Ruby Robinson Co., Inc. v. Herr

Fifth Circuit Court of Appeals, Docket no. 10-20788 (This opinion is unpublished and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.)
In this unpublished opinion, the Fifth Circuit rules that the shareholder of a company engaged in the purchase of perishable agricultural commodities may not avoid liability under general trust principles arising upon application of The Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. §§ 499(a)-499(t), merely by failing to assume responsibilities to which he is entitled, and remains liable for a breach of fiduciary duty so long as he was in a position to control the company's PACA trust assets. Because appellants Herr and Petro were specifically authorized to control certain business and financial matters of their company, and entitled to sit on the company’s board of directors, the fact that they never assumed the responsibilities to which they were entitled did not shield them from personal liability for their failed company's PACA obligations.
Procedural context:
Defendants-Appellants Bryan Herr and Samuel Petro, Jr. appeal the district court’s summary judgment, holding them liable to Intervenor Plaintiff-Appellee NatureBest Pre-Cut & Produce LLC (“NatureBest”) under PACA.
In 2002 Herr and Petro purchased a combined fifty (50) percent interest in Debtor from Kalil, memorialized by a Stock Purchase Agreement. That Agreement entitled Herr and Petro to input and authority regarding which accounts to sell to and on what terms, equipment purchases, major personnel changes, and sales and business strategies. The Agreement further stated that a company board of directors would be established, with Petro, Herr, and Kalil as its members. Kalil was appointed chief executive officer, with day-to-day operating authority. The stock purchase agreement afforded each owner a right to audit the company’s books. Ruby Robinson Co., Inc. v. Herr at p. 2. Debtor failed to segregate and pay its PACA-type obligations and filed Chapter 7 in 2008 with outstanding obligations to several PACA vendors who had supplied the Debtor with produce. Unable to garner full payment from Debtor or the PACA-trust assets (see 7 U.S.C. § 499e(c)(2)), several PACA creditors sought to hold Herr, Petro and Kalil personally liable for those obligations under the general trust principles arising as a result of the trust created under PACA. All of those claims were resolved, with the exception of NatureBest’s claims against Herr and Petro, from whom NatureBest sought the remaining balance of $8,918.82. Id. The District Court granted summary judgment against Herr and Petro, based solely on the Stock Purchase Agreement, concluding that "Herr and Petro are liable under PACA because, even if they did not have actual control of the PACA trust assets, they were shareholders in a position to control those assets and failed to preserve them." Id. at p. 2-3. Herr and Petro appealed, asserting that they had never exercised any of the control afforded them in the Stock Purchase Agreement and were therefore not liable under PACA because they did not have "actual control or dominion over the trust assets." Id. at p. 3. Quoting Golman-Hayden Co. v. Fresh Source Produce Inc., 217 F.3d 348, 350-51 (5th Cir. 2000) (citation omitted) and Hawkins v. Agric. Mktg. Serv., 10 F.3d 1125, 1130 (5th Cir. 1993), the Court noted that "PACA is a 'tough law,' . . . designed in part to protect the producers of perishable agricultural products, most of whom must 'entrust their products to a buyer who may be thousands of miles away, and depend for their payment upon his business acumen and fair dealing.'" The Court further noted that “[a]n investor in a perishable commodities corporation ‘should know at the beginning of his association with such a corporation that he is buying into a corporation which is strictly regulated by the federal government through PACA.’” Id. (quoting Hawkins, 10 F.3d at 1131). Further explaining its holding, the Court stated generally that "PACA liability attaches first to the licensed commission merchant, dealer, or broker of perishable agricultural commodities. If, however, the assets of the licensed commission merchant, dealer, or broker are insufficient to satisfy the PACA liability, then others may be held secondarily liable if they had some role in causing the corporate trustee to commit the breach of trust. Thus, . . . individual shareholders, officers, or directors of a corporation who are in a position to control trust assets, and who breach their fiduciary duty to preserve those assets, may be held personally liable under PACA. Id. Ruby Robinson Co., Inc. v. Herr at p. 3-4. Turning to the two appealing shareholders at bar, the Court ruled that the 2002 Stock Purchase Agreement alone - which granted Herr and Petro authority over certain business and financial matters and entitled them to sit on the Debtor’s board of directors - gave them "legal authority to control the trust assets." Having established the requisite element of control, the Court readily refused to entertain the Appellants' notion that they had sidestepped PACA liability by failing to exercise that control to which they were entitled. The Court concluded by noting that "it is established that a shareholder may not avoid liability under PACA merely by failing to assume responsibilities that he is entitled to." Id. at 4-5 (citing Golman-Hayden, 217 F.3d at 351).

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