Meuers Law Firm v. Reasor's ( 2019 )

FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT November 27, 2019
_________________________________
Elisabeth A. Shumaker
Clerk of Court
MEUERS LAW FIRM, P.L., a Florida
limited liability company, as assignee and
PACA trustee of Crossroads Fresh
Connections, Inc.,
Plaintiff - Appellant /
Cross - Appellee,
v. No. 18-5055 & 18-5059
(D.C. No. 4:16-CV-00208-GKF-JFJ)
REASOR’S, LLC, an Oklahoma limited (N.D. Okla.)
liability company doing business as
Reasor's Foods,
Defendant - Appellee /
Cross - Appellant.
_________________________________
ORDER AND JUDGMENT*
_________________________________
Before BRISCOE, BALDOCK, and CARSON, Circuit Judges.
_________________________________
*
This order and judgment is not binding precedent, except under the doctrines
of law of the case, res judicata, and collateral estoppel. It may be cited, however, for
its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
These cross appeals arise from the district court’s adjudication1 of federal
claims brought under the Perishable Agricultural Commodities Act (“PACA”), 7
U.S.C. §§ 499a–499s. Specifically, Meuers Law Firm (as assignee of Crossroads
Fresh Connection, Inc., a wholesaler) asserted before the district court that Reasor’s
Foods (a grocery store) was unlawfully in possession of $308,721.73 that was subject
to a statutory PACA trust, and therefore the $308,721.73 must be returned to Meuers
for dispersal to the PACA trust beneficiaries (a group of farmers and produce sellers
referenced as “the Suppliers”).
The district court granted judgment in favor of Meuers, but only for
$135,818.59. The district court reasoned that Crossroads consented to a set off in the
amount of $172,903.14 for rebates Crossroads owed to Reasor’s, and therefore that
amount could not be recovered for the beneficiaries of the PACA trust. On cross
appeal, Reasor’s argues that it is entitled to keep all $308,721.73, or that, in the
alternative, the district court’s division of funds should be upheld.
Exercising jurisdiction pursuant to 28 U.S.C. § 1291, we affirm in part, reverse
in part, and remand to the district court with instructions to enter judgment for
Meuers in the additional sum of $172,903.14 and to grant any other relief it may
deem appropriate.
1
The parties submitted the case for decision on stipulated facts and exhibits.
[App. at 77–138.] The parties filed “motions for judgment” with the district court,
which permitted the district court to resolve all factual disputes necessary for
judgment. [See id. at 254.] The district court’s order contains no additional findings
of fact beyond those to which the parties stipulated. [See id. at 239–55.]
2
I
Before recounting the relevant factual and procedural background, we provide
a brief introduction to PACA.
A. The Perishable Agricultural Commodities Act (PACA)
“Congress enacted PACA in 1930 to regulate the sale and marketing of
produce in interstate commerce.” Am. Banana Co. v. Republic Nat’l Bank of N.Y.,
362 F.3d 33, 36 (2d Cir. 2004). Fifty years later, “Congress examined the sufficiency
of the PACA . . . and determined that prevalent financing practices in the perishable
agricultural commodities industry were placing the industry in jeopardy.”
Regulations Under the Perishable Agricultural Commodities Act (PACA): Growers’
Trust Protection Eligibility and Clarification of “Written Notification,” 81 Fed. Reg.
90,255, 90,255 (proposed Dec. 14, 2016) (explaining statutory background). Two
financing practices in particular were troubling. First, Congress noted that there was
an increase in buyers of perishable agricultural commodities who were slow to pay,
or entirely failed to pay, their suppliers. Id. Second, Congress discovered that
perishable agricultural commodities buyers would commonly grant a security interest
to lenders in their inventories, proceeds from sale, and accounts receivables of such
commodities. Id.; see also 7 U.S.C. § 499e(c)(1) (explaining the “burden on
commerce in perishable agricultural commodities caused by [certain] financing
agreements”).
Therefore, in 1984, Congress amended PACA “by impressing a trust on the
commodities and sales proceeds of perishable agricultural commodities for the
3
benefit of the unpaid seller . . . .” Act of May 7, 1984, Pub. L. No. 98-273, 98 Stat.
165. The amendment added a new subsection (c) to PACA § 5. Id. (codified as
amended at 7 U.S.C. § 499e(c)). In relevant part, PACA § 5(c) provides:
(c) Trust on commodities and sales proceeds for benefit of unpaid
suppliers, sellers, or agents; preservation of trust; jurisdiction
of courts
* * *
(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 suppliers,
sellers, or agents. Payment shall not be considered to have been
made if the supplier, seller, or agent receives a payment instrument
which is dishonored. The provisions of this subsection shall not
apply to transactions between a cooperative association, as defined
in section 1141j(a) of Title 12, and its members.
7 U.S.C. § 499e(c)(2). A PACA trust’s assets, therefore, consist of perishable
agricultural commodities “received . . . in all transactions,” “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.” Id.
§ 499e(c)(2); see also 7 C.F.R. § 46.46(b) (same).2 “Trust assets are to be preserved
2
In early 2018, the United States Department of Agriculture (“USDA”)
amended 7 C.F.R. § 46.46, but did not alter the definition of PACA trust assets found
in 7 C.F.R. § 46.46(b). See Perishable Agricultural Commodities Act (PACA):
Guidance on Growers’ Trust Protection Eligibility and Clarification of “Written
4
as a nonsegregated ‘floating’ trust” because “[c]ommingling of trust assets is
contemplated.” 7 C.F.R. § 46.46(b). Additionally, sellers of perishable agricultural
commodities must satisfy certain statutory notice requirements to preserve their trust
protections under PACA. See 7 U.S.C. § 499e(c)(3)–(4).
We now turn to the relevant factual and procedural background.
B. Factual Background
Crossroads was, from March 2010 to April 2014, in the wholesale produce
business. [App. at 78.] Crossroads ran its business from a warehouse in Tulsa,
Oklahoma, and operated under a valid United States Department of Agriculture
PACA license. [Id.] Reasor’s operates a chain of grocery stores throughout
Northeastern Oklahoma, has a valid PACA license, and often bought produce from
Crossroads. [Id.] Crossroads purchased produce from various farmers (the
aforementioned Suppliers) and sold the produce to Reasor’s. One of the Suppliers
was Keith Connell. [Id. at 105.] Connell also holds a valid PACA license, and when
he sold produce to Crossroads, he gave written notice of his intent to preserve PACA
trust benefits by including the statutory language provided by 7 U.S.C. § 499e(c)(4)
on each invoice sent to Crossroads.3 [Id.] When Crossroads ceased its business
operations, it owed Connell more than $1,000,000 for produce. [Id. at 81.]
Notification,” 83 Fed. Reg. 5175, 5176 (Feb. 6, 2018) (codified at 7 C.F.R.
§ 46.46(d), (f)(1)(iv)).
3
7 U.S.C. § 499e(c)(4) provides that:
5
Beginning in March 2010, Reasor’s agreed to purchase produce from
Crossroads, and Crossroads agreed that, in return, Reasor’s was entitled to a quarterly
rebate worth 3% of Reasor’s total purchases from Crossroads each quarter. [Id. at
78.] Pursuant to this agreement, Reasor’s issued an invoice to Crossroads at the end
of each quarter for the 3% rebate. [Id. at 79.] Crossroads would then issue a check
to Reasor’s for the invoiced amount. [Id.]
On January 17, 2014, Reasor’s issued an invoice for $141,962.16 to
Crossroads for its fourth quarter of 2013 rebate (“Q4 2013 Rebate”). [Id.] Later, on
February 14, 2014, Reasor’s informed Crossroads that an internal audit showed that
Reasor’s was entitled to an additional rebate of $30,940.98 (“Audited Rebate”). [Id.]
Thus, by February 14, 2014, Crossroads owed Reasor’s $172,903.14 for the Q4 2013
Rebate and the Audited Rebate.
From March 23, 2014, through April 7, 2014, Crossroads sold and delivered
$409,459.04 worth of produce to Reasor’s. [Id. at 80.] Approximately halfway
through this period, on March 31, Reasor’s notified Crossroads that it was ending
[A] licensee may use ordinary and usual billing or invoice statements to
provide notice of the licensee’s intent to preserve the trust. The bill or
invoice statement must . . . contain on the face of the statement the
following: “The perishable agricultural commodities listed on this
invoice are sold subject to the statutory trust authorized by section 5(c)
of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C.
499e(c)). The seller of these commodities retains a trust claim over
these commodities, all inventories of food or other products derived
from these commodities, and any receivables or proceeds from the sale
of these commodities until full payment is received.”
6
their relationship effective April 4, 2014.4 [Id.] The next day, Crossroads contacted
Reasor’s to ask whether Reasor’s would pay Crossroads for its produce that Friday
“as usual.” [Id. at 96.] Crossroads sought that assurance because it feared that it
might not be able to make payroll without Reasor’s payment. [Id. at 95–96.] On
April 2, 2014, Reasor’s confirmed that it would pay that Friday, but also inquired
about “the overdue status of the [outstanding] rebate[s] in the amount of
$172,903.14.” [Id. at 95.] The next morning, Crossroads asked if Reasor’s could
deduct half of the outstanding rebate amount in its upcoming payment and then
deduct the rest in its final payment. [Id.] Reasor’s agreed to do so. [Id. at 94.]
On April 4, 2014, Crossroads officially ceased its business operations. [Id. at
80.] On April 8, 2014, Reasor’s notified Crossroads that it was owed $126,303.90
for its first quarter of 2014 rebate (“Q1 2014 Rebate”). [Id. at 81.] At some point
after April 8, Reasor’s claimed that Crossroads owed $9,514.69 for Reasor’s second
quarter of 2014 rebate (“Q2 2014 Rebate”). The following is a listing of the rebate
amounts Reasor’s claimed:
1. Q4 2013 Rebate: $141,962.16
2. Audited Rebate: $30,940.98
3. Q1 2014 Rebate: $126,303.90
4. Q2 2014 Rebate: $9,514.69
Total Rebate Claims: $308,721.73
4
At this time Crossroads owed various produce suppliers more than
$2,000,000, including more than $1,000,000 to Connell. [See App. at 80, 105.]
7
C. Procedural Background
After Crossroads ceased its business operations, Keith Connell sued
Crossroads on April 9, 2014, to enforce his PACA trust rights. See Keith Connell,
Inc. v. Crossroads Fresh Connections, Inc., No. 4:14-CV-0166-CVE-TLW (N.D.
Okla. filed Apr. 9, 2014). He argued that, by his complying with PACA, all proceeds
from the produce he sold to Crossroads were held in a statutory trust (the “Suppliers-
Crossroads PACA Trust”) and should be paid out to him (and any other eligible
suppliers) before any other Crossroads creditor. [App. at 105–06.] Connell’s lawsuit
resulted in a consent injunction that appointed Meuers as trustee of the Suppliers-
Crossroads PACA Trust. [Id. at 108.] In that role as trustee, Meuers was responsible
for obtaining any outstanding assets that belonged to the Suppliers-Crossroads PACA
Trust. [Id. at 108–12.] As trustee of the Suppliers-Crossroads PACA Trust, Meuers
asked Reasor’s to pay its outstanding produce balance owed to Crossroads
($409,459.04). Rather than pay the full amount of the outstanding produce balance,
Reasor’s deducted its Total Rebate Claims ($308,721.73) from the outstanding
produce balance it owed to Crossroads and paid the remaining $100,737.31 to
Meuers. [Id. at 81–82.]
Meuers then filed the present lawsuit against Reasor’s to recover the Total
Rebate Claims ($308,721.73) Reasor’s had withheld. As relevant to these cross
appeals, Meuers argued that Reasor’s was a third-party unlawfully in possession of
trust property (the $308,721.73) belonging to the Suppliers-Crossroads PACA Trust.
8
II
This case comes to us in an unusual posture. As the dissent points out, PACA
appears to contain terms that govern rebates like the ones at issue here. “In 1995,
PACA was amended to establish that certain payments were not illegal[.]” JSG
Trading Corp. v. USDA, 176 F.3d 536, 538 (D.C. Cir. 1999). Congress added the
following sentence, now codified at 7 U.S.C. § 499b(4): “However, this paragraph
shall not be considered to make the good faith offer, solicitation, payment, or receipt
of collateral fees and expenses, in and of itself, unlawful under this chapter.”
Perishable Agricultural Commodities Act Amendments of 1995, Pub. L. No. 104–48,
§ 9(b)(3), 109 Stat. 424, 430 (1995). Congress also defined “collateral fees and
expenses,” now codified at 7 U.S.C. § 499a(b)(13), as “any promotional allowances,
rebates, service or materials fees paid or provided, directly or indirectly, in
connection with the distribution or marketing of any perishable agricultural
commodity.” Pub. L. No. 104–48, § 9(a), 109 Stat. 424, 429–30.
Yet the parties in this case never raised or litigated the potential applicability
of PACA provisions regarding “collateral fees and expenses.” Although we may
affirm a judgment based on any ground supported by the record, our exercise of
discretion in this area depends on whether (1) the alternate ground was “fully briefed
and argued here and below;” (2) the parties had “a fair opportunity to develop the
factual record;” and (3) “in light of factual findings to which we defer or uncontested
facts, our decision would involve only questions of law.” Brown v. Perez, 835 F.3d
9
1223, 1236 (10th Cir. 2016) (quoting Elkins v. Comfort, 392 F.3d 1159, 1162 (10th
Cir. 2004)).
Not one of these factors supports deciding this case based on §§ 499b(4) and
499a(b)(13). The applicability of these PACA provisions was not raised at all in the
district court or on appeal, let alone “fully briefed.” And because no one understood
these portions of the statute were in play, the parties had no occasion or opportunity
to develop relevant facts. Section 499b(4) turns on a “good faith offer, solicitation,
payment, or receipt” of a rebate. USDA regulations define “good faith” in this
context as “honesty in fact and the observance of reasonable commercial standards of
fair dealing in the trade.” 7 C.F.R. § 46.2. As we have noted in other settings,
subjective good faith is typically an issue of fact, not an issue of law. See, e.g.,
Haberman v. The Hartford Ins. Grp., 443 F.3d 1257, 1269–70 (10th Cir. 2006)
(stating that under Oklahoma insurance law, when there is conflicting evidence as to
good faith and fair dealing, “what is reasonable is always a question of fact to be
determined by the trier of fact by a consideration of the circumstances in each case”)
(citation omitted).
An examination of the record confirms that no party developed or submitted to
the district court facts bearing on the “good faith” element of PACA’s “collateral fees
and expenses” defense. The stipulated facts presented by the parties say nothing
about “honesty in fact” or “reasonable commercial standards of fair dealing in the
trade” vis-à-vis the rebates offered to Reasor’s by Crossroads. [App. at 77–83.] Nor
did the district court make any factual findings on these issues. [Id. at 239–55.] It
10
would be uncharacteristic under any circumstances for this court to serve as the
initial trier of fact on an issue of good faith. It would be virtually unprecedented for
this court to fulfill that fact-finding role without evidence from the parties or rulings
from the district court to guide the analysis. The dissent’s hypothesis that Reasor’s
must have been on the lookout for evidence of bad faith, and therefore the absence
of evidence on this issue proves Crossroads’ good faith, is pure speculation.
As a result, we decide this case based on the arguments actually presented by
the parties, as opposed to positions the parties could have taken. This means today’s
ruling is case specific – addressing only the arguments these parties have raised in
the context of the factual background determined by the district court. Nothing in the
opinion should be read as nullifying the “collateral fees and expenses” language in §
499b(4), § 499a(b)(13), or any other PACA provisions not cited by the parties.
Those statutory terms may dictate the outcome in a future case involving rebates
providing the parties raise and brief those issues. This limitation on our holding
eliminates the risk of setting a precedent that, in the dissent’s words, “reinforces
error.”
III
“In an appeal from a bench trial, we review the district court’s factual findings
for clear error and its legal conclusions de novo.” Sw. Stainless, LP v. Sappington,
582 F.3d 1176, 1183 (10th Cir. 2009) (quoting Weyerhaeuser Co. v. Brantley, 510
F.3d 1256, 1260 (10th Cir. 2007)). As the district court relied on the parties’
11
stipulated facts and made no additional factual findings, the arguments actually
presented by the parties in these cross appeals involve only questions of law.
There is no dispute that the Suppliers are “unpaid suppliers or sellers of
[perishable agricultural] commodities” within the meaning of § 499(e)(2).5 There is
also no dispute that the Suppliers complied with the statutory notice requirements of
§ 499e(c)(3)–(4) and thereby preserved their PACA trust rights when they sold
perishable agricultural commodities to Crossroads. It is likewise undisputed that
Reasor’s withheld $308,721.73 to satisfy its Total Rebate Claims. However,
Reasor’s contends that it should prevail on cross appeal for two reasons. First,
Reasor’s argues that under the plain language of PACA, the $308,721.73 at issue is
not subject to the Suppliers-Crossroads PACA Trust. Second, Reasor’s asserts that it
should prevail under general trust principles. We find neither argument persuasive.
A. Whether PACA trust protections are limited to financing
arrangements
Congress employed expansive language to define the property subject to a
PACA trust. On its face, PACA appears to apply to “all” transactions involving
perishable agricultural commodities. See 7 U.S.C. § 499e(c)(2) (“Perishable
agricultural commodities received by a commission merchant, dealer, or broker in all
transactions, . . . shall be held . . . in trust for the benefit of all unpaid suppliers or
5
Under PACA, the term “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; and . . . cherries in brine as defined by the
Secretary in accordance with trade usages.” 7 U.S.C. § 499a(b)(4).
12
sellers . . . until full payment . . . has been received by such unpaid suppliers, sellers,
or agents.”) (emphasis added). “All” means “the whole amount, quantity, or extent
of,” or “as much as possible.” All, Merriam-Webster Dictionary,
https://www.merriam-webster.com/dictionary/all (last visited July 8, 2019).
Reasor’s, however, argues that “all” must be read in the context of the legislative
finding provided in 7 U.S.C. § 499e(c)(1). When read in this context, Reasor’s
argues, PACA trust protections extend only to “all transactions” involving a security
interest or similar financing arrangements. Section 499e(c)(1) sets forth the
legislative reasoning for the 1984 PACA amendment:
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.
7 U.S.C. § 499e(c)(1) (emphasis added). Therefore, according to Reasor’s, Congress
only intended to remedy a particular, limited burden on interstate commerce through
the 1984 amendment to PACA: scenarios where “commission merchants, dealers, or
brokers” grant a lender a security interest in perishable agricultural commodities, in
inventories of products derived from perishable agricultural commodities, or in any
receivable or proceeds from the sale of perishable agricultural commodities before
13
the merchants, dealers, or brokers pay their suppliers. See id. Reasor’s argues that,
since this case does not involve a security interest, PACA does not apply.6
We are not persuaded. Reasor’s fails to explain how the plain language of the
broad congressional remedy provided in § 499e(c)(2) is somehow inconsistent with
the specific burden on interstate commerce identified in § 499e(c)(1). Extending
PACA trust protections to “all transactions”—both those encumbered by security
interests and those that are not—“remed[ies] [the identified] burden on commerce in
perishable agricultural commodities and . . . protect[s] the public interest.” 7 U.S.C.
§ 499e(c)(1)–(2). Moreover, if Congress desired to limit PACA trust protections to
the certain transactions in 7 U.S.C. § 499e(c)(2), it could have employed the precise
language found in 7 U.S.C § 499e(c)(1) (such as “security interest” or “financing
arrangements”) rather than the language it ultimately used (“all”). But Congress
decided otherwise, and courts may not “rewrite the statute that Congress has
enacted.” Puerto Rico v. Franklin Cal. Tax-Free Tr., 136 S. Ct. 1938, 1949 (2016)
(quoting Dodd v. United States, 545 U.S. 353, 359 (2005)). Accordingly, we are
bound by the express congressional command to extend PACA trust protections to
“all transactions” involving perishable agricultural commodities, not just those
involving security interests.
6
We note that while this case does not involve a security interest, it does
involve a recurring quarterly 3% rebate.
14
B. Whether Reasor’s Prevails Under General Trust Principles
As recognized by the district court, “the interpretation of PACA trust interests
is guided by general trust principles to the extent there is no conflict with the
statute.” Skyline Potato Co. v. Hi-Land Potato Co., 188 F. Supp. 3d 1097, 1110
(D.N.M. 2016) (citing In re Arctic Express, Inc., 636 F.3d 781, 798 (6th Cir. 2011)).7
And under the salient general trust principles we can only conclude that Reasor’s
should have disgorged all of $308,721.23 in trust assets in its possession.
1. Trust Terminology
We begin with a refresher on general trust principles. A trust “is a fiduciary
relationship with respect to property, . . . subjecting the person who holds title to the
property to duties to deal with it for the benefit” of another. Restatement (Third) of
Trusts § 2 (Am. Law Inst. 2003). “[A] trust involves three elements: (1) a trustee,
who holds the trust property and is subject to duties to deal with it for the benefit of
one or more others; (2) one or more beneficiaries, to whom and for whose benefit the
trustee owes the duties with respect to the trust property; and (3) trust property,
which is held by the trustee for the beneficiaries.” Id. § 2 cmt. f; see also id. § 3
(defining trust property, trustee, and beneficiary). “A breach of trust is a failure by
the trustee to comply with any duty that the trustee owes, as trustee, to the
beneficiaries, or to further the charitable purpose, of the trust.” Id. § 93. One of
7
Circuit courts look to the Restatement (Second) of Trusts (Am. Law Inst.
1959) and the Restatement (Third) of Trusts (Am. Law Inst. 2003) for guidance on
general trust principles. See Skyline Potato Co., 188 F. Supp. 3d at 1110–11
(collecting cases).
15
these duties is “a duty to administer the trust,” which “includes a duty, at the outset
of administration, to take reasonable steps to ascertain the assets of the trust estate
and to take and keep control of those assets.” Id. § 76(1) & cmt. d.
In this case, and pursuant to PACA, Crossroads was the trustee of the
Suppliers-Crossroads PACA Trust;8 the Suppliers are the beneficiaries of the
Suppliers-Crossroads PACA Trust; and, as the parties and district court appeared to
agree, an account receivable (for $308,721.73) was an asset held by the Suppliers-
Crossroads PACA Trust. There is a dispute, however, concerning whether the
account receivable was “transferred” from Crossroads to Reasor’s and thereby
remained trust property.
2. Transfer of the Suppliers-Crossroads PACA Trust Property
As explained above, under the plain language of the statute, the perishable
agricultural commodities themselves, any inventories of products derived from the
perishable agricultural commodities, and “any receivables or proceeds from the sale
of such commodities or products” are PACA trust assets. 7 U.S.C. § 499e(c)(2).
Here, then, when Crossroads sold any perishable agricultural commodities that it
purchased from the Suppliers, the resulting account receivable, by operation of law,
was immediately held in trust pursuant to PACA for the benefit of the Suppliers until
they were paid in full. See PACA Tr. Creditors of Lenny Perry’s Produce, Inc. v.
8
As stated previously, Meuers is now the trustee of the Suppliers-Crossroads
PACA Trust.
16
Genecco Produce, Inc., 913 F.3d 268, 277 (2d Cir. 2019). The district court reached
this same conclusion [App. at 253], but then took a wrong turn.
The district court “conclude[d] Reasor’s [wa]s entitled to judgment” on the
breach of trust claim because “[i]n the bankruptcy context at least, ‘it is well-settled
that setoffs are not transfers.’” 9 [App. at 254, quoting In re Porter, 562 B.R. 658,
659 n.1 (Bankr. E.D. Va. 2016).] Therefore, according to the district court, since a
setoff is not a transfer, “Meuers has not shown Reasor’s possesses Crossroads’
account receivable—or any other asset of the Suppliers-Crossroads PACA Trust—
that could be disgorged.” Id. It is important to note, however, that in the bankruptcy
context “transfer” is actually defined in the Bankruptcy Code. See 11 U.S.C.
§ 101(54) (defining transfer). “The definition, though broad in scope, does not
expressly include setoff.” In re Damas, 504 B.R. at 296. And bankruptcy courts
have given full effect to this congressional choice, in the bankruptcy context, “to
exclude setoff from the meaning of transfer.” Id. Since this case does not involve
the Bankruptcy Code, we are not bound by the congressional choice to exclude setoff
from the Code’s definition of “transfer.”
9
The complete context of the bankruptcy court’s opinion cited by the district
court follows: “[I]t is well-settled that setoffs are not transfers and therefore are not
avoidable under 11 U.S.C. § 547(b).” In re Porter, 562 B.R. at 659 n.1 (quoting In re
Damas, 504 B.R. 290, 296 (Bankr. D. Mass. 2014)) (emphasis added). Therefore, in
Porter, the bankruptcy court did not state that setoffs are not transfers as a general
matter, but instead that, under the Bankruptcy Code, a setoff is not “any transfer of
an interest of the debtor in property” that “the trustee may avoid” within the meaning
of 11 U.S.C. § 547(b).
17
Instead, we give the term “transfer” its plain, ordinary meaning. A “transfer”
is “[a]ny mode of disposing of or parting with an asset or an interest in an asset,
including a gift, the payment of money, release, lease, or creation of a lien or other
encumbrance.” Transfer, Black’s Law Dictionary (10th ed. 2014). In this case,
Crossroads disposed of an asset of the Suppliers-Crossroads PACA Trust (the
account receivable) when it allowed Reasor’s to set off the $308,721.23. That is
plainly a transfer, and since Crossroads failed to “keep control of [trust] assets,”
Crossroads agreeing to Reasor’s set off was a breach of trust. Restatement (Third) of
Trusts § 76 cmt. d. As a result, in the absence of some defense, Reasor’s must
disgorge the Suppliers-Crossroads PACA Trust assets held in its possession.
3. Reasor’s Remaining Defenses
Reasor’s presents three final defenses to support its position that it is entitled
to keep the Suppliers-Crossroads PACA Trust assets. First, Reasor’s asserts that “the
entire set off was authorized by Crossroads.” Second Br. (Reasor’s) at 15
(capitalization removed).10 Second, Reasor’s argues that “PACA trust claims can
only be asserted by a PACA beneficiary who is in privity with the buyer/fiduciary.”
Id. at 18. Finally, Reasor’s claims that it has presented an affirmative defense under
general trust principles. We disagree with each assertion.
10
The district court found “[t]his argument persuasive, but only as to the
$172,903.14 in rebates discussed in the email exchange between” representatives
from Crossroads and Reasor’s. [App. at 250.]
18
To begin, the consent of Crossroads (as trustee of the Suppliers-Crossroads
PACA Trust) to any transfer of trust property is irrelevant under general trust
principles. Under general trust principles, consent of the beneficiary, not the trustee,
determines whether a third party may permissibly retain trust property it received in
breach of trust without incurring liability. Restatement (Second) of Trusts § 315
(rights of third-party where beneficiary consents to transfer of trust property). In this
case, the Suppliers never consented to the set off against the Suppliers-Crossroads
PACA Trust assets. Therefore, Reasor’s is (absent some other defense) liable as a
third party unlawfully in possession of trust assets.
Reasor’s next argument, that it is not in privity with the Suppliers, is also
flawed. The plain language of PACA does not limit which party may bring a claim
under PACA, and therefore general trust principles apply. Under general trust
principles, “[a] trustee may maintain a proceeding against a third party on behalf of
the trust and its beneficiaries.” Restatement (Third) of Trusts § 107(1). This is so
“even if a loss or potential loss to the trust or an improper benefit to the third party is
attributable to the trustee’s misconduct.” Id. § 107 cmt. (b)(1). In fact, “an action to
recover trust property transferred in breach of trust may be maintained against a third
party by the very trustee who made the improper transfer.” Id.
Here, the trustee of the Suppliers-Crossroads PACA Trust (Meuers) brought an
action against a third party (Reasor’s) on behalf of the trust and its beneficiaries (the
Suppliers). This is entirely consistent with general trust principles, and we therefore
19
reject Reasor’s argument to the contrary.11 We now proceed to discuss Reasor’s
affirmative defense under general trust principles.
Reasor’s characterizes its affirmative defense as “set off,” but the most recent
authority on general trust principles simplified all third party defenses into one
affirmative defense: bona fide purchaser. See Restatement (Third) of Trusts § 108(2)
(“A third party who acquires an interest in trust property through a breach of trust is
entitled to retain or enforce the interest to the extent the third party is protected as a
bona fide purchaser.”); see also id. § 108 Reporter’s Notes (“This Section is
consistent with but a condensation of Restatement Second, Trusts §§ 284–285, 321–
326.”).12 Because “the bona fide purchaser term . . . has been consistently used in the
case law regarding PACA and third party recipients of trust assets,” we will follow
suit. Spada Props., Inc. v. Unified Grocers, Inc., 38 F. Supp. 3d 1223, 1233 n.5 (D.
Or. 2014).
“[W]hen trust assets are held by a third party, resulting in the failure of the
trustee to pay unpaid sellers of perishable agricultural commodities, the third party
may be required to disgorge the trust assets unless the third party can establish that it
has some defense, such as having taken the assets as a bona fide purchaser without
11
Reasor’s primarily relies on In re So Good Potato Chip Co., 124 B.R. 298
(Bankr. E.D. Mo. 1991), for its argument regarding who may maintain an action
under PACA. The bankruptcy court in So Good Potato Chip neither cites to nor
appears to rely on any general trust principles in its decision. Accordingly, we
decline to follow it.
12
The concept of “set off” under general trust principles is found in
Restatement (Second) of Trusts § 323.
20
notice of the breach of trust.” Nickey Gregory Co. v. AgriCap, LLC, 597 F.3d 591,
595–96 (4th Cir. 2010). A defendant bears the burden of proof to show that an
affirmative defense, such as bona fide purchaser, applies. Albee Tomato, Inc. v. A.B.
Shalom Produce Corp., 155 F.3d 612, 615 (2d Cir. 1998) (“In establishing the
protected status of bona fide purchaser, the burden of proof is on the transferee.”);
see also Johnson v. Riddle, 443 F.3d 723, 724 n.1 (10th Cir. 2006) (explaining that
the defendant bears the burden of proof on an affirmative defense). Reasor’s,
therefore, had to show by a preponderance of the evidence that it received the
$308,721.23 in trust assets (1) “for value” and (2) “without notice of the breach of
trust.” Restatement (Second) of Trusts § 284(1).13 As Reasor’s fails to satisfy the
first requirement of the bona fide purchaser defense, we need proceed no further.
Reasor’s did not receive the trust assets for value. Under general trust
principles, there is a general rule that “if [a] trustee transfers trust property in
consideration of the extinguishment of a pre-existing debt or other obligation, the
transfer is not for value.” Id. § 304(1). There are three limited exceptions to the
general rule: where “the trust property transferred is a negotiable instrument or
13
The Restatement (Third) of Trusts “does not undertake the laborious
treatment of the application of the bona fide purchaser rule found in” the Restatement
(Second) of Trusts because “[t]he doctrine of bona fide purchase and the definition of
a bona fide purchaser are already adequately addressed in other Restatements and in
commercial law.” Restatement (Third) of Trusts § 108 cmt. c (internal quotation
marks omitted). Therefore, we apply the doctrine of bona fide purchase stated in
other Restatements, including the Restatement (Second) of Trusts.
21
money,” when “the transferee held security for the debt or other obligation and
surrendered the security,” and a general equitable “change of circumstances”
exception. Id. § 304(2).14
Here, none of the exceptions apply. Crossroads did not transfer money, a
negotiable instrument, or a security interest to Reasor’s when it disposed of the
receivable. Further, there are no equitable concerns in recognizing the Suppliers’
right to recover under PACA instead of any set off claim asserted by Reasor’s. In
this case, Crossroads simply extinguished Reasor’s $172,903.14 debt owed to the
Suppliers-Crossroads PACA Trust by a transfer that was not, under general trust
principles, for value. See id. § 304 cmt. a. Since Reasor’s did not satisfy the first
requirement of the bona fide purchaser defense, we need not reach the second.
In sum, Reasor’s has failed to establish an affirmative defense to its possession
of trust assets transferred in breach of trust, and Meuers is entitled to the $172,903.14
which the district court permitted Reasor’s to set off.
4. The Dissent
The dissent contends that even outside of §§ 499b(4) and 499a(b)(13),
$172,903.14 worth of rebates extended to Reasor’s by Crossroads were permissible
because they “satisf[ied] obligations that are commercially reasonable and consistent
14
There is also an extension of the negotiable instrument or money exception:
where “the trustee transfers trust property in consideration both of the extinguishment
of a pre-existing debt or other obligation and of the payment of money or transfer of
other property or the rendition of services, the transfer is for value.” Restatement
(Second) of Trusts § 304(3).
22
with the trustee’s duties under PACA.” The analysis set forth above answers much
of this argument, and we reject the dissent’s position for at least two additional
reasons.
First, the dissent’s assertion that rebates and other “collateral fees and
expenses” are permitted by general trust principles contradicts the very statutory
provisions giving rise to the dissent’s PACA argument. If a PACA trustee was
already allowed by trust law to countenance promotional allowances, rebates, service
fees, and materials fees, then Congress accomplished nothing when it amended §§
499b(4) and 499a(b)(13) in 1995. This circuit has long recognized that “[w]e do not
and should not suppose that Congress intended to enact unnecessary statutes.”
Jackson v. Kelly, 557 F.2d 735, 740 (10th Cir. 1977). Similarly, “[i]t is a cardinal
principle of statutory construction that a statute ought, upon the whole, to be so
construed that, if it can be prevented, no clause, sentence, or word shall be
superfluous, void, or insignificant.” TRW, Inc. v. Andrews, 534 U.S. 19, 31 (2001)
(citation and internal quotation marks omitted). Under the dissent’s view, §§ 499b(4)
and 499a(b)(13) are at best insignificant and at worst superfluous, because they
convey rights that trustees already enjoy by virtue of trust law.
Second, the dissent’s “commercial reasonableness” approach is not even the
law in the Second Circuit, the court from which the dissent purports to draw support.
The dissent cites E. Armata, Inc. v. Korea Commercial Bank of N.Y., 367 F.3d 123
(2d Cir. 2004), a case involving fees associated with a checking account, for the
proposition that a trustee may act in a commercially reasonable manner consistent
23
with its fiduciary duties. But in Coosemans Specialties, Inc. v. Gargiulo, 485 F.3d
701 (2d Cir. 2007), the Second Circuit distinguished E. Armata on the ground that the
latter case involved “a PACA suit against a third-party bank,” rather than a suit
against a PACA trustee. Id. at 706. The Second Circuit then rejected an independent
“commercial reasonableness” test like the one embraced by the dissent:
We have never held that a PACA trustee can escape all liability for
entering into a transaction that results in a large loss of PACA assets
merely by showing that the transaction was commercially reasonable on
its face. Nothing in E. Armata suggests that, simply by entering into a
commercially reasonable transaction, a PACA trustee necessarily avoids
breaching its fiduciary duty. Instead, whether a transaction is
commercially reasonable is simply one factor that may be relevant in
determining whether a PACA trustee has met its ultimate burden of
proving that trust assets remained freely available to plaintiffs.
Id. at 706–07;15 see also Nickey Gregory, 597 F.3d at 604–05 (indicating that the
reasoning in E. Armata at most should be applied to “bank checking accounts that are
subject to banking rules and regulations,” because interpreting the decision more
broadly “would undoubtedly conflict with the purpose and effect of PACA”).
15
The court in Coosemans concluded that PACA trust assets must remain
“freely available” to beneficiaries under 7 C.F.R. § 46.46(d)(1). 485 F.3d at 706.
Section 46.46(d)(1) further provides that “[a]ny act or omission which is inconsistent
with this responsibility, including dissipation of trust assets,” is unlawful. USDA
regulations define “dissipation” as “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.” 7 C.F.R. § 46.46(a)(2). These provisions provide even more support
for the conclusion we reach today.
24
IV
Resolving this case, as we must, based solely on the arguments presented by
the parties, we hold that the district court erred when it failed to apply a PACA trust
to all monies withheld by Reasor’s, which would have resulted in entry of judgment
in favor of Meuers in the full $308,721.73 amount. Therefore, we affirm in part,
reverse in part, and remand to the district court with instructions to enter judgment
for Meuers in the additional sum of $172,903.14 and to grant any other relief it may
deem appropriate.
Entered for the Court
Mary Beck Briscoe
Circuit Judge
25
Meuers Law Firm, et al. v. Reasor’s, et al., 18-5055
CARSON, J., concurring in the judgment in part and dissenting in part.
The majority holds that Meuers may recover all of the PACA trust assets—
$308,721.73—that Reasor’s retained to satisfy Crossroads’ unpaid rebates. The majority
is only partly correct.
For the reasons I describe below, I concur in the judgment with the majority’s
holding that Meuers may recover the $135,818.59 that Reasor’s unilaterally retained
(what I call the “Unilateral Payments”). But I respectfully dissent from the majority’s
holding that Meuers may recover the $172,903.14 that Crossroads permitted Reasor’s to
retain (what I call the “Authorized Payments”).
I.
To start, I agree with the majority that 7 U.S.C. § 499e(c)(2) broadly extends
PACA trust protections to “all transactions” involving perishable agricultural
commodities and “any receivables . . . from the sale of” those commodities. The plain
language of § 499e(c)(2) makes that conclusion unavoidable. By extension, the account
receivable at issue in this case is clearly an asset subject to a PACA trust.
I part ways with the majority, however, when it turns a blind eye to 7 U.S.C.
§ 499b(4) and 7 U.S.C. § 499a(b)(13). As the majority observes, § 499b(4) mandates that
“the good faith offer, solicitation, payment, or receipt of collateral fees and expenses” is
not “unlawful under [PACA].” And § 499a(b)(13) defines “collateral fees and expenses”
as “any promotional allowances, rebates, service or materials fees paid or provided,
directly or indirectly, in connection with the distribution or marketing of any perishable
agricultural commodity.” 7 U.S.C. § 499a(b)(13)(emphasis added).
That clear statutory language warrants judgment in favor of Reasor’s for the
Authorized Payments. Those payments were for collateral fees and expenses—more
specifically, they were payments of rebates. Further, no evidence suggests that
Crossroads did not make those payments in good faith (a point that I discuss further
below). By the very terms of § 499b(4), the Authorized Payments were therefore not
unlawful under PACA. And of course, if they were not unlawful under PACA, then
Crossroads did not breach the PACA trust by ostensibly failing to keep control of the
trust’s assets. I would thus affirm the district court’s decision precluding Meuers from
recovering the $172,903.14.
True, Reasor’s does not make any arguments on appeal relating to § 499b(4) or
§ 499a(b)(13). Nor did it do so in the district court. Meuers has similarly omitted any
reference to either of those statutes. Presumably, both parties unintentionally overlooked
that language, which is troubling given the statutes’ clear relevance. In no way do I
condone that oversight, and I recognize that we usually would not reward Reasor’s for
failing to cite or invoke applicable law. See, e.g., Henderson ex rel. Henderson v.
Shinseki, 562 U.S. 428, 434 (2011) (“[C]ourts are generally limited to addressing
the . . . arguments advanced by the parties. Courts do not usually raise . . . arguments on
their own.” (emphasis added) (citation omitted)).
With that said, if “an issue . . . is properly before the court, the court is not limited
to the particular legal theories advanced by the parties, but rather retains the independent
2
power to identify and apply the proper construction of governing law.” United States v.
Bustamante-Conchas, 850 F.3d 1130, 1141 n.7 (10th Cir. 2017) (en banc) (quoting U.S.
Nat’l Bank v. Indep. Ins. Agents of Am., Inc., 508 U.S. 439, 446 (1993)). Although, of
course, exercising that power is often inappropriate—a point the majority seizes upon—
the Supreme Court has nevertheless suggested we should do so when the governing law
that went unobserved is “‘antecedent to and ultimately dispositive of’ the dispute before”
us. U.S. Nat’l Bank, 508 U.S. at 447 (ellipsis omitted) (quoting Arcadia v. Ohio Power
Co., 498 U.S. 73, 77 (1990)). The reason why is obvious: pretending otherwise and
“render[ing] judgment on the basis of a rule of law whose nonexistence is apparent on the
face of things, simply because the parties agree upon it,” only serves to “reinforce error.”
United States v. Burke, 504 U.S. 229, 246 (1992) (Scalia, J., concurring in the judgment);
see also U.S. Nat’l Bank, 508 U.S. at 447 (endorsing Justice Scalia’s logic). Thus, should
we become aware of such undeniably case-ending law, we are not “oblige[d] . . . to treat
[an] unasserted argument” relating to that law “as having been waived.”1 U.S. Nat’l
Bank, 508 U.S. at 447.
Such is the case here. The salient issue—whether Reasor’s must disgorge the
Authorized Payments to Meuers—is properly before us. Further, as I describe above,
§ 499b(4) and § 499a(b)(13) are governing law that definitively settle that issue. After
all, if Crossroads did not breach the PACA trust in the first place (which those two
1
This principle seems to apply with special force when, as in this case, the central
issue turns on whether a statute governs. See, e.g., U.S. Nat’l Bank, 508 U.S. at 445–48
(holding that the court of appeals had the discretion to consider the validity of a statute
even though the parties had not questioned its validity).
3
statutes prove it did not), then we lack a basis to force Reasor’s to hand those payments
over. And § 499b(4) and § 499a(b)(13) are antecedent to the disgorgement issue for the
same reason: no breach, no disgorgement. In sum, we have every reason to affirm the
district court’s decision regarding the Authorized Payments even though “the parties
fail[ed] to identify and brief” the applicable law. U.S. Nat’l Bank, 508 U.S. at 447.
But to the extent any doubts remain, an additional reason should tip the scales in
favor of applying § 499b(4) and § 499a(b)(13)—namely, that not applying those statutes
risks characterizing entirely lawful conduct as unlawful. The majority falls into that very
trap. Take a step back and consider in broader terms the majority’s conclusion regarding
the Authorized Payments. The majority is effectively ruling that Crossroads breached its
duties as a PACA trustee even though Congress has expressly said that Crossroads did
not breach its duties as a PACA trustee. That troubles me. I cannot act as if an activity
is unlawful when I know that a congressional statute confirms it is not. But the majority
does just that, which ultimately punishes Reasor’s for conduct that was not wrong in the
first place. I will not endorse that result.
The majority’s argument to the contrary—that disregarding § 499b(4) and
§ 499a(b)(13) is the correct course of action because we do not know and cannot decide
the factual question whether Crossroads acted in “good faith” under § 499b(4)—is
unconvincing. For one thing, I simply disagree with the majority that neither Meuers or
Reasor’s had a fair opportunity to develop the factual record bearing on that question of
good faith. See Brown v. Perez, 835 F.3d 1223, 1236 (10th Cir. 2016) (directing us to
consider, when deciding whether to affirm on an alternate ground, whether the parties
4
had “a fair opportunity to develop the factual record” (quoting Elkins v. Comfort, 392
F.3d 1159, 1162 (10th Cir. 2004))). That the parties did not realize § 499b(4) came into
play does not mean that they were not on the lookout for evidence that Crossroads had
made the Authorized Payments in good or bad faith. Reasor’s, for instance, had every
reason to be on the lookout for that evidence because evidence that Crossroads had made
the Authorized Payments in good faith could have reinforced Reasor’s claim that it was a
bona fide purchaser—after all, if Crossroads was acting in good faith, Reasor’s could
have argued that it had no reason to suspect any breach of the PACA trust. And Meuers
had every reason to be on the lookout for that evidence for a similar reason: if Crossroads
had acted in bad faith, Meuers could have leveraged that evidence to refute Reasor’s
claim that it was a bona fide purchaser. The point is that evidence pertaining to good
faith had such obvious relevance that I have a difficult time believing the parties did not
have a fair opportunity to develop the factual record in that regard. See Restatement
(Third) of Trust § 76(1) (instilling trustees with the general “duty to administer the trust[]
diligently and in good faith” (emphasis added)); cf. Gilmer v. Interstate/Johnson Lane
Corp., 500 U.S. 20, 37 (1991) (Stevens, J., dissenting) (discussing issues that are “so
integral to decision of the case that they [can] be considered fairly subsumed by the
actual questions presented” (internal quotation marks omitted)).
Further, the parties’ stipulated facts make no mention of Crossroads acting in bad
faith when making the Authorized Payments, which in my opinion means the parties
agree that Crossroads acted in good faith. See Brown, 835 F.3d at 1236 (directing us to
consider, when deciding whether to affirm on an alternate ground, “whether, in light
5
of . . . uncontested facts, our decision would involve only questions of law” (emphasis
added) (quoting Elkins, 392 F.3d at 1162)). Again, in light of the obvious relevance of
the good-faith/bad-faith inquiry, one would expect Meuers—a trustee trying to recover
significant sums of money—to shout from the rooftops that Crossroads had acted in bad
faith if Meuers had even suspected that were actually the case. But that did not happen,
and for good reason. Crossroads owed Reasor’s payment for rebates. Reasor’s
demanded that payment. Crossroads then provided that payment. That course of events
seems like the prototypical example of good faith. See 7 C.F.R. § 46.2(hh) (defining
good faith under PACA as “honesty in fact and the observance of reasonable commercial
standards of fair dealing in the trade”). I thus believe that Meuers and Reasor’s did not
dispute the issue of good faith because they could not say with a straight face that
Crossroads had acted in bad faith. In turn, I believe that the parties’ stipulated facts allow
us to apply § 499b(4) and § 499a(b)(13) as a matter of law. See United States v. Taylor,
97 F.3d 1360, 1364 (10th Cir. 1996) (“The district court failed to make specific [factual]
findings relative to this issue. However, we may address it because ‘we are free to affirm
a district court decision on any grounds for which there is a record sufficient to permit
conclusions of law, even grounds not relied upon by the district court.’” (quoting Griess
v. Colorado, 841 F.2d 1042, 1047 (10th Cir. 1988)).
But let’s assume that I’m entirely wrong and that the circumstances weigh against
affirming the district court’s decision regarding the Authorized Payments on the basis of
§ 499b(4) and § 499a(b)(13). Even if the parties did not have a fair opportunity to
develop the factual record bearing on the question of good faith under § 499b(4), and
6
even if the parties’ silence on that question would require us to act as the initial factfinder
on appeal, I still think other deep-seated issues underlie the majority’s opinion.
First, why not simply remand this case to the district court to make a factual
finding on the issue of good faith under § 499b(4)? The majority does not even consider
that option, yet it seems to be the logical backup plan should we not be able to affirm
outright via § 499b(4) and § 499a(b)(13). Indeed, although the majority chastises me for
(supposedly) committing the “uncharacteristic” and “virtually unprecedented” sin of
acting as a factfinder on appeal, I believe an even greater sin is labeling activity unlawful
when a simple procedural fix would definitively establish that it is not.
Second, in the absence of § 499b(4) and § 499a(b)(13), the majority makes a weak
case that Crossroads breached the PACA trust. The majority’s analysis boils down to
“general trust principles” that require a trustee to “keep control of” trust assets, an
obligation which the majority concludes Crossroads failed to live up to when it
authorized a setoff from the account receivable. Restatement (Third) of Trust § 76 cmt.
d. That analysis, however, fails to account for other trust principles that require us to
take into account the unique realities that make up the world of PACA trusts. And when
accounting for those realities, I believe that Crossroads’ authorization of the setoff—an
action that was commercially reasonable and consistent with its duty as a PACA trustee
7
to make trust assets freely available to the Suppliers—did not amount to a breach of
trust.2
Consider first the application of general trust principles. Although trustees surely
have the duty to keep control of trust assets, the majority fails to note a corollary
principle of trust law that clarifies that duty. Namely, “[t]he manner of . . . maintaining
control of the trust property depends on the nature of the property, the terms of the trust,
and what is appropriate to the prudent administration of the trust.” Restatement (Third)
of Trusts § 76 cmt. d. In layman’s terms, that means the duty to keep control of trust
assets is not black or white in the way the majority makes it out to be. Rather, that duty
applies differently depending on the specific trust at issue. And for that reason, we must
analyze the characteristics of any given trust with a sharp eye when determining whether
a trustee breaches his, her, or its duty to keep control of the trust’s assets.
To that end, next consider some simple truths about PACA trusts. For one thing,
nearly all PACA trustees pay regular business expenses with trust assets—even when
they have not yet fully paid the PACA beneficiaries. See, e.g., Farm-Wey Produce, Inc.
v. Wayne L. Bowman Co., 973 F. Supp. 778, 784 (E.D. Tenn. 1997) (“It is unlikely that
any produce broker exists that pays no business expenses other than its suppliers.”); id.
(“In such a case, any payment of ordinary business expenses must necessarily be made
from [PACA] trust assets.”). Further, courts can hold PACA trustees individually liable
2
Unlike any arguments it could have made (but ultimately did not make)
pertaining to § 499b(4) and § 499a(b)(13), Reasor’s does argue that Crossroads’ actions
were commercially reasonable and thus not a breach of the PACA trust.
8
for breaching PACA trusts. See, e.g., Morris Okun, Inc. v. Harry Zimmerman, Inc., 814
F. Supp. 346, 348 (S.D.N.Y. 1993) (“[A] PACA trust in effect imposes liability on a
trustee, whether a corporation or a controlling person of that corporation . . . .”
(emphasis added)). Putting two and two together, I seriously doubt that Congress
intended for a PACA trustee to be individually liable for breaching the PACA trust
“every time” that he, she, or it “dissipat[es] trust assets” to pay regular business expenses.
Farm-Wey Produce, 973 F. Supp. at 784; see also Restatement (Third) of Trusts § 88
cmt. a (observing that trustees may “pay proper expenses directly from the trust estate”).
The reasoning underlying the majority’s holding, however, naturally leads to such
a conclusion. That seems problematic. Again, absent the law demanding it (which the
law does not), I view with suspicion any holding that will effectively cause PACA
trustees to breach their fiduciary duties on a daily basis. My suspicion doubles when
many of those daily breaches will stem from the trustee paying off obligations—such as
rebates, as I explain more below—that he, she, or it, incurred for the benefit of the trust in
the first place. Cf. S & H Packing & Sales Co. v. Tanimura Distrib., Inc., 883 F.3d 797,
822 (9th Cir. 2018) (en banc) (Ikuta, J., dissenting) (“[T]he . . . theory of breach . . . that
the [PACA] trustee cannot repay a loan to the trust until all beneficiaries have been
paid . . . would likely preclude a trustee from borrowing money secured by trust assets.”).
I believe that Congress would have recognized and endorsed my perspective since
at least 1984. See id. at 815 (Ikuta, J., dissenting) (“Congress added a trust mechanism to
PACA in 1984.”); see also Restatement (Second) of Trusts § 244 cmt. b (noting twenty-
five years earlier in 1959 that “[i]f the trustee properly incurs a liability in the
9
administration of the trust, he is entitled to . . . us[e] trust property in discharging the
liability so that he will not be compelled to use his individual property in discharging it”
(emphasis added)). I thus believe that Congress eventually enacted § 499b(4) and
§ 499a(b)(13) eleven years later in 1995 to make clear that a PACA trustee’s act of
paying collateral fees and expenses is not a breach of the PACA trust. Contrary to the
majority’s suggestion, that does not mean “Congress accomplished nothing” in passing
those statutes if PACA trustees could already lawfully pay collateral fees and expenses
with trust assets for over a decade. The more likely explanation is that Congress had
intended all along to exempt the act of paying collateral fees and expenses from PACA
liability, had witnessed courts misapplying “general trust principles” come to the contrary
conclusion (as the majority ultimately does today), and decided to alleviate any confusion
on the matter by passing § 499b(4) and § 499a(b)(13). Put differently, Congress may—
and often does—pass statutes to definitively clarify its prior intent. See Brown v.
Thompson, 374 F.3d 253, 259 (4th Cir. 2004) (“Certainly, Congress may amend a statute
to establish new law, but it also may enact an amendment ‘to clarify existing law, to
correct a misinterpretation, or to overrule wrongly decided cases.’” (quoting United
States v. Sepulveda, 115 F.3d 882, 885 n.5 (11th Cir. 1997))). I am aware of no authority
that suggests a federal law is insignificant or superfluous simply because that law refines
a view Congress previously adopted in a less-than-clear manner.
In any event, and for the reasons I describe above, concluding that Crossroads
breached the PACA trust when authorizing the setoff leads to an impractical result. I
therefore believe that, even before passing § 499b(4) and § 499a(b)(13), Congress
10
intended some limiting factor to come into play to alleviate the concern that PACA
trustees would face unreasonable liability.
The Second Circuit persuasively articulates that limiting factor in E. Armata, Inc.
v. Korea Commercial Bank of New York, 367 F.3d 123 (2d Cir. 2004). In that case, the
Second Circuit held that a PACA trustee’s commercially reasonable payment of trust
assets to a third-party does not amount to a breach of the PACA trust—at least as long as
the payment is consistent with the trustee’s duty to make the trust assets freely available
to the trust’s beneficiaries. Id. at 133–34; see also 7 C.F.R. § 46.46(d)(1) (requiring
PACA trustees to make PACA trust assets “freely available to satisfy outstanding
obligations to sellers of perishable agricultural commodities”). In reaching that
conclusion, the court reasoned that the PACA trustee—who had used PACA trust funds
to pay banking fees and interest on a checking account—had not breached the trust
because “maintaining a checking account with commercially reasonable terms may
facilitate, rather than impede, the fulfillment of a PACA trustee’s duty to maintain trust
assets so that they are freely available to satisfy outstanding obligations to sellers of
perishable commodities.” Id. (internal quotation marks omitted); see also Am. Banana
Co. v. Republic Nat’l Bank of N.Y., 362 F.3d 33, 42 (2d Cir. 2004) (“Nor are we
convinced that a trustee’s payments of commercially reasonable fees and interest in
exchange for routine banking services such as check cashing services and overdraft
privileges extended to facilitate payments to beneficiaries necessarily constitute a breach
of the PACA trust.”); cf. S & H Packing, 883 F.3d at 825 (Ikuta, J., dissenting) (“[U]nless
the transaction is commercially unreasonable or otherwise a breach of the trustee’s
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fiduciary duty, there is no basis under PACA or trust law for depriving the lender of its
right to repayment under the loan agreement or, as in this case, requiring a lender that has
loaned money to the trust and been repaid by the borrower to return the borrower’s
repayment.”).
I find the Second Circuit’s logic in E. Armata sound and persuasive. After all, so
long as the PACA trustee acts in a commercially reasonable manner consistent with its
fiduciary duty of maintaining the free availability of trust assets, the beneficiary of the
PACA trust is adequately protected from any nefarious, negligent, or otherwise
inadequate trustees. At the same time, the Second Circuit’s approach in E. Armata
safeguards a PACA trustee from unintentionally breaching the PACA trust whenever it
engages in common actions such as paying business expenses.3
For that reason, I believe that even if we do not apply § 499b(4) and § 499a(b)(13)
to the facts of this case, Crossroads still did not breach the PACA trust when it made the
Authorized Payments. First, authorizing Reasor’s to retain part of the amount it owed
Crossroads in exchange for a corresponding reduction in Crossroads’ outstanding rebate
balance was a commercially reasonable action. That action resolved an obligation (the
rebates) Crossroads had contemporaneously assumed to facilitate a larger transaction
3
The majority notes that at least two cases—a Second Circuit case postdating E.
Armata and a Fourth Circuit case—distinguish and seek to limit E. Armata. See
Coosemans Specialties, Inc. v. Gargiulo, 485 F.3d 701 (2d Cir. 2007); Nickey Gregory
Co. v. AgriCap, LLC, 597 F.3d 591 (4th Cir. 2010). Although that may be true, the
majority never takes on the reasoning of E. Armata directly or otherwise explains what
about that case is flawed. I therefore stand by E. Armata even in light of this other
authority and maintain that the Second Circuit got it right the first time around.
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(selling the produce) that had benefitted the trust as a whole. And the Restatement of
Trusts suggests that using trust assets to pay obligations fitting that rubric is entirely
appropriate. See Restatement (Third) of Trusts § 88 cmt. b (“[I]f a trustee borrows funds
from a third party for use in the administration of the trust, the interest on the loan is
payable (or reimbursable) from the trust estate, provided the rate of interest is reasonable
and the borrowing serves an appropriate trust purpose and is otherwise consistent with
the trustee’s fiduciary duties.”). Of course, if an action is appropriate, labeling it
commercially unreasonable would make little sense.
Second, Crossroads acted consistently with its duty as a PACA trustee to maintain
the free availability of the trust’s assets when it authorized the setoff. To understand
why, consider in more detail how Crossroads’ willingness to assume the rebate liability
benefited the PACA trust as a whole. In short, the PACA trust obtained its assets largely
because Crossroads had agreed with Reasor’s to assume the rebate liability. Without
those rebates, Reasor’s almost certainly would have turned to another seller to obtain
produce at a cheaper price. For the same reason, Reasor’s right to receive the rebates
likely convinced it to keep coming back to Crossroads to buy produce again and again.
That recurrent business relationship would, of course, have resulted in the PACA trust
receiving more and more money over time. Thus, whenever Crossroads paid off its
rebate liability, incoming trust assets would have offset those payments and allowed
Crossroads to satisfy its obligations to the Suppliers. So from a larger, overarching
perspective, Crossroads was ensuring that the PACA trust’s assets were freely available
to the Suppliers whenever it paid off its rebates. In my opinion, PACA requires nothing
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more even though individual rebate payments (such as the Authorized Payments) may
have momentarily reduced the trust’s assets.4
Thus, even if we choose not to apply § 499b(4) and § 499a(b)(13), the result
should be the same as if we did. As shown, that analysis requires a few extra steps, but it
ultimately should not make a difference. Regardless of whether we take the shortcut or
the scenic route, the final destination remains the same.
As the majority notes, though, one can ostensibly read Department of Agriculture
regulations in such a way that, without recourse to § 499b(4) and § 499a(b)(13), he or she
may think Crossroads breached the PACA trust. See 7 C.F.R. § 46.46(d)(1) (noting that
“[a]ny act or omission which is inconsistent with” the duty to make PACA trust assets
freely available to trust beneficiaries, “including dissipation of trust assets,” is unlawful
(emphasis added)).
But those regulations just make me come full circle: Why are we pretending that
§ 499b(4) and § 499a(b)(13) do not apply? This is not a case where a statute makes clear
that conduct is unlawful but we nonetheless presume it is lawful because the suing party
failed to cite the statute—a harsh result, to be sure, but one that I can at least accept. Nor
4
Bolstering this conclusion is the fact that PACA trusts are nonsegregated floating
trusts that commingle trust assets from multiple suppliers and third-party buyers of
produce. See 7 C.F.R. § 46.46(b) (“[PACA] [t]rust assets are to be preserved as a
nonsegregated ‘floating’ trust. Commingling of trust assets is contemplated.”). Thus,
even aside from Reasor’s and the Suppliers, other produce suppliers and third-party
buyers likely contributed to the PACA trust in this case. If so, Crossroads would have
often had other trust assets at hand with which to pay its obligations to the Suppliers. See
S & H Packing, 883 F.3d at 822 (Ikuta, J., dissenting) (discussing the effects of PACA
trusts being nonsegregated floating trusts).
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is it a case where we are pretty sure that a statute makes the conduct lawful. Instead, this
is a case where a statute clearly demonstrates that conduct was lawful, but the majority
nevertheless calls it unlawful. Few legal scenarios would seem more unjust to the lay
observer.
By no means am I advocating for us to raise or pursue every possible argument
that a party could have made on his, her, or its behalf. See Cordova v. Aragon, 569 F.3d
1183, 1191 (10th Cir. 2009) (“It is not our role to sift through the record to find evidence
not cited by the parties to support arguments they have not made.”). Indeed, if a future
party in a similar position to Reasor’s fails to cite a governing statute that would
definitively establish the lawfulness of its behavior, that party risks reaping its just deserts
for that failure should we not recognize the statute’s relevance or should we exercise our
discretion to deem the argument waived. Even so, if we come across such a statute by
virtue of our own research, I see no reason why we should not apply it. By doing
anything else, the parties do not benefit, our precedent does not benefit, and the rule of
law as a whole certainly does not benefit.
I therefore respectfully dissent from the majority’s holding relating to the
Authorized Payments.
III.
In contrast to the Authorized Payments, the Unilateral Payments force us into
murkier territory. True, the Unilateral Payments could conceivably represent Reasor’s
receipt of collateral fees and expenses—namely, the receipt of rebates. See 7 U.S.C.
§§ 499a(b)(13), 499b(4). But in my view, Reasor’s very well might not have retained
15
those payments in good faith given that it did so without Crossroads’ permission. That
means § 499b(4) and § 499a(b)(13) might not be “ultimately dispositive of” the issue
whether Reasor’s must disgorge the Unilateral Payments to Meuers, which negates a
large portion of the concerns I outline above when discussing the Authorized Payments.
U.S. Nat’l Bank, 508 U.S. at 447. To be sure, we could remand for the district court to
make a definitive factual finding on the question of good faith—a possibility I also
discuss above—but I do not feel as compelled to do so given that the answer is not as
clear-cut as it is for the Authorized Payments.
In any event, compounding my reluctance is that the Unilateral Payments also do
not satisfy my preferred commercial-reasonableness standard. More specifically, because
Crossroads did not authorize the Unilateral Payments, calling those payments
“commercially reasonable” is a stretch. Further, Crossroads’ lack of involvement in
those payments means it had no way of acting in a way consistent with its duty to make
the PACA trust assets freely available to the Suppliers. Thus, in the absence of § 499b(4)
and § 499a(b)(13), I can rest assured that requiring Reasor’s to disgorge the Unilateral
Payments is the correct course of action.
I would therefore affirm the district court’s decision requiring Reasor’s to disgorge
the $135,818.59. And for that reason, I concur in the judgment with the majority’s
holding relating to the Unilateral Payments.
IV.
“At bottom, the majority’s concern appears to be that trust principles are
insufficiently protective of [the Suppliers] here.” S & H Packing, 883 F.3d at 824 (Ikuta,
16
J., dissenting). While I understand that concern, I am not willing to ignore Congress’s
clear statutory mandate to give it effect. I therefore respectfully concur in the judgment
in part and dissent in part.
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