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Protecting Your Assets

Corporate structures aren’t ironclad protection against liability claims

Marion Quesenbery, an attorney based in Berkeley, CA states “there are five [general] exceptions for when an owner of a corporation can be held personally liable, if he or she: (1) personally and directly injures someone; (2) personally guarantees a bank loan or other debt; (3) fails to deposit taxes withheld from employees’ wages; (4) does something intentionally fraudulent or illegal that causes harm to the company or someone else; and (5) treats the corporation as an extension of his or her personal affairs, rather than as a separate legal entity.

For produce companies, the difference is that personal liability may attach to a person who is in a position to control PACA trust assets. This, Quesenbery notes, is based on a leading court decision on the issue, Sunkist v. Fisher, 104 F. 3rd 280 (9th Cir. 1996). The court held that “An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for the tortious act. A PACA trust, in effect, imposes liability on the trustee, whether a corporation or a controlling person of that corporation, who uses the trust assets for any purpose other than repayment of the supplier.”

Quesenbery adds, “Buyers of perishable agricultural commodities are required to maintain trust assets in a manner that such assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities.” Additionally, she notes, “Any act or omission which is inconsistent with this responsibility, including dissipation of trust assets, is unlawful and in violation of 7 USC § 499b(4).”

Amendola agrees and cites two notable legal decisions, Weis-Buy Services v. Paglia, 411 F. 3d 415, 420-21 (3d Cir. 2005) and Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F. Supp. 346, 348-50 (S.D.N.Y. 1993), stating, “An individual who is in a position to control the assets of the PACA trust and fails to preserve them may be held personally liable to the trust beneficiaries for breach of fiduciary duty.”

In a Drake Journal of Agricultural Law article from 1997 that is still considered the gold standard for interpreting PACA and personal liability, Bartholomew M. Botta, a partner at Rynn & Janowsky, LLP in Newport Beach, CA, discusses how the 1930 PACA law was amended in 1984 to create a non-segregated floating trust. “By amending PACA, Congress broadened the protections afforded produce sellers and created a powerful new tool for suppliers of fresh produce.”

Further, Botta notes that under the PACA trust “when a seller, dealer, or supplier ships produce to a buyer, a statutory trust is created on acceptance of the commodities. The statutory trust is impressed on all inventory of food or other products derived from perishable agricultural commodities, as well as any receivables or proceeds from the sale of such commodities or products, until the seller is fully paid.”

In Okun v. Zimmerman, the U.S. District Court for the Southern District of New York wrote: “PACA establishes a statutory trust for the benefit of sellers and suppliers. This trust arises from the moment perishable goods are delivered by the seller. An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for that tortious act. This legal framework is to be distinguished from the piercing the veil doctrine, where the corporate form is disregarded because the individual has either committed a fraud, or because the corporation is a ‘shell’ being used by the individual shareholders to advance their own purely personal rather than corporate ends.”

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