(Sept. 5) DETROIT — Some good news for the creditors of out-of-business Michigan Repacking & Produce Co. may turn into good news for the entire produce industry.

Mike Keaton, partner in Keaton & Associates, a Glenn Ellyn, Ill., law firm specializing in Perishable Agricultural Commodities Act issues, said a recent ruling by a magistrate judge in the U.S. District Court for the Eastern District of Michigan could affect future PACA decisions.

Keaton, who represents nine creditors in the case, said Michigan Repacking & Produce Co. has about $3.5 million in total PACA debt that was to be paid with the liquidation of receivables and the sale of all of the company’s remaining assets.

The trouble is that Firstar Bank, Michigan Repacking’s secured lender, had begun taking money from the company’s PACA trust fund even after the fund became insolvent.

“The bank started taking money out of MRP’s accounts while it was sliding down the tubes,” Keaton said. “There are more claims against the fund than there are funds available to pay those claims, and once a PACA trust reaches insolvency, any money the bank takes has strings attached.”

Magistrate Judge Virginia Morgan tied the bank with those strings when she ruled that, because the bank knew the account was insolvent as early as December 2001 and because it continued to take money from the account in spite of this, the bank must pay back any money it took up to the full extent of the PACA claims.

“The bank grabbed an additional $18 million that could have been used for PACA claims,” Keaton said. “So now there will be enough money to pay everybody.”

Keaton said this could benefit creditors in future PACA rulings because it is the first time in which a court has held the bank liable for the gross amount of what it took from a company’s accounts.

In the past, banks would seize money, then return some of it to the debtor, who may not necessarily use it to pay off creditors. The banks would then claim they were only responsible for that portion of the money that was not returned to the debtor.

Now, Keaton said, this court is saying the bank has to return all of the money and allow the PACA claims to be paid off first. The remainder of the money then goes back to the bank.

“The bank is grabbing everything that’s left and the PACA creditors are counting on that to get paid from,” Keaton said. “Now it’s got to pay the PACA claims first.”

Keaton said the bank has until Sept. 11 to object to the ruling from the magistrate. At press time, it had not objected.After Sept. 11, it will go as a recommendation to the district judge, who will either approve it, request changes or reject it altogether. Keaton said he sees no reason why the district judge wouldn’t approve the ruling.

The other important lesson from this ruling, Keaton said, is that in this case creditors will recover attorney’s fees and interest as part of their PACA claims. This isn’t always the case.

“It’s very important for everybody in the industry to put the right to attorney’s fees and interest on their invoices,” he said. “Otherwise, they won’t be able to recover it in the PACA claim. It shouldn’t cost you anything to go and collect a PACA claim if you do it right.”