Business Law

Produce Seller’s Collection Rights and Remedies Under PACA, Including Right to Sue Account Debtor in Tort, Can be Assigned to Commercial Factor (Produce Pay, Inc. v. FVF Distributors Inc.)

The following is an update analyzing a recent case of interest:

Produce Seller’s Collection Rights and Remedies Under PACA,  Including Right to Sue Account Debtor in Tort, Can be Assigned to Commercial Factor

Summary

In Produce Pay, Inc. v. FVF Distributors Inc., 2020 WL 3448384 (S.D, Cal. 6/24/20) the United States District Court held that the rights and remedies of a seller of produce to collect from a buyer under the Perishable Agricultural Commodities Act (“PACA”) 7 U.S.C. §§ 499a-499t could be assigned to a commercial finance company factoring the seller’s accounts, allowing the finance company to sue the buyer and its principals in tort, even in a case where the buyer mistakenly paid the account in full to the seller, and not to the assignee. A copy of the opinion may be found here.

Facts

Defendants Veg-Fresh Farms, LLC and FVF Distributors, Inc. are each in the business of buying and selling produce. The case arises from a series of produce sales by FVF to Veg Fresh which were subject to PACA, which provides powerful remedies for the collection of receivables arising from the sale of produce. PACA establishes a far-reaching statutory trust which applies to the proceeds of sale of produce in the hands of a purchaser.

Plaintiff Produce Pay, Inc. is a commercial finance company which is in the business of factoring accounts receivable that are subject to PACA. Under a factoring agreement, FVF sold its produce-related accounts receivable at a discount to Produce Pay “including any and all PACA trust rights appurtenant thereto.” Prior to the produce sales in question, Produce Pay and FVF sent a written notice of the factoring assignment to Veg Fresh, which responded with a written acceptance of the notice.

Veg Fresh accepted produce purchased from FVF under a series of invoices totaling $93,741.60. It was undisputed that Veg Fresh paid those invoices, but it mistakenly sent its payment to FVF and not to Produce Pay, which did not receive any of those proceeds. Produce Pay commenced an action in the United States District Court against Veg Fresh, FVF, several individuals alleged to be officers and directors of Veg Fresh, and one individual officer of FVF. Some details mentioned here come from papers filed in the case, reviewed via ECF.

The Complaint stated several claims for relief against Veg Fresh, based on breach of contract and to enforce the PACA trust, one claim for relief against the individual principals for breach of their fiduciary duties in relation to the PACA trust, and three claims for relief against FVF based on breach of contract, interference with the PACA trust and conversion.

FVF answered the complaint. Veg Fresh and its principals moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6) and also moved to strike certain allegations as “impertinent, scandalous and prejudicial.” The District Court denied the motions to strike and to dismiss. Following the Court’s ruling, the Veg Fresh defendants were dismissed on stipulation after a settlement.

Reasoning

The first and easiest issue that the Court resolved was the legal effect of the assignment of the produce receivables to Produce Pay, and of the Veg Fresh payment to FVF. The Court cited Delaware’s version of Uniform Commercial Code section 9-322(a)(3), which provides that “an account debtor… may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor. [emphasis added by the Court].” Veg Fresh was clearly notified and even acknowledged and agreed to the assignment in writing. Thus at a minimum Produce Pay had the right to sue Veg Fresh for breach of contract notwithstanding that it had paid the invoices in full to the seller, FVF.

Nothing in the UCC, however, and nothing in PACA itself, establishes the validity of FVF’s assignment of PACA rights to Produce Pay. The Court relied on non-binding authority cited by Produce Pay in holding that PACA trust rights are alienable. See, Mastronardi Int’l Ltd. v. SunSelect Produce (California), Inc., 2019 WL 3996608, at *3 (E.D. Cal. Aug. 23, 2019), (citing All. Shippers, Inc. v. Guarracino, 575 B.R. 298, 310 (Bankr. D.N.J. 2017) (“In re Guarracino”)). The Court reasoned that the overarching goal of PACA is to protect the financial well-being of produce suppliers, who are benefitted by the ability to assign their PACA rights “because an assignment allows them to transfer the risk of delayed payment or non-payment to a factor like Produce Pay.”

The Court ruled that based on the assignment of PACA rights, Produce Pay had standing to assert its claims against all of the Veg Fresh defendants, including tort claims against the individual officers and directors of Veg Fresh based on breach of fiduciary duty committed in their capacity as trustees of the PACA trust. The Court gives little explanation for what seems an odd consequence of its ruling on the assignability of PACA rights – that a buyer which pays the seller in full for the produce is guilty of a breach of the PACA trust simply because it didn’t pay the finance company instead.

Author’s Comment

While it is clear that the aim of PACA is to protect produce suppliers, it is less clear that the aim is to protect commercial finance companies. In Produce Pay the finance company was allowed to sue the principals of the defaulting buyer in tort for breach of their fiduciary duties as trustees of the PACA trust. There is not much case law discussing the entitlement of sellers to consequential damages under PACA, but it seems clear that the tort damages suffered by a seller in the produce business might be different than the damages suffered by a finance company which purchased a PACA receivable at a discount. If the right of a seller to sue the principals of a defaulting buyer in tort is precluded under the assignment provisions of a factoring agreement (which the seller usually has no practical ability to negotiate) then the seller loses all leverage in a lawsuit or settlement discussion with the defaulting buyer and its principals.

On the other hand, the assignment provision of UCC section 9-322(a)(3) is cold comfort to the finance company if the account debtor is insolvent. In this particular case it is difficult to feel sorry for FVF, which breached its contract with Produce Pay, and committed the tort of conversion, by accepting and not turning over the Veg Fresh payment.

The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association’s (CLA) Business Law Section. These materials were written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., located in San Diego, California. Mr. Kirby is a member of the ad hoc group and a member of the Commercial Transactions Committee of the Business Law Section. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. The opinions expressed herein are solely those of the author.  Thomson Reuters holds the copyright to these materials and has permitted the Commercial Transactions Committee of Business Law Section of the California Lawyers Association to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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