S. Katzman Produce Inc. v. Abraham Produce Corp.

Background

S. Katzman Produce Inc. sells wholesale produce in interstate commerce and is licensed under the Perishable Agricultural Commodities Act, 7 U.S.C. § 499a et seq. Katzman sold defendants various wholesale lots of produce worth $447,581.00. The court found that $442,350.50 remained unpaid, that defendants accepted the produce without protest, and that Katzman preserved its interest in the PACA statutory trust by including the language required by 7 U.S.C. § 499e(c)(4) on its invoices.

The court found that defendants refused to pay despite repeated demands. Katzman learned that Abraham Produce Corp. had stopped operating and had not paid numerous other produce suppliers. Defendants’ counsel reportedly stated that Abraham owed as many as 30 suppliers several million dollars, had less than $100,000 in its bank account, and that Abraham and Nam H. Lee had no other assets. The court also found that other suppliers were likely to assert interests in the same PACA trust.

Preliminary-injunction findings

The court concluded that the requirements for a preliminary injunction were met. It found a likelihood that Katzman would succeed on its claims, a likelihood of irreparable harm to Katzman and similarly situated PACA trust creditors if assets were dissipated, and that the balance of the hardships favored Katzman. The court also found that the public interest favored enforcement of PACA’s trust provisions, which protect produce suppliers from nonpayment.

The court determined that the relevant PACA trust assets could include produce received by Abraham, food or other products derived from that produce, receivables and proceeds from sales, and assets commingled with or acquired using those proceeds. The order states that assets purchased with money from an account containing commingled produce and non-produce proceeds are trust assets.

Ruling and asset protections

The court granted Katzman’s Motion for Preliminary Injunction and PACA Claims Procedure. The order prohibited defendants, their customers, agents, employees, officers, directors, subsidiaries, related entities, successors, assigns, and banking institutions from alienating, dissipating, paying over, or assigning Abraham’s assets except as authorized by the order.

The order required defendants to provide financial and business records, including balance sheets, profit-and-loss statements, accounts-receivable information, electronic-payment records, tax returns, bank statements, checking-account records, and cash-receipt records. Defendants and banking institutions were ordered to deliver funds held for Abraham to Katzman’s counsel for deposit into a new account called the “Abraham PACA Trust Account.” Third parties holding Abraham’s funds were also ordered to deliver those funds.

Katzman’s counsel was authorized to collect Abraham’s accounts receivable and to liquidate and sell furniture, fixtures, vehicles, and other equipment for fair market value through commercially reasonable means. Defendants were required to preserve the company’s records and cooperate with collection efforts, including by providing requested documents, computers, software, usernames, and passwords. The order also allowed Katzman to take reasonable steps to secure records located at Katzman’s place of business if defendants did not timely provide them.

PACA trust account and expenses

The order directed Katzman’s counsel to open the PACA Trust Account within ten business days. Liquid trust assets and proceeds from the sale of non-liquid trust assets had to be deposited into that account. Withdrawals were permitted only as authorized by the order, by a later court order, or by written agreement between counsel for Katzman and defendants. Interest was to follow the funds to creditors entitled to them on a proportional basis.

The court found that there were insufficient non-PACA assets, if any existed, to pay the costs of administering and collecting the trust assets. It therefore authorized reasonable administrative expenses to be paid from the common trust account, subject to notice and objection procedures. The order provided that collected receivables and sold equipment would be free of asserted liens and claims as assets, while those interests would attach to the proceeds in their existing order and priority. The validity and priority of those interests would be decided through the court’s procedures.

Claims procedure

The order established a procedure requiring potential PACA trust creditors to assert their rights in this action. A creditor seeking a distribution generally had to file and serve a Complaint in Intervention and a sworn PACA Proof of Claim by January 27, 2023. A party seeking to challenge the scope, validity, or application of the PACA trust had to file and serve a Complaint in Intervention by that date. The order stated that claims or challenges not timely filed and served would be barred, and that supporting documents not timely filed and served would be inadmissible at an evidentiary hearing or trial, subject to the order’s stated exception for documents rebutting an objection.

The order set February 17, 2023, as the deadline for objections to claims and March 3, 2023, as the deadline for responses to objections. An uncontested claim would be treated as valid for the amount stated in the proof of claim. A claim subject to an objection would be treated as valid only to the extent not challenged, unless the dispute was later submitted to the court and resolved.

The order directed Katzman’s counsel to prepare a chart listing timely filed claims, amounts deemed valid, amounts under objection, and available funds. The order authorized an interim distribution of 75 percent of the funds on deposit, subject to the chart and objection procedures. It also required later distributions to follow comparable procedures.

Expedited information gathering and administration

The order relieved the parties of certain ordinary initial-disclosure and discovery timing requirements. Defendants had to provide detailed information about cash, deposits, accounts receivable, accounts payable, bank statements, and assets and liabilities. On notice, defendants or record custodians had to provide access to business records and computer systems. Banks and other entities holding records had to provide account and financing documents. Katzman’s counsel was authorized to take depositions concerning the accounting, records, trust assets, other assets, and business operations, and to issue subpoenas to identify third parties holding or having received trust assets.

The court stated that it would exercise exclusive authority over the action, the PACA Trust Assets, and the PACA Trust Account, and retained authority to enforce the claims procedure. The order did not determine the final validity or priority of every creditor’s claim or state a final distribution amount.