Please stop by Booth # 840 and visit Jason Klinowski of Freeborn & Peters. Members of our Food Industry Team will be on hand to greet everyone. Come see us!
PACA Trust Litigation Alert
On April 23, 2013, a civil action was filed in Florida against Old Fashion Honey Corp. d/b/a U.S. Food Logistics in an effort to collect about $465,670.00 in alleged PACA trust debt.
On April 24, 2013, a civil action was filed in California against Producers Choice…
On March 6, 2013, East Coast Brokers & Packers, Inc. (“East Coast Brokers”) filed a Ch. 11 bankruptcy in the Middle District of Florida. Along with East Coast Brokers, Circle M Ranch, Inc., Ruskin Vegetable Corporation, Oakwood Place, Inc. and both Batista J. Madonia, Sr. and Evelyn M. Madonia all filed for bankruptcy protection. The Debtors are currently seeking the Court’s permission to administer all of the separately filed bankruptcy cases jointly.
Although the Debtors have not (as of the time of this entry) filed their schedules or list of top 20 creditors, court documents show that all of the debtors are “closely intertwined” and that the Madonias own at least 20% of the shares for each of the entities listed above. The Debtors did acknowledge that they owe “significant debts” and cited MetLife Agricultural Investments as an example of a creditor to whom they owe about $46 Million. The Debtors’ court documents also acknowledged owing money to Anthony Marano Company, Crop Production, and Triangle Chemical.
For those of you familiar with East Coast Brokers and the Madonias, you may remember that various news sources reported that East Coast “quit tomatoes” back in December of 2012 and that they owed “more than $15 million in judgments and liens to state and federal governments and crop production services.” At that time, Anthony Marano Company was reported to hold a $5.6 million dollar lien against East Coast Brokers.” See East Coast Brokers Quit Tomatoes
Counsel for East Coast Brokers should be filing various first day motions and the balance of its schedules in the very near future. These filings will contain additional information. Right now, we know that claims are due on May 20, 2013.
The FDA recently issued a revised industry guidance document titled: What You Need to Know About Administrative Detention of Foods Small Entity Compliance. Utilizing a question and answer format, this industry guidance document contains some valuable information. Here are some of the highlights you need to know:
Why is administrative detention needed?
Administrative detention provides a means through which FDA can hold adulterated or misbranded food and prevent it from reaching the marketplace, thus further enhancing FDA’s ability to ensure the safety of food for U.S. consumers.
What food is subject to administrative detention?
The term food refers to (1) articles used for food or drink for man or other animals, (2) chewing gum, and (3) articles used for components of any such article (section 201(f) of the FD&C Act [21 U.S.C. § 321(f)]). The term food also refers to dietary supplements, which are to be treated as food under the FD&C Act (section 201(ff) [21 U.S.C. § 321(ff)]).
How long may FDA administratively detain an article of food?
FDA may detain an article of food for a reasonable period, not to exceed 20 calendar days, after the detention order is issued. However, an article of food may be detained for 10 additional calendar days if a greater period of time is required to institute a seizure or injunction action. The entire detention period may not exceed 30 calendar days (21 CFR 1.379).
What criteria does FDA use to order an administrative detention?
An officer or qualified employee of FDA may order the administrative detention of any article of food that is found during an inspection, examination, or investigation under the FD&C Act if the officer or qualified employee has reason to believe that the article of food is adulterated or misbranded (21 CFR 1.378).
May an administratively detained article of food be delivered to another entity or transferred to another location?
It is a prohibited act under section 301(bb) of the FD&C Act [21 U.S.C. 331(bb)] to transfer an article of food subject to an administrative detention order and/or to alter or remove any mark or label that identifies an article of food as administratively detained.
Can an administrative detention order be modified?
FDA may approve a request for modification of an administrative detention order to allow for the destruction of the article of food or movement of the detained article of food to a secure facility, to maintain or preserve the integrity or quality of the article of food, or for any other purpose that the authorized FDA representative believes is appropriate in the case (21 CFR 1.381(c)).
What’s the difference between an import detention and administrative detention?
FDA’s authority to administratively detain food under section 304(h) of the FD&C Act [21 U.S.C. 334(h)] is separate and distinct from detention that may occur during FDA’s import admissibility review. Under section 801(a) of the FD&C Act [21 U.S.C. 334(h)], when food is imported or offered for import into the United States, FDA conducts an admissibility review to determined whether to admit the product into United States or detain the product.
On the other hand for administrative detentions under section 304(h) of the FD&C Act, FDA will issue an order to the owner of the suspect food notifying him that FDA is administratively detaining the food and that he has an opportunity to appeal the detention with or without a hearing (see 21 CFR Part 1 Subpart K).
When does an administrative detention order terminate?
If FDA terminates an administrative detention order or the detention period expires, an authorized FDA representative will issue an administrative detention termination notice to any person who received the detention order (or that person’s representative), releasing the article of food, as quickly as possible. If FDA fails to issue an administrative detention termination notice and the detention period expires, the administrative detention is deemed to be terminated (21 CFR 1.384).
Who pays the costs associated with the detention order, such as storage, moving, disposal or reconditioning?
As stated in the preamble to the 2004 final rule (69 Federal Register 31659 at 31690), the party or parties responsible for paying the storage costs of food that FDA orders administratively detained is a matter between the private parties involved with the food. FDA is not liable for those costs. An owner, operator, or agent in charge of the place where the food is located can always request modification of a detention order to destroy the food if they do not want to store it.
Please take the time to read the entire guidance document. It contains information about your rights and other deadlines that become very important if your product is administratively detained.
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:
- The scope of the PACA trust covers the debtor’s cash collateral as a matter of law
- PACA trust assets are not property of the debtor’s estate
- The debtor cannot use non-estate property as cash collateral
- 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.)
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.
On February 28, 2013, a civil action was filed in California against Great Pacific, Inc. in an effort to collect approximately $511,000.00 in alleged PACA trust debt.
On February 28, 2013, a civil action was filed in New Jersey against Fresh Marketing, Inc. in an effort to collect approximately $89,500.00 in alleged PACA trust debt.
On March 1, 2013, a civil action was filed in California against Gil Angelo Bautista d/b/a Marina Farms in an effort to collect approximately $44,000.00 in alleged PACA trust debt.
On March 1, 2013, a civil action was filed in California against H.P. Skolnick, Inc. t/a Imperial Frozen Foods in an effort to collect an undisclosed amount of alleged PACA trust debt.
On March 1, 2013, a civil action was filed in Illinois against Timothy J. Galderio in an effort to collect approximately $246,400.00 in alleged PACA trust debt.
On March 1, 2013, a civil action was filed in New Jersey against WM Consalo & Sons Farms, Inc. in an effort to collect approximately $38,000.00 in alleged PACA trust debt.
Please check your A/R to see if these cases affect you. If they do, please do not wait to assert your rights.
The bankruptcy court entered an order on March 1, 2013 authorizing Bissett Produce to utilize its cash collateral in order to incur certain operating expenses anticipated in relation to a wind down of its operations. According to court documents, at the time of its Chapter 11 filing, Bissett Produce said it owed liabilities of nearly $5.5 million, with $2.1 million of that amount due to secured creditors and the remaining $3.4 million owed to unsecured creditors, including claims held by several farms located in North Carolina.
Importantly, Bissett Produce has neither established any type of carve out to pay PACA trust creditors nor filed any motion seeking to establish a PACA trust claims procedure. Rather, Bissett Produce simply asked the Court to allow it to use its cash collateral to pay pre-petition wages and to fund the wind down of the business. In essence, the defunct entity seeks to use assets, which most likely include PACA trust assets, to pay professionals, employee wages and other operating expenses without regard to any trust obligations that may exist. This is exactly the type of situation that requires an immediate objection to the Debtor’s continued use of cash collateral so that the PACA trust may be protected. Until the PACA trust is preserved and the unpaid suppliers of produce paid in full, there may not be an estate to administer.
Industry Note: Bankruptcy cases often move quickly with numerous motions filed on the very first day the case is open. Because of this, produce companies would be well advised to get involved in these types of cases early and take the steps needed to ensure trust assets are not placed out of the reach.
On March 27, 2013, substantially all of Eurofresh’s assets will go to auction and, as it stands right now, NatureSweet has emerged as the stalking horse bidder (through Zona Acquisition) with an opening bid of $51.18 million dollars.
Eurofresh, which filed its Chapter 11 petition January 27, 2013, claims it is America’s largest greenhouse grower, spanning 318 acres of facilities. Its products include tomatoes on the vine, as well as roma, campari, beefsteak and grape tomatoes and long English and “mini” cucumbers. Eurofresh markets its products directly to major U.S. food retailers under the label “Eurofresh Farms” and “Sweet Star.” The debtor also claims its flagship facility in Wilcox, AZ is the largest single-site commercial greenhouse operation in the world with six of its greenhouses covering 274 acres. Eurofresh also operates a small wholesale business under the label Garden Fresh Selections out of a facility in Nogales, AZ that imports various types of produce from Mexico, packages that produce and then sells that produce through brokers in various wholesale channels and operates a small maquiladora facility in Agua Prieta, Mexico where some of its products are packaged.
In documents provided to the Court, Eurofresh emerged from a Chapter 11 bankruptcy in November of 2009 that resulted from a highly leveraged balance sheet, high interest rates, high energy prices and various operating issues. Importantly, Eurofresh stated that it also faced widespread pricing declines in the industry resulting from increased competitor greenhouse acreage and “shade” tomatoes crossing the border from Mexico.
To a savvy purchaser (like NatureSweet), Eurofresh is a smart acquisition! Operating issues can be resolved and the U.S. Department of Commerce is set to remedy (or at least significantly lessen) the tomato pricing decline issue as it relates to Mexico. Specifically, the new Tomato Suspension Agreement was set to take effect on March 4, 2013 and that agreement carries a 42.9% increase in the minimum price for Mexican tomatoes sold into the United States’ fresh tomato market.
When this agreement becomes effective, Eurofresh and other domestic tomato companies in the fresh produce industry will be able to increase their prices without fear of losing business to Mexican growers. As it applies to the sale of Eurofresh, the company seems to be positioned to benefit from this new agreement by gaining the ability to increase its prices without any corresponding increase in capital investments.
As I see it, this means one of two things:
(1) There should be no real reason Eurofresh cannot successfully reorganize and pay all of its creditors as it emerges from its newly filed Chapter 11 bankruptcy.
(2) NatureSweet should be applauded for positioning itself to purchase substantially all of Eurofresh’s assets (Sec. 363 Sale) in time to reap the benefits that come with the ability to increase its fresh tomato prices by about 42.9% when the new suspension agreement becomes effective, which the U.S. Department of Commerce planned on announcing March 4, 2013.
On February 20, 2013, a civil action was filed in South Carolina against Paramount Produce in an effort to collect approximately $74,400.00 in alleged PACA trust debt.
On February 20, 2013, a civil action was filed in Massachusetts against Banana Joe’s Farm Stand and Deli, Inc. in an effort to collect approximately $10,800.00 in alleged PACA trust debt.
On February 19, 2013, a civil action was filed in New Jersey against Newland North America Foods, Inc. in an effort to collect approximately $343,300.00 in alleged PACA trust debt.
On February 19, 2013, a civil action was filed in Missouri against Garrison’s Garden Market in an effort to collect approximately $9,200.00 in alleged PACA trust debt.
Please check your A/R to see if these cases affect you. If they do, please do not wait to assert your rights.