Overton Distr Inc v. Heritage Bank

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206 2 Overton Distributors, Inc. No. 02-5261

ELECTRONIC CITATION: 2003 FED App. 0292P (6th Cir.) v. Heritage Bank

File Name: 03a0292p.06

_________________

UNITED STATES COURT OF APPEALS COUNSEL

FOR THE SIXTH CIRCUIT ARGUED: Richard L. Colbert, COLBERT & WINSTEAD,

_________________ Nashville, Tennessee, for Appellant. Stephen P. McCarron,

McCARRON & DIESS, Washington, D.C., for Appellee.

OVERTON DISTRIBUTORS, X ON BRIEF: Richard L. Colbert, W. Gregory Miller, J. Frank

INC., - Rudy, Jr., COLBERT & WINSTEAD, Nashville, Tennessee,

Plaintiff-Appellee, - for Appellant. Stephen P. McCarron, McCARRON &

- No. 02-5261 DIESS, Washington, D.C., for Appellee.

-

v. > _________________

,

- OPINION

HERITAGE BANK, - _________________

Defendant-Appellant. -

- RONALD LEE GILMAN, Circuit Judge. Overton

N Distributors, Inc. supplied produce to Quality Foods of

Appeal from the United States District Court Tennessee, Inc. between 1993 and 2000. Quality went out of

for the Middle District of Tennessee at Nashville. business in January of 2000, leaving an unpaid debt to

No. 00-00284—John T. Nixon, District Judge. Overton of over $220,000 for produce purchased between

October of 1999 and January of 2000. Overton now seeks to

Argued: July 29, 2003 recover this unpaid debt from Heritage Bank, Quality’s

lender, by invoking the statutory trust provisions of the

Decided and Filed: August 15, 2003 Perishable Agricultural Commodities Act (PACA), 7 U.S.C.

§§ 499a-499t, a statute enacted in 1930 to regulate the sale of

Before: GILMAN and GIBBONS, Circuit Judges; perishable agricultural commodities.

JORDAN, Senior District Judge.*

In 1996, Quality entered into an agreement with Heritage

Bank that allowed Quality to obtain advances against the

value of its accounts receivable. Approximately 90% of these

accounts receivable arose from the sale or resale of produce

covered by PACA. The owners of Quality filed a Chapter 7

bankruptcy petition in July of 2000. This caused Overton to

sue Heritage to recover its losses, contending that the bank’s

*

agreement with Quality constituted a breach of Overton’s

The Honorab le R. Leon Jordan, Senior United States District Judge statutory trust, and that the bank had received the proceeds of

for the Eastern District of Tennessee, sitting by designation.

1

No. 02-5261 Overton Distributors, Inc. 3 4 Overton Distributors, Inc. No. 02-5261

v. Heritage Bank v. Heritage Bank

Overton’s produce that were subject to the PACA trust The perishable agricultural commodities listed on this

provisions. invoice are sold subject to the statutory trust authorized

by section 5(c) of the Perishable Agricultural

In ruling on the parties’ cross-motions for summary Commodities Act, 1930 (7 U.S.C. 499e(c)). The seller of

judgment, the district court held that Overton had properly these commodities retains a claim over these

preserved its statutory trust benefits under PACA, leaving the commodities, and any receivables or proceeds from the

other issues for resolution at trial. The district court sale of these commodities until full payment is received.

subsequently ruled for Overton following a two-day bench

trial, concluding that the agreement between Quality and Quality consistently paid Overton on an irregular and tardy

Heritage constituted a breach of Overton’s statutory trust. basis, often taking between 40 and 60 days to pay an invoice.

Overton, in the court’s opinion, was thus entitled under Overton regularly called Quality about its slow payments on

PACA to assert a superior claim to the proceeds from the sale the account, but it never required Quality to strictly abide by

of its produce that were acquired by Heritage from Quality. any specific terms of payment. Grossman testified that

For the reasons set forth below, we REVERSE the judgment Overton tolerated Quality’s late payments because Overton

of the district court and REMAND with instructions to thought that Quality would eventually pay.

dismiss Overton’s complaint.

Heritage provided banking services to Quality throughout

I. BACKGROUND the latter’s existence. For many of the years in which it

conducted business, Quality had difficulty making its

A. Factual background payments, often writing checks on insufficient funds that

Heritage covered. Quality entered into a financing

In late 1993, shortly after Overton began selling produce to arrangement with Heritage in 1996 called the Business

Quality, it sent a letter to Quality providing that the latter Manager Agreement (BMA). The BMA provided for the sale

would pay Overton’s invoices within 10 days of a 15-day of Quality’s accounts receivable to Heritage, with Heritage

accrual cycle. That is, all of the invoices were to be paid advancing Quality payment for those receivables, less a 2.5%

within 25 days of Quality’s receipt of the produce. Charlain service charge. But the BMA contained numerous provisions

Jarman-Hall, one of the principals of Quality, countersigned limiting Heritage’s exposure. Quality, for example, remained

the letter and returned it to Overton in early 1994. For the liable for all of the advances it received from Heritage should

next four years, Overton’s invoices to Quality reflected these the proceeds from the accounts receivable not cover the

payment terms. Then, in 1998, Overton’s invoices to Quality amount of the funds advanced. Heritage could also reassign

were unilaterally changed to provide that payment was to be any account receivable to Quality in case of default, it could

received within 10 days after the end of each calendar month debit any of Quality’s accounts without notice to pay any

in which produce was delivered. Cathy Grossman, Overton’s deficiencies, and it could demand that Quality pay any

director of Business Development, changed the payment shortfall to the bank. Finally, the BMA contained a blanket

terms because Quality’s payments were typically late and security interest on all of Quality’s assets and a representation

subject to her boss’s criticism. Overton’s invoices at this time that Quality’s receivables were free and clear of all security

also contained the following statement: interests, liens, and claims of third parties.

No. 02-5261 Overton Distributors, Inc. 5 6 Overton Distributors, Inc. No. 02-5261

v. Heritage Bank v. Heritage Bank

In January of 2000, Quality went out of business, leaving than 30 days after acceptance, this agreement must be in

Overton with more than $220,000 in produce delivered to writing. The seller must also disclose these non-statutory

Quality for which Overton had never been paid. Heritage, payment terms “on invoices, accountings, and other

which had acquired the accounts receivable from Quality’s documents relating to the transaction.” 7 U.S.C. § 499e(c)(3);

resale of the produce, became the focus of Overton’s 7 C.F.R. § 46.46(e)(1).

attention.

Thirty days is the maximum allowable payment term under

B. Statutory background PACA regulation 7 C.F.R. § 46.46(e)(2), which provides as

follows: “The maximum time for payment for a shipment to

One of the purposes of PACA is to protect unpaid sellers of which a seller, supplier, or agent can agree and still qualify

perishable agricultural commodities. In 1984, Congress for coverage under the trust is 30 days after receipt and

amended PACA to create a statutory trust in their favor. acceptance of the commodities . . . .” This limitation exists

7 U.S.C. § 499e(c); Endico Potatoes, Inc. v. CIT because the statute is intended to protect only those produce

Group/Factoring, Inc., 67 F.3d 1063, 1067 (2d Cir. 1995) sellers making short-term credit arrangements. H.R. Rep. No.

(“[D]ue to the need to sell perishable commodities quickly, 98-543 at 7 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 410

sellers of perishable commodities are often placed in the (“[T]he committee does not intend the trust to apply to any

position of being unsecured creditors of companies whose credit transaction that extends beyond a reasonable period.”).

creditworthiness the seller is unable to verify.”). The trust

protects the sellers against financing arrangements made by C. Procedural background

merchants, dealers, or brokers who encumber or give lenders

a security interest in the commodities or the receivables or Because Quality was insolvent, Overton sued Heritage to

proceeds from the sale of the commodities, thus giving the recover the amount of its unpaid invoices owed by Quality.

claims of these sellers precedence over those of secured Overton maintained that it had properly preserved its claim to

creditors. trust benefits under PACA, that the BMA between Quality

and Heritage constituted a breach of the PACA trust, and that

The statute and the federal regulations expressly lay out the Overton was therefore entitled to recover from Heritage.

steps that a produce seller must take to come within PACA’s Heritage responded by arguing that Overton had not properly

protection. 7 U.S.C. § 499e(c)(3) and (4); 7 C.F.R. preserved its trust benefits, and that, even if it had, the BMA

§§ 46.2(aa) and 46.46(e). Under all circumstances, the seller represented a bona fide sale of the accounts receivable to the

must give the buyer written notice of the seller’s intention to bank, not a security interest that would allow Overton to

preserve its trust benefits. Congress further amended PACA claim priority over these funds.

in 1995 by allowing sellers to provide this notice on the

invoices given to the buyer. If the seller and the buyer use the The district court, in partially granting Overton’s motion

default payment terms provided in the regulations (“within 10 for summary judgment, found that Overton had properly

days after the day on which the produce is accepted”), this preserved its PACA trust benefits. A two-day bench trial

notice of intent to preserve benefits is all that is necessary. followed to resolve the remaining issues. In an order dated

On the other hand, if the parties agree to payment terms January 7, 2002, the district court concluded that the BMA

greater than 10 days after acceptance, but in no event more constituted a breach of the trust. The court also held that

No. 02-5261 Overton Distributors, Inc. 7 8 Overton Distributors, Inc. No. 02-5261

v. Heritage Bank v. Heritage Bank

Heritage’s bona-fide-purchaser defense was without merit. It compliance with PACA, payment was due within the 30-day

therefore ordered Heritage to pay Overton the full amount due maximum allowed by the regulations. In addition, Overton

from Quality plus prejudgment interest. This timely appeal included on all of the relevant invoices a statement of its

followed. intention to preserve its PACA trust benefits. Overton failed,

however, to place the payment terms as agreed to in the 1994

II. ANALYSIS written agreement on these invoices. Instead, the payment

terms on all invoices from 1998 forward were “10 days

A. Standard of review EOM,” establishing that the payment was due within 10 days

after the end of each calendar month in which produce was

Heritage appeals both the district court’s bench-trial delivered. Because payments for produce delivered on the

decision and its order granting partial summary judgment to first of the month could be made as late as 40 days after the

Overton. “In considering a district court’s decision following date of acceptance, the invoices indicated that Overton was

a bench trial, this court reviews findings of fact under the agreeable to a payment schedule outside of PACA’s

clearly erroneous standard. Conclusions of law, on the other protection.

hand, are reviewed de novo. We also review de novo the

district court’s grant of summary judgment.” Burzynski v. Overton presented two alternate theories to avoid the

Cohen, 264 F.3d 611, 616 (6th Cir. 2001) (internal citations consequences of its failure to comply with PACA’s

omitted). requirements: (1) the very fact that the parties’ 1994

agreement and the payment terms on the relevant invoices

Summary judgment is proper where no genuine issue of differ indicates that the agreement was ambiguous and, as a

material fact exists and the moving party is entitled to result, no agreement at all; and (2) the different terms on the

judgment as a matter of law. Fed. R. Civ. P. 56(c). In invoices were the result of a clerical error, and that Overton

considering such a motion, the court must construe all should be given the benefit of the doubt due to its good faith

reasonable factual inferences in favor of the nonmoving party. effort to substantially comply with PACA.

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.

574, 587 (1986). The central issue is “whether the evidence In order to bring Overton within the statute’s protection, the

presents a sufficient disagreement to require submission to a district court adopted both of the above theories. It used the

jury or whether it is so one-sided that one party must prevail 1998-2000 invoices to find ambiguity in the unambiguous

as a matter of law.” Anderson v. Liberty Lobby, Inc., 477 1994 writing expressing the parties’ agreement, and it

U.S. 242, 251-52 (1986). examined the record as a whole to give Overton the benefit of

the doubt. But the statutory language is quite clear. Absent

B. The district court erred in concluding that Overton a written agreement altering the payment terms set in 1994,

had preserved its trust benefits pursuant to the all of the subsequent invoices from Overton to Quality were

provisions of PACA required to disclose the agreed terms of payment. 7 U.S.C.

§ 499e(c)(3); 7 C.F.R. § 46.46(e)(1).

In early 1994, Quality confirmed the payment terms of 10

days within a 15-day accrual by countersigning and returning The parties had clearly agreed in 1994 to terms different

Overton’s letter that set forth this understanding. Thus, in from the standard 10-day payment provision contained in the

No. 02-5261 Overton Distributors, Inc. 9 10 Overton Distributors, Inc. No. 02-5261

v. Heritage Bank v. Heritage Bank

PACA regulations. Consequently, PACA and the regulations (“Unless the terms of the statute are met, [PACA] specifies

mandate that those terms had to be disclosed on the invoices. that the benefits of the trust are lost.”). We agree with the

Overton cannot have it both ways. It cannot, on the one hand, Ninth Circuit’s analysis.

list terms on its invoices that are not only different from those

mutually agreed upon, but also permit payment outside of Overton argues that the 1998-2000 invoice-payment terms

PACA’s requirements, and then on the other hand argue that are an alteration that rendered the earlier agreement

it has substantially complied with PACA. ambiguous or void. As previously indicated, however, we

find no factual or legal support for Overton’s position. Its

There are no Sixth Circuit cases dealing with the alternative contention that the incorrect terms were placed on

preservation of trust benefits under PACA. The two cases the invoices due to a clerical error is also without merit.

from other circuits relied on by the district court deal with Overton’s Director of Business Development testified that the

oral agreements that extended the payment terms beyond the change extending the payment term was made in 1998

standard 10-day statutory provision. Idahoan Fresh v. because Quality’s payments were typically late. This was

Advantage Produce, Inc., 157 F.3d 197 (3d Cir. 1998) consistent with Overton’s practice of not requiring Quality to

(holding that PACA’s requirement that an agreement to abide by any specific terms of payment, which often was

extend the payment period be in writing relates to the received 40 to 60 days after invoice. Overton was of course

enforceability of an agreement to extend a payment term, but free as a business matter to provide lenient payment terms to

does not disqualify an unpaid seller from receiving trust Quality, but by doing so it failed to preserve its trust benefits

benefits); Hull Co. v. Hauser’s Foods, Inc., 924 F.2d 777 (8th under PACA. 7 U.S.C. § 499e(c)(3); 7 C.F.R. § 46.46(e)(2).

Cir. 1991) (holding that oral agreements between produce

sellers and buyers as to payment terms beyond the standard Even though the payment terms included on the relevant

10 days after delivery had no effect on the seller’s right to invoices had the effect of requiring payment within thirty

trust protection under PACA). The statute, however, imposes days on shipments that happened to be made after the tenth

strict disclosure obligations relating to written agreements day of the prior month, Congress’s purpose in enacting PACA

that extend the payment terms, and there is no dispute about was to protect sellers delivering their produce on essentially

the contents of the parties’ 1994 agreement. As a result, these cash terms, not to provide protection to sellers who are

cases provide little guidance for the situation presented here. willing to extend payment terms beyond the statutory

maximum. See Hiller Cranberry Prods., Inc. v. Koplovsky,

The Ninth Circuit case of Bowlin & Son, Inc. v. San 165 F.3d 1, 12 (1st Cir. 1999) (Selya, J. dissenting) (“Those

Joaquin Food Service, Inc. (In re San Joaquin Food Service, courts that have addressed claims involving payment terms of

Inc.), 958 F.2d 938 (9th Cir. 1992), presented facts more more than thirty days uniformly have held PACA inapplicable

analogous to those before us. In Bowlin, the parties had a on the ground that the thirty-day maximum period is to be

written agreement that extended the payment terms beyond imposed as written.”). This interpretation has the significant

the standard 10-day statutory provision, but the seller failed commercial advantage of putting third parties such as

to include these terms on its invoices. Id. at 939. The court Heritage on notice as to whether or not the invoice-payment

held that the benefits of the trust were lost. Id. at 940. The terms themselves make the produce sale in question subject

Bowlin court also held that the seller’s argument that it had to PACA trust protection, without the onerous requirement of

substantially complied with the statute failed. Id. at 940 having to ascertain the precise delivery date of each particular

No. 02-5261 Overton Distributors, Inc. 11

v. Heritage Bank

shipment. Furthermore, in the case before us, Overton neither

argued that we should ascertain individual delivery dates nor

made any effort to segregate deliveries made within the first

10 days of each billing cycle from those made thereafter.

Because Overton’s 40-day maximum payment term failed

to preserve its trust benefits under PACA, it is not entitled to

assert priority over Quality’s accounts receivable that arose

from the sale of Overton’s produce. We therefore have no

reason to resolve the issue of whether Quality’s BMA with

Heritage was in fact only a security interest in Quality’s

accounts receivable or whether Heritage was a bona fide

purchaser for value of those accounts.

III. CONCLUSION

For all of the reasons set forth above, we REVERSE the

judgment of the district court and REMAND with

instructions to dismiss Overton’s complaint.