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DAYOUB MARKETING, INC. v. S.K. PRODUCE CORP.

November 9, 2005.

DAYOUB MARKETING, INC., Plaintiff,
v.
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 (JSR) (S.D.N.Y.).

  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 following language:
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. at 12-13.)

  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 PACA trustee.*fn3

  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' ...


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