February 1, 2018
Authored by: Mark Duedall and Leah Fiorenza McNeill
Happy 2018! We at The Bankruptcy Cave have been itching to write about the Cherry Growers Chapter 11 case – which really is ground-breaking – but the holidays, life, and yes, work for clients too, all just got in the way. But with each passing week, the case stayed on our minds. So now that time permits, here is the writeup – and see below for the remarkable significance of the case.
In re Cherry Growers (now reported at 576 B.R. 569, Bankr. W.D. Mich. 2017), is a garden-variety produce-related bankruptcy case. (Ha ha, “garden-variety” produce, get it?) The Debtor bought produce and sold it to others, in addition to conducting other food distribution activities. When the Debtor filed for bankruptcy, there was the typical push-and-pull between a lender secured by the Debtor’s inventory and a/r, and a supplier claiming a trust interest in those same assets, protected by the Perishable Agricultural Commodities Act (“PACA”). This was litigated in the context of the Debtor’s motion to use cash collateral, and the PACA supplier’s objection, asserting that the Debtor cannot use PACA trust assets absent immediate payment of the claims protected by the PACA trust.
The opinion provides some in-depth analysis of how courts should approach this issue when a debtor obtains some assets from PACA-protected produce, and obtains other assets from non-produce business activities, like sub-letting its warehouse space. But that is not what makes the case interesting. There was also a big fight in the pleadings over whether $450,000 worth of frozen cherries sitting in awarehouse since 2014 (!!!) could serve as adequate protection for $350,000 in asserted PACA claims (yes, that’s right, monstrous blocks of frozen fruit lying dormant in a refrigerated warehouse for three+ years can be “adequate protection” – amazing). And we got a kick out of Judge Dales’ wry reference to the “voracious PACA trust” that seeks to gobble all estate assets. But that is not why the case is interesting either.
Judge Dales’ conducted a thorough and scholarly analysis of the interplay of Section 541 (property of the estate) and the common law of trusts, which PACA incorporates. He concluded that PACA, when filtered through Section 541, does not require the immediate payment of PACA claims, or the immediate segregation of assets to pay PACA claims – all that is required is “adequate protection” of the PACA trust interests under Section 361 of the Bankruptcy Code. And because the Debtor showed it had several million dollars of assets, it could adequately protect a $350,000 PACA claim. Hence, the Debtor could use its cash, A/R, and inventory to continue to operate, as opposed to writing an immediate check for $350,000 to the PACA claimant (which likely would have been impossible, as most of the Debtor’s assets were real property, equipment, and the like, not liquid or susceptible to immediate conversion to cash). In short, the case could go on, the Debtor would not have to shut down immediately for lack of $350,000 in cash, and it can try to reorganize under Section 1129 of the Code.
And so, we get to the real fascinating part of the case. At the end of the ruling, the Court reminds us that it sometimes makes sense to actually read the Bankruptcy Code. In this case, the definition of a lien under Section 101(37) of the Bankruptcy Code: “a charge against or interest in property to secure payment of a debt or performance of an obligation.” Judge Dales then remarks that this definition of a lien “embraces both a secured creditor’s and a PACA claimant’s interest in particular items in the nature of property.”
Wow – can we all grasp the consequence of that? A PACA trust interest is really just a “lien,” by the Bankruptcy Code’s definition. And that would make a PACA trust right just another secured claim under Section 506(a) of the Bankruptcy Code. As we all know, weird things can happen to secured claims – they can be crammed down under Section 1129(b)(2)(A), and paid out over years. They can be surcharged under Section 506(c) of the Bankruptcy Code. So picture this – a Chapter 11 debtor fights off the PACA creditors in a cash collateral fight. The Chapter 11 debtor then seeks to cramdown the PACA creditors, paying them over 20 years (or more!). And a really smart Chapter 11 debtor adds a third party release to its plan, providing that the PACA creditors cannot pursue officers and directors (which they normally can under PACA) based on some miscellaneous new consideration provided by the Ds and Os to the reorganized debtor. Let’s all watch how Cherry Growers is used – it could have a real impact on how PACA claims are addressed in Chapter 11.
Of course, as additional protection of the PACA creditors, there is always the $450,000 worth of frozen cherries that have been sitting in the back of the freezer since 2014 . . .