“An Intentionally Tough Law”: Employment Rights Lost by “Responsibly Connected” Individuals When Their PACA-Licensed Companies Became Insolvent

by Davis Wright Tremaine LLP
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[author: Craig Miller, Peter Isola]

The Perishable Agricultural Commodities Act of 1930 (“PACA”)1 is deservedly renowned for its provisions creating a statutory trust on sold perishable commodities, and the products and revenues thereof. See 7 U.S.C. §499e. The PACA statutory trust can have dramatic consequences in the cases of bankrupt produce buyers; produce sellers often are paid in full, ahead of secured creditors holding liens on all inventory and accounts receivable. That is a story often told.

A different lesson is provided by the recent 9th Circuit decision in Perfectly Fresh Farms, Inc. v. U.S. Department of Agriculture.2 This case is a stern reminder that PACA’s reach runs to individuals who are owners, officers and managers of PACA licensees and who are “actively involved” in the buying and selling of produce. These persons, even when acting with honorable intentions, can suffer stiff penalties if they run afoul of PACA’s strictures.

Key factors that PACA-licensee owners, officers and managers should be aware of include:

  • Maintain corporate formalities. This is important with respect to every limited liability entity, and especially so with a business that is a PACA licensee.
  • Be aware of the status of accounts payable. Make sure that accounts for perishable commodities are being paid current, or are otherwise being handled in a PACA-compliant fashion.
  • Get legal advice. Understand how PACA works prior to an acquisition of any interest in a PACA-licensee company. Stay current on developments in PACA jurisprudence.

As demonstrated by the 9th Circuit’s decision in Perfectly Fresh Farms, PACA favors produce sellers (and the Secretary of USDA). PACA does not favor produce buyers or the owners, officers and managers of PACA-licensee produce buyers.

In Perfectly Fresh Farms, an umbrella company, Perfectly Fresh Marketing, held a 90 percent ownership interest in each of its subsidiaries. Mr. Duncan owned the other 10 percent of one subsidiary, Perfectly Fresh Consolidation, and Mr. Bennett similarly owned 10 percent of another subsidiary, Perfectly Fresh Farms. Both Duncan (who was expert in the “exacting business” of produce sales to cruise lines) and Bennett (“a forty-year veteran of the produce industry”) were, apparently, real produce guys, and had relatively little to do with the management of the business. Although Duncan and Bennett were each listed as president and director of their respective subsidiary company, in fact “neither . . . was much involved in the legal or financial affairs of their companies.” The business management of the parent and all three subsidiaries was handled by Mr. Tice.3

According to the findings of the USDA’s Judicial Officer (“JO”), the parent and subsidiaries “were to be run as one entity...[the subsidiaries] were [to be] sales entities, with [the parent] handling all the operations including the purchasing...“ “None of the entities ever held a board meeting.” Customers generally understood that they were dealing with a single company called “Perfectly Fresh.” Only one bank account was actively used. Nevertheless, the accounts payable documents of the companies showed payables owed by the subsidiaries, and not by the parent.

Financial problems ensued, and the parent and subsidiaries filed for bankruptcy with unpaid accounts for perishable commodities. Bennett, upon learning of the financial distress of the companies, had resigned a month before the bankruptcies were filed in an effort to protect his “reputation in the produce industry.” Duncan stayed on longer, apparently believing that his particular subsidiary—Consolidation—remained profitable.

The Secretary of Agriculture, acting under PACA, commenced administrative proceedings against the Perfectly Fresh subsidiary companies, and against Duncan and Bennett individually on the grounds that each was a “responsibly connected” person to the PACA-violator subsidiary company. 

PACA defines “responsibly connected” as:

affiliated or connected with a commission merchant, dealer, or broker as (A) partner in a partnership, or (B) officer, director, or holder of more than 10 per centum of the outstanding stock of a corporation or association.

7 U.S.C. §499a(b)(9).  A person who is thus found to be “responsibly connected” to a PACA violator can rebut that finding on proof that he (1) was “not actively involved in the activities” resulting in the PACA violation, AND (2) was either only “nominally” a partner, officer, director or shareholder of the violating licensee or not an owner of the violating licensee if that licensee was the “alter ego” of its owners. Id.

The 9th Circuit opinion acknowledged the “difficulty of rebutting the presumption of responsible connection,” and cited 1956 legislative history that said that PACA is “admittedly and intentionally a ‘tough law’.”4

It certainly was a tough law on Duncan and Bennett.

As to their respective subsidiary companies, Duncan and Bennett were officers, directors, and 10 percent owners. Thus, under three separate prongs of the test, each was “responsibly connected” to his company. Duncan and Bennett attempted to rebut the presumption (under the standard stated above), but failed. The controlling law is that a “responsibly connected” person is “involved” in the violation unless his actions were “ministerial only...[and he] did not exercise judgment, discretion, or control with respect to the activities that resulted in the violation . . .”5 Stated another way, “the buying and selling of produce at a time when produce sellers are not getting paid…constitutes active involvement.”6 Here, Duncan and Bennett both, though in slightly different ways, were actively involved in the ordering and purchasing of produce and in supervising employees who handled these functions. That was more than enough for the JO to find “active involvement,” and the 9th Circuit agreed.

With their status as “responsibly connected” persons to the subsidiaries thus decided, the remaining issue was: At which corporate level did the PACA violations occur? If the violations occurred at the parent level, then Duncan and Bennett would have been exonerated. But if at the subsidiary level, then they were in trouble.

Despite some facts indicating that the parent company purchased all the perishable commodities and served as the business manager of the enterprise, the record at the very least showed that the purchasing and sales functions were highly blurred between parent and subsidiary. Things went poorly for Duncan and Bennett on this issue:

  • The JO found, based on the companies’ business records and testimony at the hearing, that it was sufficiently clear the subsidiaries were the purchasers of perishable commodities.
  • The JO also found (apparently alternatively) that, in any event, even if the purchasing was done by the parent, then the parent was acting as the purchasing agent for the subsidiaries (and not vice versa, as Duncan and Bennett contended).
  • Finally, the JO held, as a matter of law, that the subsidiaries’ bankruptcy schedules—which provisionally listed the perishable commodities accounts payable as debts of that debtor company—were affirmative admissions on that issue.

In sum, the JO found that Perfectly Fresh’s failures to pay for perishable commodities to be PACA violations of the subsidiaries. The 9th Circuit affirmed that ruling on all points.

The net result was that, as “responsibly connected” persons to PACA-licensee violators, Duncan and Bennett became “subject to employment and licensing bans of variable duration in the perishable agricultural commodities industry,”7 as required by 7 U.S.C. §§ 499d(b) & 499h(b).

And the pain for Duncan and Bennett did not quite end even there.

The JO also agreed with the Secretary that the subsidiaries’ PACA violations were “willful” and “repeated.” If sustained, these findings subject a person “responsibly connected” to a PACA violator to a more severe range of sanctions, including more onerous bonding requirements for re-employment in the industry. Here, the JO ruled that the subsidiaries’ failures to pay for perishable commodities were “intentional or committed with careless disregard of statutory requirements.”8 Especially pertinent to the question of willfulness was a finding by the JO that Duncan and Bennett both allowed the subsidiaries to place orders despite their knowledge that suppliers were not being paid promptly. Further, since “repeated” violations are established whenever there are multiple violations that “did not occur simultaneously,” Duncan and Bennett lost on that issue too.9

Thus, this recent 9th Circuit decision is a harsh reminder of PACA’s reach and the severity of the consequences for non-compliance with PACA’s requirements. The facts and holding of Perfectly Fresh Farms provide a cautionary tale for all individuals who are owners, officers and managers of PACA licensees, and who are “actively involved” in the buying and selling of produce. The decision reminds these individuals to maintain corporate formalities, monitor the status of accounts payable, and understand and stay current on PACA jurisprudence.10

DWT Food Industry Practice
DWT’s Food, Beverage and Agribusiness industry group provides business counsel and strategic representation across the entire spectrum of agribusiness, from issues faced at the farm product level and throughout production and distribution operations. We counsel and represent clients on issues related to U.S. Food and Drug Administration and U.S. Department of Agriculture compliance, administrative litigation before state and federal agencies, and product recalls and other food safety matters.

FOOTNOTES

1 7 U.S.C. Sections 499a et seq.
2 ___ F.3d ___, 2012 WL 3667318 (9th Cir. 2012).
3 2012 WL 3667318, pp. 5-6, passim.
4 2012 WL 3667318, p. 5 (full citation in opinion).
5 2012 WL 36673318, p. 10, citing In re Michael Norinsberg, 58 Agric. Dec. 604, 610 (U.S.D.A. 1999).
6 2012 WL 36673318, p. 10, citing In re Janet S. Orloff, 62 Agric. Dec. 281, 290-92 (U.S.D.A. 2003).
7 2012 WL 3667318, p. 4.
8 2012 WL 3667318, p. 9, citing Potato Sales Co. v. Dep’t. of Agric., 92 F.3d 800, 805 (9th C., 1996).
9 2012 WL 3667318, p. 9, citing Reese Sales Co. v. Hardin, 458 F.2d 183, 187 (9th Cir. 1972).
10 A useful and convenient source of PACA law is the website of the National Agricultural Law Center: http://new.nationalaglawcenter.org/

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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