Kingdom Fresh Produce v. Bexar County (In re Delta Produce, LP), 498 B.R. 731

Background

Delta Produce filed Chapter 11; multiple PACA lawsuits against Delta were consolidated and referred to the bankruptcy court for resolution of PACA trust claims.
Bankruptcy court appointed Special PACA Trust Counsel (Craig A. Stokes) to preserve, collect, and oversee distribution of PACA trust assets and ordered Special Counsel was "entitled" to be paid from PACA trust funds, with the court to determine reasonable amounts.
Special Counsel sought $95,978 in interim attorney fees from PACA trust funds; Kingdom Fresh and other PACA claimants objected, arguing PACA trust res are excluded from the bankruptcy estate and may not be used to pay trustee/attorney fees prior to full payment of beneficiaries.
Bankruptcy court granted Special Counsel’s fee application; PACA claimants appealed to the district court.
The district court held that the bankruptcy court had jurisdiction (28 U.S.C. §§ 1334, 157) and that claimants waived objection to core adjudication, but vacated the portion of the fee order that authorized payment of Special Counsel’s fees from the PACA trust before PACA beneficiaries were paid in full.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether bankruptcy court had subject-matter jurisdiction over PACA trust matters	PACA Claimants: PACA trust assets are excluded from estate, so bankruptcy court cannot authorize use of trust funds	Special Counsel/debtor: Bankruptcy court has jurisdiction to adjudicate PACA claims referred to it	Court: §1334 "related to" jurisdiction exists because resolution could affect administration of the estate; jurisdiction proper
Whether matter required core vs non-core determination or consent	Claimants: bankruptcy court lacked power to enter final orders absent core status	Special Counsel/debtor: parties consented; the court could exercise full authority	Court: parties (at least one explicitly, others by participation) waived objection; §157(b) adjudication appropriate
Whether judicial estoppel bars claimants’ objection to use of PACA funds	Special Counsel: claimants previously assented to using PACA funds; estoppel prevents reversal	Claimants: no court acceptance of any prior assent; their position not judicially adopted	Court: Judicial estoppel fails—no evidence earlier position was accepted by the court
Whether Special Counsel (PACA trustee) may be paid attorney fees from PACA trust before beneficiaries fully paid	Claimants: PACA and regulations prohibit diversion of trust res to trustee/attorneys before sellers are paid in full	Special Counsel: trustee performed necessary services and should be paid from trust under trust law and court order	Court: Under PACA and controlling precedent (C.H. Robinson), trustee may not use PACA trust funds to pay attorney fees until PACA beneficiaries are paid in full; bankruptcy court’s fee order vacated as to PACA-funded payment

Key Cases Cited

Celotex Corp. v. Edwards, 514 U.S. 300 (bankruptcy jurisdiction derives from statutory grant under 28 U.S.C. § 1334)
Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir.) (definition of "related to" bankruptcy jurisdiction)
In re Wood, 825 F.2d 90 (5th Cir.) (treating "arising under/ in/ related to" conjunctively; "related to" test adoption)
In re Canion, 196 F.3d 579 (5th Cir.) ("related to" jurisdiction may be broad; outcome could conceivably affect estate)
Zale Corp. v. In re Zale Corp., 62 F.3d 746 (5th Cir.) (bankruptcy court injunctions and jurisdiction beyond estate property)
Golman-Hayden Co. v. Fresh Source Produce Inc., 217 F.3d 348 (5th Cir.) (PACA purpose and trust principles)
Middle Mountain Land & Produce, Inc. v. Sound Commodities, Inc., 307 F.3d 1220 (9th Cir.) (PACA broadly construed to include expenses in connection with transactions)
Country Best v. Christopher Ranch, LLC, 361 F.3d 629 (11th Cir.) (attorney fees recoverable when bargained for under PACA)
Coosemans Specialties, Inc. v. Gargiulo, 485 F.3d 701 (2d Cir.) (contracts allowing fees can make them recoverable under PACA)
C.H. Robinson Co. v. Alanco Corp., 239 F.3d 483 (2d Cir.) (statutory PACA trust/regs prohibit trustee from paying attorney fees from trust before sellers are paid in full)
New Hampshire v. Maine, 532 U.S. 742 (judicial estoppel doctrine protects integrity of judicial process)