An “Open Price” Sale or “Price After Sale” is Still a Sale Requiring Prompt Payment Within 10 Days of Delivery

Neither the UCC nor the PACA recognize the term “Price After Sale.”  The term is a subcategory of “Open Price.”  A.P.S. Marketing, Inc. v. R.S. Hanline & Co., Inc., 59 Agric.154 Dec. 407 (2000), Sucasa Produce v. A.P.S. Marketing, Inc., 59 Agric. Dec. 421 (2000), and Well Pict,…

Objecting to a Debtor’s Use of Cash Collateral in Bankruptcy

When a produce company files a chapter 11 bankruptcy case, one of the first questions my PACA trust creditor clients ask is whether the debtor will be able to keep any cash it may have in the bank or any cash it receives from collecting its accounts receivable.

The answer is that the debtor almost always has a bank or other secured creditor which holds a lien on substantially all of its assets.  Property like inventory, machinery and equipment and the like is called hard collateral.  Such items can be used and sold in the ordinary course of business in a chapter 11 case.

Liquid assets, like cash, bank accounts, and accounts receivable, however, are a different matter.  These are called “cash collateral.”  And cash collateral may not be used over the objection of a secured party without a court order.  This order is called the “cash collateral order.”   Simply put, the purpose of a cash collateral order is to allow the debtor to utilize its cash collateral even though the cash collateral is subject to the liens of a secured party.  To do this, the debtor must provide its secured lenders with adequate protection (e.g. replacement liens in post-petition assets, super-priority administrative claims, etc.) necessary to facilitate the use of the cash collateral.  Because the debtor’s ability to use its cash collateral is critical to its ability to successfully emerge from a chapter 11 filing, debtor’s counsel often seek court approval of a cash collateral order on the very first day of the bankruptcy filing.

If you are a PACA trust creditor, you must be mindful of the cash collateral order process because there are almost never any provisions included in a cash collateral order that protect the rights of the PACA trust creditors.  As a result, a savvy PACA trust creditor will immediately object to the debtor’s use of cash collateral and create a seat at the negotiating table for the PACA trust creditors.  A well advised PACA trust creditor understands the debtor’s obligations under PACA and will generally make the following objections to debtor’s use of cash collateral:

1. The scope of the PACA trust covers the debtor’s cash collateral as a matter of law
2. PACA trust assets are not property of the debtor’s estate
3. The debtor cannot use non-estate property as cash collateral
4. The debtor cannot use PACA trust assets as collateral for post-petition financing

A timely filed objection to a debtor’s attempt to obtain a cash collateral order will often result in the full and immediate payment of the PACA trust claim.  When that is not possible, the objecting PACA trust creditor will have the ability to either seek adequate protection (just like a secured party) from both the debtor and its secured creditors or force the case to convert to a chapter 7 liquidation case.  Remember, a chapter 11 case will not stand if there are no estate assets to administer.

Key Point: If the PACA trust creditors do not act quickly when they are notified of a produce buyer’s insolvency, the debtor will obtain a cash collateral order that does not include any protections for PACA trust creditors.  If that happens, the cash collateral order will allow the debtor to use trust assets (the Court won’t know unless someone speaks up) to administer its estate, obtain DIP financing, and otherwise place trust assets out of the PACA trust creditors reach (e.g. paying pre-petition wages, etc.)

Effective Immediately: Suspension Agreement to Sharply Increase Floor Prices for Mexican Tomatoes

As reported by The Produce News, the U.S. Department of Commerce published the final version of a newly renegotiated antidumping investigation suspension agreement with producers and exporters of fresh tomatoes from Mexico, which sharply increases the reference or floor prices at which Mexican tomatoes can be sold in the United States, effective immediately.

The new reference prices, which are identical to those in the propose agreement announced by Commerce Feb. 2, range from nearly 50 percent higher than under the previous agreement to nearly three times as high.

Importantly, under the final version of the new agreement PACA is now involved in actively enforcing the agreement.  Violators could face serious penalties from fines up to losing your PACA license for repeated and flagrant violations.

See Suspension Agreement Will Sharply Increase Floor Prices for Mexican Tomatoes

Restrictive Endorsements: What you need to know about accord and satisfaction

Savvy credit managers need to understand how to use restrictive endorsements to their advantage and how to deal with any restricted check they may receive.

As a matter of policy, a company should make it a practice not to deposit any check containing a restrictive endorsement until they have discussed the issue with their legal counsel. 

With that said, here is an overview of what credit managers should know about accord and satisfaction: 

To constitute a valid accord and satisfaction it is essential that what is given shall be offered in full satisfaction and extinction of the original debt.  That the debtor shall intend it as a full satisfaction of the original debt and that such intention shall be made known to the creditor in some unmistakable manner. 

It is equally important that the creditor shall have accepted it with the intention that it should operate as a full satisfaction of the original debt.

Generally, an accord and satisfaction requires:

1. a bona fide dispute, plus
2. tender which is clearly made as payment in full. 

1 Am. Jur. Accord & Satisfaction, Section 22 et. seq.  See also Louis Caric & Sons v. Ben Gatz Co., 38 Agric. Dec. 1486 (1979); Mendelson-Zeller Co. v. Michael J. Navilio, Inc., 34 Agric. Dec. 903 (1975); Kelman Farms v. Bushman Brokerage, 34 Agric. Dec. 1146 (1975); Mendelson-Zeller Co. v. The Season Produce Co., 31 Agric. Dec. 1288 (1972). 

“To constitute an accord and satisfaction it is necessary that the money be offered in full satisfaction of the demand, and be accompanied by such acts and declarations as amount to a condition that the money, if accepted, is accepted in satisfaction; and it must be such that the party to whom it is offered is bound to understand therefrom that, if he takes it, he takes it subject to such conditions. The mere fact that the creditor receives less than the amount of his claim, with knowledge that the debtor claims to be indebted to him only to the extent of the payment made, does not necessarily establish an accord and satisfaction.” 

Spada Distributors Co. v. Frank KenworthyCo., 17 Agric. Dec. 347 (1958). (emphasis added).  Quoted in Mendelson-Zeller Co. v. The Season Produce Co., 31 Agric. Dec. 1288 (1972).

Clear and CONSPICUOUS terms required

Words: “This check is in settlement of the following invoices: . . .” and words: “This check is in settlement of the following. If incorrect please return.” did NOT constitute clearly conditional tender.  Half Moon Fruit & Produce Co. v. North American Produce, 40 Agric. Dec. 1610 (1981) (emphasis added); Harvitz Brothers v. David Goldsamt, 20 Agric. Dec. 391 (1961).

Words: “Payment in Full” or “similar words” held effective. Kelman Farms v. Bushman Brokerage, 34 Agric. Dec. 1146 (1975) (emphasis added); Southmost Vegetable Co-Op v. M. & G. Tomato, 28 Agric. Dec. 966 (1969); Johnson & Allen v. Fernandez Bros., 27 Agric. Dec. 1127 (1968); Zinno v. Marvin, 24 Agric. Dec. 396 (1965); National Produce Distributors, Inc. v. Stewart Produce, 21 Agric. Dec. 955 (1962) [Transaction lacked bona fide dispute, and check was not offered in good faith where accord language was pre-printed on the check].

Where a partial payment check was tendered on the condition that it be accepted as payment in full, but debtor did not specify to what debt it was to be applied, and there were several open accounts at the time of tender, creditor was within its rights when it applied the payment to an open freight bill, and no accord and satisfaction of the produce debt was accomplished. Jody DeSomma d/b/a Impact Brokerage v. All World Farms, Inc., 61 Agric. Dec. 821 (2002).

Bona Fide Dispute Required!

One of the biggest misuses of restrictive endorsements arise from the mistaken belief that placing a restrictive endorsement on all checks as a matter of company policy provides some benefit if a unknowing recipient deposits a partial payment.  NOT TRUE!  There must be a bona fide or good faith dispute that the partial payment is intended to resolve.  A “gotcha” move will not carry the day and will be resolved in the payee’s favor.

Although respondent’s partial payment checks stated that the checks were tendered as payment in full, it was found that no accord and satisfaction existed as to several transactions because respondent had not proven that a dispute existed between the parties as to such transactions.   Eustis Fruit Company, Inc. v. The Auster Company, Inc., 51 Agric. Dec. 865 (1992).  Where a Respondent presented evidence of a breach by the Complainant this was not enough to show that there had been a dispute.  Richard Ruiz v. Pacific Sun Produce Co., 48 Agric. Dec. 1105 (1989).

Good Faith Tender As Full Payment Necessary

Debtor tendered payment in one check for six produce transactions. Four of the transactions were undisputed, and the check covered these transactions in their full amount. The remaining two transactions were disputed, and as to these the check tendered only partial payment. The creditor negotiated the check, and then sought to recover the balance alleged due on the disputed transactions. The debtor pled accord and satisfaction. It was held that the good faith tender requirement of UCC 3-311 would not be met by such a check, especially in view of the “full payment promptly” requirement of the Act and Regulations. Lindemann Produce, Inc. v. ABC Fresh Mktg., Inc., et al., 57 Agric. Dec. 7389 (1998).

In C. H. Robinson Company v.TrademarkProduce, Inc., 53 Agric. Dec. 1861 (1994) the words “Full and Final Payment” were pre-printed on all of respondent’s checks in very small type.  Referencing Official Comment 4 to UCC Section 3-311 it was held that the requirement of “good faith tender” had not been met, and there was no accord and satisfaction.

Although respondent’s partial payment checks stated that the checks were tendered as payment in full, it was found that no accord and satisfaction existed as to one transaction because there was no manifested intent that the payment should apply to all the items on the invoice where respondent paid in full for one of the types of fruit.  Eustis Fruit Company, Inc. v. The Auster Company, Inc., 51 Agric. Dec. 865 (1992).

Return the Check!

Under UCC  Section 3-311 the return within 90 days of an amount paid in full satisfaction of a claim disputed in good faith precludes the discharge of the claim.  Pacific Tomato Growers, LTD v. American Banana Co., Inc., 60 Agric. Dec. 352 (2001).  Simply put, you must return the check containing a restrictive endorsement to the sender within 90 days of your receipt.  If you keep it as a partial payment you will be deemed to have accepted full payment.

BEST PRACTICES

• If you use a lock box service to receive payments, consider notifying your bank in writing not to deposit any checks containing a restrictive endorsement.  Instead, these checks should be forwarded directly to the company for assessment.
• If you place a restrictive endorsement on a check, use the correct terminology and make it CONSPICUOUS. 
• Do not bundle or combine payment for both disputed and undisputed invoices.  You may lose the benefit of the restrictive endorsement if there is not a bona fide dispute. 
• Always reference the disputed invoice the check is intended to resolve.
• Be prepared to return the partial payment if you are not willing to accept it as full payment.
• Return the check in a timely manner and include a cover letter articulating your position.
• Don’t deposit checks containing a restrictive endorsement until you have assessed the situation.

The law does not recognize “Price After Sale” terms…

Neither the UCC nor the PACA recognize the term “Price After Sale“.  The term is a subcategory of “Open Price.”  A.P.S. Marketing, Inc. v. R.S. Hanline & Co., Inc., 59 Agric. 154 Dec. 407 (2000), Sucasa Produce v. A.P.S. Marketing, Inc., 59 Agric. Dec. 421 (2000), and Well Pict, Inc. v. Ag-West Growers, Inc., 39 Agric. Dec. 1221, 1227-1228 (1980).

See Eustis Fruit Co., Inc. v. The Auster Co., Inc., 51 Agric. Dec. 865 at 877 (1991) (“The term “price after sale” usually contemplates the parties agreeing to a price following the prompt resale of the produce. Such a sale is either f.o.b., delivered, or some variation thereof, in accordance with the agreement of the parties.  If the parties do not specify f.o.b. or delivered then the Department assumes that the sale is f.o.b.”); Bonanza Farms, Inc. v. Tom Lange Co., Inc., 51 Agric. Dec. 839 at 846 (1991); M. Offutt Co., Inc. v. Caruso Produce, Inc., 49 Agric. Dec. 596 (1990).

Here is what you meant to say… “OPEN PRICE TERM”

UCC 2-305(1) defines an “Open Price Term” as follows:

(1) The parties, if they so intend, can conclude a contract for sale even though the price is not settled. 

This first section means that a valid and enforceable contract may exist for the sale of goods even if the parties have not settled on an agreed price term.  If the parties fail to agree upon a fixed price, the price will be set at a “reasonable price” and the question becomes: “what is a reasonable price?” 

Under UCC 2-305(1), the price is a reasonable price at the time for delivery if:

(a) nothing is said as to price (i.e. no party timely objects); or

(b) the price is left to be agreed by the parties and they fail to agree; or

(c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.

Here are some examples of how the USDA deals with Open Price Term cases:

“Open Price” assumes parties will negotiate a price after the goods are sold.  If they do not the reasonable value of the goods should be imputed.  A.P.S. Marketing, Inc. v. R.S. Hanline & Co., Inc., 59 Agric. Dec. 407 (2000), and J. Macchiaroli Fruit Co. v. Ben Gatz Co., 38 Agric. Dec. 565 (1979).  See also Anonymous, 5 Agric. Dec. 494 (1946).

The buyer cannot expect a seller to share in any losses which might be incurred in an open sale.  Sharyland L.P. d/b/a Plantation Produce v. C.H. Robinson Company, 55 Agric. Dec. 1341 (1996).   (emphasis added).

The term “open” is a generic term used to describe a SALE without a price being agreed to when the contract is first made.  Other similar terms, which all fit under the generic term “open“ are:

•  “price after sale”
• “price arrival”
• “deferred billing”
• “price after”  

These terms should be examined with care because they do not all have the same meaning. 

• “price after sale” usually means that the parties will agree to a price after the buyer completes its resales at destination.
• “price arrival” means that the parties will agree on a price when the goods arrive at destination after opportunity for inspection (see 7 C.F.R. 46.43 (cc)).

The terms “price after” and “deferred billing” are so vague that one must look solely to the context of the transaction and perhaps guess at what the parties intended.  See Eustis Fruit Co., Inc. v. The Auster Co., Inc., 51 Agric. Dec. 865 at 877 (1991) (The term “price after sale” usually contemplates the parties agreeing to a price following the prompt resale of the produce.  Such a sale is either f.o.b., delivered, or some variation thereof, in accordance with the agreement of the parties. If the parties do not specify f.o.b. or delivered then the Department assumes that the sale is f.o.b.).  See also Bonanza Farms, Inc. v. Tom Lange Co., Inc., 51 Agric. Dec. 839 at 846 (1991); M. Offutt Co., Inc. v. Caruso Produce, Inc., 49 Agric. Dec. 596 (1990); Dennis Produce Sales, Inc. v. Caruso-Ciresi, Inc., 42 Agric. Dec. 178 (1983); Northwest Fruit Sales v. The Norinsberg Corporation, 39 Agric. Dec. 1556 (1980); and Slayman Fruit Co. v. Wholesale Produce Supply, Inc., 30 Agric. Dec. 1751 (1971).

TAKE AWAY…

The KEY point here is that WORD CHOICE matters.  It is perfectly acceptable to use Open Terms on sales contracts, but clear and unambiguous language is needed.  Buyers bear the risk here… Don’t accept questionable language about price terms from your suppliers.  Vague terms should be deemed a red flag and steps should be taken as early as practicable to clarify the open terms.

A buyer’s failure to clearly define its open term contracts invites disputes about reasonable prices.  To this end, the USDA will not make a seller share in any losses.  So, if you have a deal to move distressed produce… the terms of that deal better be clear or the seller will assume all the risk.  You know what they say, no good deed goes un-punished.

Words produce buyers should NOT rely upon…

Use of words such as “work out the load“or “sell the product and we will settle at a later date” by the seller are NOT sufficiently specific to constitute an authorization that the buyer handle the produce on consignment.  Granada Marketing, Inc. v. Jos. Notarianni & Co., Inc., 47 Agric. Dec. 329 (1988); Royal Packing Co. v. William D. Class, Jr. d/b/a W.D. Class & Son, 42 Agric. Dec. 2077 (1983); B&L Produce of Arizona v. Mim’s Produce, 37 Agric. Dec. 201 (1978).

Similarly, “do the best you can” does NOT constitute permission to handle on consignment.  Relan Produce Farms v. Rushton & Co., 38 Agric. Dec. 1636 (1979); B & L Produce, Inc. v. Harry Becker Produce Co., 36 Agric. Dec. 913 (1977); Barkley Company of Arizona v. Ifsco, Inc., 31 Agric. Dec. 279 (1972).

Nor does:

“the buyer should work it out.” See Frank Gaglione & Sons v. Theron Hooker Co., 30 Agric. Dec. 528 (1971).

or “handle best possible” or “handle to best advantage.” See Ralph Samsel v. L. Gillarde Sons Co., 19 Agric. Dec. 374 (1960).

or “handle” or “open.”   See Ronnie Carmack v. Delbert E. Selvidge, 51 Agric. Dec. 892 (1992).

or respondent “should keep the shipment, [and] do with it what respondent could. . ..”  See Chiquita Brands, Inc. v. Joseph Williams, Jr. Co. Inc., 45 Agric. Dec. 374 (1986).

Still further, the phrase “customer will keep + Work Out” did NOT signify an agreement that the load could be handled on a consignment basis.   See The Lionheart Group, Inc. v. Sy Katz Produce, Inc., 59 Agric. Dec. 449 (2000).

Buyer’s Obligation to Modify Agreement or Reject Produce

When a buyer is seeking permission from the seller to sell a troubled load of produce on a price after sale (“PAS”) basis the buyer must take steps to ensure that the parties’ fixed price agreement (e.g. the invoice) is modified.

To convert a fixed price term agreement to PAS terms, the buyer must obtain clear, definite and unequivocal authorization from the seller.  Absent such authority, the Seller may successfully enforce the terms of its fixed price invoice and they buyer may have lost the opportunity to properly reject the produce or otherwise protect itself.

Is Unloading Produce an Act of Acceptance?

As a general rule, the unloading or partial unloading of the transport is an act of acceptance.  UCC 2-606(1) (c).  See also 7 C.F.R. 46.2 (dd)(1).

M. J. Duer & Co., Inc. v. The J. F. Sanson & Sons Co. and C. H. Robinson Co., 49 Agric. Dec. 620 (1990); Jim Hronis & Sons v. M. Pagano & Sons, Inc., 46 Agric. Dec. 1010 (1987); Harvest Fresh Produce, Inc. v. Clark-Ehre Produce Co., 39 Agric. Dec. 703 (1980); Crown Orchard Co. v. Mid – Valley Prod. Corp., 34 Agric. Dec. 1381 at 1385 (1975); Theron Hooker Co. v. Ben Gatz Co., 30 Agric. Dec.1109 (1971); Conn & Scalise Co., Inc. v. Frank J. Crivella & Co., Inc., 20 Agric. Dec. 415 (1961); Charles P. Tatt Fruit Co. v. Mac’s Produce, 9 Agric. Dec. 802 (1950).

Where tomatoes were unloaded prior to inspection, and Respondent, after seeing the results of the inspection, notified Complainant that the load was being rejected, it was held that Respondent’s attempted rejection was illegal and ineffective because the unloading of the tomatoes amounted to an acceptance.  J&J Produce Co., Inc. v. Weis-Buy Services, Inc., 58 Agric. Dec. 1095 (1999).

Where Respondent gave notice of rejection following the unloading of produce the rejection was ineffective, and the load was deemed to have been accepted. The Lionheart Group, Inc. v. Sy Katz Produce, Inc., 59 Agric. Dec. 449 (2000).

WHEN UNLOADING IS NOT AN ACCEPTANCE

Where Complainant was notified prior to unloading and specifically requested an unrestricted inspection.  Under limited circumstances such as unloading for the purpose of inspection or to retrieve other produce from the nose of the truck, and where the product is then placed back on the truck within a reasonable time, unloading will not be deemed an acceptance.  Pope Packing & Sales v. Santa Fe Veg. Growers Coop. A’ssn., 38 Agric. Dec. 101 (1979).

USDA Practice Tip – Single Transaction Rule

A produce buyer is not at liberty to breach a contract with a produce seller via nonpayment on an invoice simply because the buyer perceives that a seller is indebted to them.  A buyer who accepts produce becomes liable to the seller for the full purchase price thereof, less any damage resulting from any breach of contract by the seller.  Ocean Breeze Export, Inc. v. Rialto Distributing, Inc., 60 Agric. Dec. 840 (2001)(emphasis added).  

An offset is not a defense to a buyer’s non-payment.  See Standard Fruit & Steamship Company v. Jos. Notarianni & Company, Inc., 41 Agric. Dec. 1425 (1982)(finding the buyer defenseless against a seller’s unpaid invoice claim and holding that the buyer owed the gross invoice amount, unless it can prove offsetting credits. )

What does this mean?  Every produce transaction/file must stand on its own.  It also means that a buyer cannot justify its failure to make full payment promptly under the Perishable Agricultural Commodities Act simply because the seller may owe the buyer some amount on an unrelated produce transaction/file.