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In re Spiech Farms, LLC

United States District Court, W.D. Michigan, Southern Division

December 17, 2019

In re SPIECH FARMS, LLC, Debtor.
SPIECH FARMS, LLC, Appellee. PRODUCE PAY, INC., Appellant,



         This is 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.

         I. Background

         Debtor-Appellee 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 6-39, PageID.3037.)

         The 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 higher commission.

         PP was 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.[1] Under state law, U.C.C. §§ 2-401 and 2-501, [2] 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.

         The 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.

         Meanwhile, 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.

         In the 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.

         Apparently, 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 PACA claim.

         II. Standard of Review

         The 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).

         III. PACA

         PP 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 ...

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