United States District Court, W.D. Michigan, Southern Division
In re SPIECH FARMS, LLC, Debtor.
SPIECH FARMS, LLC, Appellee. PRODUCE PAY, INC., Appellant,
T. NEFF, UNITED STATES DISTRICT JUDGE.
an appeal from a bankruptcy proceeding in the Western
District of Michigan. Appellant Produce Pay, Inc.
(“PP”) appeals a decision by the bankruptcy court
denying its claim for protection under the Perishable
Agricultural Commodities Act (PACA), 7 U.S.C. § 499a
et seq. PP sought to exempt certain funds held by
the debtor from the bankruptcy estate, under 11 U.S.C. §
541(d). PP claims that those funds are protected by a PACA
trust. The bankruptcy court denied the exemption and PP now
appeals that decision. In addition, PP appeals the bankruptcy
court's decision to allow the debtor to pay the fees of
its attorneys and advisors. For the reasons herein, PP's
appeal will be denied and the decisions of the bankruptcy
court will be affirmed.
Spiech Farms, LLC is a grower and processor of blueberries,
asparagus, and grapes. Before filing for bankruptcy, it
relied upon Chemical Bank to finance its operations. Spiech
mortgaged substantially all of its assets to Chemical Bank in
exchange for loans and a line of credit. Spiech fell on hard
times in early 2017 when frost destroyed a significant
portion of its blueberry crop. In an attempt to shore up its
financial state, Spiech entered into a “Distribution
Agreement” with PP, which billed itself as a
“multi-service finance company” that could
provide “access to cash flow . . . the day after you
ship your produce to the U.S.” (Op. re PACA Claim of
Produce Pay, Inc. (Bankr. W.D. Mich. Oct. 18, 2018), ECF No
terms of the agreement between Spiech and PP are somewhat
opaque, but the nuts and bolts are fairly straightforward.
The parties agreed that Spiech would notify PP that it has a
pallet of produce for sale by registering that pallet on
PP's software platform. PP could then purchase the pallet
of produce from Spiech for half the market price. In
connection with that purchase, Spiech would assign “all
right, title and interest” in the produce to PP, but
Spiech would keep the produce in its possession.
(Distribution Agreement § 3.2, ECF No. 6-3, PageID.232.)
Spiech would then sell, or attempt to sell, that produce to a
grocery store or other customer. Whether Spiech sold the
produce or not, it was obligated to repay the money it
received from PP, plus a commission, within 30 days after
receipt. After 30 days, the commission rate increased. After
60 days, Spiech had to “repurchase” the produce
from PP by repaying the purchase price to PP, plus a
commission. (Id. § 6.4, PageID.237.) In effect,
the agreement allowed Spiech to obtain short-term loans from
PP as a partial advance on payments that Spiech expected to
receive from its existing customers. Also, by listing its
produce on PP's software platform, Spiech could
potentially reach new customers. If Spiech sold the produce
to a customer introduced by PP, then PP would receive a
not deterred by the fact that Spiech had mortgaged its
assets, including its produce and accounts receivable, to
Chemical Bank. PP apparently expected that its share of the
proceeds from the produce would be protected by a PACA trust,
with rights superior to those held by Chemical Bank. By
taking ownership of the produce before the sale to
Spiech's customer, PP could position itself as an
“unpaid supplier [or] seller” of a perishable
agricultural commodity, with all the rights of a beneficiary
to a trust created under 7 U.S.C. § 499e(c). It did not
work out that way in practice, however, because PP never
acquired ownership of the produce sold by Spiech. Each time
that Spiech notified PP of a pallet of produce for sale,
Spiech had already sold that pallet and delivered it to a
customer. Under state law, U.C.C. §§ 2-401
and 2-501,  title to the produce transferred to the
customer upon delivery. Spiech could not give PP any rights
in the produce that Spiech did not have at the time.
Consequently, PP could not sell or supply produce that it
never owned or possessed.
agreement between Spiech and PP did not do much to help
Spiech financially. In fact, it may have made things worse.
Around the time that PP began disbursing money to Spiech in
early September 2017, Chemical Bank discovered that PP had
filed a financing statement against Spiech's produce and
the proceeds therefrom. Chemical Bank expressed concerns to
Spiech about that statement, because it suggested a possible
violation of the loan agreement between Spiech and Chemical
Bank. The loan agreement prohibited Spiech from granting
additional security interests in its property to other
entities. The following month, Spiech told Chemical Bank that
PP might be entitled to protection under PACA. Chemical Bank
believed that PP was attempting to circumvent the bank's
security interests in Spiech's property. Chemical Bank
declared Spiech to be in default and removed money from
Spiech's deposit account in November.
the relationship between Spiech and PP deteriorated. In
October, Spiech began falling behind on its payments to PP.
By November, Spiech lacked the funds to repay PP, due in part
to its default under the loan agreement with Chemical Bank,
and was unable to continue operations. On November 22, 2017,
Spiech filed a petition for bankruptcy relief in the Western
District of Michigan under Chapter 11 of the Bankruptcy Code.
proceedings before the bankruptcy court, PP asserted a PACA
claim against the bankruptcy estate in the amount of $1, 002,
273.70, to recover the unpaid cash advances that PP made to
Spiech. The bankruptcy court held an evidentiary hearing on
the claim in September 2018. After the hearing, the court
denied PP's claim in an opinion issued on October 18,
2018. It also denied PP's motion for reconsideration in
an order entered on November 20, 2018. The denial of that
claim is under review by this Court.
PP also challenges the bankruptcy court's decision to
allow Spiech to pay the fees of its attorneys and its
financial advisor. PP objected that paying these fees would
dissipate the assets in the PACA trust. The bankruptcy court
overruled this objection because PP did not have a valid PACA
claim. On appeal, PP acknowledges that its challenge to the
payment of professional fees depends upon the success of its
Standard of Review
bankruptcy court's conclusions of law are reviewed de
novo. Pierce v. Underwood, 487 U.S. 552, 558
(1988); Rowell v. Chase Manhattan Auto. Fin. Corp. (In re
Rowell), 359 F.Supp.2d 645, 647 (W.D. Mich. 2004).
Issues of statutory interpretation are questions of law, and
are thus subject to review de novo. ITT Indus.
v. BorgWarner, Inc., 506 F.3d 452, 457 (6th Cir. 2007).
The bankruptcy court's findings of fact are reviewed
under a “clearly erroneous” standard.
Inv'rs Credit Corp. v. Batie (In re Batie), 995
F.2d 85, 88 (6th Cir. 1993).
seeks the benefit of a PACA trust. In PACA, Congress
recognized that certain financing arrangements with buyers of
perishable agricultural commodities can create a
“burden on commerce in perishable agricultural
commodities” and are ...