Opinion
04 CV 2666 (GBD).
June 27, 2005
MEMORANDUM DECISION AND ORDER
This action was commenced to enforce the statutory trust provisions of the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. § 499e(c), against the statutory trustee, defendant Dom's Wholesale Retail Center, Inc. ("Dom's), and its responsibly connected individuals, defendants Alan J. Gargiulo, Sr. ("Gargiulo") and Alan J. Gargiulo, Jr., in favor of those parties with valid PACA trust claims. Certain PACA claimants moved for summary judgment against Dom's and Gargiulo (collectively "defendants"), jointly and severally, in the aggregate amount of $1,299,018.71, plus pre and post-judgment interest and reasonable attorneys' fees.
Dom's, which has ceased operations, has insufficient liquid assets to satisfy its PACA debts. In 2002, Dom's entered into a factoring agreement with intervening plaintiff, Platinum Funding Corp. ("Platinum"). In Platinum's amended complaint, it seeks, inter alia, a declaratory judgment declaring that Dom's did not breach it obligations, under PACA, by entering into the factoring agreement and awarding Platinum all of Dom's accounts receivable which were, pursuant to this Court's April 28, 2004 preliminary injunction order, collected and deposited into the PACA account. Additionally, Platinum contends that Dom's owes Platinum more than one million dollars. Defendants asserted a counterclaim against Platinum seeking to recover for funds allegedly collected by Platinum that are rightfully the property of defendants. Defendants allege that Platinum provided false and inaccurate reports to defendants regarding the amount of payments received on assigned accounts receivable from defendants. Defendants maintain that Platinum owes Dom's $1,773,031, an amount greater than that sought by the movants.
A factoring agreement is "an agreement to `convert receivables into cash by selling them at a discount.'" E. Armata, Inc. v. Korea Commercial Bank of New York, 367 F.3d 123, 133 (2d Cir. 2004) (quoting Boulder Fruit Express Heger Organic Farm Sales v. Transp. Factoring, Inc., 251 F.3d 1268, 1271 (9th Cir. 2001)).
The PACA claimants' motion was referred to Magistrate Judge Andrew J. Peck for a Report and Recommendation ("Report"). Magistrate Judge Peck recommended granting summary judgment to the PACA claimants against both Dom's and Gargiulo in the amount of $1,299,018.71, plus interest and attorneys' fees. The defendants did not oppose the granting of summary judgment against Dom's. Magistrate Judge Peck determined that Gargiulo, who is Dom's sole shareholder, officer and director, should be held personally liable for Dom's PACA debts. The magistrate judge further found that exhaustion of Dom's assets (if any), which are tied up in this litigation, is not required prior to holding Gargiulo personally liable. In addition, the magistrate judge concluded that movants were entitled to an award of attorneys' fees and interest because the PACA claimants' invoices provided that a purchaser of produce is liable for the pre-judgment interest, attorneys' fees and costs accumulated in connection with collecting payment.
Defendants submitted objections to the Report. The Court may accept, reject or modify, in whole or in part, the findings and recommendations set forth within the Report. 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b). The Court must make "a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made." 28 U.S.C. § 636(b)(1); see also, Fed.R.Civ.P. 72(b). It is not required that the Court conduct a de novo hearing on the matter. United States v. Raddatz, 447 U.S. 667, 676 (1980). Rather, it is sufficient that the Court "arrive at its own, independent conclusion" regarding those portions to which the objections were made. Nelson v. Smith, 618 F.Supp. 1186, 1189-90 (S.D.N.Y. 1985) (quoting Hernandez v. Estelle, 711 F.2d 619, 620 (5th Cir. 1983)). Accordingly, the Court, in the exercise of sound judicial discretion, must determine the extent, if any, it should rely upon the magistrate judge's proposed findings and recommendations. Raddatz, 447 U.S. at 676. Where there are no objections, the Court may accept the Report provided there is no clear error on the face of the record. Nelson, 618 F.Supp. at 1190; see also, Heisler v. Kralik, 981 F.Supp. 830, 840 (S.D.N.Y. 1997), aff'd sub nom. Heisler v. Rockland County, 164 F.3d 618 (2d Cir. 1998).
Defendants do not dispute that Gargiulo was in a position of control over the PACA trust assets and that he can be held personally liable for his own breach of his fiduciary duty to the PACA claimants. Defendants, however, object to the Report's finding that Gargiulo dissipated the PACA trust assets, arguing Gargiulo's factoring agreement with Platinum did not dissipate the PACA trust assets or commit a breach of defendants' PACA obligations. Although defendants are correct that entering into a factoring agreement does not necessarily constitute a breach of the trust, it does so in the instant case.
A PACA trustee is statutorily required to maintain trust assets in such a manner "that such assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities." 7 U.S.C. § 1499b. "An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breach a fiduciary duty, and is personally liable for that tortious act." See, Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F.Supp. 346, 348 (S.D.N.Y. 1993). "[A] breach of trust [is] `a violation by the [PACA] trustee of any duty which as trustee he owes to the beneficiary.'" Am. Banana Co., Inc. v. Republic Nat'l Bank of New York, N.A., 362 F.3d 33, 41 (2d Cir. 2004) (quoting RESTATEMENT (SECOND) OF TRUSTS § 201 (1959)). The dissipation of trust assets runs contrary to the trustee's duty to maintain available assets to satisfy outstanding PACA obligations. 7 U.S.C. § 1477b. "`Dissipation' that would constitute a breach of trust includes `any act or failure to act which could result in the diversion of trust assets or which could prejudice or impair the ability of unpaid suppliers, sellers, or agents to recover money owed in connection with produce transactions.'" E. Armata, 367 F.3d at 129 (quoting 7 U.S.C. § 46.46(a)(2)).
PACA "imposes a non-segregated floating trust on perishable commodities and their derivatives which permits the commingling of trust assets without defeating the trust." D.M. Rothman Co., Inc. v. Korea Commercial Bank, ___ F.3d ___, 2005 WL 1325293, at *2 (2d Cir. June 6, 2005) (internal quotation marks and brackets omitted) (quoting Endico Potatoes, Inc. v. CIT Group/Factoring Inc., 67 F.3d 1063, 1067 (2d Cir. 1995)). Thus, the PACA trustee may use trust assets for non-PACA purposes. However, it is incumbent upon the PACA trustee "`to insure that it has sufficient assets to assure prompt payment for produce and that any beneficiary under the trust will receive full payment, including sufficient assets to cover the value of the disputed shipments.'" Id. (quoting Regulations Under the Perishable Agricultural Commodities Act; Addition of Provisions To Effect a Statutory Trust, Final Rule, 49 Fed.Reg. 45735, *45738, 1984 WL 134664 (USDA Nov. 20, 1984) ("PACA Regs")).
The test to determine whether a PACA trustee's actions or omissions constitute a breach of a PACA trust is whether "`the PACA trustee in any way encumbered the funds or rendered them less `freely available' to PACA creditors.'" See, D.M. Rothman, 2005 WL 132593, at *7 (internal brackets omitted) (quoting E. Armata, 367 F.3d at 135). The Ninth Circuit held, in Boulder Fruit, 251 F.3d at 1272, that "factoring agreements do not, per se, violate PACA." Boulder Fruit, 251 F.3d at 1272. The Ninth Circuit reasoned:
[N]othing in PACA or the [PACA] regulations prohibits PACA trustees from attempting to turn receivables into cash by factoring. To the contrary, a commercially reasonable sale of accounts for fair value is entirely consistent with the trustee's primary duty under PACA and 7 C.F.R. § 46.46(d)(1) — to maintain trust assets so that they are freely available to satisfy outstanding obligations to sellers of perishable commodities. The goal of PACA, after all, is not the perpetuation of unliquidated commercial paper, but to assure that growers are paid for their commodities. Of course, whether a particular factoring agreement is commercially reasonable will depend upon its terms. A PACA trustee who sells accounts for pennies on the dollar, just to turn a quick buck, might well have breached the PACA trust, while a trustee who factors accounts at a commercially reasonable rate would not. Boulder Fruit, 251 F.3d at 1271-72 (internal quotation marks and citations omitted).
The Second Circuit has favorably cited and relied upon Boulder Fruit in finding that it is not a breach of trust for a PACA trustee to use PACA funds to enter into a commercially reasonable transaction with a non-PACA party especially where the transaction facilitates, rather than impedes, the trustee's duty to maintain trust assets so that they are freely available to satisfy the outstanding PACA obligations. See, D.M. Rothman, 2005 WL 1325293, at *8; E. Armata, 367 F.3d at 133-34; Am. Banana, 362 F.3d at 42. A factoring agreement may "`actually enhance the trust' by making more funds available to PACA creditors than otherwise would be available." E. Armata, 367 F.3d at 134 (quoting Boulder Fruit, 251 F.3d at 1272).
Whether a particular factoring agreement is commercially reasonable depends upon the terms of the agreement. Boulder Fruit, 251 F.3d at 1271; see also, E. Armata, 367 F.3d at 135. In the case at bar, however, defendants allege Platinum was given possession of more than a million dollars of trust assets belonging to Dom's. The amount exceeded the amount sought to be recovered by the PACA claimants. The factoring agreement did not facilitate the defendants' obligation to maintain freely available trust assets, but rather was the cause for more than a million dollars of trust assets to be unavailable to satisfy the PACA claims.
In Boulder Fruit, the company which purchased the accounts receivables paid the PACA trustee more money that the factoring company collected on the accounts, albeit less than the face value of the accounts. Thus, the factoring agreement in Boulder Fruit did not dissipate assets, but rather the PACA trustee obtained more for the accounts than the accounts proved to be worth. Boulder Fruit, 251 F.3d at 1272. Unlike the situation inBoulder Fruit, the sale of Dom's account receivables to Platinum did not enhance the trust by converting unliquidated commercial paper into liquid trust assets which would otherwise not be available to satisfy the outstanding PACA claims. Instead, Gargiulo surrendered his control of the non-liquid trust assets. He failed to exercise sound business practices, by monitoring Platinum's activities, thereby causing the trust assets to become unavailable to satisfy the defendants' PACA obligations. Relinquishing control of Dom's account receivables and failing to secure appropriate payment by Platinum constitutes a dissipation of trust assets. See generally, Bronia, Inc. v. Ho, 873 F.Supp. 854, 861 (S.D.N.Y. 1995). Accordingly, Magistrate Judge Peck correctly determined that Gargiulo dissipated the trust assets by the nature of the sale of Dom's account receivables to Platinum.
The defendants also object to the Report's finding that the PACA claimants are entitled to judgment against Gargiulo before the liquidation of all of Dom's assets. Defendants argue that Gargiulo's liability is secondary to that of Dom's. They, therefore, contend that since Dom's is owned 1.7 million dollars from Platinum, Dom's has sufficient assets to meet its PACA trust obligations, and accordingly Gargiulo cannot be held liable before all of Dom's assets are exhausted.
In support of their arguments, defendants cite to a number of cases which hold that PACA liability attaches first to the buyer of perishable agricultural commodities and, if the buyer's assets are insufficient to satisfy the PACA liability, then the individual who had control of the PACA assets and breached his duty to preserve trust assets, can be held secondarily liable.See, Goldman-Hayden Co., Inc. v. Fresh Source Produce Inc., 217 F.3d 348, 351 (5th Cir. 2000); Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 283 (9th Cir. 1997) (quoting Shepard v. K.B. Fruit Vegetable, Inc., 868 F.Supp. 703, 706 (E.D.Pa. 1994); Morris Okun, 814 F.Supp. at 350. "Congress enacted PACA in order to provide growers and sellers of agricultural commodities with `a self-help tool . . . enabling them to protect themselves against the abnormal risk of losses resulting from slow-pay and no-pay practices by buyers or receivers of fruits and vegetables.'" D.M. Rothman, 2005 WL 1325293, at 1 (internal bracket omitted) (quoting PACA Regs, 49 Fed.Reg. at *45737)). "The primary objective of securing prompt payment was to protect sellers in this volatile industry," because "[i]f the grower-shipper cannot realize any returns on the sale of the crop when due, he may not be able to survive.'" Am. Banana, 362 F.3d at 44 (quoting h.r. rep. no. 98-543, 2-4 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406-07).
Other than defendants' assertion that Platinum owes Dom's monies, there is no basis to conclude that Dom's has sufficient assets to satisfy its PACA's obligations. It would be inconsistent with Congress' intent to provide sellers with prompt payment, to require the PACA claimants to wait to recover on their claims until the litigation between defendants and Platinum is concluded. See, Loi Banana Corp. Of Brooklyn v. Cent. Brooklyn Produce Wholesalers Comm'n Merch., Inc., 1996 WL 391574, * (E.D.N.Y. July 10, 1996) (PACA "legislation certainly did not envision that a [PACA claimant] seeking reimbursement would have to endure protracted third-party litigation involving internal disputes between" defendant-employer and an employee that defendants claimed misappropriated trust assets.). It is conceivable that during the litigation between defendants and Platinum, Gargiulo could deplete his own personal assets. Thus, if Platinum is ultimately found not to be liable to defendants, Gargiulo, may at that time, have insufficient assets to satisfy the outstanding PACA claims.
Moreover, Gargiulo is being held personally liable because of his own breach of fiduciary duty, and he is not simply being held responsible for Dom's tort. It was Gargiulo's role, in entering into the factoring agreement on behalf of Dom's and failing to responsibly manage Dom's accounts, which resulted in the imposition of liability upon him. Dom's potential and unrealized assets are presently of no value in satisfying the PACA claims, and Gargiulo may not escape personal liability when it was his breach of fiduciary duty that resulted in Dom's having inadequate liquid trust assets. See generally, Bronia, 873 F.Supp. at 861 ("Whether or not [produce wholesaler] has surrendered the trust assets by filing a petition for bankruptcy and placing any trust assets that may still exist in control of the bankruptcy trustee, [the wholesaler's sole shareholder, officer and director] has breached his obligation to keep those assets freely available for satisfying [the company's] obligations to [the PACA claimants] and is personally liable to [the claimants] therefor.").
Thus, equitable principles mandate that the PACA creditors are entitled to judgment against Gargiulo notwithstanding the contingency that, at some unspecified time in the future, Dom's may secure a possible judgment against Platinum sufficient to satisfy the PACA claims. To the extent Gargiulo uses his personal assets to pay the PACA claims, he may seek to recover such monies from Dom's should Dom's receive a favorable award against Platinum over and above its other obligations. Thus, the magistrate judge correctly found that the imposition of liability upon Gargiulo was not dependent upon the exhaustion of any potential assets belonging to Dom's.
Defendant's final objection concerns the magistrate judge's finding that the PACA trust claimants are entitled to attorneys' fees and interest based upon language contained in their invoices. The magistrate judge determined that although the parties' contracts did not provide for the recovery of attorneys' fees and interest, the claimants were still entitled to such an award. The magistrate judge found that since the sellers' invoices indicated that they could recover attorneys' fees and interest in the event of non-payment, and since defendants did not object to the terms set forth in the invoices, those terms became part of the parties' contract pursuant to N.Y.U.C.C. § 2-201(2). Defendants contend that since movants are seeking an award of attorneys' fees and interest in the hundreds of thousands of dollars, such an award would substantially alter the terms of the contracts. They, therefore, claim that absent true negotiation or some form of bargaining, the fine print language of the invoices materially altering the contracts cannot be enforced.
Terms printed on an invoice are not incorporated into the parties' contract if they materially alter it. N.Y.U.C.C. § 2-207(2)(b). The party opposing the inclusion of additional terms bears the burden of proving that those terms materially alter the contract. Bayway Ref. Co. v. Oxygenation Mktg. Trading A.G., 215 F.3d 219, 222, 223 (2d Cir. 2000). "A material alteration is one that would `result in surprise or hardship if incorporated without the express awareness by the other party.'" Id. at 224 (quoting N.Y.U.C.C. § 2-207 cmt. 4). "Surprise includes both a subjective element of what a party actually knew and an objective element of what a party should have known." Aceros Prefabricados, S.A. v. TradeArbed, Inc., 282 F.3d 92, 100 (2d Cir. 2002) (citation omitted). Conclusory allegations of surprise are insufficient to defeat a motion for summary judgment. Rather, "[t]o carry the burden of showing surprise, a party must establish that, under the circumstances, it cannot be presumed that a reasonable merchant would have consented to the additional term." Bayway Ref., 215 F.3d at 224 (citation omitted). The official comment to N.Y.U.C.C. § 2-207 states that "a clause providing for interest on overdue invoices" is an example of a clause which involves no element of unreasonable surprise and which is therefore to be incorporated into the contract unless there is a timely objection by the buyer. N.Y.U.C.C. § 2-207, cmt.5. Defendants have failed to offer any evidence to demonstrate either their objective or subjective surprise as to the subject terms of the invoices. They have similarly failed to offer any evidence that they would suffer a hardship if the invoice provisions were incorporated into the contracts. Accordingly, the magistrate judge properly found that the movants were entitled to an award of attorneys' fees and interest. See, In re Delyser, 295 B.R. 430, 431, 435-36 (Bankr. W.D.N.Y. 2003);"R" Best Produce Inc. v. Eastside Food Plaza Inc., 2003 WL 22231577, at *1 n. 1 (S.D.N.Y. Sept. 30, 2003); Morris Okun, 814 F.Supp. at 351.
The Second Circuit has expressed doubt as to whether hardship alone may constitute an independent basis for finding that an additional term materially alters a contract, and has specifically declined to resolve the issue. Aceros Prefabricados, 282 F.3d at 101; Bayway Ref., 215 F.3d at 226. "Typically, courts that have relied on hardship to find that an additional term materially alters a contract have done so when the term is one that creates or allocates an open-ended or prolonged liability." Bayway Ref., 215 F.2d at 226 (citations omitted).
The Court has examined the remaining portions of the Report to which there are no objections, and finds that they are not facially erroneous.
In light of the foregoing, the Report and Recommendation is hereby adopted and, for the reasons stated therein, movants' motion for summary judgment against defendant Dom's Wholesale Retail Center, Inc. and defendant Alan J. Gargiulo, Sr. is granted in the amount of $1,299,018,71, plus interest and attorney's fees in an amount to be determined in accordance with the procedures set forth by Magistrate Judge Peck.
SO ORDERED.