913 F.3d 268
2d Cir.2019Background
- Lenny Perry's Produce, Inc. (LPP) and Genecco Produce, Inc. (GPI) traded perishable produce 2005–2008 and kept mutual, offsetting open accounts rather than paying each transaction.
- By January 2009 LPP owed GPI $263,061.92; GPI owed LPP $204,774.88 (net $58,287.04 to GPI). LPP filed Chapter 7 on January 27, 2009.
- Unpaid produce sellers (the plaintiffs) sued, claiming LPP’s receivables were PACA trust assets for their benefit; GPI asserted a full statutory offset under 11 U.S.C. § 553 and New York law.
- Bankruptcy and district courts concluded PACA creates a floating trust at the moment of delivery/receipt, excluding trust assets from the bankruptcy estate and giving PACA creditors priority.
- The courts held GPI was not entitled to a full offset against PACA trust assets but could recover a pro rata share as a PACA beneficiary because GPI preserved PACA rights in its invoices and filed a proof of claim before the Claims Procedure Order.
- The Second Circuit affirmed: PACA trust assets are outside the bankruptcy estate (so § 553 offset unavailable against them), and GPI may recover a pro rata share despite not filing a PACA proof of claim after the Claims Procedure Order, given statutory notice and reasonable reliance on pursuing offset earlier.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether GPI may offset mutual debts against amounts claimed by PACA beneficiaries | PACA trust assets are held for unpaid suppliers; defendants cannot offset against the trust | Section 553 and NY law permit setoff of mutual debts, so GPI may offset amounts owed to LPP | PACA trust assets are held outside the bankruptcy estate and enjoy priority; § 553 offset cannot be asserted against PACA trust assets |
| Whether LPP’s receivables from GPI are PACA trust assets | Receivables automatically become PACA trust assets upon delivery/receipt | Disputed — factual issues/argument that receivables were not trust assets or transferred subject to offset | No genuine dispute: PACA trust arises on delivery; receivables are PACA assets and not subject to GPI’s offset defense |
| Whether factual disputes (barter, factoring, reconciliation) preclude summary judgment | Plaintiffs: record shows open, unreconciled accounts; no evidence of bartering or factoring | Defendants: assert bartering/other arrangements that would defeat trust characterization | Defendants failed to show evidence of bartering, factoring, or reconciliation; summary judgment appropriate on trust characterization |
| Whether GPI’s failure to file a PACA proof of claim (after Claims Procedure Order) bars pro rata recovery | Plaintiffs: failure to submit under Claims Procedure should bar recovery | Defendants: preserved PACA rights by invoice notices and earlier filed proof of claim; relied reasonably on offset route | Court allowed pro rata recovery — GPI preserved statutory notice, filed a proof of claim earlier, and reasonably relied on offset; equitable reading furthers PACA’s purpose |
Key Cases Cited
- Am. Banana Co. v. Rep. Nat'l Bank of N.Y., 362 F.3d 33 (2d Cir.) (PACA gives sellers superior interest in proceeds)
- Coosemans Specialties, Inc. v. Gargiulo, 485 F.3d 701 (2d Cir.) (PACA provides self-help protections for produce sellers)
- Tom Lange Co. v. Kornblum & Co., In re Kornblum & Co., 81 F.3d 280 (2d Cir.) (PACA trust assets excluded from bankruptcy estate)
- United States v. Whiting Pools, Inc., 462 U.S. 198 (U.S. Supreme Court) (property held in trust is excluded from bankruptcy estate)
- Albee Tomato, Inc. v. A.B. Shalom Produce Corp., 155 F.3d 612 (2d Cir.) (PACA gives unpaid suppliers priority to trust assets)
- D.M. Rothman & Co. v. Korea Commercial Bank of N.Y., 411 F.3d 90 (2d Cir.) (PACA trust automatically established on purchase/delivery)
- Patterson Frozen Foods, Inc. v. Crown Foods Int'l, Inc., 307 F.3d 666 (7th Cir.) (PACA floating trust created when dealer accepts goods)
- Westinghouse Credit Corp. v. D'Urso, 278 F.3d 138 (2d Cir.) (mutuality for setoff requires same parties in same capacity)