) However, because Steven Kanowitz could not obtain a PACA
license due to the USDA's restrictions, he decided that his wife
should act on behalf of SK Produce for official purposes. (Tr. at 44,
48-49.) Thus, Sheryl Kanowitz signed SK Produce's PACA license
application and was on record as the holder of SK Produce's
license. (Tr. at 30-31, 34, 49; Plaintiff's Trial Exhibit ("Ex.")
4.)*fn2 Sheryl Kanowitz also signed the company's
incorporation papers and was its president and sole shareholder.
(Tr. at 30, 35, 44, 49.) She opened corporate bank accounts and
signed its tax returns. (Tr. at 40.) She also received a weekly
paycheck from SK Produce of approximately $1,500. (Tr. at 35, 37,
50.) Nonetheless, Sheryl Kanowitz did not actually work for SK
Produce or exercise managerial control over the company. (Tr. at
36, 39.) Rather, Steven Kanowitz controlled SK Produce by
overseeing two employees who directly managed the company. (Tr.
at 9, 36, 45, 52.) Under questioning by this Court, Sheryl
Kanowitz claimed to be ignorant of her husband's activities,
simply asserting that he was at home when she left for her
secretarial job each morning and also there when she returned
each afternoon. (Tr. at 41.) If such testimony were credited, it
would demonstrate her conscious avoidance. However, this Court
declines to credit that testimony.
In 1998, SK Produce contacted Dayoub Marketing to purchase
produce. (Tr. at 15-16, 20.) It is Plaintiff's practice to sell
on credit only to buyers holding valid PACA licenses. (Tr. at
15-16, 25-26.) Thus, Plaintiff's office manager checked the
prospective buyer's credit, ensured that it held a PACA license
and learned that Sheryl Kanowitz was its sole officer and owner.
(Tr. at 10, 16, 25.) As a result, Dayoub Marketing began selling
to SK Produce on credit. (Tr. at 9, 16-17, 25-26.) Neither Sheryl
Kanowitz nor Steven Kanowitz personally interacted with Plaintiff
on behalf of SK Produce. (Tr. at 10, 23, 31-32, 46, 53.) Between September 2000 and January 2001, SK Produce ordered,
received and accepted large quantities of cabbage from Dayoub
Marketing. (Ex. 1.) Each invoice from this period contains the
In the event collection actions become necessary,
buyer agrees to pay seller's costs and expenses of
collection, including attorneys' fees, until account
balances are paid in full. Interest shall accrue on
any past due balance at the rate of 1.5% per month
(18% per annum).
(Ex. 1.) SK Produce never objected to and the parties never
discussed this language. (Tr. at 13.)
SK Produce failed to make full payment for the cabbages that it
ordered and accepted from Dayoub Marketing between September 2000
and January 2001. (Ex. 2.) In its efforts to collect these
past-due payments, Plaintiff spoke only with Steven Kanowitz.
(Tr. at 21, 23-24, 26, 46.) It did not attempt to contact Sheryl
Kanowitz. (Tr. at 10, 24, 26, 32.)
In January 2001, creditors of SK Produce commenced an action in
this Court. See All World Farms, Inc. v. S.K. Produce Corp.,
01 Civ. 0580 (WHP) (S.D.N.Y.). Dayoub Marketing knew of that
litigation but elected to pursue its remedies administratively
before the USDA. (Tr. at 12.) In January 2002, this Court ordered
that the assets of SK Produce be liquidated and dispersed among
the plaintiffs in the All World Farms action. Therafter, Dayoub
Marketing withdrew its administrative claim and commenced this
action against SK Produce and the Kanowitzes in April 2004. (Tr.
Prior to the bench trial, the parties stipulated that the
invoices and produce at issue are covered by PACA and that the
total amount due on the unpaid invoices is $32,333.50. (Tr. at
9.) They further stipulated that SK Produce and Steven Kanowitz
are liable, but dispute whether that liability extends beyond the
invoiced amounts. (Tr. at 7-9.) Thus, the only issues before the
Court are (1) the liability of Sheryl Kanowitz, and (2)
Defendants' liability for interest and collection costs,
including attorneys' fees. CONCLUSIONS OF LAW
I. Liability of Sheryl Kanowitz
"Under PACA, purchasers of produce on credit are required to
hold the produce and its proceeds, including accounts receivable
and derivatives, `in trust for the benefit of all unpaid
suppliers or sellers of such commodities . . . until full payment
of the sums owing in connection with such transactions has been
received by such unpaid suppliers [or] sellers.'" C.H. Robinson
Co. v. Alanco Corp., 239 F.3d 483, 486 (2d Cir. 2001) (quoting
7 U.S.C. § 499e(c)(2)); accord D.M Rothman & Co. v. Korea
Commercial Bank of New York, 411 F.3d 90, 93 (2d Cir. 2005). "A
PACA trustee's primary duty is to `maintain trust assets in a
manner that such assets are freely available to satisfy
outstanding obligations to sellers of perishable agricultural
commodities. Any act or omission which is inconsistent with this
responsibility, including dissipation of trust assets, is
unlawful and in violation of [PACA].'" D.M. Rothman,
411 F.3d at 93-94 (quoting 7 C.F.R. § 46.46(d)(1)). Although it is
typically the company that is held liable for breaching its
fiduciary duty, "individual shareholders, officers, or directors
of a corporation who are in a position to control PACA trust
assets, and who breach their fiduciary duty to preserve those
assets, may be held personally liable under the Act." Sunkist
Growers, Inc. v. Fisher, 104 F.3d 280, 283 (9th Cir. 1997);
accord Goldman-Hayden Co. v. Fresh Source Produce Inc.,
217 F.3d 348, 351 (5th Cir. 2000); Hiller Cranberry Prods., Inc. v.
Koplovksy, 165 F.3d 1, 8-9 (1st Cir. 1999); Top Banana, L.L.C.
v. Dom's Wholesale & Retail Ctr., Inc., No. 04 Civ. 2666 (GBD)
(AJP), 2005 WL 1149774, at *5 (S.D.N.Y. May 16, 2005) (Report and
Recommendation), adopted by 2005 WL 1529736 (S.D.N.Y. June 28,
2005); "R" Best Produce Inc. v. Eastside Food Plaza Inc., No.
02 Civ. 6925 (DLC), 2003 WL 22231577, at *6 (S.D.N.Y. Sept. 30,
2003); Morris Okun, Inc. v. Harry Zimmerman, Inc.,
814 F. Supp. 346, 348 (S.D.N.Y. 1993). Sheryl Kanowitz was the sole owner and president of SK Produce
and the holder of its PACA license on record with the USDA. (Tr.
at 35, 44, 49; Ex. 4.) She knowingly signed SK Produce's
certificate of incorporation, PACA license application, corporate
bank resolutions and tax returns. (Tr. at 30-31, 34, 40.) Sheryl
Kanowitz's position in SK Produce and her actions demonstrate her
willingness to vouch for the company and hold herself out to the
world as the individual primarily responsible for it. Cf.
Mid-Valley Produce Corp. v. 4-XXX Produce Corp.,
819 F. Supp. 209, 212-13 (E.D.N.Y. 1993) (declining to hold a 100% shareholder
personally liable because "she was never an officer, director, or
employee of the company" and therefore could only be held liable
under a "pierc[ing] the corporate veil" theory). In fact, were it
not for her role, it is doubtful that SK Produce could have
secured a PACA license to purchase on credit from produce dealers
such as Plaintiff. (See Tr. at 15-16, 25-26.) Sheryl Kanowitz
voluntarily placed herself in a position to control the PACA
trust assets that are at issue in this action.
PACA imposes liability on any individual who was in a
position to control trust assets and allows the assets to
dissipate. Top Banana, 2005 WL 1149774, at *6 (PACA "imposes
strict liability on a PACA trustee if there is insufficient
liquid assets to pay the PACA creditors."); Morris Okun,
814 F. Supp. at 349 ("[A]ny failure to account for or preserve trust
assets, for whatever reason and however innocent, creates a
liability for those trust assets."). As discussed above, the
parties stipulated that SK Produce allowed the trust assets to
dissipate and that Steven Kanowitz had sufficient control over
those assets to be liable. (Tr. at 7-9.) Defendants contend that
Sheryl Kanowitz bears no liability because "[s]he did not
exercise judgment, direction or control with respect to the
activities that violated the PACA." (Defendants' Proposed
Findings of Fact and Conclusions of Law ("Def. Mem.") at 7.)
However, Defendants' argument divulges the very reason Sheryl
Kanowitz is liable: she was in a position to control the trust assets and failed to ensure that they were
preserved for Dayoub Marketing. That is, an individual who is the
sole shareholder and president of a corporation need not be
directly involved in the dissipation of assets to be held
personally liable for breach of fiduciary duty as a PACA trustee.
See Loi Banana Corp. of Brooklyn v. Cent. Brooklyn Produce
Wholesalers & Comm'n Merchs., Inc., No. CV 93-4102 (RJD), 1996
WL 391574, at *2 (E.D.N.Y. July 10, 1996) ("[E]ven assuming the
assertions that [the defendant] was only a `silent partner' were
true, it would make no difference. The defendants have conceded
[his] role as the principal officer and owner of Central.");
Bronia, Inc. v. Seo Young Ho, 873 F. Supp. 854, 861 (S.D.N.Y.
1995) ("Defendant argues that he should not be liable because
. . . [he] did not personally misappropriate the trust
assets. . . . [H]owever, . . . as the controlling person of
Tradefield, he owes a fiduciary duty to the plaintiffs.
Therefore, Tradefield's failure to preserve trust assets is also
his failure."). By failing to exert her control over SK Produce
as present and sole shareholder to prevent the trust assets from
dissipating, Sheryl Kanowitz breached her fiduciary duty as a
Accordingly, this Court finds Sheryl Kanowitz personally liable
for breaching her fiduciary duty to preserve the PACA trust
assets for the benefit of Dayoub Marketing. II. Defendants' Liability for Pre-Judgment Interest and
Defendants contend that they are not liable for the interest
that has accrued on the unpaid invoice amounts or for Plaintiff's
collection costs because the provision establishing those
obligations first appeared in Dayoub Marketing's invoices and SK
Produce did not specifically agree to it. In any event,
Defendants argue, both the 18% annual interest rate set forth in
the invoices and the collection costs for which Dayoub Marketing
seeks recompense are unreasonable.
PACA does not itself establish a right to interest and
collection costs. However, the purchaser is required to pay such
items when the parties' contract so provides; in such a case, the
interest and collection costs become subject to the PACA trust
together with the principal debt. Country Best v. Christopher
Ranch LLC, 361 F.3d 629, 632-33 (11th Cir. 2004); Middle
Mountain Land & Produce Inc. v. Sound Commodities Inc.
307 F.3d 1220, 1222-26 (9th Cir. 2002); accord E. Armata, Inc. v.
Platinum Funding Corp., 887 F. Supp. 590, 594-95 (S.D.N.Y.
1995); Morris Okun, 814 F. Supp. at 351. Thus, the pivotal
question is whether the parties' contract provides for an award
of interest and collection costs in favor of Dayoub Marketing.
The parties stipulated that there were no discussions between
purchaser and seller regarding these items. (Tr. at 13.) However,
each invoice contains a paragraph stating that SK Produce "agrees
to pay seller's costs and expenses of collection, including
attorneys' fees, until account balances are paid in full" and
that "[i]nterest shall accrue on any past due balance at the rate
of 1.5% per month (18% per annum)." (Ex. 1.) Between merchants
such as Dayoub Marketing and SK Produce, additional terms
contained in the seller's invoice become part of the parties'
contract unless (1) the buyer expressly limited the seller's
acceptance to the terms of the offer; or (2) the buyer objects to
the new terms within a reasonable time; and (3) the additional
terms materially alter the contract. See N.Y.U.C.C. §
2-207(2)(b); Bayway Ref. Co. v. Oxygenated Mktg. & Trading A.G., 215 F.3d 219, 223 (2d Cir.
2000). Defendants do not contend that they limited their offer or
timely objected to the interest and collection cost provision in
the invoices. However, they argue that these terms materially
altered the contract because the amounts Plaintiff claims for
such items are exorbitant compared to the unpaid invoice balance.
Because Defendants challenge the inclusion of these terms, they
bear the burden of demonstrating a material alteration. See
Bayway Ref., 215 F.3d at 223; Avedon Eng'g, Inc. v. Seatex,
126 F.3d 1279, 1284 (2d Cir. 1997).
A material alteration is one that would "result in surprise or
hardship if incorporated without express awareness by the other
party." N.Y.U.C.C. § 2-207, cmt. 4. New York's Uniform Commercial
Code ("UCC") expressly provides that a contract is not materially
altered by "a clause  providing for interest on overdue
invoices [or 2] fixing the seller's standard credit terms where
they are within the range of trade practice and do not limit any
credit bargained for." N.Y.U.C.C. § 2-207, cmt. 5; see St.
Charles Cable TV, Inc. v. Eagle Comtronics, Inc.,
687 F. Supp. 820, 827 (S.D.N.Y. 1988) ("No surprise or hardship can be claimed
to arise from charging interest on an unpaid bill."). Thus, the
provision for interest even at a rate of 1.5% per month does
not materially alter the parties' contract. See Morris Okun,
814 F. Supp. at 351 (enforcing a term in the invoice through
which the defendant agreed that "past due accounts will accrue
1.25% interest per month").
Defendants argue that the collection cost term works a hardship
on them because Plaintiff's claimed costs constitute nearly sixty
percent of Defendants' principal liability. (Def. Mem. at 9.)
Moreover, Defendants argue, rather than joining SK Produce's
other creditors in the All World Farms action, Dayoub Marketing
incurred unnecessary litigation expenses by pursuing its claims
administratively and bringing this action only after the earlier
federal action closed. Hardship, however, is assessed as of the
time the parties contracted not retrospectively. See Bayway Ref., 215 F.3d at 226 ("`You cannot walk away from
a contract that you can fairly be deemed to have agreed to,
merely because performance turns out to be a hardship for you.'"
(quoting Union Carbide v. Oscar Mayer Foods Corp.,
947 F.2d 1333, 1336 (7th Cir. 1991))). At the time Dayoub Marketing and SK
Produce entered into their contracts for the sale and purchase of
cabbage, the costs of collection provision should not have
surprised SK Produce or presented any hardship. Moreover, like
pre-judgment interest, an award of attorneys' fees in a PACA case
furthers Congress' intent "to protect agricultural suppliers" by
discouraging slow payment by purchasers. E. Armata,
887 F. Supp. at 595; see also Morris Okun, 814 F. Supp. at 351
("Failure to make . . . an award [of pre-judgment interest and
attorneys' fees] may create a disincentive to prompt payment to
suppliers and encourage collection litigation while financially
strapped purchasers fend off creditors, contrary to the
congressional intent evidenced in PACA.").
Nonetheless, this Court notes that the invoices impose
liability on the buyer for all of Dayoub Marketing's "costs and
expenses of collection," without limitation. Absent a limitation
of reasonableness, the additional term creates "open-ended"
liability and thus materially alters the parties' contract. See
Baway Ref., 215 F.3d at 226; see also N.Y.U.C.C. § 1-203
("Every contract or duty within this Act imposes an obligation of
good faith in its performance or enforcement."). Accordingly,
Dayoub Marketing is entitled only to its reasonable collection
costs, including attorneys' fees.
While the collection costs are substantial, the record reveals
that Defendants and their counsel engaged in hardball tactics
that multiplied the costs of pursuing this litigation. For
example, Defendants agreed to produce Sheryl Kanowitz for
deposition but only two hours before the scheduled start of that
examination announced that she would not be produced. Then,
despite representations that the only issue for trial would be
the personal liability of Sheryl Kanowitz, Defendants' counsel
notified Dayoub Marketing's counsel the night before trial that Defendants would not stipulate to anything. That required
Plaintiff to prepare for a plenary trial on all issues overnight
and fly a witness into New York at the last minute. Thus,
Defendants' tactics contributed to the costs of this litigation.
Nevertheless, Dayoub Marketing delayed pursuing its claims and
employed two law firms to litigate this relatively
straight-forward PACA action. Their respective billing rates are
modest by any standard in this District. However, a review of
Plaintiff's law firms' billing records reveals overlap and
duplication of effort. (Compare Declaration of Thomas G.
Aljian, dated Feb. 17, 2005, with Declaration of Mary E.
Gardner, dated Feb. 11, 2005.) Accordingly, this Court reduces
the claimed attorneys' fees of $23,019.71 by twenty-five percent.
This Court will not apply any reduction to the witness' travel
expenses. Therefore, Dayoub Marketing is entitled to reasonable
attorneys' fees of $17,264.78 and $694.62 for the witness' travel
For the reasons set forth above, this Court finds Defendants
jointly and severally liable to Dayoub Marketing in the amount of
$32,333.50, plus pre-judgment interest at the rate of 1.5%
monthly, or 18% per annum, and $17,959.40 in collection costs.
The foregoing constitutes this Court's findings of fact and
conclusions of law as required by Rule 52 of the Federal Rules of
Civil Procedure. The parties are directed to submit a proposed
judgment to this Court by November 21, 2005.
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