Personal Liability Under PACA: Exposure for Non-Shareholding Officers

On August 2, 2012, the U.S. Court of Appeals for the 6th Circuit issued an unpublished decision that discussed, inter alia, personal liability under the Perishable Agricultural Commodities Act (“PACA”).  Specifically, the 6th Cir. addressed the issue of whether an individual could be held personally liable under PACA absent a showing of “active wrongdoing.”  The Court said: YES! See Arava USA, Inc. v. Karni Family Farm, LLC, 6th Cir. Case No. 11-1944.

In this case, the 6th Circuit found that an individual (who was an officer of the company, but not a shareholder) could be prosecuted personally for any shortfall in the company’s ability to fully satisfy it’s PACA trust obligations.

In so doing, the 6th Cir. agreed with the District Court (W.D. Mich.) and noted that thenon-shareholding officer at issue was not a statutory trustee of the PACA trust.  However, the 6th Cir. further held:

[b]ut that does not mean that [an individual] cannot be personally liable for interfering with [a PACA trust beneficiary’s] receipt of trust assets.  Ordinary principles of trust law apply to statutory trusts created by the Act. See Owner Operator Indep. Drivers Ass’n, Inc. v. Comerica Bank (In re Arctic Exp. Inc.), 636 F.3d 781, 798 (6th Cir. 2011).  This court has held that, where an officer causes a corporate trustee to commit a breach of trust, the beneficiary of the trust may sue the officer personally for the loss.  See Capitol Indemnity Corp. v. Interstate Agency, Inc. (In re Interstate Agency, Inc.), 760 F.2d 121 (6th Cir. 1985).  This liability arises not because the officer is a trustee or because of a piercing of the corporate veil, but rather because the officer himself has committed a tort against the trust’s beneficiary. Id. at 125.  The law of trusts is clear that “a beneficiary who is entitled to immediate distribution of . . . property may bring an action against a third party [i.e., not the trustee] who has damaged that property or interfered with its delivery to the beneficiary.” Restatement (Third) of Trusts § 107 cmt. c(1).  (emphasis added).

Every court of appeals to consider this issue has held that a corporate officer may be held personally liable under the Act.  See Coosemans Specialities, Inc. v. Gargiulo, 485 F.3d 701, 705–06 (2d Cir. 2007) (collecting cases from the First, Second, Third, Fifth, Seventh, and Ninth Circuits).   We now join them and hold that “individual shareholders, officers, or directors of a corporation who are in a position to control [statutory] trust assets,” and who fail to preserve those assets, may be held personally liable under the Act. Sunkist Growers, 104 F.3d at 283. Where the officer has “fail[ed] to maintain” the assets of a § 499e trust, trust law allows an unpaid produce seller to sue that officer in his personal capacity. 7 U.S.C. § 499b(4).

Critical Point

The thrust of this case is that you do not have to be a shareholder of a produce company to be exposed to PACA trust liability.  The proper test for determining liability is control over the PACA trust assets and how your actions affected the PACA trust beneficiary’s ability to receive full payment promptly.

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