Citations
- 188 F. Supp. 3d 1097
Full opinion text
MEMORANDUM OPINION
James 0. Browning, UNITED STATES DISTRICT JUDGE
THIS MATTER comes before the Court on: (i) the Defendants and Third-Party Defendants Hi-Land Potato Company, Ine.’s, and Carl Worley’s Motion for Award of Attorney’s Fees and Costs, filed February 28, 2014 (Doc. 374)(“Motion”); and (ii) Defendant Tan-O-On Marketing, Inc.’s Motion to File Response Out of Time, filed April 8, 2014 (Doc. 382)(“Timing Motion”). The Court held a hearing on July 9, 2014. The primary issues are: (i) whether the Court .has the power under general trust law principles to award attorney’s fees to Defendants and Third-Party Defendants Hi-Land Potato Company, Inc. and Carl Worley, the prevailing parties in this case under the Perishable Agricultural and Commodities Act, 7 U.S.C. §§ 499a-499t (“PACA”); (ii) whether the Court should award attorney’s fees; and (iii) whether the Court should grant Defendant Tan-O-On Marketing’s request to file its response to the Motion out of time. First, the Court will deny the Motion,.The Court concludes that it will not award attorney’s fees, because Hi-Land Potato and Carl Worley do not have a contractual or statutory right to attorney’s fees, and general trust law principles do not support the award of attorney’s fees under the circumstances of this case. Second, the Court -will grant the Timing Motion.
FACTUAL BACKGROUND
The Court has explained the facts of this ease in four prior Memorandum Opinion and Orders: (i) the Memorandum and Opinion and Order, filed July 4, 2012 (Doc. 214)(“Motion to Amend MOO”), see Skyline Potato Co., Inc. v. Tan-O-On Mktg., Inc., 879 F.Supp.2d 1228 1233-34 (D.N.M.2012); (ii) the Memorandum Opinion and Order, filed June 12, 2012 (Doc. 189) see Skyline Potato Co., Inc. v. Tan-O-On Mktg., Inc., CIV 10-0698 JB/RHS, 2012 WL 2384087, at**1-4 (D.N.M. June 12, 2012); (iii) the Memorandum Opinion and Order, filed October 12, 2012 (Doc 101); and (iv) the Memorandum and Opinion and Order, filed Dec. 6, 2012 (Doc. 331), see Skyline Potato Co., Inc. v. Tan-O-On Mktg., Inc., 909 F.Supp.2d 1225, 1230-37 (D.N.M.2012). The Court will therefore integrate those facts herein by reference, and not repeat them. The Court will restate only some facts that are needed to evaluate and provide context to the Motion.
• This lawsuit arises from Defendant Tan-O-On Marketing’s failure to pay Plaintiff Skyline Potato Company, Inc. (“Skyline Potato”), and Intervening Plaintiffs Folson Farm Corporation, Mark Produce Corporation, Billingsley Produce Sales, Inc., Al-sum Produce, Inc., and Peterson Bros. River Valley Farms, Inc. (collectively the “Folson Farm Group”) for sales of potatoes they made to Tan-O-On Marketing between October and December, 2009. During that time period, Tan-O-On Marketing paid Hi-Land Potato for potatoes that Hi-Land Potato shipped to customers between October and December, 2009. The invoices that Billingsley Produce provided to Tan-O-On Marketing during that time period included the following language:
The perishable agricultural commodities listed bn this invoice are sold subject to the statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. § 499e(c)). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.
MISCELLANEOUS TERMS.
Should any action be commenced between the parties to this contract concerning the sums due hereunder or the rights and duties of any party hereto or the interpretation of this contract, the prevailing party in such action shall be entitled to, in addition to such other relief as may be granted, an award as and for the actual attorney’s fees and costs in bringing such action and/or enforcing any judgment therein.
1.5% per month will be charged on past due accounts (18% annual percentage rate). Plaintiff and Intervening Plaintiffs’ Joint Motion for Partial Summary Judgment and Incorporated Memorandum of Law, filed August 8, 2012 (Doc. 253-6)(“Billingsley Produce invoice”) at 11. The invoices that Mart Produce provided to Tan-O-On Marketing during that time period included the following language:
In compliance with the PACA TRUST, our terms are invoices due 10 days after shipment. The perishable commodities listed on this invoice are sold subject to the statutory trust authorized by section 5(c) of the P.A.C.A., 1980 (7 U.S.C. § 499e(c)). The seller of these commodities retains a trust claim over there commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until payment in full is received. Not responsible for claims for shortage, damage, shrinkage, or any other allowances unless presented to us with all the proper papers within 24 hours after arrival of the goods and proper notation is made on freight bill at the time of unloading. In the event legal action is commenced to collect the sums due under this invoice, the prevailing party shall bfe entitled to recover all court costs and attorney fees incurred thereby as damages in addition to any principal balance then remaining due.
Plaintiff and Intervening Plaintiffs’ Joint Motion for Partial Summary Judgment arid Incorporated Memorandum of Law, filed August 8, 2012 (Doc. 253-7)(“Mart Produce invoice”) at 9.
PROCEDURAL HISTORY
Skyline Potato and the Folson Farm Group allege that Tan-O-On Marketing, Inc. accepted delivery of Skyline Potato’s and the Folson Farm Group’s produce, and delivered the potatoes to various buyers, but did not pay Skyline Potato and the Folson Farm Group for the produce. See Petition for Enforcement of USDA PACA Order and Award of Damages; Complaint for Violation of Federal Unfair Trade Practices Provision in PACA (7 USC [sic] 499b), Breach of Contract, Breach of Covenant of Good Faith and Fair Dealing, Fraud, Money Owed on Open Account, and Prayer for Declaratory Relief and Piercing of the Corporate Veil ¶¶ 22-25, at 5, filed July 23, 2010 (Doc. 2)(“Skyline Complaint”); Complaint in Intervention ¶¶ 7-16, at 4-6, filed July 8, 2011 (Doc. 60)(“Folson Farm Group Complaint”). Skyline Potato alleges that Hi-Land Potato and Carl Wor-ley are liable for the same amount and on the same counts, because “Tan-O-On was acquired by Hi-Land Potato Company, Inc.” Skyline Complaint ¶ 7, at 3. The Fol-son Farm Group alleges that Hi-Land Potato is liable to them for payment for the produce that they delivered to Tan-O-On Marketing, because Hi-Land Potato and Worley received assets and retained those assets, which were assets of the statutory trust created pursuant to § 499e of PACA. See Folson Farm Group Complaint ¶¶ 40-44, at 10-11. Tan-O-On Marketing alleges that Hi-Land Potato and Worley misappropriated its Kroger Co. vender number, and in the process, took over Tan-O-On Marketing’s business operation. See Response to Motion to Dismiss Fraud Claims, filed Jan. 23, 2012 (Doc. 96). The Court entered its Final Judgment, together with its Findings of Fact, Conclusions of Law, and Order on January 31, 2014. See Final Judgment, filed January 31, 2014 (Doc. 373); Findings of Fact, Conclusions of Law, and Order, filed January 31, 2014 (Doc. 372). In its Findings of Fact, Conclusions of Law, and Order and Final Judgment, the Court ruled that Hi-Land Potato and Worley were not liable to Skyline Potato or to-the Folson Farm Group for PACA violations. The Court also ruled that neither Hi-Land Potato nor Worley were liable to Tan-O-On Marketing or to the Andersons for theft of trade secrets, fraudulent conveyance, or unjust enrichment. The Court’s ruling terminated this case. Hi-Land Potato and Carl Worley now ask the Court to award attorney’s fees against Tan-O-On Marketing, the Andersons, Skyline Potato, and the Folson Farm Group.
1. Skyline Potato’s Claims.
In Skyline Potato’s Petition for Enforcement of USDA PACA Order and Award of Damages; Complaint for Violation of Federal Unfair Trade Practices Provision in PACA (7 U.S.C. § 499b), Breach of Contract, Breach of Covenant of Good Faith and Fair Dealing, Fraud, Money Owed on Open Account, and Prayer for Declaratory Relief and Piercing of the Corporate Veil, filed July 23, 2010 (Doc. 2)(“Skyline Potato’s Original Complaint”), it raised the following causes of action, without distinguishing among the Defendants: (i) “Petition for Enforcement of Order and Collection Under the PACA Trust,” Skyline Potato’s Original Complaint at 7-8; (ii) ‘Violation of PACA Unfair Business Conduct Provision,” Skyline Potato’s Original Complaint at 9; (iii) “Breach of Written Contract,” Skyline Potato’s Original Complaint at 9-10; (iv) “Breach of Implied Covenants of Good Faith and Fair Dealing,” Skyline Potato’s Original Complaint at 10-12; (v) “Quantum Meruit,” Skyline Potato’s Original Complaint at 12; (vi) “Conversion,” Skyline Potato’s Original Complaint at 12; (vii) “Fraud,” Skyline Potato’s Original Complaint at 13-14; (viii) “Money Due on an Open Account,” Skyline Potato’s Original Complaint at 14-15; and (ix) “Prayer for the Remedy of ‘Piercing the Corporate Veil,’ ” Skyline Potato’s Original Complaint at 15-16. Skyline Potato named the following entities as the Defendants: Tan-O-On Marketing, Hi-Land Potato, G, Anderson, J. Anderson, Mark Lounsbury, and Bill Metz, in their “individual capacity[ies] and as Director[s]/Shareholder[s] of Tan-Q-On Marketing”; and Carl Worley, individually, “as Director/Shareholder of Tan-O-On Marketing Inc., and as Director/Shareholder of Hi-Land Potato Company.” Skyline Potato’s Original Complaint at 1.
In its Memorandum Opinion and Order, filed January 24, 2011 (Doc. 23)(“MTD MOO”), the Court granted: (i) the Motion to Dismiss as to Defendant Bill Metz, filed September 13, 2010 (Doc. 7); (ii) the Motion to Dismiss as to Defendant Mark Lounsbury, filed September 13, 2010 (Doc. 9); and (iii) the Unopposed Motion to Dismiss Defendants Hiland [sic] Potato Company, Mark Lounsbury, Bill Metz, and Carl Worley Without Prejudice, filed September 22,2010 (Doc. 12), thereby dismissing Bill Metz, Mark Lounsbury, Carl Wor-ley, and Hi-Land Potato. See MTD MOO at 9.
At a hearing held on October 3, 2011, the Court granted Skyline Potato Company’s Opposed Motion for Leave to File Amended Complaint, filed June 7, 2011 (Doc. 54). The Court memorialized this decision in its Memorandum Opinion and Order, filed November 23, 2011 (Doc. 83), and its. Amended Memorandum Opinion and- Order, 278 F.R.D. 628, 629-30 (D.NiM.2011).
In its First Amended Petition and Complaint, Prayer for Declaratory Relief and Piercing of the Corporate Veil, filed October 21, 2011 (Doc. 73)(“Skyline Potato’s First Amended Complaint”), Skyline Potato asserted the following claims, without distinguishing among the Defendants for each claim: (i) “Petition for Enforcement of Order and Collection Under the PACA Trust,”- Skyline Potato’s First Amended Complaint ¶¶ 37-51, at 7-9; (ii) “Violation of PACA Unfair Business Conduct Provision,” Skyline Potato’s First Amended Complaint ¶¶ 52-57, at 9-10; (iii) “Breach of Written Contract,”' Skyline Potato’s First Amended Complaint ¶¶ 58-65, at 10-11; (iv) “Breach of Implied Covenants of Good Faith and Fair Dealing,” Skyline Potato’s First Amended Complaint ¶¶ 66-77, at 11-12; (v) “Quantum Meruit,” Skyline Potato’s First Amended Complaint ¶¶ 78-80, at 12-13; (vi) “Conversion and Unlawful Retention of Plaintiffs Property and PACA Trust Assets,” Skyline Potato’s First Amended Complaint ¶¶ 81-89, at 13-14; (vii) fraud, see Skyline Potato’s First Amended Complaint ¶¶ 90-97, at 14-15; (viii) “Money Due on an Open Account,” Skyline Potato’s First Amended Complaint ¶¶ 98-101, at 15-16; . (ix).. “Violation of PACA-—Failure to Maintain PACA Trust Assets and Creation of a Common Fund,” Skyline Potato’s First Amended Complaint ¶¶ 102-108, at 16-17; (x) fraudulent transfer, see Skyline Potato’s First Amended Complaint ¶¶ 109-115, at 17; (xi) “Constructive Trust,” Skyline Potato’s First Amended Complaint ¶¶ 116-121, at 18; and (xii) “Prayer for the Remedy of ‘Peircing [sic] the Corporate Veil,’ ” Skyline Potato’s First Amended Complaint ¶¶ 122-126, at 19-20. .
The Court entered default judgment on Skyliné Potato’s claims under PACA against Tan-O-On Marketing. See Default Judgment Order at 2, filed March 23, 2012 (Doc. 140).
In the Court’s Stipulated Order , Granting Joint.Motion for Dismissal of Certain Claims by Plaintiff Skyline Potato Company Against Defendant Tan-O-On Marketing, filed April 18, 2012 (Doc. 158)(“-Stipulated Order”), the Court granted the parties’ Joint Motion for Dismissal of Certain Claims by Plaintiff Skyline Potato Company against Defendants Tan-O-On Marketing, Inc.[,] Hi-Land Potato Company, Inc., and Carl Worley, filed April 17, 2012 (Doc. 155), and dismissed a number of claims. As against Tan-O-On Marketing, the Court dismissed Skyline Potato’s claims for: (iv) “Breach of Implied Covenants of Good Faith and Fair Dealing”; (v) “Quantum Meruit”; (vii) fraud; (viii) “Money Due on an Open Account”; (x) fraudulent transfer; (xi) “Constructive Trust”; and (xii) “Prayer ' for Remedy of Piercing the Corporate Veil.” Stipulated Order at 2. Against Hi-Land Potato and Worley, the Court dismissed: (i) “Petition for Enforcement of Order and Collection Under the PACA Trust,” (ii) “Violation of PACA Unfair Business Conduct Provision”; (iii) “Breach of Written Contract”; (iv) “Breach of Implied Covenants of Good Faith and Fair Dealing”; (vii) fraud; (viii) “Money Due on an Open Account”; (ix) “Violation of PACA— Failure to Maintain PACA Trust Assets and Creation of a Common Fund”; and (xii) “Prayer for the Remedy of Piercing the Corporate Veil.” Stipulated Order at 2-3.
In their Stipulation for Voluntary Dismissal of Claims Asserted by Intervening Plaintiff Potandon Produce, L.L.C. Against Défendant Tan-O-On Marketing, Inc. and Third Party Defendants Hi-Land Potato Company, Inc. and Carl Worley, filed April 25, 2012 (Doc. 167)(“Potandon Produce Stipulation”), the parties stipulated to dismiss all of Potandon Produce’s claims against Tan-O-On Marketing, Hi-Land Potato, and Carl Worley. See Potandon Produce Stipulation at 1.
During summary judgment briefing, Skyline Potato abandoned a number of claims. The Court held a hearing on multiple motions for summary judgment on September 27,2012, in which Skyline Potato confirmed that it had abandoned all but the PACA claims. See Transcript of Hearing at 4:20-5:5 (taken September 27, 2012)(Bohnhoff, Court, Jaramillo).
In the Pretrial Order, filed October 18, 2012 (Doc. 315), Skyline Potato and the Folson Farm Group indicated that they brought a claim only with respect to the alleged breach of the PACA trust. See Pretrial Order at 4.
2. The Folson Farm Group.
In their-Complaint in Intervention, filed July 8, 2011 (Doc. 60), Folson Farm, Po-tandon Produce, Mart Produce, Billingsley Produce, Alsum Produce, and Peterson Brothers asserted claims for: (i) “Declaratory Relief Validating PACA Trust Claim” against Tan-O-On Marketing, Complaint in Intervention ¶¶ 6-16, at 4-6; (ii) “Enforcement of Payment From PACA Trust Assets” against Tan-O-On Marketing, Complaint in Intervention ¶¶ 17-21, at 6-7; (iii) “Violation of the PACA: Failure To Maintain PACA Trust Assets and Creation of Common Fund” against Tan-O-On Marketing, Complaint in Intervention ¶¶ 22-28, at 7-8; (iv) “Violation of PACA: Failure to Pay Promptly” against Tan-O-On Marketing, Complaint in Intervention ¶¶ 29-34, at 8-9; (v) breach of contract- against Tan-O-On Marketing, see Complaint in Intervention ¶¶ 35-39, at 9-10; (vi) “Conversion and Unlawful Retention of PACA Trust Assets” against Hi-Land Potato, Complaint in Intervention ¶¶ 40-45, at 10-11; (vii) fraudulent transfer against Hi-Land Potato, see Complaint in Intervention ¶¶ 46-53, at 11-12; (viii) “Constructive Trust” against Hi-Land Potato, Complaint in Intervention ¶¶ 54-58, at 12-13; and (ix) unjust enrichment against Hi-Land Potato, see Complaint in Intervention ¶¶ 59-63, at 13-14.
The Court entered default judgment on the Folson Farm Group’s PACA claims against Tan-O-On Marketing. See Default Judgment at 1-2, filed June 21, 2012 (Doc. 205).
During summary judgment briefing, the parties abandoned a number of claims. The Court held a hearing on multiple motions for summary judgment on September 27, 2012, where the Court recognized, and the Folson Farm Group confirmed, that it had abandoned all but the PACA claims. See Transcript of Hearing at 4:1-9 (taken September 27, 2012)(Court, Esquivel).
In the Pretrial Order, Skyline Potato and the Folson Farm Group indicated that they brought a claim only with respect to the alleged breach of the PACA trust. See Pretrial Order at 4.
3. G. Anderson, J. Anderson, and Tan-O-On Marketing’s Claims.
In G. Anderson and J. Anderson’s Third Party Complaint for Fraud, -filed February 22, 2011 (Doc. 26)(“Andersons’ Complaint”), G. Anderson and J. Anderson purported to assert various fraud claims against Hi-Land Potato and Carl Worley. See Andersons’ Complaint at 1-4.
• In what is labeled on the docket as Tan-O-On ■ Marketing, G. Anderson, and J. Anderson’s Amended Third-Party Complaint for Fraud and Theft of Trade Secrets and Unjust Enrichment, filed October 14, 2011 (Doc. 72), those parties purported to assert, under a single heading, claims for “Fraud, Unjust Enrichment Theft or Conversion of Trade Secrets and Corporate and Personal Assets” against Hi-Land Potato, Worley, and two additional Defendants: RPE, Inc. and Russell Wysocki. Amended Third-Party Complaint at 3.
In its Motion to Amend MOO, the Court granted in part and denied in part: (i) Tan-O-On Marketing’s Motion to Amend Third Party Complaint for Fraud and Theft of Trade Secrets and Unjust Enrichment, filed February 2, 2012 (Doc. 105); and (ii) Defendants Hi-Land Potato Company’s and Worley’s Motion to Dismiss Fraud and Fraud-Related Claims in Third Party Complaint and to Dismiss Claims Filed by Gerald and Julie Anderson in Their Individual Capacities, filed February 7, 2012 (Doc. 109). See Motion to Amend MOO at 67-68, 879 F.Supp.2d at 1274. The Court explained:
The Court will permit Defendant Tan-O-On Marketing to assert only claims for unjust enrichment and theft of trade secrets against Third-Party Defendants RPE, Inc. and Russell Wysocki consistent with the allegations presented in Tan-O-On Marketing’s Second Amended Third Party Complaint for Fraud and Theft of Trade Secrets and Unjust Enrichment and Unfair Trade Practices, filed February 2, 2012 (Doc. 105-1). The Court will not permit Tan-O-On Marketing to assert any other claim against the RPE, Inc. Parties. The Court will not permit Tan-O-On Marketing to assert a common-law fraud claim against Defendants Hi-Land Potato Company and Carl Worley. The Court will not permit Tan-O-On Marketing to assert a claim under the New Mexico Unfair Practices Act, N.M.S.A. 1978, §§ 57-12-1 to -26, against the Hi-Land Potato Parties. The Court will permit Tan-O-On Marketing to assert a fraudulent-conveyance claim against Hi-Land Potato consistent with the fraudulent-conveyance claim presented in Tan-O-On Marketing’s Second Amended Third-Party Complaint. The Court will permit Tan-O-Marketing to assert claims for unjust enrichment and theft of trade secrets against the Hi-Land Potato Parties consistent with the allegations in its Second Amended Third-Party Complaint.
Motion to Amend MOO at 68, 879 F.Supp.2d at 1274.
In their Amended Third Party Complaint for Fraudulent Conveyance and Theft of Trade Secrets and Unjust Enrichment, filed July 26,'2012 (Doc. 240)(“Tan-O-On Marketing’s Second Amended Complaint”), Tan-O-On Marketing asserted claims for: (i) fraudulent conveyance against Hi-Land Potato, see Tan-O-On Marketing’s Second Amended Complaint ¶¶ 39-62, at 8-12; (ii) theft of-trade secrets and proprietary information against Hi-Land Potato, see Tan-O-On Marketing’s Second Amended Complaint ¶¶ 62-80, at 12-17; (iii) theft of trade secrets against RPE, Inc. and Russell Wysocki, Tan-O-On Marketing’s Second Amended Complaint ¶¶ 81-103, at 17-22; (iv) “Unjust Enrichment and Unfair Trade Practice” against RPE, Inc. and Russell Wysocki, Tan-O-On Marketing’s Second Amended Complaint ¶¶ 102-108, at 22-23; and (v) unjust enrich-mént against Hi-Land Potato and Carl Worley, see Tan-O-On Marketing’s Second Amended Complaint ¶¶ 109-113, at 24-25.
In their Stipulation of Dismissal of All Claims Against RPE, Inc., and Russell Wysocki with Prejudice, filed August 14, 2012 (Doc. 257), the parties informed the Court ’ that they stipulated to “dismissal with prejudice of any and all claims that any of them asserted, or could have asserted, in this matter against Third-Party Defendant RPE, Inc., Third-Party Defendant Russell Wysocki, or -their respective employees, agents, and/or assigns.” Stipulation of Dismissal of All Claims Against RPE, Inc., and Russell Wysocki with Prejudice at 1. The parties also informed the Court that, “following said dismissals there are no claims remaining in this matter against” RPE, Inc. or Wysocki, “and they are no longer parties to this action.” Stipulation of Dismissal of All Claims Against RPE, Inc., and Russell Wysocki with Prejudice at 1-2.
In the Pretrial Order, G. Anderson, J. Anderson, and Tan-O-On Marketing indicated that they brought claims for theft of trade secrets, fraudulent conveyance, and unjust enrichment. See Pretrial Order at 5.
4. Hi-Land Potato and Carl Worley.
In Third-Party Defendant Hi-Land Potato Company, Inc.’s and Carl Worley’s Answer ..to. Third-Party Complaint for Fraudulent Conveyance, Theft of Trade Secrets, and Unjust Enrichment, and Counterclaim Against Tan-O-On Marketing, Inc., filed August 10, 2012 (Doc. 256), Hi-Land Potato and Worley contend that, if the Court finds them liable to Skyline Potato or to the Folson Farm Group, they are “entitled to indemnification, contribution, and/or subrogation against [Tan-O-On Marketing] for the amount of such liability.” Third-Party Defendant Hi-Land Potato Company, Inc.’s and Carl Worley’s Answer to Third-Party Complaint for Fraudulent Conveyance, Theft of Trade Secrets, and Unjust Enrichment, and Counterclaim Against Tan-O-On Marketing, Inc. at 13. In Third-Party Defendant Hi-Land Potato Company, Inc.’s and Carl Worley’s Amended Answer to Third-Party Complaint for Fraudulent Conveyance, Theft of Trade Secrets, ■ and Unjust Enrichment, and Counterclaim Against Tan-O-On Marketing, Inc., filed August 15, 2012 (Doc. 259), Hi-Land Potato and Wor-ley assert the same theory of liability. See
Third-Party Defendant Hi-Land Potato Company, Inc.’s and Carl Worley’s Amended Answer to Third-Party Complaint for Fraudulent Conveyance, Theft of Trade Secrets, and Unjust Enrichment, and Counterclaim Against Tan-O-On Marketing, Inc. at 13.
In the Pretrial Order, Hi-Land Potato indicates that the Court should offset its liability, if any, from G. Anderson and Tan-O-On Marketing’s assets. See Pretrial Order at 4.
5. Findings of Fact, Conclusions of Law and Order, and Final Judgment.
On January 31, 2014, after three years of litigation, the Court entered its Final Judgment (Doc. 373), together with its Findings of Fact, Conclusions of Law and Order (Doc. 372), ruling that Hi-Land Potato and Worley were not liable to Skyline Potato or to the Folson Farm Group for PACA violations. The Court also ruled that neither Hi-Land Potato nor Worley were liable to Tan-O-On Marketing or to the Andersons for theft of trade secrets,-fraudulent conveyance, or unjust enrichment. The Court’s ruling terminated this case.
In its Findings of Fact, Conclusions of Law, and Order, the Court explained the equitable basis underlying its conclusions:
C. HI-LAND POTATO DID NOT BREACH ITS TRUST DUTIES AS A GENERAL CREDITOR OR AS A CO-BENEFICIARY OF TAN-O-ON MARKETING’S PACA TRUST.
18. The United States Circuit Courts of Appeal, in construing PACA, have uniformly held that “[t]he interpretation of PACA trust interests is guided by general trust principles to the extent there is no conflict with the statute.” In re Arctic Exp. Inc., 636 F.3d 781, 798 (6th Cir.2011)(quoting Consumers Produce Co. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1381 (3d Cir.1994)). See R Best Produce, Inc. v. Shulman-Rabin Marketing Corp., 467 F.3d 238, 242 (2d Cir.2006)(noting that the Second Circuit has “previously noted that PACA trusts are ‘governed by general principles of trust law.’ ”)(quoting Albee Tomato, Inc. v. A.B. Shalom Produce Corp., 165 F.3d 612, 615 (2d Cir.1998)); Bear Mountain Orchards, Inc. v. Mich-Kim, Inc., 623 F.3d 163, 167 (3d Cir.2010)(“General trust principles of trust law apply to trusts created under PACA ..., ”)(quoting Nickey Gregory Co., LLC v. AgriCap, LLC, 597 F.3d 591, 595 (4th Cir.2010)); Reaves Brokerage .Co., Inc, v. Sunbelt Fruit & Vegetable Co., Inc., 336 F.3d. 410, 413 (5th Cir.2003)(“General principles of trust law govern PACA trusts.”); Boulder Fruit Exp. & Heger Organic Farm Sales v. Transp. Factoring, Inc., 251 F.3d 1268, 1271 (9th Cir.2001) (“We apply general trust principles to questions involving the PACA trust, unless those principles directly conflict with PACA.”); Gargiulo v. G.M. Sales, Inc., 131 F.3d 995, 999 (11th Cir.1997)(“General principles of trust law govern the PACA trust .... ”). This interpretation is sound, because § 499e(2) expressly uses the word trust, thus indicating Congress intended the PACA trusts to be administered under general trust principles like any oth.er trust. See In re Arctic Exp. Inc., 636 F.3d at 794 (6th Cir.2011)(noting that “common law principles apply to the formation of [Congress’ numerous], statutory trusts”).
19. The United States Circuit Courts of Appeal have consistently looked to the Restatement of the Law of Trusts to provide the general principles of trust law.
[A] trust involves three elements: (1) a trustee, who holds the trust‘property and is subject to duties to deal with it for the benefit of one or more others; (2) one or more beneficiaries, to whom and for whose benefit the trustee owes the duties with respect to the trust property; and (3) trust property, which is held by the trustee for the beneficiaries.”
In re Arctic Exp. Inc., 636 F,3d at 794 (quoting Restatement (Third) of Trusts § 2, cmt. f). Thus, in Consumers Produce Co. v. Volante Wholesale Produce, Inc., the United States Court of Appeals for the Third Circuit held that, because the transferee met the requirements in Restatements (Second) of Trusts § 284, which exempts a third-party transferee from liability where the third-party is a bona fide purchaser for value without notice that the transfer was in breach of the trust, the transferee was not required to disgorge the payments made in breach of the PACA trust. See 16 F.3d at 1385. Similarly, in C.H. Robinson Co. v. Trust Co. Bank, N.A., the United States Court of Appeals for the Eleventh Circuit concluded that the district court erred in determining that a third-party transferee with knowledge of the existence of the PACA trust was required to disgorge payments made in breach of the trust, because the court did not faithfully apply general trust law principles:
First, the district court erred in its conclusion that transferee liability under traditional trust law turns on “actual knowledge of the trust.” ... A transferee takes property free of trust if he received it for value and without notice of the breach of trust. “If the trustee transfers trust property in breach of trust to a transferee for value, the transferee takes free of the trust although he had notice of the existence of the trust, unless he has notice that the trustee is committing a breach of trust in making the transfer.” Restatement (Second) of Trusts § 296.... Second, the district court erroneously created an exception to general trust principles by imposing transferee liability upon lenders which happen to have a security interest in trust assets. We conclude that síteh an exception is inconsistent with established precedent and the intent of Congress.
C.H. Robinson Co. v. Trust Co. Bank, N.A., 952 F.2d 1311, 1314 (11th Cir.l992)(emphasis in original).
20. Under general trust principles, because the merchant’s, dealer’s, or broker’s proceeds from the sales'of produce commodities under PACA are held in trust for the suppliers as PACA trust beneficiaries, the merchant, dealer, or broker becomes a PACÁ trustee subject to a trustee’s fiduciary duties. “An individual who is in a position to control the assets of the PACA trust and fails to preserve them, may be held personally liable to the trust beneficiaries for breach of fiduciary duty.” Coosemans Specialties, Inc. v. Gargiulo, 485 F.3d 701, 705 (2d Cir.2007). See Weis-Buy Servs., Inc. v. Paglia, 411 F.3d 415, 422 (3d Cir,2005)(analyzing whether the plaintiffs claim against the PACÁ trustee failed, because the statute of limitations for a trustee’s breach of fiduciary duty claim had run). “PACA trust rights may be enforced ... through a court action for breach of fiduciary trust .,. permitting] recovery against both the corporation and its controlling officers.” Patterson Frozen Foods, Inc. v. Crown Foods Intern., Inc., 307 F.3d 666, 669 (7th Cir.2002)(citing Golman-Hayden Co. v. Fresh Source Produce, Inc., 217 F.3d 348, 351 (5th Cir.2000)). See Farm-Wey Produce, Inc. v. Wayne Bowman Co., Inc., 973 F.Supp. 778, 785 (E.D.Tenn.1997)(concluding that PACA trustee did not violate its fiduciary duty as a trustee, because it did not violate its duty under Restatement (Second) of Trusts § 174 “to exercise the skill and care of a person of ordinary prudence ... in dealing with his own property”).
1. PACA Beneficiaries’ Protections and Remedies to Prevent the Dissipation of Funds.
21. The PACA trust was created to protect a supplier and PACA beneficiary by ensuring that the assets of the trust, the proceeds from the shipment of produce, are not dissipated before the suppliers are paid. The first protection for suppliers from a merchant’s, dealer’s, or broker’s dissipation of PACA trust funds is to seek an injunction. Section 499e(5) provides the equitable remedies available to suppliers under PACA: “The several district courts of the United States are vested with jurisdiction specifically to entertain (i) actions by trust beneficiaries to enforce payment from the trust, and (n) actions by the Secretary to prevent and restrain dissipation of the trust.” 7 U.S.C. § 499e(c)(5). Dissipation is defined as “any act or failure to act which could result in the diversion of trust assets or which could prejudice or impair the ability of unpaid suppliers, sellers, or agents to recover money owed in connection with produce transactions.” 7 C.F.R. § 46.46. Courts have construed § 499e(5) to mean that both the Secretary of the U.S.D.A. and district courts can enjoin a merchant, dealer, or broker to prevent the dissipation of trust assets. See Tanimura & Antle, Inc. v. Packed Fresh Produce, 222 F.3d 132, 137 (3d Cir.2000)(“§ 499e(c)(5)(ii) .., authorizes the district court to entertain ,.. injunctive relief on behalf of trust. beneficiaries, thereby adding to, instead of detracting from, available common law remedies.”)(reversing the district court for failing to enjoin dissipation of PACA trust funds); Frio Ice, S.A. v. Sunfruit, Inc., 918 F.2d 164, 158 (11th Cir.1990)(“[W]e find the district court’s interpretation of Section 499e(c)(4), as limiting injunctive relief to suits brought by the Secretary, to be incorrect.”). See also JSG Trading Corp. v. Tray-Wrap Inc., 917 F.2d 75, 79 (2d Cir.1990)(noting that the court saw “nothing in the Act that would prohibit the court from exercising its traditional equity powers to grant a preliminary injunction at the instance of a private litigant if the normal standards for such relief are met”).
22. The second protection to PACA beneficiaries is their priority interest in the PACA trust’s assets. Congress designed the 1984 amendment to PACA to provide PACA trust beneficiaries with a superior interest in the PACA trust assets over creditors with security interests in those same assets, allowing the suppliers to recover first in the merchant’s, dealer’s, or broker’s— the PACA trustee’s—bankruptcy. Thus, “a PACA trustee holds legal title to PACA trust assets but the seller retains an equitable interest in the assets pending .full payment, so that the Bankruptcy Code excludes PACA trust assets from the PACA trustee’s bankruptcy estate.” C.H. Robinson Co. v. Alanco Corp., 239 F.3d 483, 487 (2d Cir.2001)(citing In re Kornblum, 81 F.3d 280, 284 (2d Cir. 1996); In re San Joaquin Food Serv., Inc., 958 F.2d 938, 939 (9th Cir.1992)). As amongst beneficiaries, when a PACA trustee becomes insolvent, the legislative intent suggests, and courts have enforced PACA to require, the trust’s assets are distributed first to the PACA beneficiaries pro rata. See In re Milton Poulos, Inc., 947 F.2d 1351, 1353 (9th Cir.1991)(holding that all suppliers who had “properly perfected their PACA trust rights [ ] are entitled to their pro rata share of the trust assets”); H.C. Schmieding Produce Co., Inc, v. Alfa Quality Produce, Inc., 597 F.Supp.2d at 316 (“Included in the trust protection provided by PACA is not only an elevated priority over other creditors but also the right to a pro rata distribution of trust assets in the event qf insolvency.”). See also 49 Fed. Reg. at 45, 735-36 (“Where a court is involved, USDA would recommend to the court that the available trust assets be distributed on a pro-rata basis to all beneficiaries who have protected their right to trust benefits”). Two United ' States District Courts have analyzed whether one supplier/beneficiary is liable to another when one beneficiary receives a priority payment before the PACA trustee becomes insolvent, each reaching a different conclusion. Compare Fresh Kist Produce, LLC v. Choi Corp., Inc., 223 F.Supp.2d 1 (D.D.C.2002)(concluding that the defendant produce supplier was required to disgorge payments made to it by the seller), with H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d 313 (E.D.N.Y.2009)(concluding that the supplier did not have to disgorge payments it received from the buyer).
2. The Fiduciary Relationship of PACA Beneficiaries.
23. It is á general proposition in debtor/creditor law, and the Supreme Court has held, that “except as forbidden by the bankrupt law, a debtor has the right to prefer one creditor over another, and that the vigilant creditor is entitled to the advantage secured by his watchfulness and attention to his own interests.” Blennerhassett v. Sherman, 105 U.S. 100, 117, 26 L.Ed. 1080 (1881). Under trust law, however, because of the nature of a co-beneficiary relationship, creditors who are also co-beneficiaries of a trust additionally owe their co-benefieiaries duties that contain a fiduciary element. See G. Bogert & G. Bo-gert, The Law of Trusts and Trustees § 191 (Rev. 2d ed. 1979)(“Co-beneficiaries ... are in a fiduciary relation to each other .... ”)(cited in the Reporter’s Notes on Restatement (Third) Trusts § 104).
a. General Trust Law Duties of Co-Beneficiaries.
24. The duties owed to co-beneficiaries under general trust principles govern the duties that suppliers owe to each other as PACA trust beneficiaries. See Fresh Kist Produce, LLC v. Choi Corp., Inc., 223 F.Supp.2d at 12 (noting that a dispute between two suppliers is “a dispute between two beneficiaries”), amended sub nom. Fresh Kist Produce, LLC v. Choi Corp., Inc., 251 F.Supp.2d 138 (D.D.C.2003). Under general principles of trust law, a beneficiary is liable to its co-beneficiaries for participating in a trustee’s breach of the trust. See Restatement (Second) of Trusts § 256(4) (“If one of several beneficiaries participates with the trustee in a breach of trust ..., [that] beneficiary is personally liable to the extent of the loss, and [the beneficiary’s] interest is subject to a charge for the amount of loss ....); Restatement (Third) of Trusts § 104(l)(c) (“A beneficiary is not personally liable to the trust except to the extent ... the trust suffered a loss resulting from a breach of trust in which the beneficiary participated .... ”). Comment f to Restatement (Third) of Trusts § 104 describes conduct which constitutes a beneficiary’s participation in a breach of the trust:
Certainly, the beneficiary participates in a breach of trust if the beneficiary performs, or joins in performing, an act the beneficiary knows is a breach. Otherwise, the question of what conduct of the beneficiary constitutes participation in a breach of trust is a question of degree. For example, a beneficiary has participated in a breach qf trust if the beneficiary induced the misconduct knowing that it would or might be a breach of trust. However, mere knowledge of, or consent to, the breach, without more, is insufficient to constitute participation
Restatement (Third) of Trusts § 104, cmt. f. The Reporter’s Notes on § 104, comment f, direct the reader to A. Scott & M. Ascher, Scott and Ascher on Trusts § 25,2.6.3- (5th ed., 2007), for more information “[o]n a beneficiary’s duty to other beneficiaries not to participate in a breach of trust.” Restatement (Third) of Trusts § 104, Reporter’s Notes on cmt.. f. Professors Austin W. Scott and Mark L. Ascher suggest that co-beneficiaries have duties to one another beyond the duty not to participate in a breach of the trust: “Although there is not the same fiduciary relationship between trust beneficiaries as there is between them and the trustee, there is enough of a fiduciary element in their relationship to make it inequitable for one to seek to obtain an advantage over another.” Scott and Ascher on Trusts § 25.2.6.3, at 1866. Similarly, the late Professor George G. Bogert and George T. Bogert, .which the Reporter’s Notes on § 104 also cite, state that beneficiaries have duties to each other, at least to a certain extent, as fiduciaries. See G. G. Bogert & G. T. Bogert, The Law of Trusts and Trustees § 191 (“Co-beneficiaries ,..' are in a fiduciary relation to each other in the sense that one beneficiary may not secretly secure for himself a special advantage in the trust administration”). Thus, the Court concludes that PACA beneficiaries, as co-owners of the equitable interest in the PACA trust, have some limited fiduciary duties to the other beneficiaries of the PACA trust, including at least the duty not to affirmatively seek an advantage over their co-beneficiaries.
b. Case Law Addressing the Duties of PACA Co-Beneficiaries. -
25. While no authority is precisely on point with the unique facts and issues in this case, two cases present contrasting conclusions regarding the trust, responsibilities of PACA beneficiaries. In the end, the Court believes that Fresh Kist Produce, LLC v. Choi Corp., Inc, may come closest to reflecting Congress’ intent to protect PACA beneficiaries. What that conclusion means is that general trust principles protect- PACA beneficiaries to the extent, of trust law, but no more.
i. Fresh Kist Produce, LLC v, Choi Corp„ Inc,
26. In Fresh Kist Produce, LLC v. Choi Corp„ Inc., a plaintiff supplier, Fresh Kist, and defendant suppliers, J.C. Watson (“JCW”), Norfolk Banana, and Berkley Tomato all sold perishable agricultural commodities to a common produce dealer, Washington Wholesale Produce Company (“WWP”). 223 F.Supp.2d at 4. On June 5, 2001, JCW filed a complaint against WWP for breach of contract,' alleging that WWP owed JCW $75,946.20 for produce sold and also alleging that WWP was insolvent. See 223 F.Supp.2d at 5. WWP and JCW reached an agreement out of court in which WWP would pay a sum certain monthly to JCW until the balance was paid. See 223 F.Supp.2d at 5. After several payments over two months, WWP failed to make the payments, and JCW filed an amended complaint to obtain the balance owed. See 223 F,Supp.2d at 5. Fresh Kist then contacted JCW and asked if it would waive the potential conflict of interest in having a common attorney represent both Fresh Kist and JCW; JCW would not waive the conflict. See 223 F.Supp.2d at 5. On August 28, 2001, Fresh Kist initiated an action against JCW and WWP requesting a temporary restraining order to enjoin WWP from paying the rest of the amount owed to JCW, and establishing a procedure for non-parties to assert PACA claims, See 223 F.Supp.2d at 5. Fresh Kist alleged that JCW, Norfolk Banana, and Berkley Tomato “must disgorge the PACA benefits received from WWP after they learned that WWP was insolvent.” 223 F.Supp.2d at 5-6.
27. The Honorable Ricardo M. Urbina, United States District Judge for the District of Columbia, framed the issue in front of the court as “whether PACA requires a beneficiary with knowledge of a PACA trust’s insolvency to set up a mechanism for all beneficiaries to submit claims for the remaining funds.” Fresh Kist Produce, LLC v. Choi Corp., Inc., 223 F.Supp.2d at 8. Recognizing that general trust principles govern PACA trusts, Judge Urbina answered in the affirmative, noting: “Under trust law, co-beneficiaries are in a fiduciary relationship with each other so that one beneficiary may not secretly secure for himself a special advantage in the trust administration.” Fresh Kist Produce, LLC v. Choi Corp., Inc., 223 F.Supp.2d at 8 (citing G. Bogert & G. Bogert, The Law Of Trusts And Trustees § 191, at 478 (2d ed. 1979)). The court found that, under PACA, “the law compels a beneficiary with knowledge of a trust’s insolvency to refrain from securing for itself a greater advantage than its co-beneficiaries.” 223 F.Supp.2dat 8. Thus, Judge Urbina concluded that PACA requires beneficiaries to “employ pro rata distribution when one of them has belief or knowledge of the trust’s insolvency,” rather than waiting until, the PACA trustee becomes fully insolvent or bankrupt. 223 F.Supp.2d at 9. Judge Urbina based this conclusion on three considerations:- (i) that it is a breach of a fiduciary duty to co-beneficiaries where a trustee who • is also a creditor “secure[s] itself by the depletion of assets which, in the event of the debtor’s insolvency it would be obliged to share ratably with all of the debtor’s creditors,” 223 F.Supp.2d at 8 (quoting Dabney v. Chase Nat’l Bank of City of New York, 196 F.2d 668, 672-73 (2d Cir.1952)(Learned Hand, J.); (ii) that “when a trustee pays one beneficiary and becomes bankrupt, a court may set aside this preference,” 223 F.Supp.2d at 8 (citing G. Bogert & G. Bogert, The Law of Trusts and Trustees § 191, at 478-79); and (iii) that an insolvent PACA trust’s “assets are distributed among beneficiaries pro rata,” Fresh Kist Produce, LLC v. Choi Corp., Inc., 223 F.Supp.2d at 8 (citing In re Milton Poulos, Inc., 947 F.2d at 1352). Judge Urbina thus required JWC, the supplier who had previously sued WWP, to disgorge the payments it had received since the prior suit, concluding that, because JWC’s complaint in that case alleged WWP was insolvent at the time, JCW, the defendant supplier at that time had the requisite knowledge of the PACA trustee’s insolvency. 223 F.Supp.2d at 11.
ii. H.C. Schmieding Produce Co., Inc. v, Alfa Quality Produce, Inc,
28. In H.C. Schmieding Produce Co., Inc, v, Alfa Quality Produce, Inc„ the intervening supplier plaintiff, Amco Produce, Inc. (“Amco Produce”), amended its complaint to add a claim against the original supplier plaintiffs, Wm. Rosen-stein & Sons, Co. and Eagle Fruit Traders,. LLC (together,, “Rosenstein & Sons”), seeking disgorgement of payments made to Rosenstein & Sons for participation in the dissipation of the PACA trust’s assets. 597 F.Supp.2d at 315. “Specifically, Amco has alleged that Rosenstein, despite either knowing or having information that would have led it to reasonably know of defendants’ financial instability or insolvency, received PACA trust assets from defendants in payment of Rosenstein’s pre-existing claims.” 597 F.Supp.2d at 315.
29. The Honorable Brian M. Cogan, United States District Judge for the Eastern District of New York, distilled the issues to two questions that he had to resolve:
■When interpreting the trust provisions of PACA, the Second Circuit-has held that “general trust law applies to PACA trusts unless such law directly conflicts with the PACA statute.” ■Thus, we must ask two questions: (1) does general trust law create a cause of action in favor of a creditor of an insolvent corporation to set aside preferential payments made to another creditor of the corporation; and (2) if not, does PACA modify the general trust law by creating such a claim and enforcement mechanism?
597 F.Supp.2d at 316 (quoting D.M. Rothman & Co., Inc. v. Korea Commercial Bank of New York, 411 F.3d 90, 94 (2d Cir.2005))(internal citations and alterations omitted).
30. In answering the first question, Judge Cogan first posited that, under the common law, any insolvent business, not just a PACA trustee, holds its assets in trusts for its creditors, resulting in the directors of the insolvent corporation serving as trustees, imposing upon them a fiduciary duty to the corporation’s creditors. See 597 F.Supp.2d at 316 (citing In re Poseidon Pool & Spa Recreational, Inc., 391 B.R. 234, 241 (Bankr.E.D.N.Y.2008)). “This is no different than the duty that exists- under PACA, except that PACA arguably expands, or at least clarifies that, this obligation additionally include ‘controlling persons, not just directors.’ ” 597 F.Supp.2d at 316. Judge Cogan also stated that payment of bona fide debts of an insolvent corporation to outsiders is not improper under common law, “despite the fact that these payments deplete the remaining assets available for creditors!” 597 F.Supp.2d at 316-17 (citing In re Sharp Int’l Corp., 403 F.3d 43, 54 (2d Cir.2005)(“[A] mere preference between creditors does not constitute bad faith .... Nor does it matter that the preferred creditor knows that the debtor is insolvent.”)). Judge Cogan pointed out: “By allowing preferential payments, the common law recognizes the business reality that distressed debtors must make hard decisions about who to pay and who not to pay.” H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d at 317.
31. Judge Cogan noted that the case law has been abrogated: first, by “bar[ring] insolvent corporations from preferring their insiders over outside creditors,” Southern Indus., Inc. v. Jeremias, 66 A.D.2d 178, 184, 411 N.Y.S.2d 945 (2d Dep’t 1987)); and second, via “the preference recovery provision of the Bankruptcy Code, which establishes a ninety-day (or one year, for insiders) preference recovery,” 11 U.S.C. § 547(b)(4)(A). H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d at 317. There is no subjective inquiry regarding the preference payments recovered under the Bankruptcy Code’s clawback provision. See H.C. Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d at 317 (“It does not matter if the creditor knew or should have known at the time he received the payment that the debtor was insolvent, or if he pressured or refrained from pressuring the debtor for payment.”).
32.Judge Cogan concludes that there is nothing in PACA suggesting a change to the common law’s allowance of bona fide preference payments to creditors:
I see nothing in PACA that changes the common law in this regard. As explained above, the purpose of PACA is to elevate the priority of produce sellers over other classes of creditors; PACA does not create any special rights among such produce sellers inter se. An insolvent corporation in any business owes a fiduciary duty to its creditors not to dissipate assets, but preference payments by definition reflect the payment of bona fide debts and thus are not a breach of any fiduciary duty. PACA appears to merely codify this principle in the produce business under the law of trusts, not change it.
597 F.Supp.2d at 318. Judge Cogan did not accept Amco Produce’s argument that the distribution of the assets of an insolvent PACA trustee pro rata to the PACA beneficiaries implies that Congress intended that a PACA beneficiary/creditor should be required to disgorge any preference payments made just before insolvency:
[I]t is important not to confuse PACA’s clearly stated requirement of pro rata distribution with the creation of an implied preference recovery action that could be brought by one creditor against another.... However, it is a far cry from recognizing the concept of pro rata distribution to creating a remedy for preference payments that would actually increase the trust and which, at least as the instant case is presently postured, might constitute the entirety of the trust corpus (as no res has yet been identified for this trust). Without some guidance from Congress under PACA, there is no basis for implying such a remedy.
33. In response to Amco Produce’s argument that Judge Cogan should apply Fresh Kist Produce, LLC v. Choi Corp., Inc.’s “knew or should have known” standard, Judge Cogan noted that the cases from which the “knew or should have known” standard developed were “cases dealing either- with the obligation of an interested trustee, ie., a [bank] who is both holding funds on behalf of creditors and who [it]self has an interest in those funds, or [as in Fresh Kist Produce, LLC v. Choi Corp., Inc.,] an insider with special access to the debtor.” 597 F.Supp.2d at 318-19. Judge Cogan agreed with a narrow reading of the standard: “To be sure, a co-beneficiary who is an insider may owe a fiduciary duty to his co-beneficiaries. But it is his status as an insider, not as a co-beneficiary, that creates this duty.” 597 F.Supp.2d at 319. Judge Cogan distinguished his case from Fresh Kist Produce, LLC v. Choi Corp., Inc, and the cases upon which it relied, however, noting that “Rosenstein [is not] an insider; it had no special relationship with the debtor that allowed it to manipulate the debtor other than, perhaps, the debtor wanted to keep doing business with it more than Amco ....” 597 F. Supp. 2d at 319. Judge Cogan therefore dismissed Amco Produce’s claims against Rosen-stein & Sons. See 597 F.Supp.2d at 321.
iii. PACA Beneficiaries Have a Fiduciary Relation to their Co-Beneficiaries Such That They Owe their Co-Beneficiaries a Limited Fiduciary Duty Not to Secure a Secret or Inequitable Benefit Over their Co-Beneficiaries.
34. Congress acted intentionally in creating- a trust to benefit all the produce suppliers, and part of that intent was to create rights for produce suppliers beyond merely extending liability to
“controlling persons, not just directors.” Schmieding Produce Co., Inc. v. Alfa Quality Produce, Inc., 597 F.Supp.2d at 316. If, as Judge Cogan suggests in H.C. Schmieding Produce Co., Inc, v. Alfa Quality Produce, Inc., it was Congress’ intention only to extend liability to controlling persons as well as directors, Congress could have done so more short-handedly than by establishing the PACA trust; it could have .simply tweaked the common law, which already prevents preference payments to insiders, by also making those insiders or controlling persons personally liable. If, as some courts have found, Congress’ intention in creating the PACA trust was to give produce suppliers, as a class, only priority over financial creditors, as a class, in their claims to the produce sellers’ assets, Congress could have also done so without the need to create a trust; it could have drafted a provision like that in the bankruptcy code, which gives preference to secured creditors over general creditors. See 11 U.S.C. § 507 (setting forth the order of priority for expenses and claims in bankruptcy). Congress’ intention in creating the PACA trust, however, was to impose general trust principles on all parties to the trust—including creating fiduciary relationships, or relationships that have a fiduciary element, between beneficiary suppliers. Under general trust principles, a beneficiary is liable to its co-beneficiaries for its participation in a breach of the trust. See Restatement (Third) of Trusts § 104(1)(c). Just as PACA beneficiaries are entitled to a pro rata share of the PACA trustee’s assets when insolvent, an equitable outcome, even where the PACA beneficiaries do not know that a PACA trustee is insolvent, there is enough of a fiduciary element in their relationship as co-PACA beneficiaries to make it inequitable for one to seek to obtain an advantage over another.
35. It is very difficult in most' instances for a creditor to know that a debtor is insolvent. • Black’s Law Dictionary defines insolvency as “having liabilities that exceed the value of assets,” Black’s Law Dictionary 867 (9th ed. 2009). In bankruptcy, insolvency has a specific definition: “The term ‘insolvent’ means ... financial condition such that the sum of [the] entity’s debts is greater than all of [the] entity’s property, at fair valuation .11 U.S.C. § 101(32)(A). Creditors often know that debtors are struggling to pay them, but may not have an intimate knowledge of the debtor’s balance sheet. To not impose liability unless the co-beneficiary knows the trustee was insolvent may impose a burden that is never or rarely met. Thus, the Court believes that, rather than bright line rules that would eliminate most beneficiary suits, the better course may be to impose liability for a beneficiary’s “inequitable [conduct in] ... seeking] to obtain an advantage over another,” Scott and Ascher on Trusts § 25.2.6.3, at 1866, or impose liability where “one beneficiary ... secretly secure[s] ... a special advantage in the trust administration,” Bogert & Bogert, The Law of Trusts and Trustees § 191.
36. The Court cannot fairly impose a rule that says any payment to one PACA beneficiary in preference over payments to the other PACA beneficiaries would be a breach of the PACA trust because it dissipates the PACA trust assets. To impose such a rule would, in effect, amount to a finding that Congress did not allow for any preference payments to co-beneficiaries and in fact all payments should be pro rata. No intent or knowledge would be necessary to impose liability. Such a rule would effectively impose strict liability upon the PACA beneficiaries if they would ever receive more than their pro rata share. The Court recognizes that; trust law does not go that far and that Congress did not set up a simple mechanism for pro rata payments in all .circumstances. Rather, the co-beneficiary must be culpable in some way. For example, consenting to such a breach by receiving these payments is not a breach of a beneficiary’s limited fiduciary relationship with its co-beneficiaries. See Restatement (Third) of Trusts § 104, cmt. f (noting that “mere knowledge of, or consent to, the breach, without more, is insufficient to constitute participation” subjecting a co-beneficiary to liability for a breach of the trust). If a co-beneficiary receives a check in the mail, without any knowledge that the trustee is distinguishing between beneficiaries and actually making a preference payment which constitutes dissipation of the trust, no possible liability has been set in motion. Moreover, if a co-beneficiary receives an unusually large check in the mail, and knows that the trustee is in fact differentiating or even preferring the beneficiary, such knowledge still does not rise to the level of participation in the breach or inequitable conduct on behalf of the beneficiary to 'impose liability. Finally, if a trustee calls a co-beneficiary A and says it will send co-beneficiary A full payment of what it owes, but will only send partial payment- to the other co-beneficiaries, and co-beneficiary A consents, that consent does not trigger any liability to the co-beneficiary for co-beneficiary A. There must be more evidence of unfair affirmative action on co-beneficiary A’s behalf to seek or secure an advantage to impose liability. In other words, PACA does not completely eliminate the common-law-rule allowing preference payments and allowing vigilant creditor/suppliers to be the beneficiaries of a preference - payment. Should the PACA' trustee’s preference payment come as a result of a PACA beneficiary’s conduct of attempting to receive or secure a preference payment or other advantage, however, such conduct constitutes participation in the breach, violates the PACA beneficiary’s-fiduciary relationship with its co-beneficiaries, and subjects the beneficiary to liability for the harm- caused by the1-breach in which it participated. See Restatement (Third) ■of Trusts § 104(2) (“If a beneficiary is personally liable to the trust, the trust is entitléd to a charge against the beneficiary’s interest in the trust to secure the payment of the liability.”).
37. As beneficiaries of Tan-O-On Marketing’s PACA trust, Hi-Land Potato had the same co-beneficiary duties imposed upon it as those imposed upon Skyline Potato and the Folson Farm Group: the duty not to participate in the breach of the trust by affirmatively securing an advantage over co-beneficiaries. Because the Restatement (Third) of Trusts § 104, cmt. f, states that participating in the breach requires something more than just knowledge of the breach, because of the definition of dissipation of a PACA trust in 7 C.F.R. § 46.46 and because Hi-Land Potato knew only that Tan-O-On Marketing was having difficulty paying some of its bills,, that knowledge and receipt of trust assets, even to the exclusion of the other co-beneficiaries, is not sufficient to constitute a breach of its duty as a PACA trust co-beneficiary.
38. That Hi-Land Potato handled the billing, bookkeeping, and collection for shipments of Hi-Land Potato’s and Metz Potato’s potatoes which Tan-O-On Marketing arranged places Hi-Land Potato in a different situation than other producer co-beneficiaries who were merely receiving checks from Tan-O-On Marketing for their shipments. Hi-Land Potato’s special relationship with Tan-O-On Marketing—handling the billing, bookkeeping, and collection for its potatoes— allowed Hi-Land Potato to know exactly when and how much Tan-O-On Marketing- was receiving in payment for Hi-Land Potato’s produce, and also allowed Hi-Land Potato to get paid; although this payment came before Tan-O-On Marketing and the other PACA co-beneficiaries, Hi-Land Potato did not know that fact at the time. That Tan-O-On Marketing was operating out of an office at Hi-Land Potato’s packing shed only adds incentive, whether explicitly or implicitly, to Hi-Land Potato being promptly paid for shipment of its potatoes.
39.Nevertheless, this arrangement by itself, or this arrangement in conjunction with knowledge that Tan-O-On Marketing was struggling to pay its bills, is still insufficient to constitute Hi-Land Potato affirmatively participating in the breach of the trust by seeking to secure an advantage over Tan-O-On Marketing’s PACA trust’s other co-beneficiaries. Hi-Land Potato did not know at the time it was handling the billing, bookkeeping, and collection for the Tan-O-On Marketing arranged-shipment of its potatoes that Tan-O-On Marketing was unable to fully pay all of the PACA trust beneficiaries for shipment of their produce. It did not, therefore, know that the payments Tan-O-On Marketing was making out of the PACA trust assets to Hi-Land Potato for these shipments was in lieu of payments to other suppliers/beneficiaries of Tan-O-On Marketing’s PACA trust. In context, Hi-Land Potato’s billing, bookkeeping, and collecting arrangement with Tan-O-On Marketing, and Tan-O-On Marketing’s operating out of Hi-Land Potato’s facilities, combined with Hi-Land Potato’s knowledge that not all the PACA trust beneficiaries were being paid, would constitute Hi-Land Potato participating in the breach of Tan-O-On Marketing’s PACA t