Many years ago I wrote a piece in the California Bankruptcy Court Reporter on the Perishable Agricultural Commodities Act and bankruptcy. That particular journal seems not to have survived notwithstanding my modest contribution but you can still read the text of what I wrote here. PACA was Congress's response to the plight of farmers who don't get paid for their crops. (Why Congress chose to give super-priority status to unpaid farmers and not, say, to hubcap manufacturers, speaks to the power of the farm lobby in 1930.)
PACA imposes a statutory "trust" on the farm products and their proceeds. In other words, if the buyer/dealer doesn't pay, the seller/farmer can take back her commodities and grab any money and accounts the buyer still has from the resale of the stuff. As an attorney who represented banks and other secured lenders, another power granted to farmers by PACA stood out: their trust claims had priority over secured claims. This was a big deal because it effectively reduced the amount that buyer/dealers could borrow and required a bank to be extra-diligent to monitor the finances of its dealer/borrower.
A recent federal case illustrates one more weapon in the PACA sheath: individual shareholders, officers, and directors of a corporate buyer/dealer who let it fail to pay the farmer are personally liable for breach of trust. This is a really, really big deal because such claims can be enormous and will likely not be dischargeable in bankruptcy. Onions, Inc. v. Z&S Fresh, Inc., 2011 WL 3348039 (E.D. Cal.) shows that even kindly, retired, former shareholders, officers, and directors of a corporation whose shares were sold to an unscrupulous co-owner might be on the hook.
Loren and Marge Schoenburg together with Martin Zaninovich owned Z&S Fresh. Z&S had bought and sold agricultural produce since 1985. The Schoenburgs sold their 50% interest in Z&S to Zaninovich in 2008 but, unknown to them, remained as directors on Z&S's records. The Schoenburgs continued to draw salaries at the minimum to permit them to continue to get health insurance as employees of Z&S.
Together with a few other incidents of management, these facts were enough to get the Schoenburgs on the wrong side of a series of lawsuits by unpaid farmers for over $4 million. The Schoenburgs managed to defeat motions for summary judgment, which means they'll get to spend even more in attorneys' fees with a downside risk of $4 million and no upside.
Were the Schoenburgs represented by counsel when they sold their stock to Zaninovich? Was s/he competent? Is there a malpractice suit waiting to be filed? I don't know but I am certain that there are more potential mines in the field of transactional practice than many practicing attorneys realize.
Forewarned is forearmed.
PACA imposes a statutory "trust" on the farm products and their proceeds. In other words, if the buyer/dealer doesn't pay, the seller/farmer can take back her commodities and grab any money and accounts the buyer still has from the resale of the stuff. As an attorney who represented banks and other secured lenders, another power granted to farmers by PACA stood out: their trust claims had priority over secured claims. This was a big deal because it effectively reduced the amount that buyer/dealers could borrow and required a bank to be extra-diligent to monitor the finances of its dealer/borrower.
A recent federal case illustrates one more weapon in the PACA sheath: individual shareholders, officers, and directors of a corporate buyer/dealer who let it fail to pay the farmer are personally liable for breach of trust. This is a really, really big deal because such claims can be enormous and will likely not be dischargeable in bankruptcy. Onions, Inc. v. Z&S Fresh, Inc., 2011 WL 3348039 (E.D. Cal.) shows that even kindly, retired, former shareholders, officers, and directors of a corporation whose shares were sold to an unscrupulous co-owner might be on the hook.
Loren and Marge Schoenburg together with Martin Zaninovich owned Z&S Fresh. Z&S had bought and sold agricultural produce since 1985. The Schoenburgs sold their 50% interest in Z&S to Zaninovich in 2008 but, unknown to them, remained as directors on Z&S's records. The Schoenburgs continued to draw salaries at the minimum to permit them to continue to get health insurance as employees of Z&S.
Together with a few other incidents of management, these facts were enough to get the Schoenburgs on the wrong side of a series of lawsuits by unpaid farmers for over $4 million. The Schoenburgs managed to defeat motions for summary judgment, which means they'll get to spend even more in attorneys' fees with a downside risk of $4 million and no upside.
Were the Schoenburgs represented by counsel when they sold their stock to Zaninovich? Was s/he competent? Is there a malpractice suit waiting to be filed? I don't know but I am certain that there are more potential mines in the field of transactional practice than many practicing attorneys realize.
Forewarned is forearmed.
No comments:
Post a Comment