Opinion
Case No. 00 C 7264
September 26, 2001
ORDER
This appeal from an order of the Bankruptcy Court raises a single question of law: whether a restaurant whose purchases of perishable agricultural commodities do not exceed $230,000 annually is a "dealer" within the meaning of the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C.A. § 499a, et seq., such that its property is subject to PACA's constructive trust provisions. The bankruptcy court's determination of this issue of law is subject to de novo review. In the Matter of Woodbrook Assoc., 19 F.3d 312, 316 (7th Cir. 1994).
The debtor in this Chapter 11 case is Reservoir Dogs, Inc., doing business as "Johnny D's." Johnny D's operates (or operated) a restaurant in Schaumburg, Illinois, and in the course of its business, purchased produce from Sysco Food Services, Inc., appellant herein. Sysco shipped produce to Johnny D's which on occasion totaled more than one ton per day, but the invoice cost of the produce never exceeded $230,000 in any one calendar year. Johnny D's filed a Chapter 11 petition on July 24, 2000, at which time Sysco held unpaid invoices for produce sold to Johnny D's in the amount of $46,796.90. Sysco sought the imposition of a trust upon Johnny D's cash to the extent of Sysco's claim and to enjoin Johnny D's from transferring or dissipating such funds. The bankruptcy court declined to order the relief requested. This appeal followed.
In order for Sysco to prevail under PACA, it must establish that Johnny D's is a dealer regulated by PACA. PACA defines "dealer" as follows:
The term "dealer" means any person engaged in the business of buying or selling in wholesale or jobbing quantities, as defined by the Secretary, any perishable agricultural commodity in interstate or foreign commerce, except that (A) no producer shall be considered as a "dealer" in respect to sales of any such commodity of his own raising; (B) no person buying any such commodity solely for sale at retail shall be considered as a "dealer" until the invoice cost of his purchases of perishable agricultural commodities in any calendar year are in excess of $230,000; and (C) no person buying any commodity other than potatoes for canning and/or processing within the State where grown shall be considered a "dealer" whether or not the canned or processed product is to be shipped in interstate or foreign commerce, unless such product is frozen or packed in ice, or consists of cherries in brine, within the meaning of paragraph (4) of this section. Any person not considered as a "dealer" under clauses (A), (B), and (C) may elect to secure a license under the provisions of section 499c of this title, and in such case and while the license is in effect such person shall be considered as a "dealer."7 U.S.C.A. § 499a(b)(6).
From its inception, as the bankruptcy court pointed out, PACA has defined "dealer" to include a buyer of perishable agricultural products in quantities above the specified threshold, but has provided an exception for buyers who purchase "solely for sale at retail" unless their purchases exceed the specified purchase threshold. It is undisputed in this case that Johnny D's satisfied the requirement that it bought in wholesale or jobbing quantities but did not buy in excess of $230,000 a year. However, from the inception of PACA approximately 70 years ago, the Secretary of Agriculture has declined to subject restaurants to the licensing and regulatory scheme PACA imposes on "dealers." In 1962, the definition of "dealer" was amended by Congress to modify the specified quantity threshold in the definition of "dealer" and to modify the threshold for the retail sale exception. The provision for a statutory trust was added in 1984, 7 U.S.C.A. § 499e(c)(2), "to increase the legal protection for unpaid sellers and suppliers of perishable agricultural commodities until full payment of sums due have been received by them." H.R. Rep. No. 98-543, at 2 (1983). Through these various amendments, the definition of dealer was not changed, nor was there any indication from Congress of its disapproval of the Secretary of Agriculture's position that PACA did not apply to restaurants.
Indeed, in 1995, when PACA was again amended to phase out the license fees that had traditionally been charged to certain dealers, specifically, retailers and grocery wholesalers, the House Report accompanying the legislation made clear that Congress had no intention of treating restaurants as dealers:
Section 3 phases out license fees for retailers and grocery wholesalers. It defines the term "retailer" as a person who is a dealer engaged in the business of selling any perishable commodity at retail. Approximately 4,000 retailers are currently estimated to be licensed under PACA. Those businesses such as grocery stores and other like businesses that predominantly serve those consumers purchasing food for consumption at home or off the premises of the retail establishment are considered to be included in the definition of retailer. It is not the intent of the Committee that the definition of retailer be construed to include foodservice establishments such as restaurants, or schools, hospitals and other institutional cafeterias.
H.R. Rep. No 104-207, at 7 (1995), reprinted in 1995 U.S.C.C.A.N. 453, 454.
As the bankruptcy court's opinion makes clear, a number of courts, including the Third, Eighth and Ninth Circuits, have held that inasmuch as the language of the statute is unambiguous, a restaurant is a "dealer" subject to PACA if the purchase amount threshold is satisfied. Finding the statutory language clear, these courts have held that the long-standing administrative interpretation of the law, declining to treat restaurants as "dealers" subject to PACA's regulatory and licensing requirements, is immaterial. See Royal Foods Co., Inc. v. RJR Holdings, Inc., 252 F.3d 1102, 1107-08 (9th Cir. 2001); In re Old Fashioned Enterprises, Inc., 236 F.3d 422, 425 (8th Cir. 2001); In re Magic Restaurants, Inc., 205 F.3d 108, 114-15 (3d Cir. 2000); In re Country Harvest Buffet Restaurants, Inc., 245 B.R. 650, 654 (9th Cir. B.A.P 2000); JC Produce, Inc. v. Paragon Steakhouse Restaurants, Inc., 70 F. Supp.2d 1119, 1121-22 (E.D. Cal. 1999). The bankruptcy court, however, found it unnecessary to resolve the issue of whether restaurants are "dealers" (although the bankruptcy judge noted that the statutory definition would appear to include them) because he determined that Johnny D's falls within the statute's exemption for retailers. The bankruptcy court reasoned that the ordinary meaning of "retail" is "the sale of commodities or goods in small quantities to ultimate consumers—opposed to wholesale." 253 BR. 422, 426 (Bankr. N.D. Ill. 2000), quoting from Webster's Third New International Dictionary 1938 (1981). Restaurants, unlike wholesalers, the bankruptcy court stated, do not sell food for resale but sell it to the ultimate consumer, making them a retail business. Since Johnny D's never purchased produce in amounts in excess of $230,000 a year, the court held, Johnny D's fell within PACA's retail exception, and no PACA trust existed in favor of Sysco.
In its argument for reversal, Sysco relies on PACA's definition of "retailer":
The term "retailer" means a person that is a dealer engaged in the business of selling any perishable agricultural commodity at retail.7 U.S.C.A. § 499a(b)(11).
Sysco also relies on the statutory definition of "perishable agricultural commodity":
[Perishable agricultural commodity] [m]eans any of the following, whether or not frozen or packed in ice: Fresh fruits and fresh vegetables of every kind and character. . . ."Id. at § 499a(b)(4)(A).
Sysco also cites the regulatory definition of "[f]resh fruits and fresh vegetables
Fresh fruits and fresh vegetables include all produce in fresh form generally considered as perishable fruits and vegetables, whether or not packed in ice or held in common or cold storage, but does not include those perishable fruits and vegetables which have been manufactured into articles of food of a different kind or character. The effects of the following operations shall not be considered as changing a commodity into a food of a different kind or character: Water, steam, or oil blanching, chopping, color adding, curing, cutting, dicing, drying for the removal of surface moisture; fumigating, gassing, heating for insect control, ripening and coloring; removal of seeds, pits, stems, calyx, husk, pods, rind, skin, peel, et cetera; polishing, precooling, refrigerating, shredding, slicing, trimming, washing with or without chemicals; waxing, adding of sugar or other sweetening agents; adding ascorbic acid or other agents used to retard oxidation; mixing of several kinds of sliced, chopped, or diced fruits or vegetables for packaging in any type of containers; or comparable methods of preparation.7 C.F.R. § 46.2(u).
On the issue of whether Johnny D's is a "retailer" within the meaning of PACA, the court concludes that appellant is correct. The statute clearly requires that in order for one to be a retailer, what one must sell at retail are "perishable agricultural commodities," 7 U.S.C.A. § 499a(b)(11), and the statutory definition of that phrase limits "perishable agricultural commodities" to "fresh fruits and fresh vegetables." Id. § 499a(b)(4)(A). While certain types of processing, according to the regulatory definition, do not change the character of "perishable agricultural commodities," most of what a restaurant does to the fruits and vegetables that it uses as components of the food that it serves to customers goes far beyond the limited sorts of processing set forth in the regulation. As a retailer of prepared foods with constituent fresh fruits and vegetables in entirely changed forms, Johnny D's falls outside the meaning of the statute's definition of retailer. See Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1070-71 (2d Cir. 1995).
The court recognizes that there are vegetarian restaurants dealing only in "whole" vegetables and fruits which might arguably be found to sell perishable agricultural commodities at retail.
Having determined that Johnny D's is not a "retailer" within the meaning of PACA, the court cannot avoid deciding the question pretermitted by the bankruptcy court, whether Johnny D's is a dealer. As indicated above, three courts of appeals have held that the statutory language unambiguously includes restaurants in its broad definition. This court, however, is not convinced. "Dealer" is defined as "any person engaged in the business of buying and selling in wholesale or jobbing quantities . . . any perishable agricultural commodity." 7 U.S.C. § 499(b)(6). Surely, Johnny D's bought perishable agricultural commodities in the requisite quantity, but its business was the processing of those commodities (and other ingredients) into foodstuffs and the service of meals to customers. As Judge Rendell stated, dissenting in In re Magic Restaurants, 205 F.3d at 117 (emphasis in original): "Restaurants are engaged in the business of preparing and selling meals to customers. Not only is buying and selling perishables in large quantities not their primary business, it is not their business at all." See also Royal Foods, 252 F.3d at 1110-11 (dissenting opinion of Trott, J); Monteverde's, Inc. v. The Italian Oven, 207 B.R. 839, 844 (W.D. Pa. 1997). This court further agrees with Judge Rendell's observation that "[t]he majority reading would make most prisons `dealers,' yet prisons are not engaged in the perishable commodity-buying business." In re Magic Restaurants, 205 F.3d at 117. Indeed, if in order to be a "dealer" one needs only to be a purchaser of large quantities of perishable agricultural commodities, schools, hospitals and many other institutions would be subject to regulation as "dealers."
The Ninth Circuit has characterized the argument that restaurants are not in the business of buying or selling perishable agricultural commodities as an argument that they are not "primarily" engaged in this business, an argument that, so characterized, necessarily fails because the statute does not require that the buying or selling of commodities be an entity's only business to make it subject to regulation under PACA. See Royal Foods, 252 F.3d at 1107. But the point that Judges Rendell and Trott make in Magic Restaurants and Royal Foods, respectively, is that the buying or selling of perishable agricultural commodities is not the business of restaurants at all, although these are tasks that restaurants perform in the course of their business. As Judge Rendell stated, "If PACA was intended to include [restaurants], Congress should have said, `any business that buys or sells . . .'; it did not." In re Magic Restaurants, 205 F.3d at 117.
All this having been said, this court is not convinced that the phrase "engaged in the business of buying or selling . . . any perishable agricultural commodity," 7 U.S.C.A. § 499a(b)(6), when applied to entities in the business of preparing and selling meals, unambiguously answers the question of whether restaurants are dealers within the meaning of PACA. Because the statute does not give a clear answer, a reasonable interpretation of the statute by the agency charged with administering the PACA provisions, namely the U.S. Agriculture Department, must be given significant deference. See Chevron, USA., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-44 (1984) (stating that when a statute is "silent or ambiguous with respect to a specific issue, . . . considerable weight should be accorded to an executive department's construction of a statutory scheme it is entrusted to administer. . . .") Here, the Agriculture Department has stated consistently for 70 years that restaurants are not dealers, and, given the discussion above, this interpretation is a "permissible construction of the statute." Id. at 843.
The court is also mindful that Congress has amended and re-enacted PACA in the face of the Agriculture Department's interpretation of the definition of dealer without changing the definition. This inaction on the part of Congress coupled with legislative history indicating a desire to exclude restaurants from the purview of PACA suggests that Congress agrees with the Agriculture Department's view of the issue. See Lorillard v. Pons, 434 U.S. 575, 580 (1978) ("Congress is presumed to be aware of an administrative or judicial interpretation of a statute and to adopt that interpretation when it re-enacts a statute without change. . . .") The indications in the legislative and regulatory history that PACA should not be applied to restaurants are consistent and convincing. Relying on this history, the court concludes that Johnny D's is not a dealer within the meaning of the PACA. For this reason, the decision of the bankruptcy court is affirmed.