Hull Company and J & J Distributing Co. v. Hauser's Foods, Inc., Individually and Doing Business as Forest Lake Foods Maple Foods, Inc., Doing Business as Rainbow Foods Hauser's Iga, Inc., Hauser's Family Center, Inc. And Gateway Foods of Minneapolis, Inc.

Citations: 924 F.2d 777; 1991 U.S. App. LEXIS 1215Docket: 89-5614

Court: Court of Appeals for the Eighth Circuit; January 28, 1991; Federal Appellate Court

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The case involves Hull Company and J. J. Distributing Co., unpaid wholesale distributors of perishable agricultural products, seeking to enforce trust rights under the Perishable Agricultural Commodities Act (PACA) against the assets of Hauser's Foods, Inc., which had been seized by Gateway Foods of Minneapolis, Inc., a secured creditor. The legal dispute centers on whether Hull and J. J. are entitled to trust relief despite having orally agreed to extended payment periods with Hauser beyond the PACA regulations, which typically require payment within ten days of delivery.

Gateway argues that these oral agreements disqualify Hull and J. J. from receiving trust relief. Additionally, Gateway challenges the validity of J. J's notice preserving trust protection, claiming it did not meet regulatory requirements. The district court granted trust relief to Hull and J. J. through summary judgment, and Gateway's appeal was subsequently denied.

The facts establish that the sellers supplied Hauser over several years, with specific payment agreements differing from standard invoicing terms. At the time of Gateway's foreclosure on April 14, 1989, Hauser owed Hull $40,737.10 and J. J. $8,949.89. After the foreclosure, Gateway continued purchasing from the sellers while Hull filed a notice to preserve trust benefits compliant with PACA on April 17, 1989, for invoices from February 13 to April 14, 1989. The court affirmed the district court's decision, rejecting Gateway's arguments.

On April 21, 1989, J. J sent a notice to the USDA regarding Maple Foods' non-compliance with PACA payment obligations for invoices from March 6 to April 11, 1990. The notice included essential details such as invoice number, commodity, shipment date, amount, and debtor information but lacked a clear statement of intent to preserve trust benefits and explicitly stated payment due dates, as required by 7 C.F.R. Sec. 46.46(g)(3) (1990). Despite these omissions, the USDA accepted the notice as a valid intent to preserve trust benefits. J. J subsequently informed Maple Foods of its intent to claim trust benefits, indicating payment was due within ten days of receipt, and attached the relevant invoices.

In May 1989, Hull and J. J filed a lawsuit against Gateway for payment under PACA's trust provisions, seeking summary enforcement. The district court granted their motion while denying Gateway's motion for summary judgment. The court noted that PACA regulations specify a ten-day payment period, but parties may extend this to thirty days through written agreements while maintaining eligibility for trust benefits. The court found that Hull and J. J were entitled to trust benefits despite any oral extensions of payment time, emphasizing that written agreements are necessary for extensions beyond the ten-day requirement.

Regarding the sufficiency of J. J's notice, the district court concluded that the notice constituted substantial compliance to preserve trust benefits. While Gateway argued that J. J's notices were deficient, the court determined that the necessary information was implicit in the correspondence, and the USDA effectively recognized it as a notice to preserve trust benefits. Overall, the court acknowledged that while the notices could have been clearer, they were adequate for preserving the trust benefits under PACA.

The PACA (Perishable Agricultural Commodities Act) was enacted to protect small farmers and growers from unscrupulous brokers by requiring buyers to make 'full payment promptly' for received commodities. Failure to comply can result in civil liabilities for the buyer and potential revocation of their agricultural license. In 1984, Congress amended PACA to enhance protections for produce sellers, recognizing that they were often unsecured creditors with limited recourse in payment disputes. The amendments prioritize sellers' interests, establishing a trust that requires buyers to hold purchased commodities and related proceeds in trust for sellers until full payment is made. The USDA regulates specifics around prompt payment deadlines, stipulating that the maximum payment period is 30 days post-receipt of goods unless otherwise agreed in writing. Prompt payment is defined as full payment made within 10 days of acceptance of produce, with any alternative payment terms needing to be documented by the parties involved.

Payment for produce is due within ten days of delivery unless extended by a written agreement, which cannot exceed thirty days to qualify for PACA trust protection. Oral agreements do not affect produce sellers' rights to trust protection, as established by federal appellate court analysis. The regulations require written agreements; oral extensions violate PACA. A precedent case, In re The Caito Produce Co., highlighted that oral agreements for payment extensions were not recognized, binding the buyer to the regulatory payment terms.

In this case, Hauser's oral agreements to extend payment terms to forty-five and thirty days constituted violations of PACA. Thus, despite these oral agreements, sellers retained the right to demand payment within ten days and seek PACA trust protection. Legislation is intended to protect sellers from risks associated with slow or non-payment, advocating for a strict adherence to written agreements for extensions.

Further, J. J's claim to trust protection was challenged due to alleged non-compliance with notice provisions. However, the district court found that J. J's notices substantially complied with requirements, allowing for the preservation of trust benefits. A produce seller must notify both the debtor and the Secretary to maintain trust protections under PACA.

Notice of intent to preserve benefits under the trust must be written, provided to the debtor, and filed with the Secretary within 30 days after the payment due date. The notice must state its purpose, include details for each shipment such as the names and addresses of involved parties, transaction dates, contract terms, invoice details, and any dishonored payment notices. Courts have differing views on whether strict compliance with these notice requirements is necessary. Some cases allow for substantial compliance, while others insist on strict adherence, which can lead to forfeiture of trust benefits. The court leans towards substantial compliance to support the remedial intent of the statute, arguing that the notice serves primarily to inform the Secretary and debtor about the claimed trust. In this case, the debtor was able to ascertain the required information from J. J's notice, which included unpaid invoices, despite not strictly following the regulation's organization. Although one notice lacked a clear statement of intent to preserve trust benefits and the payment due date, it indicated J. J's intention to assert its trust rights. The court concluded that J. J's notices substantially complied with the regulations, preserving its trust benefits. The district court's ruling that oral agreements do not impact trust protection and that substantial compliance suffices was affirmed. The court also noted that all unpaid sales of produce within 40 days of J. J's notice qualified for trust protection but did not evaluate that ruling on appeal. A dissenting opinion argued that the sellers had lost their eligibility for trust protection without addressing the notice adequacy under the regulation.

All parties involved are licensed under the Perishable Agricultural Commodities Act (PACA). Hull's invoices stipulated a payment period of 10 days post-delivery, while J. J's invoices did not specify a payment date. Hull and J. J orally agreed to extend their payment terms to 45 and 30 days after delivery, respectively. However, they have not received payment for shipments delivered before April 14, 1989, due to the buyer, Hauser's Foods, Inc., defaulting, resulting in a debt of approximately $13 million owed to Gateway Foods, Inc. Gateway, having seized Hauser's assets as a secured creditor, is contesting Hull's and J. J's claims to PACA statutory trust benefits, arguing that they failed to meet the necessary requirements for preserving these benefits and that J. J's notices were insufficient. The majority opinion supports the district court’s view that oral agreements extending payment terms beyond 10 days are unenforceable under PACA, and thus such agreements cannot be used defensively by secured creditors against unpaid sellers. The dissenting opinion highlights that PACA was amended in 1984 to protect sellers by establishing a statutory trust on a defaulting buyer's assets, ensuring that sellers, who are typically unsecured creditors, have priority over secured creditors in the event of bankruptcy. This statutory trust is intended to provide sellers with financial protection and is superior to any liens or security interests held by the buyer's lenders.

Sellers are not automatically entitled to protection under the PACA trust; specific procedural and substantive requirements must be met, largely determined by the Department of Agriculture. Buyers are obligated to make 'full payment promptly,' defined as within 10 days of delivery, as per 7 U.S.C. Sec. 499b(4) and 7 C.F.R. Sec. 46.2(aa)(5). Any alternative payment terms must be documented in writing prior to the transaction. Additionally, the maximum allowable payment period for trust coverage is 30 days post-delivery, as outlined in 7 C.F.R. Sec. 46.46(f)(2). Agreements extending beyond this timeframe do not qualify for trust protection, supported by case law including In re Davis Distributors, Inc. and In re Lombardo Fruit cases. In the current case, sellers Hull and J. J agreed to payment terms exceeding both the 10-day requirement and the 30-day limit without written documentation. Consequently, neither seller qualifies for PACA trust coverage, and they cannot utilize misleading invoices to claim such protection. The question of notice adequacy is deemed unnecessary to address.

The judgment of the district court is reversed. The statutory amendments from May 7, 1984, stipulate that perishable agricultural commodities received by commission merchants, dealers, or brokers are held in trust for the benefit of unpaid suppliers, sellers, or agents until full payment is made. Payments are deemed incomplete if the payment instrument is dishonored. To retain trust benefits, unpaid suppliers, sellers, or agents must provide written notice of intent to preserve trust benefits to the commission merchant, dealer, or broker and file this notice with the Secretary within thirty days after the payment deadline specified by regulations, any mutually agreed-upon payment terms, or upon notification of a dishonored payment instrument. Any alternative payment agreements must be documented and disclosed in transaction-related records.