Reser's Fine Foods, Inc. v. H.C. Schmieding Produce Company, LLC et al, No. 5:2016cv04150 - Document 42 (D. Kan. 2017)

Court Description: MEMORANDUM AND ORDER granting 25 Motion for Leave to File Under Seal. Counsel directed to file forthwith requested document(s) with an event from the SEALED DOCUMENTS category. The clerk shall grant access to sealed document(s) to counsel of recor d. Pro hac vice attorneys must obtain sealed document(s) from local counsel; granting 33 Motion for Leave to File surreply; granting 17 Motion for Summary Judgment being treated as a motion to dismiss for failure to state a claim. See order for details. Signed by U.S. District Senior Judge Sam A. Crow on 3/1/17. (msb)

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Reser&#039;s Fine Foods, Inc. v. H.C. Schmieding Produce Company, LLC et al Doc. 42 I N THE UNI TED STATES DI STRI CT COURT FOR THE DI STRI CT OF KANSAS RESER’S FI NE FOODS, I NC., Plaint iff, v. No. 16- 4150- SAC H.C. SCHMI EDI NG PRODUCE CO., LLC., and C & E FARMS, I NC., Defendant s. ____________________________________ H.C. SCHMI EDI NG PRODUCE CO., LLC., Third- part y Plaint iff, v. MARK A. RESER, PATRI CI A J. RESER, PAUL A. LEAVY, and SUNTERRA PRODUCE TRADERS, I NC., Third- part y Defendant s. MEMORANDUM AND ORDER This case com es before t he court on t he m ot ion for sum m ary j udgm ent ( Dk. 17) filed by t he individual t hird- part y defendant s, Mark A. Reser, Pat ricia J. Reser, and Paul A. Leavy; on t he m ot ion for leave t o file t wo exhibit s under seal ( Dk. 25) filed by t he plaint iff Reser’s Fine Foods, I nc. ( “ Reser’s” ) and t he individual t hird- part y defendant s; and on t he m ot ion for leave t o file a surreply or conduct oral argum ent ( Dk. 33) filed by t he t hird- Dockets.Justia.com part y plaint iff H.C. Schm ieding Produce Co., LLC. ( “ Schm ieding” ) . The court will t ake up t he m ot ions in reverse order. I n Sept em ber of 2016, Reser’s filed t his declarat ory j udgm ent act ion asking for an offset of $269,519.87, as t he alleged dam ages incurred from first a “ recall” and t hen a “ hold” being placed on a load of celery supplied by Schm ieding and C & E Farm s, I nc. in Novem ber of 2015. Reser’s com plaint alleges t hat it did not receive not ice of t he recall and hold unt il aft er it had used t he celery in fresh food product s t hat were ready for shipm ent . Reser’s also alleges it did not receive not ice of t he hold being lift ed unt il aft er it had been required t o dest roy t he finished product cont aining t he celery and t o replace t he dest royed product . ( Dk. 1) . Schm ieding filed an answer and four count erclaim s against Reser’s including t wo count erclaim s for failure t o pay t rust funds and failure t o m ake prom pt paym ent pursuant t o t he Perishable Agricult ural Com m odit ies Act ( “ PACA” ) , 7 U.S.C. §§ 499a, et seq. Schm ieding also filed a cross- claim for indem nificat ion against C & E Farm s, I nc. Most im port ant t o t he sum m ary j udgm ent m ot ion now pending, Schm ieding filed t hird- part y claim s against Mark A. Reser, Pat ricia J. Reser, and Paul A. Leavy for unlawful dissipat ion of PACA t rust asset s. These t hree individual t hird- part y defendant s are seeking sum m ary j udgm ent arguing t hat Reser’s has adequat e and readily available t rust asset s which m ean t hat as a m at t er of 2 law t here has been no dissipat ion of t rust asset s and t here is no basis for secondary personal liabilit y. M ot ion for Le a ve t o File a Su r r e ply ( D k . 3 3 ) . The early filing of a sum m ary j udgm ent m ot ion in t his case has creat ed som e unique procedural issues. I t also has generat ed som e evident iary obj ect ions on m at t ers about which discovery has yet t o occur. I n response t o Schm ieding’s m em orandum opposing sum m ary j udgm ent , t he individual t hird part y defendant s did subm it argum ent s and evidence in t heir reply m em orandum which t he court regards as new even if offered in reply t o Schm ieding’s argum ent s. The court finds t hese unusual circum st ances j ust ify Schm ieding’s filing of it s at t ached surreply. The court has considered t he surreply in it s sum m ary j udgm ent ruling. M ot ion for Le a ve t o File Ex h ibit s Un de r Se a l ( D k . 2 5 ) . Movant s seek leave t o file under seal t wo exhibit s: Reser’s consolidat ed balance sheet t hat reflect s Oct ober t ot als for t he years of 2015 and 2016 and t he second affidavit of Paul A. Leavy t hat discusses, in part , figures from t he balance sheet . ( Dk. 25- 1 and 25- 2) . As a privat ely held corporat ion, Reser’s subm it s t his balance sheet cont ains “ confident ial business inform at ion” t hat includes sensit ive det ails about it s financial condit ion which Reser’s ret ains as privat e business inform at ion. While t hese allegat ions cert ainly leave room for m ore det ail and explanat ion in t he fut ure, t he court accept s for t he lim it ed purpose of t hese sum m ary j udgm ent 3 proceedings t hat Reser’s general int erest in keeping it s financial condit ion privat e current ly out weighs t he public’s presum ed right of access t o t his inform at ion. This conclusion is largely influenced by Reser’s general financial condit ion not having a significant or cent ral issue in t hese im m ediat e proceedings. Should t his change, t he court m ay invit e an addit ional showing on confident ialit y and reconsider it s decision t o seal. For now, t he court grant s t he m ot ion on t his condit ion. M ot ion for Su m m a r y Ju dgm e n t ( D k . 1 7 ) . “ Sum m ary j udgm ent is appropriat e only if ‘t he m ovant shows t hat t here is no genuine issue as t o any m at erial fact and t he m ovant is ent it led t o j udgm ent as a m at t er of law.’” Tolan v. Cot t on, ___ U.S. ____, 134 S.Ct . 1861, 1866 ( 2014) ( quot ing Fed. R. Civ. P. 56( a) ) . A fact ual disput e is “ m at erial” only if it “ m ight affect t he out com e of t he suit under t he governing law.” Anderson v. Libert y Lobby, 477 U.S. 242, 248 ( 1986) . A “ genuine” fact ual disput e requires m ore t han a m ere scint illa of evidence in support of a part y's posit ion. I d. at 252. The m oving part y has t he init ial burden of show ing “ t he absence of a genuine issue of m at erial fact ,” and, if carried, t he non- m oving part y t hen “ m ust bring forward specific fact s showing a genuine issue for t rial as t o t hose disposit ive m at t ers for which [ it ] carries t he burden of proof.” Nat ional Am erican I ns. Co. v. Am erican Re- I nsurance Co., 358 F.3d 736, 739 ( 10t h Cir. 2004) ( int ernal quot at ion m arks and cit at ion om it t ed) . At t he 4 sum m ary j udgm ent st age, t he court is not t o be weighing evidence, credit ing som e over ot her, or det erm ining t he t rut h of disput ed m at t ers, but only deciding if a genuine issue for t rial exist s. Tolan, 134 S. Ct . at 1866. The court perform s t his t ask wit h a view of t he evidence t hat favors m ost t he part y opposing sum m ary j udgm ent . I d. Sum m ary j udgm ent m ay be grant ed if t he nonm oving part y's evidence is m erely colorable or is not significant ly probat ive. Libert y Lobby, 477 U.S. at 250–51. Essent ially, t he inquiry is “ whet her t he evidence present s a sufficient disagreem ent t o require subm ission t o t he j ury or whet her it is so one- sided t hat one part y m ust prevail as a m at t er of law.” I d. at 251–52. Counsel for Schm ieding has filed a declarat ion which includes a review of t he procedural post ure of t his case. ( Dk. 19- 1) . The declarat ion not es t hat t he m ovant s filed for sum m ary j udgm ent before filing t heir answer t o t he t hird- part y claim s. Addit ionally, t here is no scheduling order in place, and Schm ieding has yet t o obt ain discovery from t he m ovant s. At paragraph t en, Mr. Brown declares: Wit hout such discovery, Schm ieding is unable t o t est t he assert ions in t he Leavy Affidavit , including t he allegat ions concerning Reser’s liquidit y, Reser’s preservat ion of PACA t rust asset s and it s abilit y t o pay any j udgm ent ent ered in Schm ieding’s favor. As a result , Schm ieding is wholly unable t o present fact s essent ial t o j ust ify it s opposit ion on fact ual grounds. Not wit hst anding t he foregoing, Schm ieding believes t he Mot ion can and should be dism issed on legal grounds. ( Dk. 19- 1, ¶ 10) . Schm eiding opposes sum m ary j udgm ent , in part , by asking t hat it “ be perm it t ed t o engage in discovery t o review evidence 5 exclusively in t he cont rol of t he m ovant which evidence t he m ovant cont ends est ablishes undisput ed m at erial fact s. Fed. R. Civ. P. 56( d) ( 2) .” ( Dk. 19, p. 7) . The Tent h Circuit recent ly addressed t he operat ion of Rule 56( d) : Rule 56( d) allows a nonm ovant t o show by affidavit or declarat ion t hat , for a specified reason, it cannot present fact s essent ial t o j ust ify opposit ion t o a m ot ion for sum m ary j udgm ent . That is, it provides a m eans for a nonm ovant t o “ ask t he court t o refrain from act ing on t he sum m ary j udgm ent request unt il addit ional discovery can be conduct ed.” Been v. O.K. I ndus., I nc., 495 F.3d 1217, 1235 ( 10t h Cir. 2007) . Thus, Rule 56( d) serves a not icing funct ion t hat “ safeguards against an im provident or prem at ure grant of sum m ary j udgm ent .” See 10B Charles Alan Wright , Art hur R. Miller et al., Federal Pract ice & Procedure § 2740 ( 3d ed. & Sept . 2016 Updat e) ( foot not e om it t ed) . Helget v. Cit y of Hays, Kansas, 844 F.3d 1216, 1226 ( 10t h Cir. 2017) . When t he non- m ovant is seeking discovery, t he following applies: I n t he Tent h Circuit , a non- m ovant request ing addit ional discovery under Rule 56( d) “ m ust specify ( 1) t he probable fact s not available, ( 2) why t hose fact s cannot be present ed current ly, ( 3) what st eps have been t aken t o obt ain t hese fact s, and ( 4) how addit ional t im e will enable [ t he part y] t o obt ain t hose fact s and rebut t he m ot ion for sum m ary j udgm ent .” Birch v. Polaris I ndus., I nc., 812 F.3d 1238, 1249 ( 10t h Cir. 2015) . Gut ierrez v. Cobos, 841 F.3d 895, 908 ( 10t h Cir. 2016) . This Rule 56( d) disput e concerns t he m ovant s’ evidence t hat Reser’s current financial condit ion includes freely available and liquid asset s in an am ount sufficient t o sat isfy t he t rust of $276,519.87, which Schm ieding claim s has been creat ed and held for it s benefit under PACA. The m ovant s’ evidence originally consist ed of only t he affidavit of Paul A. Leavy, 6 Reser’s Chief Financial Officer ( “ CFO” ) and Treasurer. Leavy’s affidavit st at es t hat as CFO and Treasurer, he is “ required t o know whet her Reser’s has freely available liquid asset s in an am ount sufficient t o sat isfy t he $276,519.87.” ( Dk. 17- 1, ¶ 7) . Leavy furt her avers t hat Reser’s has had “ freely available liquid asset s” in a sufficient am ount since Novem ber of 2015 and t hat Reser’s “ has m ade arrangem ent s t o m aint ain freely available liquid asset s in” in a sufficient am ount “ unt il such t im e as a com plet e and final resolut ion is reached for all claim s m ade in t his lawsuit .” ( Dk. 17- 1, ¶ 10) . For purposes of t hese proceedings, Schm ieding sum m arily denies Leavy’s affidavit saying t hat wit hout discovery it “ cannot know what is wit hin Leavy’s personal knowledge” and t hat “ [ b] ecause of t he procedural post ure of t his case, . . . [ it ] cannot present fact s essent ial t o j ust ify it s denial” of Leavy’s st at em ent s.” ( Dk. 19, pp. 2- 3) . Schm ieding’s Rule 56( d) present at ion is deficient in not specifying “ t he probable fact s not available” as t o Reser’s liquidit y, Reser’s preservat ion of PACA t rust asset s, and Reser’s abilit y t o pay any j udgm ent ent ered in Schm ieding’s favor. Gut ierrez, 841 F.3d at 908. Schm ieding also obj ect s t o Leavy’s affidavit as lacking any support ing financial docum ent s. I n reply, t he m ovant s asked t o file under seal Leavy’s second affidavit as support ed by an averred “ t rue and correct copy of t he Oct ober 1, 2016, Consolidat ing Balance Sheet for Reser’s Fine Foods, I nc. and Subsidiaries.” ( Dk. 25, Ex. B, and Dk. 29, p. 6) . This order grant s t hat 7 m ot ion. Leavy avers t hat t he balance sheet “ is a t rue and correct copy of t he sam e docum ent subm it t ed t o t he federal bank wit h which Reser’s does business” and “ is a t rue and accurat e st at em ent of Reser’s financial condit ion as of Oct ober 1, 2016.” ( Dk. 25, Ex. B, ¶¶ 10 and 11) . Leavy’s affidavit point s t o t he first line it em of “ cash” on t he balance sheet as showing “ Reser’s current ly has readily available liquid asset s on hand in an am ount m ore t han sufficient t o sat isfy” Schm ieding’s t rust claim . ( Dk. 29, p. 6) . I n it s sur- reply, Schm ieding obj ect s t hat t he balance sheet is inadm issible hearsay offered t o prove t he t rut h of t he am ount s found on t he docum ent . Schm ieding disput es t hat m ovant s have laid a sufficient foundat ion for t he business records except ion. 1 Even if adm issible, Schm ieding disput es t hat t his record alone is enough t o show Reser’s current asset s or t o est ablish t he availabilit y of such asset s t o pay Schm ieding at t he close of t he case. The court will reserve ruling on t he rest of t hese procedural quest ions unt il it has addressed Schm ieding’s PACA t hird- part y claim s and t he law governing t he elem ent s of t hose claim s. This is due t o Schm ieding assert ing t hat Reser’s liquidit y is not disposit ive of it s t hird- part y claim s: 1 As CFO, Leavy would know t he financial docum ent s prepared and subm it t ed t o t he federal bank wit h which Reser’s does business. Leavy said t he balance sheet was a copy of one of t hese financial docum ent s im pliedly prepared and used t o do business wit h a federal bank. For purposes of t hese sum m ary j udgm ent proceedings, Leavy’s affidavit is undoubt edly succinct , but it is sufficient in showing t he balance sheet was prepared as part of Reser’s business act ivit ies wit h a federal bank, was kept and subm it t ed as part of t hose regular business act ivit ies, and was based on inform at ion known by t he CFO t o be t rue and accurat e. See Unit ed St at es v. Fawaz, 881 F.2d 259, 266 ( 6t h Cir. 1989) . Schm ieding’s hearsay obj ect ion is overruled. 8 Even if t he pre- answer and pre- discovery Mot ion was support ed by adequat e evidence, Movant s could not prove t hat m ere liquidit y is enough t o defeat Schm ieding’s claim s. PACA requires prom pt paym ent . The decision of Reser’s principals t o wit hhold paym ent from Schm ieding for produce t hat was delivered, accept ed, processed and resold by Reser’s is a violat ion of PACA and is cont rary t o t he requirem ent s of t he Uniform Com m ercial Code. ( Dk. 19, p. 7) . Resolut ion of t his quest ion of law im pact s t he rem aining procedural quest ions. St at em ent of Undisput ed Fact s The court regards t he following fact s t o be undisput ed for purposes of deciding t his sum m ary j udgm ent m ot ion. I n February of 2015, Reser’s cont ract ed for Schm ieding t o sell it 91 t ruckloads of celery bet ween February of 2015 and January of 2016 according t o a m ont hly schedule of deliveries. For Novem ber of 2015, Schm ieding was obligat ed t o sell six loads of celery, but Reser’s needed a sevent h load delivered. So, Reser’s issued a purchase order num ber 838903 t o Schm ieding for t he sevent h load which was delivered on Novem ber 11, 2015. On all of it s invoices t o Reser’s, Schm ieding included language for preserving it s PACA t rust right s pursuant t o 7 U.S.C. § 499e( c) ( 4) . Reser’s has not paid Schm ieding for t he celery delivered on Novem ber 11, 2015. Reser’s alleges it did not m ake t his paym ent because of t he recall and hold not ice on t his disput ed Novem ber load of celery. Reser’s also alleges it has wit hheld addit ional paym ent s as an offset for dam ages sust ained as a result of t his disput ed load. I t is undisput ed t hat Reser’s has 9 not paid Schm ieding for $276,519.97 wort h of produce, but Reser’s did purchase and pay Schm ieding for $1,084,396.00 wort h of produce in 2015. According t o t he affidavit of Reser’s CFO, Paul A. Leavy, and t o t he consolidat ed balance sheet subm it t ed in support of his affidavit , Reser’s cash asset is m ore t han sufficient t o cover Schm ieding’s PACA t rust claim . Third- Part y Causes of Act ion For t he t hree individual t hird- part y defendant s, Mark A. Reser, Pat ricia J. Reser, and Paul A. Leavy, Schm ieding relies on t he sam e cent ral allegat ions. Schm ieding sub- t it les each of t hese t hree causes of act ion in parent heses as, “ ( Unlawful Dissipat ion of Trust Asset s by a Corporat e Official) .” ( Dk. 7, ¶¶ 100, 105, 110) . All t hree causes of act ion allege t he individual “ operat ed Reser’s during t he relevant t im e period and, upon inform at ion and belief, is and was in a posit ion of cont rol over t he PACA t rust asset s belonging t o Schm ieding.” ( Dk. 7, ¶¶ 101, 106, and 111) . All t hree are alleged t o have “ failed t o direct Reser’s t o fulfill it s st at ut ory dut y t o preserve PACA t rust asset s and t im ely pay Schm ieding for t he produce it supplied.” ( Dk. 7, ¶¶ 102, 107, 112) . All t hree causes of act ion allege t he individual’s “ failure t o direct Reser’s t o m aint ain PACA t rust asset s and pay Schm ieding for t he produce it supplied was an unlawful dissipat ion of t rust asset s by a corporat e official.” ( Dk. 7, ¶¶ 103, 108, 113) . Finally, Schm ieding concludes all t hree causes of act ion wit h t he sam e allegat ion of inj ury, “ As a result of said unlawful dissipat ion of t rust asset s, Schm ieding 10 has been deprived of it s right as a beneficiary in t he produce t rust and has been denied paym ent for t he produce it supplied.” ( Dk. 7, ¶¶ 104, 109, 114) . PACA Law Underst anding t he scope, purpose and operat ion of t he relevant PACA provisions is helpful in int erpret ing Schm ieding’s claim s and t he elem ent s of proof. The court has found t he following t o be a com plet e and concise sum m ary: The Perishable Agricult ure Com m odit ies Act , which was enact ed in 1930 t o suppress unfair and fraudulent business pract ices in t he m arket ing of perishable com m odit ies, was am ended in 1984 t o provide unique credit prot ect ion t o sellers of perishable agricult ural com m odit ies. Because sellers of perishable com m odit ies had a need t o m ove t heir invent ories quickly, t hey were oft en required t o becom e unsecured credit ors of t heir purchasers, whose credit t hey were oft en unable t o verify. . . . The 1984 am endm ent s creat e, upon t he sale of perishable agricult ural com m odit ies, a t rust for t he benefit of t he unpaid sellers of t he com m odit ies on ( 1) t he com m odit ies, ( 2) t he invent ory or product s derived from t hem , and ( 3) t he proceeds of t he invent ory or product s. 7 U.S.C. § 499e( c) ( 1) - ( 2) ; see also House Report at 3 ( recount ing congressional findings) ; Reaves Brokerage Co. v. Sunbelt Fruit & Veget able Co., 336 F.3d 410, 413 ( 5t h Cir.2003) ( sam e) . As am ended, PACA requires t hat purchasers of perishable agricult ural com m odit ies m aint ain t he t rust by ret aining t he com m odit ies or t heir proceeds unt il t he com m odit ies sellers are paid, and it m akes it unlawful t o “ fail t o m aint ain t he t rust as required.” 7 U.S.C. § 499b( 4) . PACA confers j urisdict ion on dist rict court s t o ent ert ain “ act ions by t rust beneficiaries t o enforce paym ent from t he t rust .” I d. § 499e( c) ( 5) . The t rust creat ed by PACA is a “ nonsegregat ed ‘float ing’ t rust ” on perishable agricult ural com m odit ies and t heir derivat ives unt il all sellers of such com m odit ies are paid. 7 C.F.R. § 46.46( b) . Because t he governing regulat ions specifically cont em plat e t he com m ingling of t rust asset s wit hout defeat ing t he t rust , see id., t he t rust ee of such a t rust is perm it t ed t o convert t rust asset s int o ot her propert y, provided t hat t he t rust ee honors it s obligat ion t o “ m aint ain t rust asset s in a 11 m anner t hat such asset s are freely available t o sat isfy out st anding obligat ions t o sellers of perishable agricult ural com m odit ies,” id. § 46.46( d) ( 1) . Any act inconsist ent wit h m aint aining t he t rust , including “ dissipat ion” of t rust asset s, is deem ed unlawful and a violat ion of PACA. See 7 U.S.C. § 499b; 7 C.F.R. § 46.46( d) ( 1) . “ Dissipat ion” is defined as “ any act or failure t o act which could result in t he diversion of t rust asset s or w hich could prej udice or im pair t he abilit y of unpaid suppliers, sellers, or agent s t o recover m oney owed in connect ion wit h produce t ransact ions.” 7 C.F.R. § 46.46( a) ( 2) . Nickey Gregory Co., LLC v. Agricap, LLC, 597 F.3d 591, 594- 95 ( 4t h Cir. 2010) . I n sum , a com m odit ies purchaser violat es PACA by failing t o ret ain in t rust t he com m odit ies or t heir proceeds unt il t he com m odit ies seller is paid. This t rust is a “ nonsegret at ed float ing t rust ” in which t he com m odit ies and t heir proceeds can be com m ingled or convert ed int o ot her asset s so long as t he t rust asset s are m aint ained t o be “ freely available t o sat isfy out st anding obligat ions” t o t he com m odit ies sellers. I d. Act ing or failing t o act wit h respect t o t he t rust asset s violat es PACA if t he asset s are not m aint ained t o be freely available t o sat isfy obligat ions but are divert ed or if t he unpaid sellers’ recovery of t he owed m oney is prej udiced by t he dissipat ion of asset s. Schm ieding’s t hird- part y claim s against t he individual t hird- part y defendant s are ent it led claim s for dissipat ion of PACA t rust asset s. Schm ieding alleges t he individual defendant s failed t o direct Reser’s bot h t o preserve and m aint ain Schm ieding’s PACA t rust asset s and t o pay Schm ieding for t he produce. The court regards t he following as a relevant 12 sum m ary of individual liabilit y under PACA based on t he handling of t rust asset s: The t hem e of t he PACA t rust devolves t o t his: t o benefit producers of perishable agricult ural it em s sold nat ionally t o consum ers, PACA places dut ies on t hose ent rust ed wit h such it em s for sale—t he licensed sellers, or “ m iddlem en” bet ween producers and consum ers—t o prefer t he producers over ot hers. I n t he event of a breach of t hose dut ies, “ liabilit y at t aches first t o t he licensed seller of perishable agricult ural com m odit ies. I f t he seller's asset s are insufficient t o sat isfy t he liabilit y, ot hers m ay be found secondarily liable....” Shepard v. K.B. Fruit & Veget able, I nc., 868 F.Supp. 703, 706 ( E.D.Pa. 1994) ; see also Golm an–Hayden Co. v. Fresh Source Produce I nc., 217 F.3d 348, 351 ( 5t h Cir. 2000) ( sam e) ; Sunkist Growers, I nc. v. Fisher, 104 F.3d 280, 283 ( 9t h Cir.1997) ( sam e) . “ I ndividual liabilit y ... is not derived from t he st at ut ory language, but from com m on law breach of t rust principles.” Weis–Buy [ Servs., I nc. v. Paglia] , 411 F.3d [ 415] at 421 [ ( 3rd Cir. 2005) ] ; see also Nickey Gregory Co., LLC v. AgriCap, LLC, 597 F.3d 591, 595 ( 4t h Cir. 2010) ( “ General t rust principles govern PACA t rust s unless t he principle conflict s wit h PACA.” ) ; Sunkist , 104 F.3d at 282 [ ( 9t h Cir. 1997) ] ( “ Ordinary principles of t rust law apply t o t rust s creat ed under PACA....” ) . “ ‘Under t he com m on law, t he t rust ee of a t rust is under a dut y t o t he beneficiary in adm inist ering t he t rust t o exercise such care and skill as a m an of ordinary prudence would exercise in dealing wit h his own propert y.’” Weis–Buy, 411 F.3d at 421 ( quot ing Shepard, 868 F.Supp. at 706) . Following t hese basic t rust principles, “ ‘[ a] n individual who is in t he posit ion t o cont rol t he [ PACA] t rust asset s and who does not preserve t hem for t he beneficiaries has breached a fiduciary dut y, and is personally liable for t hat t ort ious act .’“ I d. ( quot ing Morris Okun, I nc. v. Harry Zim m erm an, I nc., 814 F. Supp. 346, 348 ( S.D.N.Y. 1993) ( second alt erat ion in original) ) ; see also Aust in Wakem an Scot t , William Franklin Frat cher & Mark L. Ascher, Scot t and Ascher on Trust s § 24.2.1 ( 2007) ( “ [ I ] f t he t rust ee has m isappropriat ed t rust funds due t o a beneficiary, t he t rust ee is liable in an act ion at law.” ) . Bear Mount ain Orchards, I nc. v. Mich- Kim , I nc., 623 F.3d 163, 167- 68 ( 3rd Cir. 2010) . Thus, t here m ay be secondary liabilit y for an individual who is in 13 a posit ion of cont rol and breaches t he t rust ee’s fiduciary dut y t o preserve t rust asset s. Movant s seek sum m ary j udgm ent arguing t hat Schm ieding cannot prove a breach of t rust obligat ions in t he dissipat ion of t rust asset s, as Reser’s current ly has freely available, liquid asset s in an am ount m ore t han sufficient t o sat isfy Schm ieding’s t rust claim . Movant s assert t here can be no basis here for assert ing secondary liabilit y when t here is not hing t hat t riggers prim ary liabilit y for dissipat ion of asset s. Schm ieding point s t o t he PACA provisions t hat m ake it a violat ion for m erely failing t o m ake prom pt paym ent for produce received. See Pacific I nt ern. Market ing v. A & B Produce, 462 F.3d 279, 282 ( 3rd Cir. 2006) ( PACA m akes it “ unlawful for buyers of produce . . . t o fail t o m ake prom pt paym ent for a shipm ent of produce.” ( int ernal cit at ions om it t ed) ) . As t he Third Circuit not es, a buyer’s violat ion of t his provision “ t riggers civil liabilit y and t he possible suspension or revocat ion of t he buyer’s PACA license.” I d. But , “ Congress lat er am ended PACA t o provide t he addit ional rem edy of a st at ut ory t rust provision for ‘suppliers, sellers, or agent s’ against buyers who fail t o m ake prom pt paym ent .” Pacific I nt ern. Market ing, 462 F.3d at 282 ( cit at ions om it t ed) . The court believes t his dist inct ion in underst anding t he t rust provision and associat ed fiduciary dut ies as an addit ional rem edy is significant here. 14 Schm ieding argues t hat individual liabilit y arises, “ because PACA creat es a fiduciary relat ionship bet ween t he produce seller and purchaser,” but it also recognizes t hese are bases in com m on law t rust principles regarding fiduciary dut ies. ( Dk. 19, p. 12) . Schm ieding concludes t hat court s have held officers or direct ors who had cont rol over PACA t rust asset s “ personally liable for failure t o pay t rust funds.” ( Dk. 19, p. 12) . I n short , Schm ieding is posit ing t hat t here is a fiduciary dut y t o m ake prom pt paym ent . The cases cit ed by Schm ieding, however, recognize personal liabilit y not for failure t o m ake prom pt paym ent but for failure t o preserve t rust funds. See Bear Mount ain Orchards, 623 F.3d at 169 ( “ secondarily liable for breaching t he dut y t o preserve t he PACA t rust ” ) ; Weis- Buy Servs., 411 F.3d at 420- 21 ( breach t he “ fiduciary dut y t o prot ect PACA t rust asset s” ) ; Golm an- Hayden Co. v. Fresh Source Produce, 217 F.3d 348, 351 ( 5t h Cir. 2000) ( “ who breach t heir fiduciary dut y t o preserve t hose asset s, m ay be held personally liable under PACA.” ) ; Sunkist Growers, 104 F.3d at 283 ( “ breach t heir fiduciary dut y t o preserve t hose asset s” ) . I n Golm anHayden, t he court explained t hat t his liabilit y “ is prem ised on t he breach of one’s fiduciary dut y t o prot ect PACA t rust asset s by an individual who is in a posit ion t o cont rol such asset s.” 217 F.3d at 351 n.18. Schm ieding’s posit ion is, “ Thus, an individual who cont rols a produce purchaser’s purse st rings can be liable t o produce suppliers for violat ion of eit her t he prom pt paym ent 15 provisions or t he t rust provisions of PACA. See, Hiller Cranberry Prods., et al., supra.” ( Dk. 19, p. 12) . The court does not read Schm ieding’s cit ed cases as showing individual liabilit y for violat ing PACA’s prom pt paym ent provisions. Those cases st and for breach of fiduciary dut y based upon t he failure t o preserve t rust asset s. See Hiller Cranberry Product s, I nc. v. Koplovsky, 165 F.3d 1, 9 ( 1st Cir. 1999) ( quot ing Morris Okun, I nc. v. Harry Zim m erm an, I nc., 814 F. Supp. 346, 348 ( S.D.N.Y. 1993) ) . Schm ieding’s reliance on Bronia, I nc. v. Ho, 873 F. Supp. 854, 861 ( S.D.N.Y. 1995) , is also m isplaced. The court t here found t hat t he t rust ee had not m aint ained t he asset s as t o be freely available t o sat isfy obligat ions but inst ead had relinquished cont rol of t he com m odit ies wit hout securing paym ent . The holding in Bronia em phasizes t hat t he breach of fiduciary dut y depends on keeping t he t rust asset s “ freely available.” The Bronia decision does not involve PACA’s prom pt paym ent provisions. Schm ieding’s m em orandum fails t o provide legal aut horit y for finding separat e individual liabilit y based sim ply on a violat ion of PACA’s prom pt paym ent provisions. Applicat ion and Conclusions The court concludes t hat Schm ieding’s individual t hird- part y claim s are legally viable only in assert ing secondary liabilit y for breach of t he fiduciary dut y t o preserve t rust asset s. Schm ieding has not com e forward wit h legal aut horit ies t hat show individual legal liabilit y exist s for violat ing 16 PACA’s prom pt paym ent provisions. Schm ieding’s individual t hird- part y claim s depend on liabilit y derived from com m on law breach of t rust principles and are not derived from t he st at ut ory language. Bear Mount ain Orchards, 623 F.3d at 167. Thus, Schm ieding m ust allege and prove t hat t he individual t hird part ies failed t o preserve PACA t rust asset s for t he benefit of Schm ieding. I d. Schm ieding’s t hird- part y claim s for breach of fiduciary dut ies in failing t o preserve PACA t rust asset s is governed by t his law. The com m ingling of t rust asset s is expect ed. A t rust ee “ is perm it t ed t o convert t rust asset s int o ot her propert y, provided t hat t he t rust ee honors it s obligat ion t o m aint ain t rust asset s in a m anner t hat such asset s are freely available t o sat isfy out st anding obligat ions t o sellers of perishable agricult ural com m odit ies.” Nickey Gregory Co., 597 F.3d at 595. Thus, Schm ieding m ust allege and prove an “ act inconsist ent wit h m aint aining t he t rust .” I d. at 595; see 7 C.F.R. § 46.46( d) ( 1) 2 . “ Congress explained t hat ‘t he purpose of t he t rust is t o increase t he legal prot ect ion for unpaid sellers and suppliers . . . unt il full paym ent of sum s due have been received by t hem .” H.C. Schm ieding Produce v. Alfa Qualit y Produce, 597 F. Supp. 2d 313, 31516 ( E.D.N.Y. 2009) ( quot ing “ R” Best Produce, I nc. v. Shulm an- Rabin 2 “ Com m ission m erchant s, dealers and brokers are required t o m aint ain t rust asset s in a m anner t hat such asset s are freely available t o sat isfy out st anding obligat ions t o sellers of perishable agricult ural com m odit ies. Any act or om ission which is inconsist ent wit h t his responsibilit y, including dissipat ion of t rust asset s, is unlawful and in violat ion of sect ion 2 of t he Act , ( 7 U.S.C. 499b) .” 17 Market ing Corp., 467 F.3d 238, 241 ( 2d Cir. 2006) ) . Thus, Schm ieding m ust allege and prove t hat t he t rust ees act ed or failed t o act inconsist ent wit h m aint aining t he t rust such t hat asset s are not freely available t o sat isfy t he out st anding obligat ions. The m ovant s seek sum m ary j udgm ent arguing t hat Reser’s has m aint ained liquid asset s freely available t o sat isfy any claim of out st anding t rust obligat ions t o Schm ieding. More not able t o t he court is t hat Schm ieding’s t hird- part y claim s fail t o allege t he m anner in which t he t rust ees have failed t o m aint ain t rust asset s such t hat t hey are not freely available t o sat isfy out st anding obligat ions t o Schm ieding. Such an allegat ion seem s not only appropriat e, but also necessary here, part icularly when Schm ieding has not alleged any circum st ances t hat quest ion Reser’s financial solvency or financial abilit y t o m aint ain t rust asset s. This is not a case in which t he financial insolvency or incapacit y of t he purchaser is accept ed, given, quest ioned, or alleged. I nst ead, t his is a case in which t he unpaid supplier m akes no relevant allegat ions about t he purchaser’s financial capacit y or about t he purchaser divert ing t rust asset s such t hat t hey are not freely available t o sat isfy t rust obligat ions. I nst ead, t he supplier appears t o adm it t hat it is not in a posit ion t o disput e or even quest ion t he purchaser’s evidence showing it t o be financially st able and quit e capable of paying t hrough cash t he assert ed t rust obligat ions. Thus, t he court finds t hat Schm ieding has failed t o allege a viable breach of fiduciary dut y claim 18 against t he individual t hird- part y defendant s for failing t o m aint ain t rust asset s. The procedural j unct ure of t his case weighs against grant ing sum m ary j udgm ent . The need for discovery cert ainly depends upon t here being first alleged a viable claim warrant ed under exist ing law and based on fact ual cont ent ions having or likely t o have evident iary support aft er a reasonable chance for invest igat ion or discovery. Therefore, dism issal is appropriat e here for failure t o allege a viable claim of breach of fiduciary dut y for failure t o m aint ain or preserve t rust asset s. The court , however, will give Schm ieding t he opport unit y t o am end it s t hird- part y individual claim s on t he condit ion t hat it first files a separat e m ot ion seeking leave t o am end which sat isfies t he condit ions for grant ing leave and is consist ent wit h Fed. R. Civ. P. 11( b) . I T I S THEREFORE ORDERED t hat t he m ot ion for leave t o file t wo exhibit s under seal ( Dk. 25) filed by Reser’s and t he individual t hird- part y defendant s is grant ed on t he condit ion st at ed above; I T I S FURTHER ORDERED t hat Schm ieding’s m ot ion for leave t o file a surreply ( Dk. 33) is grant ed, and t he court considered t he sam e in it s ruling here; I T I S FURTHER ORDERED t hat t he m ot ion for sum m ary j udgm ent ( Dk. 17) filed by t he individual t hird- part y defendant s is t reat ed as 19 a m ot ion t o dism iss for failure t o st at e a claim for relief and is grant ed upon t he condit ions st at ed above. Dat ed t his 1st day of March, 2017 at Topeka, Kansas. s/ Sam A. Crow Sam A. Crow, U.S. Dist rict Senior Judge 20

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