Coosemans v. Gargiulo, No. 05-6962 (2d Cir. 2007)

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05-6962 Coosemans v. Gargiulo 1 2 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT 3 August Term, 2006 4 (Argued November 30, 2006 Decided May 4, 2007) 5 Docket No. 05-6962-cv 6 7 ----------------------------------------------------------------COOSEMANS SPECIALTIES, INC., 8 Plaintiff-Appellee, 9 10 COOSEMANS SPECIALTIES, INC., KATZMAN BERRY CORP., KATZMAN PRODUCE, INC., ROBERT MASHA SALES, INC. and TOP BANANA, L.L.C., 11 Plaintiffs-Counter-Claimants-Appellees, 12 v. 13 14 15 JACK GARGIULO, JERRY BADER, MARKET SERVICE, INC., d/b/a ACCOUNTS RECEIVABLE MANAGEMENT SOLUTIONS, also d/b/a ARMS, TOP BANANA LLC, STATE OF NEW YORK and GRACE GARGIULO, 16 Defendants, 17 ALAN GARGIULO, 18 Defendant-Counter-Claimant, 19 ALAN J. GARGIULO, JR., 20 Defendant-Intervenor-Defendant-Counter-Claimant, 21 PHILADELPHIA PRODUCE CREDIT BUREAU LLC, 22 23 Defendant-Intervenor-Defendant-Intervenor-PlaintiffCounter-Claimant-Appellee, 24 25 BALDOR SPECIALTY FOODS, R BEST PRODUCE, INC. and PUTNAM PRODUCE INC., 26 Defendants-Intervenors-Plaintiffs-Appellees, 1 2 3 4 5 6 7 SUPREME CUTS, EAST WEST FRESH FARMS, LLC, AFL FRESH & FROZEN, INC., B.T. PRODUCE CO., INC., D ARRIGO BROS. CO. OF NEW YORK, INC., E. ARMATA INC., FIERMAN PRODUCE EXCHANGE INC., FRUITCO CORP., HUNTS POINT TROPICAL, INC., J&J PRODUCE CO., KLEIMAN & HOCHBERG, INC., MIKE SIEGEL INC., MORRIS OKUN, INC., NATHEL & NATHEL, INC., PAUL STEINBERG ASSOCIATES, INC., SQUARE PRODUCE CO., INC., 8 Defendants-Intervenors-Plaintiffs-Counter-Claimants, 9 M. TROMBETTA & SONS, INC., 10 Defendant-Intervenor-Plaintiff-Counter-Claimant, 11 12 ALAN J. GARGIULO, SR., a/k/a Jack Gargiulo, and DOM S WHOLESALE & RETAIL CENTER, INC., a/t/a Dom s Wholesale Market, 13 Defendants-Intervenors-Defendants-Counter-Claimants-Appellants, 14 NARA BANK, N.A., 15 Intervenor-Plaintiff, 16 PLATINUM FUNDING CORP., 17 18 Intervenor-Plaintiff-Counter-Defendant. ----------------------------------------------------------------- 19 Before: MESKILL, CARDAMONE and RAGGI, Circuit Judges. 20 Appeal from a judgment of the United States District 21 Court for the Southern District of New York, Peck, Chief 22 Magistrate Judge, entered on December 2, 2005, against corporate 23 trustee and controlling person in action to recover amounts due 24 on unpaid invoices, attorneys fees and interest under the 25 Perishable Agricultural Commodities Act, 7 U.S.C. § 499a et seq. 26 Affirmed. 27 28 PAUL T. GENTILE, Gentile & Dickler, New York, NY, for Defendants-Appellants. -2- 1 2 3 4 5 6 JEFFREY M. CHEBOT, Whiteman, Bankes & Chebot, LLC, Philadelphia, PA, for Appellee Philadelphia Produce Credit Bureau, submitting on behalf of the PlaintiffsIntervenors-Plaintiffs-Appellees. Of Counsel: 7 8 9 10 11 Louis W. Diess, III, McCarron & Diess, Washington, D.C., for Top Banana, LLC, Coosemans Specialties, Inc., Katzman Berry Corp., Katzman Produce, Inc., Robert Masha Sales, Inc. and Supreme Cuts, LLC. 12 13 14 15 16 17 18 19 20 21 Leonard Kreinces, Kreinces & Rosenberg, Westbury, NY, for AFL Fresh & Frozen, Inc., E. Armata, Inc., B.T. Produce Co., Inc., D Arrigo Bros. Co. of New York, Inc., Fierman Produce Exchange, Inc., Fruitco Corp., Hunts Point Tropical, Inc., J&J Produce, Nathel & Nathel, Inc., Morris Okun, Inc., Mike Siegel, Inc., Square Produce Co., Inc., Kleiman & Hochberg, Inc., Paul Steinberg Associates, Inc. and Redi Fresh Produce, Inc. 22 MESKILL, Circuit Judge: 23 This appeal examines the extent of personal liability 24 of a Perishable Agricultural Commodities Act (PACA), 7 U.S.C. 25 § 499e(c), trustee controlling person for entering into a 26 factoring agreement resulting in a loss of trust assets for the 27 trust beneficiaries and whether attorneys fees are appropriate.1 28 29 Defendants Dom s Wholesale & Retail Center, Inc. (Dom s) and Alan J. Gargiulo, Sr. (Gargiulo), the President, sole 1 A factoring agreement allows a business to convert[] receivables into cash by selling them at a discount to a factoring company, thereby providing the business with immediate liquidity. E. Armata, Inc. v. Korea Commercial Bank of N.Y., 367 F.3d 123, 133 (2d Cir. 2004) (alteration in original) (internal quotation marks omitted). -3- 1 shareholder and sole director of Dom s, appeal from a judgment of 2 the United States District Court for the Southern District of New 3 York, Peck, Chief Magistrate Judge, awarding $1,704,680.75 in 4 principal, interest and attorneys fees to plaintiffs and 5 intervenor plaintiffs (collectively plaintiffs or PACA trust 6 beneficiaries ), who are unpaid sellers and suppliers of fresh 7 produce with claims against defendants under the statutory trust 8 provisions of PACA. 9 erred when it held Gargiulo personally liable for Dom s PACA- Defendants assert that the district court 10 related debts and awarded attorneys fees to plaintiffs. 11 affirm. 12 13 We BACKGROUND Plaintiffs filed suit against Dom s and Gargiulo in the 14 Southern District of New York to enforce PACA s statutory trust 15 provisions requiring produce buyers to hold perishable 16 agricultural commodities, and receivables and proceeds from the 17 sale of those commodities, in trust for the benefit of unpaid 18 sellers until full payment has been made. 19 Plaintiffs sought to recover damages from both Dom s and Gargiulo 20 for the principal amount due on unpaid invoices plus pre-judgment 21 interest and attorneys fees. 22 7 U.S.C. § 499e(c)(2). Platinum Funding Corporation (Platinum) subsequently 23 intervened in plaintiffs action, claiming that Dom s owes it 24 over one million dollars pursuant to the factoring agreement -4- 1 between them. 2 assert that Platinum owes Dom s $1,773,031 for breaching the 3 factoring agreement. 4 $4,925,659 in unidentified accounts receivable were improperly 5 written off by Platinum. 6 disputed matters from plaintiffs PACA claims. 7 claims are pending. 8 Dom s and Gargiulo deny Platinum s allegations and In addition, defendants contend that The district court severed these The disputed Plaintiffs motion for summary judgment was referred to 9 Chief Magistrate Judge Peck, who recommended granting summary 10 judgment to plaintiffs against both Dom s and Gargiulo for the 11 principal amount in unpaid invoices plus interest and attorneys 12 fees. 13 shareholder, officer and director, Gargiulo should be held 14 personally liable for dissipating the PACA trust assets, (2) 15 exhaustion of Dom s assets (if any), that were tied up in 16 litigation with Platinum, was not required prior to holding 17 Gargiulo personally liable, and (3) plaintiffs were entitled to 18 an award of attorneys fees and interest based on language 19 contained in their invoices. 20 magistrate judge s report and recommendation and granted summary 21 judgment for plaintiffs. 22 magistrate judge awarded plaintiffs $1,704,680.75 in principal, 23 interest and attorneys fees in an order and final judgment 24 pursuant to Fed.R.Civ.P. 54(b) certifying that there was no just The magistrate judge concluded that (1) as Dom s sole The district court adopted the On the consent of the parties, the -5- 1 reason for delaying entry of final judgment against defendants. 2 On appeal, defendants concede that Dom s is liable for 3 the principal amount and interest due on unpaid invoices, but 4 challenge the district court s determination that Gargiulo is 5 personally liable for Dom s PACA-related debts. 6 challenge the district court s award of attorneys fees. 7 DISCUSSION 8 9 Defendants also Federal jurisdiction is based on the action being brought pursuant to PACA, a federal statute. See 7 U.S.C. 10 § 499e(c)(5). 11 judgment entered after the Fed.R.Civ.P. 54(b) certification. 12 We have appellate jurisdiction from the final We review the district court s grant of summary 13 judgment de novo, viewing the evidence in the light most 14 favorable to the nonmoving party. 15 Co., 446 F.3d 356, 360-61 (2d Cir. 2006). 16 proper only if there is no genuine issue as to any material 17 fact and the moving party is entitled to a judgment as a matter 18 of law. 19 appeal are undisputed , 20 conclusions of law. 21 A. PACA Fed.R.Civ.P. 56(c). Greenidge v. Allstate Ins. Summary judgment is Because the relevant facts on this we review only the district court s 22 We recently reviewed the history of PACA and its trust 23 provisions in R Best Produce v. Shulman-Rabin Mktg. Corp., 467 24 F.3d 238, 241-42 (2d Cir. 2006); see also Am. Banana Co. v. -6- 1 Republic Nat l Bank of N.Y., 362 F.3d 33, 36-38 (2d Cir. 2004). 2 Congress enacted PACA in 1930 to regulate the interstate sale and 3 marketing of perishable agricultural commodities. 4 at 36. 5 produce with a self-help tool enabling them to protect 6 themselves against the abnormal risk of losses resulting from 7 slow-pay and no-pay practices by buyers or receivers of fruits 8 and vegetables. 9 N.Y., 411 F.3d 90, 93 (2d Cir. 2005) (alterations and internal See Am. Banana The statute provides growers and sellers of agricultural D.M. Rothman & Co. v. Korea Commercial Bank of 10 quotation marks omitted). 11 perishable commodities or proceeds from the sale of those 12 commodities are held in trust by the buyer for the benefit of the 13 unpaid seller until full payment is made: 14 15 16 17 18 19 20 21 22 Under the relevant provision, Perishable agricultural commodities received by a commission merchant, dealer, or broker . . . and any receivables or proceeds from the sale of such commodities . . . shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents. 23 7 U.S.C. § 499e(c)(2). As a PACA trustee, a produce buyer is 24 charged with a duty to insure that it has sufficient assets to 25 assure prompt payment for produce and that any beneficiary under 26 the trust will receive full payment. 27 94 (internal quotation marks omitted). 28 sellers a highly unusual trust beneficiary status that permit[s] -7- D.M. Rothman, 411 F.3d at PACA affords produce 1 them, in the case of defaults, to trump the buyers other 2 creditors, including secured ones. 3 B. Personal Liability Under PACA 4 Am. Banana, 362 F.3d at 38. An individual who is in a position to control the 5 assets of the PACA trust and fails to preserve them, may be held 6 personally liable to the trust beneficiaries for breach of 7 fiduciary duty. 8 420-21 (3d Cir. 2005); Patterson Frozen Foods v. Crown Foods 9 Int l, 307 F.3d 666, 669 (7th Cir. 2002); Golman-Hayden Co. v. 10 Fresh Source Produce, 217 F.3d 348, 351 (5th Cir. 2000); Hiller 11 Cranberry Prods. v. Koplovsky, 165 F.3d 1, 8-9 (1st Cir. 1999); 12 Sunkist Growers v. Fisher, 104 F.3d 280, 282-83 (9th Cir. 1997); 13 accord Bronia, Inc. v. Ho, 873 F.Supp. 854, 860-61 (S.D.N.Y. 14 1995); Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F.Supp. 15 346, 348-50 (S.D.N.Y. 1993). 16 President, sole shareholder and sole director, he was in a 17 position of control over the PACA trust assets and that, as such, 18 he can be held personally liable for any breaching of Dom s 19 fiduciary duties. 20 personally liable at this time because (1) he did not dissipate 21 the PACA trust assets, and (2) plaintiffs have not exhausted 22 Dom s corporate assets. 23 24 See Weis-Buy Servs. v. Paglia, 411 F.3d 415, Gargiulo concedes that as Dom s However, Gargiulo argues that he is not We reject both arguments. I. Dissipation of Trust Assets PACA trustees are required to maintain trust assets in -8- 1 a manner that such assets are freely available to satisfy 2 outstanding obligations to sellers of perishable agricultural 3 commodities. 4 regulations provide that [a]ny act or omission which is 5 inconsistent with this responsibility, including dissipation of 6 trust assets, is unlawful. 7 any act or failure to act which could result in the diversion of 8 trust assets or which could prejudice or impair the ability of 9 unpaid suppliers, sellers, or agents to recover money owed in 7 C.F.R. § 46.46(d)(1) (emphasis added). Id. PACA Dissipation is defined as 10 connection with produce transactions. 11 (emphasis added). 12 actions or omissions constitute a breach of fiduciary duty, we 13 examine whether the trustee in any way encumbered the funds or 14 rendered them less freely available to PACA creditors. 15 Rothman, 411 F.3d at 99 (alterations and internal quotation marks 16 omitted). 17 Id. § 46.46(a)(2) Thus, to determine whether a PACA trustee s D.M. Defendants contend that they did not dissipate PACA 18 trust assets because Dom s factoring agreement with Platinum was 19 commercially reasonable and any loss of assets was due solely to 20 Platinum s breach of the agreement. 21 trustee does not commit a per se breach of fiduciary duty when 22 trust funds are used to conduct a commercial transaction with a 23 non-PACA party. 24 N.Y., 367 F.3d 123, 133 (2d Cir. 2004) (citation omitted). We have held that a PACA E. Armata, Inc. v. Korea Commercial Bank of -9- 1 Armata was a PACA suit against a third-party bank that charged 2 fees for maintaining a checking account for the PACA trustee 3 produce buyer. 4 defendant in that suit. 5 concerned with the liability of the third-party bank. 6 determined that, in order to hold a third-party transferee in 7 breach of trust for receipt of PACA funds there first must be a 8 determination that the transfer of funds itself to the bank was 9 in breach of trust. Id. at 126-27. The PACA trustee was not a Id. at 127. Id. at 128-29. The Armata Court was only Id. We It was in that setting that 10 we held that a PACA trustee s payment of commercially 11 reasonable interest and fees in support of its duty to maintain 12 trust assets as freely available to repay its PACA creditors 13 does not constitute a breach of trust under PACA. 14 We noted that there was nothing unusual about having funds 15 available for PACA creditors without some relationship with a 16 bank. 17 determine in its analysis of the facts the commercial 18 reasonableness of the agreement between the PACA trustee and the 19 bank. 20 can occur with respect to funds that are eventually paid to PACA 21 creditors. 22 Id. Id. at 134. Id. We remanded in Armata for the district court to We declined to hold that no breach of a PACA trust Id. at 131. We have never held that a PACA trustee can escape all 23 liability for entering into a transaction that results in a large 24 loss of PACA assets merely by showing that the transaction was -10- 1 commercially reasonable on its face. Nothing in E. Armata 2 suggests that, simply by entering into a commercially reasonable 3 transaction, a PACA trustee necessarily avoids breaching its 4 fiduciary duty. 5 reasonable is simply one factor that may be relevant in 6 determining whether a PACA trustee has met its ultimate burden of 7 proving that trust assets remained freely available to 8 plaintiffs. 9 agreement in this case was commercially reasonable on its face, 10 defendants are, as a matter of law, liable to plaintiffs because 11 the factoring agreement here, unlike the banking agreement in 12 Armata, was with a party having arguable claims of more than one 13 million dollars against the PACA trustee. 14 factual dispute that the factoring agreement jeopardized the 15 trust funds and made them unavailable for timely payment to 16 plaintiffs. 17 control of the commodities without securing payment is 18 dissipation of the trust assets. 19 omitted)). 20 because the commercial reasonableness of the agreement with the 21 bank had not been determined, 367 F.3d at 134, an examination of 22 all the pleadings in our case makes clear that the district 23 court s determination that the agreement with Platinum 24 jeopardized the PACA trust assets was correct. Instead, whether a transaction is commercially We hold that regardless of whether the factoring Thus, there can be no See Bronia, 873 F.Supp. at 861 ( Relinquishing (internal quotation marks Unlike Armata, where summary judgment was improper -11- There being no 1 2 material factual issue in dispute, summary judgment was proper. II. Exhaustion of Corporate Assets 3 Gargiulo, as PACA trustee, failed to preserve the trust 4 assets, thus rendering him personally liable to plaintiffs. See 5 Morris Okun, 814 F.Supp. at 348 (noting that PACA imposes 6 liability on a trustee who uses the trust assets for any purpose 7 other than repayment of the supplier, including the use of trust 8 assets for legitimate business expenditures, such as the payment 9 of rent, payroll, or utilities (emphasis added)). However, 10 Gargiulo argues that the district court prematurely held him 11 personally liable because Dom s assets have not been exhausted. 12 According to Gargiulo, Dom s assets include more than one million 13 dollars that Platinum owes Dom s under the factoring agreement 14 and millions of dollars in uncollected accounts receivable. 15 Gargiulo cites cases from other circuits holding that 16 under PACA the corporate trustee is primarily liable and that 17 others may be held secondarily liable if they had some role in 18 causing the corporate trustee to commit the breach of trust. 19 Golman-Hayden, 217 F.3d at 351; see also Sunkist Growers, 104 20 F.3d at 283. 21 beneficiaries to await the results of Dom s collateral litigation 22 and collection efforts before they can hold him personally 23 liable. 24 the trust assets, liable, plaintiffs need only show that the Gargiulo argues that these cases require PACA trust We disagree. To hold Gargiulo, the person in control of -12- 1 assets of the licensed commission merchant, dealer, or broker are 2 insufficient to satisfy the PACA liability. 3 F.3d at 351. 4 or in the form of uncollected accounts receivable, they are 5 insufficient to satisfy the PACA liability because they are not 6 freely available for prompt payment to trust beneficiaries as 7 the PACA regulations require. 8 Accordingly, we agree with the district court that plaintiffs 9 need not wait for the conclusion of Dom s litigation or 10 collection efforts before seeking recovery directly from 11 Gargiulo. 12 13 Golman-Hayden, 217 When PACA trust assets are tied up in litigation, 7 C.F.R. § 46.46(d)(1), (e). III. Attorneys Fees Defendants final argument concerns the district 14 court s award of plaintiffs attorneys fees. 15 appeal the district court s award of interest on the principal. 16 The district court held that the invoices plaintiffs sent to 17 defendants providing for the recovery of attorneys fees in the 18 event of non-payment were enforceable against defendants. 19 appeal, defendants argue that the attorneys fees provisions in 20 the invoices are unenforceable because the parties never 21 discussed or agreed to them. 22 Gargiulo to be held personally liable for plaintiffs attorneys 23 fees they must be included as part of the PACA trust. 24 Defendants do not On Moreover, defendants argue that for As the district court properly noted, additional terms -13- 1 are to be construed as proposals for addition to the contract. 2 N.Y. U.C.C. § 2-207(2). 3 law is controlling. 4 additional terms become part of the contract unless the party 5 opposing those terms can establish one of three exceptions: (a) 6 the offer expressly limits acceptance to the terms of the offer; 7 (b) they materially alter it; or (c) notification of objection to 8 them has already been given or is given within a reasonable time 9 after notice of them is received. Defendants do not dispute that New York When the parties are two merchants, the Id. The only exception at 10 issue in this case is whether the attorneys fee provision in 11 plaintiffs invoices materially alter[ed] the terms of their 12 contracts with Dom s. 13 additional terms, Dom s bears the burden of proving that the 14 attorneys fees provision in plaintiffs invoices was a material 15 alteration. 16 A.G., 215 F.3d 219, 223 (2d Cir. 2000). 17 As the party opposing the inclusion of See Bayway Ref. Co. v. Oxygenated Mktg. & Trading Under New York law, a material alteration is one that 18 would result in surprise or hardship if incorporated without the 19 express awareness by the other party. 20 U.C.C. § 2-207 cmt. 4).2 Id. at 224 (quoting N.Y. We have noted that surprise includes 2 We have not yet decided whether hardship alone constitutes an independent basis for finding that an additional term materially alters a contract. See, e.g., Aceros Prefabricados, S.A. v. TradeArbed, 282 F.3d 92, 101 (2d Cir. 2002). We need not decide that issue here because defendants have failed to argue that they have suffered hardship. See Bayway Ref., 215 F.3d at 226. -14- 1 both the subjective element of what a party actually knew and 2 the objective element of what a party should have known. 3 To carry the burden of showing surprise, a party must establish 4 that, under the circumstances, it cannot be presumed that a 5 reasonable merchant would have consented to the additional term. 6 Id. 7 any evidence to demonstrate either objective or subjective 8 surprise over the attorneys fee provision in plaintiffs 9 invoices. 10 Id. As the district court concluded, defendants failed to offer Finally, the district court adopted the magistrate 11 judge s report and recommendation finding that defendants 12 conceded that attorneys fees can be included in the PACA trust. 13 Defendants now seek to withdraw that concession, asserting in 14 their reply brief that Gargiulo cannot be held personally liable 15 for plaintiffs attorneys fees because the fees in this case are 16 not part of the PACA trust. 17 because (1) they failed to object to the magistrate judge s 18 purported error that they conceded the issue, see Cephas v. Nash, 19 328 F.3d 98, 107 (2d Cir. 2003) (noting that a party s failure 20 to object to any purported error or omission in a magistrate 21 judge s report waives further judicial review of the point ), and 22 (2) defendants raised this argument for the first time in their 23 reply brief, see F.T.C. v. Verity Int l, Ltd., 443 F.3d 48, 65 24 (2d Cir. 2006) ( Because the defendants-appellants did not Defendants have waived this argument -15- 1 contest the district court s . . . determination until their 2 reply brief, and then only cursorily, we deem it waived on 3 appeal. ). 4 Putting aside the waiver issue, we agree with our 5 sister circuits that where the parties contracts include a right 6 to attorneys fees, they can be awarded as sums owing in 7 connection with perishable commodities transactions under PACA. 8 7 U.S.C. § 499e(c)(2). 9 LLC, 361 F.3d 629, 632 (11th Cir. 2004); Middle Mountain Land & 10 Produce v. Sound Commodities, 307 F.3d 1220, 1222-25 (9th Cir. 11 2002); see also Movsovitz & Sons of Fla. v. Axel Gonzalez, Inc., 12 367 F.Supp.2d 207, 215 (D.P.R. 2005); JC Produce v. Paragon 13 Steakhouse Rests., 70 F.Supp.2d 1119, 1123 (E.D. Cal. 1999). 14 Accordingly, because plaintiffs invoices created an enforceable 15 contract providing for attorneys fees, Gargiulo is personally 16 liable to plaintiffs for those fees as sums owing in connection 17 with perishable commodities transactions under PACA. 18 See Country Best v. Christopher Ranch, We agree with the district court that plaintiffs 19 invoices providing for attorneys fees created an enforceable 20 contract entitling plaintiffs to recover those fees from 21 defendants as sums owing in connection with perishable 22 commodities transactions under PACA. 23 district court that Gargiulo is personally liable to plaintiffs 24 at this time because Gargiulo was in a position of control over -16- We also agree with the 1 the PACA trust assets and dissipated those assets, and sufficient 2 corporate assets of Dom s were not freely available to 3 plaintiffs. 4 Accordingly, the judgment of the district court entered 5 on December 2, 2005, awarding $1,704,680.75 in principal, 6 interest and attorneys fees to plaintiffs under the Perishable 7 Agricultural Commodities Act, 7 U.S.C. § 499a et seq., is 8 affirmed. -17-

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