Court: District Court, W.D. Texas; September 27, 2013; Federal District Court
The memorandum opinion and order, issued by Senior District Judge David Alan Ezra, addresses the appeal by PACA Claimants—Kingdom Fresh Produce, Inc., I. Kunik Company, Inc., Five Brothers Jalisco Produce Co. Inc., Rio Bravo Produce Limited, LLC, and G.R. Produce, Inc.—regarding the bankruptcy court's September 25, 2012, decision to grant Special PACA Trust Counsel's first interim application for attorney fees. The bankruptcy court had approved payment of these fees from non-estate trust assets under the Perishable Agricultural Commodities Act of 1930 (PACA).
The case stems from multiple PACA-related lawsuits against Delta Produce LP, initiated by Muller Trading Company, Inc. in January 2011, followed by Wilson-Davis Company and Rio Bravo, both filing in December 2011. Due to the filing order, the lawsuits were consolidated and transferred to Judge Sparks in Austin. Delta filed for Chapter 11 bankruptcy on January 3, 2012, subsequently seeking to impose an automatic stay on the district court proceedings and requesting the transfer of claims to the bankruptcy court, which was consented to by Rio Bravo's counsel. The case was ultimately referred to the bankruptcy court in San Antonio, with Judge Rodriguez noting the parties' agreement on this jurisdiction. The court has vacated the bankruptcy court's order regarding the attorney fees.
Judge Rodriguez referred the PACA claims to the bankruptcy court, where Delta filed a proposed PACA Claim Procedure. A hearing on January 24, 2012, led to an order appointing Special Counsel to manage PACA trust assets, negotiate debts, review claims, and provide status updates to creditors. The order allowed Special Counsel to receive attorney’s fees and costs from the PACA trust, subject to the court's determination of reasonableness, requiring detailed time sheets for fee applications.
From January to March 2012, PACA creditors filed claims against Delta totaling $1,676,015.25. Special Counsel, acting as Trustee, negotiated these claims and filed a First Interim Application for attorney fees on August 14, 2012, seeking $95,978.00 in fees and $2,492.97 in expenses. Kingdom Fresh objected to this application, asserting that PACA trust funds should not be used for Special Counsel's fees due to jurisdictional concerns and the nature of the PACA trust assets.
Despite these objections, the bankruptcy court granted Special Counsel's fee application on September 21, 2012, prompting an appeal. The appeal will involve a review of the bankruptcy court’s factual findings under a clearly erroneous standard and legal conclusions de novo. The discussion will examine PACA’s statutory framework within bankruptcy and the jurisdictional authority of the bankruptcy court over PACA trust assets.
The Perishable Agricultural Commodities Act (PACA) was enacted by Congress to regulate the produce industry and ensure fair trading practices, particularly in transactions involving fruits and vegetables. The 1984 amendments emphasized the Act's aim to suppress unfair business practices and allow sellers to recover damages for unmet contractual obligations. PACA mandates that buyers make "full payment promptly," and sellers have the right to file complaints with the USDA or pursue civil suits if buyers fail to pay.
To reinforce payment obligations, PACA creates a trust framework wherein buyers must hold unpaid produce and its proceeds in trust for the seller, allowing the seller to retain an equitable interest. If a buyer defaults, they must preserve trust assets, granting sellers a "superpriority" status over other creditors. Sellers can only access these rights if they meet specific criteria: the sold goods must be perishable agricultural commodities, the buyer must be a commission merchant, dealer, or broker, the transaction must occur in interstate or foreign commerce, the seller must not have received full payment, and the seller must give timely written notice to the buyer.
If these requirements are fulfilled, a trust arises in favor of the seller until full payment is made. Additionally, if the buyer files for bankruptcy, the PACA trust assets are excluded from the bankruptcy estate, as the buyer holds only legal title without equitable interest in the trust property.
Ordinary trust law principles govern trusts established under the Perishable Agricultural Commodities Act (PACA), ensuring that trust assets are not included in a dealer’s bankruptcy estate, as supported by case law such as Sunkist Growers, Inc. v. Fisher. The Bankruptcy Code explicitly excludes PACA trust assets from the bankruptcy estate upon a Produce Debtor's bankruptcy filing. Contrary to PACA Claimants' assertions, the bankruptcy court maintains jurisdiction over PACA claims despite the exclusion of these assets from the estate. The jurisdiction of bankruptcy courts, like other federal courts, is defined by statute. To ascertain jurisdiction, one must first confirm if the district court has jurisdiction per 28 U.S.C. 1334(b), allowing for potential referral to bankruptcy courts under 28 U.S.C. 157. The distinction between core and non-core proceedings influences how the bankruptcy court can handle a case. Under 28 U.S.C. 1334, district courts have jurisdiction over civil proceedings related to Title 11 of the Bankruptcy Code, with the terms "arising under," "arising in," and "related to" functioning conjunctively. The Fifth Circuit has adopted the Third Circuit’s "related to" test from Pacor, which states that an action is related to bankruptcy if its outcome could impact the debtor's rights or the administration of the bankrupt estate, even if such effect is uncertain.
The bankruptcy court possesses “related to” jurisdiction despite the exclusion of PACA trust assets from the bankruptcy estate, as established in relevant case law. The court's jurisdiction is affirmed in circumstances where the third-party suit may impact the administration of the bankruptcy estate, as illustrated by *Pacor* and *Celotex*. In *In re Zale Corp.*, it was determined that claims outside the bankruptcy estate could still fall under the court's jurisdiction if they might affect the estate. The Ninth Circuit's *In re Southland, Keystone* rejected the argument that the absence of PACA trust assets from the estate negated the bankruptcy court's jurisdiction, emphasizing that the court can determine whether assets are part of the estate. Thus, the bankruptcy court is tasked with evaluating whether Plaintiff Monterey or any other claimant has perfected their interest in the PACA trust and assessing the trust's scope. The validity of security interests in related proceedings also falls under the bankruptcy court's jurisdiction, as demonstrated in *Maislin Indus.*. If PACA trust protection criteria are unmet, the assets may revert to the debtor’s bankruptcy estate, as noted in *In re Matter of United Fruit Produce Co., Inc.*.
Once PACA trust claims are resolved, any remaining funds in the PACA trust revert to the debtor's estate, as established in *In re Meyer’s Bakeries, Inc.*, 402 B.R. 314, 319 (Bankr. W.D. Ark. 2009). The bankruptcy court addressed the eligibility of claims for PACA trust protection and mandated that Delta notify potential creditors by March 2, 2012, regarding their opportunity to file such claims, as documented in the Order Establishing a Deadline to File PACA Trust Claims (Bankr. Dkt. 52). Throughout March and April 2012, objections were filed by Special PACA Counsel and Produce Creditors, leading to a court order on July 6, 2012, that settled various objections, including issues surrounding prejudgment interest, ineligible goods, and attorney fees for PACA Claimants (Bankr. Dkt. 274). The court recognized that the resolution of PACA claims could impact the bankruptcy estate, thereby asserting “related to” jurisdiction over these issues.
Regarding jurisdictional matters, 28 U.S.C. § 157 distinguishes between core and non-core proceedings. Core proceedings allow the bankruptcy court to exercise full judicial power, while non-core proceedings restrict the court's authority to hearing the case and necessitating proposed findings submitted to the district court. A proceeding is considered core if it arises under or in a case under Title 11, with the distinction being moot if all parties consent to the bankruptcy court’s adjudication. The district court may refer related proceedings to a bankruptcy judge for determination, as noted in *In re Majestic Energy Corp.*, 835 F.2d 87, 90 (5th Cir. 1988).
At least one PACA Claimant, Rio Bravo, consented to the bankruptcy court's authority to adjudicate PACA claims, as noted in relevant court orders. Other PACA Claimants submitted their claims to the bankruptcy court between February and March 2012, without objection to the court's authority until September 2012. The bankruptcy court established a procedure for adjudicating these claims on January 25, 2012. The PACA Claimants, including Kingdom Fresh, I. Kunik, and Five Brothers, engaged with the bankruptcy court's processes, thereby waiving any objection to the court's authority under 11 U.S.C. § 157. The determination of core versus non-core proceedings does not limit the bankruptcy court's power but rather affects the nature of the court's subsequent rulings. The court affirmed its jurisdiction under 28 U.S.C. § 1334 and proper exercise of authority under § 157. Additionally, Special Counsel argued that PACA Claimants' objections to the use of PACA trust funds for attorney fees are barred by judicial estoppel, which prevents parties from taking contradictory positions in different legal proceedings to maintain the integrity of the judicial process.
To invoke the doctrine of judicial estoppel in the Fifth Circuit, two requirements must be met: (1) the party's current position must be clearly inconsistent with a previous position, and (2) the prior court must have accepted the earlier position. Special Counsel argues that PACA Claimant Kingdom Fresh has changed its stance on using PACA trust funds for attorney fees, initially consenting during the drafting of a PACA Order and later objecting. Special Counsel cites an email from Kingdom Fresh’s counsel expressing concerns about the proposed order. However, the second requirement is not satisfied as there is no evidence that the bankruptcy court's January 25 Order accepted Kingdom Fresh’s earlier position, since Kingdom Fresh had not presented any position to the court prior to that order. The PACA claimants involved in the joint motion leading to the order did not include any currently before the court. Thus, Special Counsel's judicial estoppel argument is rejected.
Regarding the merits of PACA Claimants’ objections to the bankruptcy court’s order granting attorney fees from the PACA trust, it is noted that attorney fees are typically granted when specified by statute, and PACA does not explicitly provide for them. However, PACA allows claimants full payment for sums owed in perishable agricultural commodities transactions. The Fifth Circuit has not determined whether attorney fees can be included in these sums, but other circuits have affirmed that such fees are recoverable if included in contracts related to the transactions. Courts have recognized that Congress intended to encompass attorney fees and related expenses within the scope of PACA claims if they were negotiated.
The excerpt addresses the entitlement of a Special Counsel, acting as a trustee for a PACA (Perishable Agricultural Commodities Act) trust, to attorney fees. It references the case C.H. Robinson Co. v. Alanco Corp., where Robinson sought to recover over $200,000 from Alanco Corp., which had declared bankruptcy. Mark Mandell, the trustee for the PACA trust, withheld $18,960.57 from the proceeds when settling the claim and sought to enforce an attorney’s lien on these funds, arguing he was owed payment for necessary services performed. The district court denied his motion, and on appeal, the Second Circuit upheld this decision.
The court noted that while traditional trust law allows trustees to incur necessary expenses, PACA establishes statutory trusts with specific rules that supersede common law principles when they conflict with PACA's provisions. Specifically, PACA was designed to protect unpaid sellers in bankruptcy, mandating that trustees must first satisfy the debts owed to PACA claimants before paying any other creditors, including attorneys. The court cited regulatory provisions emphasizing the importance of keeping trust assets available to satisfy obligations to sellers. Mandell's withholding of fees impaired Robinson’s ability to recover owed funds, which the court determined would contravene the intent of PACA. Thus, it concluded that Mandell could not use PACA funds to cover attorney fees related to the collection of accounts receivable held in trust for the seller.
Special Counsel was authorized by the bankruptcy court to preserve and collect PACA trust assets and facilitate their distribution. This included determining which assets qualified as PACA trust assets, examining and objecting to PACA trust claims, collecting accounts receivables, and liquidating PACA trust assets into cash. Acting in this capacity, Special Counsel functioned as a trustee, which, according to legal definitions, entails holding property in trust for beneficiaries and adhering to fiduciary duties. Under the precedent set in C.H. Robinson, Special Counsel is not entitled to attorney fees from PACA trust assets until all PACA beneficiaries have received full payment. The bankruptcy court's approval of Special Counsel’s First Interim Application for attorney fees was deemed erroneous since the beneficiaries had not been fully paid at that time. The court confirmed that it had jurisdiction under 28 U.S.C. 1334 and exercised appropriate judicial power under 28 U.S.C. 157, but it vacated the bankruptcy court's order granting attorney fees from PACA trust assets. Special Counsel's arguments regarding equitable powers under 11 U.S.C. 105(a) conflated judicial powers with subject-matter jurisdiction. Only Rio Bravo filed its PACA claim in district court, while the others did so in bankruptcy court. The court refrained from commenting on potential consent from Kingdom Fresh regarding the payment of Special Counsel’s fees. Several PACA Claimants supported the motion, although they did not address the bankruptcy court during the hearing. It remains unclear whether the PACA beneficiaries had been fully paid before the order was granted.
