Produce Pay, Inc. v. FVF Distributors Inc. (S.D. Cal. 2020)

The following is a case summary written by John W. Kim of the Brower Law Group, APC  analyzing Produce Pay, Inc. v. FVF Distributors Inc., 468 F. Supp. 3d 1304 (S.D. Cal. 2020).  To view the opinion, click here:    

Summary

This case involves the sale of accounts receivables in the food and produce industry under the Perishable Agricultural Commodities Act, 7 U.S.C. §§ 499a et. al., commonly referred to as “PACA”.  PACA provides for, among other things, a statutory trust which applies to the sales of commodities and account receivables in the produce industry between buyers, sellers and assignees of produce goods. 

The United States District Court held that a produce seller’s “rights and entitlements” to accounts receivables under PACA are alienable and can be assigned to a third party assignee even though the produce buyer previously paid full amounts due and owed to the produce seller instead of the third party assignee.  The court therefore denied the defendant’s motion to strike and dismiss the complaint, concluding that the plaintiff had standing under PACA to survive a motion to dismiss and the case was too early in litigation to strike potentially relevant evidence.

Background Facts

Plaintiff Produce Pay, Inc. (“Plaintiff”) is in the business of buying accounts receivables in the fruit/vegetable/produce industry, which is generally subject to PACA.  Defendant Veg-Fresh Farms, LLC (“Veg-Fresh”) and FVF Distributors, Inc. (“FVF”) are a buyer and seller, respectively, of produce commodities also subject to PACA.  In 2018, Plaintiff (as the third party assignee) and FVF (as seller) entered into a written “Factoring Agreement,” whereby FVF sold all of its rights to its produce-related accounts receivables to Plaintiff, including rights to collect proceeds under “PACA trust rights.”

In 2019, FVF and Veg-Fresh entered into a series of eight sale transactions which were documented by invoices.  After Veg-Fresh accepted produce goods from FVF, FVF assigned all interests in the account receivables to Plaintiff pursuant to written bills of sales. 

On June 25, 2019, Plaintiff and FVF notified Veg-Fresh in writing of the assignment of FVF’s rights to the account receivables to Plaintiff and directed Veg-Fresh to pay Plaintiff (instead of FVF).  Both FVF and Veg-Fresh agreed to and executed the Notice of Assignment.  FVF delivered produce to Veg-Fresh, but Veg-Fresh failed to pay Plaintiff for the goods, which were valued at more than $93,000.00 at the time of transaction.

In filing suit, Plaintiff sought to recover the agreed-upon value of the goods received by Veg-Fresh.  On March 19, 2020, Plaintiff filed a complaint against Veg-Fresh, FVF, and employees of defendants, for alleged violations of PACA, breach of fiduciary duties, breach of contract and conversion. 

Veg-Fresh moved both to: (1) strike portions of the complaint, including allegations of Defendant Veg-Fresh’s insolvency, certain invoices attached to the complaint and references to invoices in the complaint; and (2) dismiss the complaint for the failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. 

In the motion to strike, Defendant Veg-Fresh sought to strike certain (1) invoices referenced and attached to Plaintiff’s complaint, and (2) allegations of Defendant Veg-Fresh’s insolvency.  Because the invoices pre-dated FVF’s assignment of rights to Plaintiff, Veg-Fresh argued the invoices on the complaint were “inauthentic” and not legally “received”. 

As to the motion to dismiss, Veg-Fresh argued the complaint failed to state a claim because Plaintiff (assignee) was not entitled to protections under PACA and could not “enforce a contract by which it is not bound.”  Veg-Fresh was later dismissed pursuant to the terms of a settlement.

Result and Reasoning

In a 23-page opinion, the District Court denied both the motion to strike and the motion to dismiss the complaint.  The court noted that at this stage of the litigation, it must accept Plaintiff’s allegations, including the invoices attached to the complaint, as true absent a showing that the invoices are inauthentic.  Id., at 1311.  As such, the issue of the “authenticity” of invoices was premature and properly addressed by way of an evidentiary motion under Rule 901 of the Federal Rules of Evidence.  The Court also concluded that because the allegations of insolvency could bear on the subject matter of the litigation, it would be premature to strike them.  

On the motion to dismiss, the court first held that “trust rights created by PACA are alienable, including by assignment.”  Id., at 1312.  As a result, Plaintiff had standing to proceed with litigation—notwithstanding Veg-Fresh’s payment of monies to FVF. 

The court then rejected Veg-Fresh’s argument that the complaint was deficient because Plaintiff admitted that Veg-Fresh paid FVF and therefore satisfied its obligations.  In reviewing the state law and PACA claims, the court sought guidance from the Uniform Commercial Code under Delaware law section 9-322(a)(3), which provides in pertinent part: “After receipt of the notification [of a valid assignment], the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor.”  Id.

The court reasoned that it could not be reasonably disputed that Veg-Fresh, as the “account debtor,” was “notified” in writing of the assignment of the account receivables, and that under section 9-406(a) of the UCC, Plaintiff showed that Veg-Fresh did not discharge its obligation. Thus, the state law claims for conversion and breach of contract survived the motions.

Finally, the court examined whether Plaintiff’s claims were in fact viable. The court explained that “PACA protects sellers of perishable agricultural goods by requiring a merchant, dealer, or retailer of perishable produce to hold in trust proceeds from the sale of the perishable produce, and food derived from that produce, for the benefit of all unpaid suppliers.”  Id., at 1313.  Under PACA, “a produce dealer holds produce-related assets as a fiduciary” in the statutory trust “until full payment is made to the produce seller.” Id., citing In re San Joaquin Food Serv., Inc., 958 F.2d 938, 939 (9th Cir. 1992). “The trust automatically arises in favor of a produce seller upon delivery of produce and is for the benefit of all unpaid suppliers or sellers involved in the transaction until full payment of the sums owing has been received.”  Id., at 1314.  The public policy of PACA is to, among other things, protect the produce seller’s rights to assign and transfer payment rights to assignees like Plaintiff and promoting the “transfer” of “risk of delayed payment or non-payment…” 

The court found that based on the written assignment of the rights created under PACA, Plaintiff had pled PACA claims for enforcement of a PACA trust, failure to maintain trust assets, and failure to promptly pay, sufficient to survive a motion to dismiss.

Author’s Comment

At first glance, the decision seems unfair in that a produce buyer may have continuing liability even though that buyer made payment for the goods received.  However, the buyer was presumably on legal notice of the assignment of the account receivables and had arguably agreed to tender payments to the third-party assignee.   

The transfer/assignment of account receivables provided in UCC section 9-322(a) is intended to protect and transfer the risk from produce sellers to third party assignees.  However, it is important to note the assignment provision of UCC section 9-322(a) is not a silver bullet to the assignee/finance company if the account debtor is insolvent or has no means to be liquidated.

The decision is a reminder of the significant attention and care required in reviewing notice and assignment provisions between any party in the produce industry in order to minimize the risks of litigation for failing to comply with provisions in a valid assignment which was undisputed.

These materials were written by John W. Kim of the Brower Law Group, APC, in Laguna Hills, California.  Editorial contributions were provided by Maggie E. Schroedter of Higgs Fletcher & Mack, LLP, in San Diego, California.  Mr. Kim and Ms. Schroedter are members of the Insolvency Law Committee.