Kingdom Fresh Produce v. Bexar County (In re Delta Produce, LP)
521 B.R. 576
Bankr. W.D. Tex.2014Background
- Delta Produce filed Chapter 11 and the district court referred multiple PACA claims to the bankruptcy court; the bankruptcy court appointed Craig A. Stokes as Special PACA Counsel and authorized payment of his fees from PACA trust funds.
- Kingdom Fresh (a PACA claimant) did not join the initial motion appointing Special Counsel, appeared at the appointment hearing but did not object then, and later filed timely objections to Special Counsel’s fee applications.
- Special Counsel filed three fee applications seeking payment from PACA trust assets; the bankruptcy court granted them and Kingdom Fresh appealed the awards.
- This Court previously affirmed that the bankruptcy court had jurisdiction but vacated the First Interim Fee award because PACA requires payment to beneficiaries in full before other uses of trust funds.
- On appeal of the Third and Final Fee Application, Kingdom Fresh argued (1) PACA forbids paying Special Counsel from trust assets until beneficiaries are paid and (2) Special Counsel had an actual conflict under 11 U.S.C. § 328(c).
- The district court VACATED the bankruptcy court’s order granting the Third and Final Fee Application, holding PACA prohibits such pre‑payment from trust funds and rejecting Special Counsel’s consent/waiver and conflict defenses as dispositive grounds to allow payment now.
Issues
| Issue | Plaintiff's Argument (Kingdom Fresh) | Defendant's Argument (Special Counsel) | Held |
|---|---|---|---|
| Whether PACA permits paying Special Counsel from PACA trust assets before PACA beneficiaries receive full payment | PACA’s statutory trust entitles beneficiaries to full payment first; trust funds cannot be used to pay attorneys until beneficiaries are paid | Appointment order and court authorization permit payment; earlier cases (Six L’s / R" Best) allow court-appointed special masters to be paid from PACA funds | Held: PACA forbids payment from trust assets until beneficiaries receive full payment; bankruptcy court award vacated |
| Whether common-law trust or equitable doctrines allow payment of attorney fees from PACA trust | Common‑law trustee/ common‑fund principles could permit fees when counsel’s efforts created or preserved a common fund for beneficiaries | PACA is a statutory trust; common-law principles cannot override the statute and its regulations | Held: Common-law exceptions cannot displace PACA’s sum‑certain requirement; not a basis to permit payment now |
| Whether Kingdom Fresh consented or waived objections to payment from PACA trust | No express written consent; any implied consent is ineffective under PACA regulations (waiver must be written and separate) | Kingdom Fresh was served, participated in negotiations, and appeared at hearing; silence/implied consent estops them | Held: No express or effective implied consent; PACA requires written waiver, so consent defense fails |
| Whether Special Counsel had an actual conflict warranting denial/disgorgement under §328(c) | Special Counsel represented both debtor and PACA claimants at times, creating an actual conflict that can bar compensation | Appointment under §327(e) exempts him from §328(c) prohibition; bankruptcy court found no conflict | Held: Court did not need to resolve conflict claim because PACA’s prohibition on pre‑payment independently bars the awards; conflict argument not dispositive here |
Key Cases Cited
- C.H. Robinson Co. v. Alanco Corp., 239 F.3d 483 (2d Cir. 2001) (statutory PACA trust requires beneficiaries be paid in full before trust assets may be used to pay other creditors, including attorneys)
- "R" Best Produce, Inc. v. Shulman-Rabin Mktg. Corp., 467 F.3d 238 (2d Cir. 2006) (distinguishes court-appointed special-master payments from ordinary creditors and emphasizes PACA’s exclusive protection for suppliers)
- Milton Poulos v. Winifred L. Hulsey, 947 F.2d 1351 (9th Cir. 1991) (applied common-law trust principles to allow fees where counsel’s efforts produced a common fund)
- Bocchi Americas Assocs. Inc. v. Commerce Fresh Mktg. Inc., 515 F.3d 383 (5th Cir. 2008) (discusses PACA’s prompt‑payment requirement and trust structure)
- Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336 F.3d 410 (5th Cir. 2003) (describes PACA’s floating trust and how trust assets are treated)
- Golman-Hayden Co. v. Fresh Source Produce, Inc., 217 F.3d 348 (5th Cir. 2000) (addresses attorney‑fee recovery and common-fund principles under PACA)