Opinion
No. 97 Civ. 6018 (AJP)
January 28, 2000
OPINION AND ORDER
ANDREW J. PECK, United States Magistrate Judge
The issue before the Court is who has superior rights to certain monies collected by a produce purchaser — the produce company's attorney, who has asserted a lien for unpaid fees pursuant to New York Judiciary Law § 475, or the original seller of the produce, pursuant to the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. § 499, et seq. The parties have consented to decision of this issue by a Magistrate Judge pursuant to 28 U.S.C. § 636(c). (Dkt. No. 30.) For the reasons set forth below, the Court holds that the PACA trust is superior to the attorney's lien, and thus the funds must be paid to the produce seller.
FACTUAL BACKGROUND
Movant, attorney Mark Mandell, served as "collection counsel" for Alanco Corp. and other claimants in a suit against Freshway Produce, Inc., in this Court, case number 96 Civ. 8940 (LMM) (AJP). (See Mandell 12/12/99 Aff. ¶¶ 1, 4; Mandell Br. at 2; Mandell 9/23/99 Letter at 1.)
In this related action, plaintiffs C.H. Robinson and other sellers of perishable agricultural commodities (hereafter, collectively, "Robinson") sued Alanco and its principal, Alan I. Elkin, to collect Alanco receivables, i.e., proceeds of perishable agricultural commodities sold by Robinson to Alanco and by Alanco to Freshway. (See Mandell 8/18/99 Letter at 1.) At the time of this litigation, Alanco's sole trust asset was the account receivable from Freshway, the subject of the related Freshway litigation. (Amendola 9/13/99 Letter at 1; see also Mandell 12/12/99 Aff. ¶ 5.)
Alanco settled the Freshway litigation for approximately $78,000, and turned over all but the disputed $18,960.57 "attorney's fee" amount to Robinson. (See Amendola 9/13/99 Letter at 1; Mandell 12/12/99 Aff. ¶¶ 5, 10; Mandell 8/18/99 Letter at 1.) As Mandell admits: "Alanco was the [PACA] statutory trustee of its account receivable giving rise to its claim in the Freshway case, and Plaintiffs [Robinson] constitute the entire beneficiary class of such trust res." (Mandell Br. at 3.) Robinson also settled all claims against Elkin personally for $6,400. (Dkt. No. 25: 7/12/99 Consent Judgment; Dkt. No. 26: Satisfaction of Judgment; see also Mandell 8/18/99 Letter at 1; Amendola 9/13/99 Letter at 1.) Alanco "has been liquidated," has "ceased to exist," and has no assets to pay Mandell's legal fees. (See Mandell 12/12/99 Aff. ¶ 5.)
The sole issue remaining in this action is Mandell's assertion of an attorney's fee lien, pursuant to New York Judiciary Law § 475, on $18,960.57 of the monies that he collected for Alanco from Freshway in the Freshway litigation. (See Mandell 12/12/99 Aff. ¶¶ 1, 4; Mandell Br. at 2.; Amendola 9/13/99 Letter at 1.)
Mandell notes that, during the two-year pendency of the Freshway case, he gave Robinson's counsel ample notice that Alanco would be unable to pay his legal fees, that he expected to be paid out of whatever Alanco collected from Freshway, and that Robinson's counsel could assume Alanco's representation in the Freshway case if Robinson wished; Robinson's counsel neither assumed Alanco's representation, nor objected, nor agreed, to Mandell's assertions. (Mandell 12/12/99 Aff. ¶¶ 8-10, 13; Mandell Br. at 2; Mandell 9/23/99 Letter at 2.)
Mandell asserts that the fees he charged were necessary to obtain cash for Alanco that Alanco could then turn over to Robinson as PACA trust beneficiary. (Mandell 12/12/99 Aff. ¶¶ 3-5.) The work, Mandell says, was in fulfillment of Alanco's duty to the PACA trust beneficiaries, was solely for their benefit, and thus the trust corpus should pay for it. (Mandell 12/12/99 Aff. ¶ 10; Mandell 9/23/99 Letter at 2-3; Mandell Br. at 3-4.) In contrast, Robinson alleges that Mandell's efforts were wholly superfluous and unnecessary, since in Robinson's view the money would have been collected anyway. (Robinson Br. at 2-3.) Finally, Robinson contends that, as a matter of PACA law, the PACA trust money belongs to Robinson, regardless of what expenses might have been necessary to maintain, preserve or increase the trust funds. (Robinson Br. at 3-4.) For the reasons explained below the Court need not decide whether Mandell's legal efforts were necessary or superfluous; the issue here is solely one of the law governing PACA trust funds.
ANALYSIS
Resolution of this issue depends on the interplay between New York Judiciary Law § 475's attorney's fee lien and the statutory trust provisions of PACA.
"Congress enacted PACA in 1930 to regulate commerce in perishable agricultural commodities, which are defined by the Act as `[f]resh fruits and fresh vegetables of every kind and character,' `whether or not frozen or packed in ice.' 7 U.S.C. § 499a(b)(4)(A). The Act established a mandatory licensing scheme, under the supervision of the Secretary of Agriculture, for dealers, brokers, and commission merchants of perishable agricultural commodities, id. § 499c, and prohibits certain unfair practices in the trading of such commodities, id. § 499b." In re Kornblum Co. (Tom Lange Co. v. Kornblum Co.), 81 F.3d 280, 283 (2d Cir. 1996). "Congress amended PACA in 1984 to broaden the protections afforded to produce suppliers," through PACA's trust provisions. In re Kornblum Co., 81 F.3d at 283.
PACA establishes a trust on the perishable agricultural commodities and their proceeds:
(c) Trust on commodities and sales proceeds for benefit of unpaid suppliers, sellers, or agents; preservation of trust; jurisdiction of courts
(1) It is hereby found that a burden on commerce in perishable agricultural commodities is caused by financing arrangements under which commission merchants, dealers, or brokers, who have not made payment for perishable agricultural commodities purchased, contracted to be purchased, or otherwise handled by them on behalf of another person, encumber or give lenders a security interest in, such commodities, or on inventories of food or other products derived from such commodities, and any receivables or proceeds from the sale of such commodities or products, and that such arrangements are contrary to the public interest. This subsection is intended to remedy such burden on commerce in perishable agricultural commodities and to protect the public interest.
(2) 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 supplier, sellers, or agents. . . .
PACA, 7 U.S.C. § 499e(c)(1)-(2).
As the Second Circuit has explained, PACA "establishes a scheme in which a purchaser of Produce on credit (a `Produce Debtor') is required to hold the Produce and its derivatives or proceeds in trust for the unpaid seller. . . . A PACA trust beneficiary is thereby entitled to claim trust property ahead of even creditors holding security interests in the property." In re Kornblum Co., 81 F.3d at 284; see also, e.g., Albee Tomato, Inc. v. A.B. Shalom Produce Corp., 155 F.3d 612, 615 (2d Cir. 1998); Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1067 (2d Cir. 1995) (§ 499e(c)(2) "imposes a `non-segregated floating trust' on the commodities and their derivatives, and permits the commingling of trust assets without defeating the trust. . . . Through this trust, the sellers of the commodities maintain a right to recover against the purchasers superior to all creditors, including secured creditors."); In re Lombardo Fruit Produce Co. (Tom Lange Co. v. Lombardo Fruit Produce Co.), 12 F.3d 806, 809 (8th Cir. 1993); JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 77-78 (2d Cir. 1990).
Mandell bases his claim to an attorney's fee lien on New York Judiciary Law § 475, which provides:
From the commencement of an action . . . in any court . . ., the attorney who appears for a party has a lien upon his client's cause of action, . . . which attaches to a verdict, report, determination, decision, judgment, or final order in his client's favor, and the proceeds thereof in whatever hands they may come; and the lien cannot be affected by any settlement between the parties before or after judgment, final order or determination. The court upon the petition of the client or attorney may determine and enforce the lien.
New York Judiciary Law § 475 (emphasis added). "[T]he Second Circuit has `long recognized that the lien created by section 475 . . . is enforceable in federal courts in accordance with its interpretation by New York courts.'" Itar-Tass Russian News Agency v. Russian Kurier, Inc., 140 F.3d 442, 449 (2d Cir. 1998) (quoting Matter of Chesley v. Union Carbide Corp., 927 F.2d 60, 67 (2d Cir. 1991)); accord, e.g., Markakis v. The S.S. Mparmpa Christos, 267 F.2d 926, 927 (2d Cir. 1959); Rivkin v. A.J. Hollander Co., 95 Civ. 9314, 1996 WL 633217 at *2 (S.D.N Y Nov. 1, 1996) (Peck, M.J.); Petition of Rosenman Colin Freund Lewis Cohen v. Richard, 656 F. Supp. 196, 197 (S.D.N.Y. 1987).
Mandell's claimed attorney's fee lien here stems from the Freshway litigation, which terminated with a settlement order in Alanco's favor (see Dkt. No. 78 in 96 Civ. 8940), and so, as against Alanco, Mandell would be entitled to a § 475 lien. However, Alanco was merely a PACA trustee, holding the settlement proceeds in PACA trust for Robinson, who filed this action to collect its PACA funds. Mandell cannot assert his lien as against the trust corpus unless Alanco itself, as trustee, would have been permitted to withdraw funds from the PACA trust to pay counsel. The question, then, is whether a PACA trustee is permitted to charge the PACA trust for expenses incurred in collecting trust funds. The answer is no.
Mandell points to bankruptcy cases indicating that such a use of trust monies is permissible. (See Mandell Br. at 4-5.) In In re Southland + Keystone (Bank of Los Angeles v. Official PACA Creditors' Comm.), 132 B.R. 632 (9th Cir. 1991), the Bank of Los Angeles extended a $500,000 credit line to Southland + Keystone, a produce buyer that resold the produce and thus was a PACA trustee. Id. at 636. When Southland + Keystone defaulted, the bank seized Southland + Keystone's accounts receivable, began collection proceedings, and collected over $400,000. Id. Meanwhile, PACA beneficiaries claimed the same funds. Id. The Bankruptcy Court awarded the funds to the PACA beneficiaries, denying the bank any reduction for its collection costs. Id. at 642. The Ninth Circuit concluded that the Bankruptcy Court was required to permit the bank a set-off for "hard" collection costs, including fees paid to outside counsel to collect the accounts receivable. Id. at 643. In so concluding, the Court analyzed two other Bankruptcy Court cases ruling on whether the bankruptcy trustee of the PACA trustee's estate could deduct collection and administrative costs. Compare In re Super Spud, Inc. (East Coast Potato Distrib. v. Grant), 77 B.R. 930, 932 (Bankr. M.D. Fla. 1987) ("PACA trust beneficiaries . . . take complete priority in payment as to all the assets of the debtor, ahead of the claims of creditors who have valid security interests, ahead of the administrative costs and expense occurred in this court, and ahead of all other priority and general creditors" including the bankruptcy trustee, even if his expenses exceed what is left in the non-PACA estate); with In re United Fruit Produce Co., 119 B.R. 10, 12-13 (Bankr. D. Conn. 1990) (a bankruptcy trustee may be compensated from PACA funds for work which benefits PACA beneficiaries since "[t]he non-PACA creditors of [the] estate should not pay for these services and the trustee should not be forced to donate them."). The Ninth Circuit followed United Fruit and concluded that the rule permitting such deductions was preferable and should be extended to the bank which had collected PACA funds benefitting the PACA creditors: "The Bank here collected the receivables before they became stale. This undoubtedly resulted in a higher recovery than if the receivables had not been promptly collected. To deny the Bank any recovery would be unfair to the Bank and provide a windfall to the PACA claimants. Thus the court should have allowed the Bank an offset for the collection costs." In re Southland + Keystone, 132 B.R. at 643.
Mandell, however, fails to cite a recent decision in this circuit that reached the opposite conclusion. On essentially the same facts as In re Southland + Keystone, the district court in Fishgold v. OnBank Trust Co., 43 F. Supp.2d 346, 352 (W.D.N Y 1999), found that there was no legal basis for the bank — which had spent money to collect accounts that ultimately wound up in the PACA creditors' pockets — to be reimbursed for such expenditures at the expense of the PACA trust. See also In re Fair (Dimare Homestead, Inc. v. Fair), 134 B.R. 672, 674-75 (Bankr. M.D. Fla. 1991) (attorney's fees and commissions paid to attorney in connection with the sale of accounts receivable are part of the statutory PACA trust and are reachable by PACA creditors).
The Court notes that the Fishgold court also implicitly criticized the bank for seeking reimbursement for all legal services "in connection with the loan and Fishgold's defalcation," as opposed to fees specifically related to preserving PACA trust assets, e.g., money to appoint a receiver. Fishgold v. OnBank Trust Co., 43 F. Supp. at 351. Similarly here, Mandell seeks all his legal fees in representing Alanco in the Freshway action. Even if Mandell were entitled to a lien for legal fees, which the Court holds he is not, he would not be entitled to the large amount he seeks.
In this case, however, there is no need to settle on a rule for the collection expenses of a bankruptcy trustee or non-PACA bank lender. Whatever the rule might be when a bank or bankruptcy (or similar) trustee collects and turns over PACA funds, the reasoning of Southland + Keystone and United Fruit Produce Co. is not applicable here. The PACA trustee is responsible under PACA for the full amount of the debt. Collection costs should not reduce the PACA trustee's obligation to pay the full amount of the debt. In the case at bar, Mandell seeks to reduce Alanco's obligation to Robinson by the amount of his attorney's fees. Since Alanco is a PACA trustee, this deduction is barred. Alanco, to the extent it exists, remains liable to Robinson for the full amount of the unpaid debt, see, e.g., In re Fair, 134 B.R. at 674-75, and is separately liable to Mandell for his legal fees.
A contrary result — permitting collection expenses including attorney's fees to be paid from the PACA trust corpus — would allow thinly financed produce dealers to defeat the purpose of the PACA trust. Judge Sand has described the nature of the relationship arising under a PACA trust as follows:
PACA establishes a statutory trust for the benefit of sellers and suppliers. This trust arises from the moment perishable goods are delivered by the seller. An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for that tortious act. . . .
We recognize . . . that a PACA trust in effect imposes liability on a trustee, whether a corporation or a controlling person of that corporation, who uses the trust assets for any purpose other than repayment of the supplier. This includes use of the proceeds from the sale of perishables for legitimate business expenses, such as the payment of rent, payroll, or utilities. Proceeds from the sales of perishables subject to PACA receive special treatment in other respects as well. Thus, a PACA beneficiary has priority over any secured creditor on the purchaser's commodity-related assets to the extent of the amount of his claim. . . . These consequences are attributable to the [PACA] statute, and it is the responsibility of Congress to revise the statute if these are not the intended results.
Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F. Supp. 346, 348-49 (S.D.N.Y. 1993); accord, Hiller Cranberry Products, Inc. v. Koplovsky, 165 F.3d 1, 8-9 (1st Cir. 1999); see also, e.g., Mid-Valley Produce Corp. v. 4-XXX Produce Corp., 819 F. Supp. 209, 212 (E.D.N.Y. 1993) ("The use of PACA trust funds by [the trustee] for such items as salary and loan payments constitutes a dissipation of PACA trust funds and a breach of [the trustee's] fiduciary duties as [PACA] trustee."). A produce buyer is obligated to "maintain trust assets in a manner that such assets are freely available" to pay the seller's bills. 7 C.F.R. § 46.46 (d). In general, then, the produce buyer is liable for collection costs incurred as a consequence of his breach of that obligation. See In re Fair, 134 B.R. at 674; In re Melon Produce, Inc., Bankr. No. 88-10112, 1994 WL 163172 at *2 (Bankr. D. Mass. March 31, 1994); Wanda Borges, Hidden Liens: Who is Entitled to What? 103 Com. L. J. 284, 291-92 (1998). The produce buyer, unlike the non-PACA bank lender in Southland+Keystone, is in a unique situation as trustee. If Alanco, the entity against whom the attorney's fee lien would be valid, were on the same footing as the bank or the bankruptcy trustee in the Ninth Circuit — that is, if Alanco were allowed to deduct collection costs including attorney's fees from its PACA obligation — the protection afforded by the PACA trust to produce sellers such as Robinson against barely solvent produce dealers would be lost. Awarding fees to Mandell in this case would allow Mandell's client, Alanco, a PACA trustee, to breach its obligation to the PACA trust beneficiaries, and is therefore contrary to the intent of PACA.
Mandell's claim that Robinson's counsel did not seek to take over the representation of Alanco and did not object to Mandell's statement that he would take his fee from the PACA trust assets, are insufficient to overcome the policies behind the PACA trust. Mandell is now asking that Robinson's money be spent on his fees; but if Robinson had wanted to retain him to collect Alanco's PACA funds for Robinson's benefit, it would have done so. Robinson's counsel's silence did not amount to a promise to allow Mandell to recover his fees from Robinson's PACA trust. Moreover, if Mandell really had been concerned as to whether he would be paid from Alanco's PACA trust funds, he could have moved early in these cases, rather than at their conclusion, for a ruling on the attorney fee lien issue.
CONCLUSION
For the reasons set forth above, Mandell's application to enforce an attorney's fee lien is DENIED. Because the money collected in the Freshway case does not belong to Mandell's client Alanco, Mandell's asserted attorney's fee lien is vacated and Mandell is directed to turn over all remaining Alanco PACA funds to Robinson within ten days hereof.
Mr. Mandell is to serve this Opinion and Order immediately on all other counsel of record.
The Clerk of Court is directed to administratively close this action.
SO ORDERED.