If you’re a creditor hoping to collect on overdue payments through the Perishable Agricultural Commodity Act, you may want to hurry.
If other creditors get there first, there could be nothing left, according to a PACA attorney involved in a recent ruling in federal court in New York.
However, another lawyer in the case applauded the ruling, saying it applied only to debtors who were still in business and thus potentially capable of paying other creditors.
In H.C. Schmieding Produce Co. versus Alfa Quality Produce, the federal court for the Eastern District of New York ruled a PACA debtor’s assets can be distributed on an “early bird gets the worm” basis — and that uncompensated creditors can’t sue those early birds for a part of the spoils — said Mike Keaton, partner in Palatine, Ill.-based Keaton & Associates.
Courts have traditionally ruled assets be distributed on a proportional, or “pro-rata,” basis, Keaton said.
It’s not good news, he said, for shippers, packers, distributors and others looking to get at least some of their lost money back through PACA.
“This is literally a green light for smash and grabs,” he said. “If you’re aggressive, get there first and clean out the pot, kudos to you. I think it’s dead wrong, and I think it’s really bad for the industry.”
In the Schmieding suit, Keaton represented Leamington, Ont.-based Amco Produce Inc., one of about 100 creditors trying to recover money from New York-based Alfa.
In this case, Coral Gables, Fla.-based Del Monte Fresh Produce NA was one of the early birds that successfully collected assets from Alfa, Keaton said.
But an attorney representing Del Monte in the case, Mark Amendola, said it was another compensated creditor, not Del Monte, that was targeted.
Amendola, an attorney with Cleveland-based Martyn and Associates, said the ruling does not apply to companies that have gone out of business. In those cases, money is distributed to creditors pro-rata, he said.
In the case of Alfa, the company was still in business when Del Monte recovered assets, Amendola said. Hypothetically, Alfa could still generate income to pay other creditors.
Amendola said the ruling prevents another layer of litigation, in which uncompensated creditors would seek to get money from early bird creditors.
Keaton and other attorneys argued that based on the history of trust law, and in particular on a 2002 case in the federal district of Washington, D.C., Fresh Kist Produce LLC v. Choi Corp., assets should be distributed proportionately — not given to the first creditors who ask for them.
The Schmieding and Fresh Kist rulings will likely hold equal sway in other cases concerning distribution of PACA assets, Keaton said.
However, Amendola said Fresh Kist was a “minority” ruling, with limited scope, and that no other courts have followed it. He said it was too early to gauge the affect Schmieding would have on other cases.
Marion Quesenbery, attorney with Rynn & Janowsky LLP, Newport Beach, Calif., said a higher court will have to decide which standard — the one established by Fresh Kist or the one established by Schmieding — should be followed.
“(Schmieding) is one decision by one judge that other judges may or may not follow,” she said.
In cases in the Eastern District of New York, which includes the Hunts Point Terminal Market in New York City, the Schmieding ruling is binding, Keaton said.