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The basics of a PACA trust lawsuit

Some financial rules to live by—never run up your credit cards, never borrow money from a friend, and never, ever stiff your produce supplier. Thanks to the trust provision of the Perishable Agricultural Commodities Act (PACA), avoiding the latter is more than a sound business practice for dealing in fresh produce, it’s part of the survival process.

The PACA trust was prompted not only by the perishable nature of fruits and vegetables, but the prevalence of produce sellers left unpaid when a buyer went bankrupt. If there was anything left after banks and other creditors secured their due, produce sellers might see some of their money, but the product was long gone. Congress saw this as a direct threat to the industry’s financial stability, so the PACA trust was created.

California attorney Marion Quesenbery characterizes the trust as “fabulous” for produce dealers. “If you file a lawsuit under PACA trust provisions, you have top priority of payment ahead of everyone. The idea is that the produce purchaser is supposed to hold assets in trust for you until you’re paid in full.”

Assuming the produce seller has followed proper requirements, including notice on every invoice that the buyer is subject to PACA trust laws, unpaid sellers have the right to file a PACA trust lawsuit if they are not paid. This means they can pursue payment from a company in default as well as other parties like banks that may have been paid with PACA trust assets.

“You can also go after the individual owners and operators of the produce company,” Quesenbery explains. “They’re personally liable for the debt. You can name the people who had control over the assets and didn’t pay you.” The action revolves around personal liability, something some buyers are not aware of.

Steven De Falco, attorney at Meuers Law Firm P.L. in Naples, FL, says the court ultimately determines who is personally liable and will be held responsible for amounts owing.

Filing Suit
The Pleading Stage
When demands for payment have failed and it’s time to engage an attorney, the process follows a standard pattern beginning with filing a complaint in the U.S. district court where the defendant is located. Next comes the process of locating the other party so it can be served with the complaint and a summons.

De Falco says this stage can be tricky if the defendant tries to avoid the summons. “It’s something we sometimes encounter,” he explains, when a defendant may adopt a ‘catch me if you can’ attitude, forcing the plaintiff to go to great lengths to serve a summons. Another option is to ask the court for a TRO, or temporary restraining order, to freeze the defendant’s PACA trust assets if there is reason to believe this money will go missing or be spent before a court date. The decision to take this route may depend on a defendant’s behavior in the case, including bounced checks, lack of communication, or an outright admission of being unable to pay.

Assuming a summons can be served, the defendant has 21 days to file an answer to the claim(s). At this point, the defendant can answer each complaint listed and/or file a counterclaim.

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Some financial rules to live by—never run up your credit cards, never borrow money from a friend, and never, ever stiff your produce supplier. Thanks to the trust provision of the Perishable Agricultural Commodities Act (PACA), avoiding the latter is more than a sound business practice for dealing in fresh produce, it’s part of the survival process.

The PACA trust was prompted not only by the perishable nature of fruits and vegetables, but the prevalence of produce sellers left unpaid when a buyer went bankrupt. If there was anything left after banks and other creditors secured their due, produce sellers might see some of their money, but the product was long gone. Congress saw this as a direct threat to the industry’s financial stability, so the PACA trust was created.

California attorney Marion Quesenbery characterizes the trust as “fabulous” for produce dealers. “If you file a lawsuit under PACA trust provisions, you have top priority of payment ahead of everyone. The idea is that the produce purchaser is supposed to hold assets in trust for you until you’re paid in full.”

Assuming the produce seller has followed proper requirements, including notice on every invoice that the buyer is subject to PACA trust laws, unpaid sellers have the right to file a PACA trust lawsuit if they are not paid. This means they can pursue payment from a company in default as well as other parties like banks that may have been paid with PACA trust assets.

“You can also go after the individual owners and operators of the produce company,” Quesenbery explains. “They’re personally liable for the debt. You can name the people who had control over the assets and didn’t pay you.” The action revolves around personal liability, something some buyers are not aware of.

Steven De Falco, attorney at Meuers Law Firm P.L. in Naples, FL, says the court ultimately determines who is personally liable and will be held responsible for amounts owing.

Filing Suit
The Pleading Stage
When demands for payment have failed and it’s time to engage an attorney, the process follows a standard pattern beginning with filing a complaint in the U.S. district court where the defendant is located. Next comes the process of locating the other party so it can be served with the complaint and a summons.

De Falco says this stage can be tricky if the defendant tries to avoid the summons. “It’s something we sometimes encounter,” he explains, when a defendant may adopt a ‘catch me if you can’ attitude, forcing the plaintiff to go to great lengths to serve a summons. Another option is to ask the court for a TRO, or temporary restraining order, to freeze the defendant’s PACA trust assets if there is reason to believe this money will go missing or be spent before a court date. The decision to take this route may depend on a defendant’s behavior in the case, including bounced checks, lack of communication, or an outright admission of being unable to pay.

Assuming a summons can be served, the defendant has 21 days to file an answer to the claim(s). At this point, the defendant can answer each complaint listed and/or file a counterclaim.

If the defendant fails to answer within the specific timeframe, the court will enter a default against the defendant and all allegations are assumed to be true—meaning the defendant essentially loses the case and is found liable. The court can then issue a default judgment to award money and possibly attorneys’ fees and interest to the plaintiff.

Scheduling
After a defendant has been served with a summons and answers the complaint, attorneys meet to plan out a series of deadlines, scheduling an exchange of information relevant to the case, as well as the possibility of settling without a trial.

At this stage, De Falco notes, “The main job of the court is to try to facilitate more discussions.” If no settlement can be agreed upon, the parties will submit a schedule of agreed deadlines for the case. This, he notes, is “the nitty gritty of any dispute.”

Discovery
Once the court has accepted the plans and schedules made by the attorneys, the discovery stage begins. Attorneys are required by law to provide some information automatically such as witness names, copies of relevant documents, etc.

Other information is provided by request of one side or the other such as answers to questions submitted in writing, specific documents, or admissions or denials of statements.

This stage also includes depositions, or testimony under oath by a witness, usually in a lawyer’s office or other informal setting without a judge. A court reporter records the testimony, which can later be used against an individual if information contradicts testimony at trial.

“Discovery is intended to get everything out in the open,” De Falco explains, including any written correspondence exchanged between the parties that can affect “the validity of a client’s PACA trust claim.” From the perspective of an attorney, De Falco finds this stage can yield new information even about one’s own client. “You see things you may not have seen before,” he explains, adding, “you want to know the risk ahead of time rather than learning it down the road at trial. If you find something that can impact your client, you want to find ways to minimize the damage.”

Dispositive motions
Once all the facts are established, each side can determine if the case should go to trial or whether to file a dispositive motion. If no facts are in dispute, either side may ask the judge to issue a summary judgment—i.e., a judgment without further proceedings because of the absence of any genuine issue of material facts. The side making a motion for summary judgment hopes to avoid the time, trouble, and expense of a trial. For example, if the defendant does not deny the money is owed, additional discovery and trial preparation may not be necessary.

If the judge grants the summary judgment motion, the case (or one issue within the case) will be decided based on the facts presented. If the judge denies the motion, the case proceeds to trial. Both sides, however, may be ordered to attend a settlement conference to try and resolve the case without a trial.

Some courts, De Falco notes, are reluctant to grant summary judgments. If any facts in the case are in dispute, the judge will likely say these issues must be resolved at trial—but only if there is merit to the case.

Alternative dispute resolutions and settlement conferences
Courts have more lawsuits filed than they can hear. Since PACA trust lawsuits deal with monetary disputes, there is a push to have parties negotiate and settle outside of court. This is where alternative dispute resolution (ADR) or settlement conferences come in. There are three classifications of ADR: early neutral evaluation; mediation; and arbitration.

As you might expect, early neutral evaluation happens early in a case, usually even before the discovery stage. Both sides agree to meet with a neutral third party to evaluate the case. The third party hears the facts and makes a nonbinding decision. If both parties agree to the decision, they can settle the case and avoid the costly discovery process and trial.

Mediation usually takes place after discovery. Once relevant facts, documents, depositions, etc. are gathered, both sides attend a settlement conference to find a solution and avoid going to trial. One or a panel of trained mediators will hear the facts of the case and propose a settlement. Like early neutral evaluation, the proposed mediation settlement is nonbinding and either side may choose to walk away and go to trial.

“A good mediator will tell you the risks and costs involved,” explains De Falco. “This is the time to control your own destiny. In a settlement, everyone may go away a little unhappy.” But if the parties work with the mediator, they can avoid the time and cost of a trial. Both De Falco and Quesenbery agree that a good mediator can make or break the process.

“The mediator has no authority to do anything except try to get you to agree,” Quesenbery points out. “Usually what goes on is the parties sit down and discuss the dispute, and try to reach common ground. If there’s no money there, there’s just no money. By the same token, if you’ve got a bank or individuals being held liable, there is a real incentive for them to agree. Both sides need to try to be reasonable, otherwise everybody wasted their time and effort.”

Arbitration is more like a trial than either of the other two ADR types. De Falco says arbitration has the same kind of timeframe proceedings as a court, but is being done privately with a third party, like a representative from the American Arbitration Association, to listen to the facts of the case.

Like mediation, one or more arbitrators will hear the case, which may include witnesses and other evidence. But instead of proposing a settlement like in mediation or early neutral evaluation, arbitration produces a decision based on the facts. Either side can decline to participate in arbitration unless they entered into a contract agreeing to be bound by the decision of an arbitrator.

De Falco cites “principle” as being a major factor in the failure of ADR. “Everyone has the right to have their day in court, but this comes with a cost. Frankly, some of the parties don’t like each other, so being in the same room doesn’t bring a compromise.” However, he adds, “you must go through the process—most courts require you to go through some kind of sit down with the other side to try to resolve the dispute.”

Going to Trial
Most cases don’t go to trial, with many resolved through a summary judgment or through the ADR process.

“The law is so in the supplier’s favor,” Quesenbery observes, “it’s pretty rare that you don’t win.”

But when a case does end up going to trial, it is up to a judge and, in some cases a jury, to determine the outcome. “At the end of the day,” De Falco comments, “It will come down to who is more believable or credible. In a he said/she said scenario, it comes down to the kind of documentation you have.” And while each side may have a different recollection of what occurred, De Falco has even seen cases where the court says “I’d like to believe you, but the other side has all this documentation.”

Asked about those in the industry who still like to do business with a handshake, De Falco says he hears almost weekly about how things used to be done, but warns that not having the particulars of a deal in writing could be disastrous if a lawsuit is filed. Relying on a handshake may be honorable, but a follow-up letter or email confirming the understanding will go a long way in a dispute.

Quesenbery agrees it is nice to be able to conduct business on a handshake, “but by the same token, you have to be really careful about who your customers are and if they have the assets and wherewithal to pay you.”

Possible Outcomes
It is important to realize that winning a lawsuit does not mean you will be paid. “Winning is not going to produce the money,” De Falco cautions.

On the other hand, the judgment certainly has meaning and carries weight. “You never know, principals may win the lottery down the road and now you’ve got the magic ticket,” De Falco remarks. “Sometimes the easiest part is getting the judgment; the hard part is getting paid.”

While the PACA trust provides great protection for produce sellers, paying careful attention to who you do business with, maintaining proper documentation, and knowing a customer’s reputation and pay history can help avoid the headache and expense of having to file a lawsuit. Quesenbery sums it up best: “No one likes to spend time in litigation except attorneys.”

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