Coosemans v. Gargiulo

05-6962
Coosemans v. Gargiulo
UNITED STATES COURT OF APPEALS 1
FOR THE SECOND CIRCUIT 2
August Term, 2006 3
(Argued November 30, 2006 Decided May 4, 2007) 4
Docket No. 05-6962-cv 5
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COOSEMANS SPECIALTIES, INC., 7
Plaintiff-Appellee, 8
COOSEMANS SPECIALTIES, INC., KATZMAN BERRY CORP., KATZMAN 9
PRODUCE, INC., ROBERT MASHA SALES, INC. and TOP BANANA, L.L.C., 10
Plaintiffs-Counter-Claimants-Appellees, 11
—v.— 12
JACK GARGIULO, JERRY BADER, MARKET SERVICE, INC., d/b/a 13
ACCOUNTS RECEIVABLE MANAGEMENT SOLUTIONS, also d/b/a ARMS, 14
TOP BANANA LLC, STATE OF NEW YORK and GRACE GARGIULO, 15
Defendants, 16
ALAN GARGIULO, 17
Defendant-Counter-Claimant, 18
ALAN J. GARGIULO, JR., 19
Defendant-Intervenor-Defendant-Counter-Claimant, 20
PHILADELPHIA PRODUCE CREDIT BUREAU LLC, 21
Defendant-Intervenor-Defendant-Intervenor-Plaintiff- 22
Counter-Claimant-Appellee, 23
BALDOR SPECIALTY FOODS, “R” BEST PRODUCE, INC. and PUTNAM 24
PRODUCE INC., 25
Defendants-Intervenors-Plaintiffs-Appellees, 26

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SUPREME CUTS, EAST WEST FRESH FARMS, LLC, AFL FRESH & FROZEN, 1
INC., B.T. PRODUCE CO., INC., D’ARRIGO BROS. CO. OF NEW YORK, 2
INC., E. ARMATA INC., FIERMAN PRODUCE EXCHANGE INC., FRUITCO 3
CORP., HUNTS POINT TROPICAL, INC., J&J PRODUCE CO., KLEIMAN & 4
HOCHBERG, INC., MIKE SIEGEL INC., MORRIS OKUN, INC., NATHEL & 5
NATHEL, INC., PAUL STEINBERG ASSOCIATES, INC., SQUARE PRODUCE 6
CO., INC., 7
Defendants-Intervenors-Plaintiffs-Counter-Claimants, 8
M. TROMBETTA & SONS, INC., 9
Defendant-Intervenor-Plaintiff-Counter-Claimant, 10
ALAN J. GARGIULO, SR., a/k/a Jack Gargiulo, and DOM’S WHOLESALE & 11
RETAIL CENTER, INC., a/t/a Dom’s Wholesale Market, 12
Defendants-Intervenors-Defendants-Counter-Claimants-Appellants, 13
NARA BANK, N.A., 14
Intervenor-Plaintiff, 15
PLATINUM FUNDING CORP., 16
Intervenor-Plaintiff-Counter-Defendant. 17
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Before: MESKILL, CARDAMONE and RAGGI, Circuit Judges. 19
Appeal from a judgment of the United States District 20
Court for the Southern District of New York, Peck, Chief 21
Magistrate Judge, entered on December 2, 2005, against corporate 22
trustee and controlling person in action to recover amounts due 23
on unpaid invoices, attorneys’ fees and interest under the 24
Perishable Agricultural Commodities Act, 7 U.S.C. § 499a et seq. 25
Affirmed. 26
PAUL T. GENTILE, Gentile & Dickler, New York, NY, 27
for Defendants-Appellants. 28

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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-
JEFFREY M. CHEBOT, Whiteman, Bankes & Chebot, LLC, 1
Philadelphia, PA, 2
for Appellee Philadelphia Produce Credit Bureau, 3
submitting on behalf of the Plaintiffs- 4
Intervenors-Plaintiffs-Appellees. 5
Of Counsel: 6
Louis W. Diess, III, McCarron & Diess, Washington, 7
D.C., 8
for Top Banana, LLC, Coosemans Specialties, Inc., 9
Katzman Berry Corp., Katzman Produce, Inc., Robert 10
Masha Sales, Inc. and Supreme Cuts, LLC. 11
Leonard Kreinces, Kreinces & Rosenberg, Westbury, 12
NY, 13
for AFL Fresh & Frozen, Inc., E. Armata, Inc., 14
B.T. Produce Co., Inc., D’Arrigo Bros. Co. of New 15
York, Inc., Fierman Produce Exchange, Inc., 16
Fruitco Corp., Hunts Point Tropical, Inc., J&J 17
Produce, Nathel & Nathel, Inc., Morris Okun, Inc., 18
Mike Siegel, Inc., Square Produce Co., Inc., 19
Kleiman & Hochberg, Inc., Paul Steinberg 20
Associates, Inc. and Redi Fresh Produce, Inc. 21
MESKILL, Circuit Judge: 22
This appeal examines the extent of personal liability 23
of a Perishable Agricultural Commodities Act (PACA), 7 U.S.C. 24
§ 499e(c), trustee controlling person for entering into a 25
factoring agreement resulting in a loss of trust assets for the 26
trust beneficiaries and whether attorneys’ fees are appropriate.1
27
Defendants Dom’s Wholesale & Retail Center, Inc. 28
(Dom’s) and Alan J. Gargiulo, Sr. (Gargiulo), the President, sole 29

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shareholder and sole director of Dom’s, appeal from a judgment of 1
the United States District Court for the Southern District of New 2
York, Peck, Chief Magistrate Judge, awarding $1,704,680.75 in 3
principal, interest and attorneys’ fees to plaintiffs and 4
intervenor plaintiffs (collectively “plaintiffs” or “PACA trust 5
beneficiaries”), who are unpaid sellers and suppliers of fresh 6
produce with claims against defendants under the statutory trust 7
provisions of PACA. Defendants assert that the district court 8
erred when it held Gargiulo personally liable for Dom’s PACA- 9
related debts and awarded attorneys’ fees to plaintiffs. We 10
affirm. 11
BACKGROUND 12
Plaintiffs filed suit against Dom’s and Gargiulo in the 13
Southern District of New York to enforce PACA’s statutory trust 14
provisions requiring produce buyers to hold perishable 15
agricultural commodities, and receivables and proceeds from the 16
sale of those commodities, in trust for the benefit of unpaid 17
sellers until full payment has been made. 7 U.S.C. § 499e(c)(2). 18
Plaintiffs sought to recover damages from both Dom’s and Gargiulo 19
for the principal amount due on unpaid invoices plus pre-judgment 20
interest and attorneys’ fees. 21
Platinum Funding Corporation (Platinum) subsequently 22
intervened in plaintiffs’ action, claiming that Dom’s owes it 23
over one million dollars pursuant to the factoring agreement 24

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between them. Dom’s and Gargiulo deny Platinum’s allegations and 1
assert that Platinum owes Dom’s $1,773,031 for breaching the 2
factoring agreement. In addition, defendants contend that 3
$4,925,659 in unidentified accounts receivable were improperly 4
“written off” by Platinum. The district court severed these 5
disputed matters from plaintiffs’ PACA claims. The disputed 6
claims are pending. 7
Plaintiffs’ motion for summary judgment was referred to 8
Chief Magistrate Judge Peck, who recommended granting summary 9
judgment to plaintiffs against both Dom’s and Gargiulo for the 10
principal amount in unpaid invoices plus interest and attorneys’ 11
fees. The magistrate judge concluded that (1) as Dom’s sole 12
shareholder, officer and director, Gargiulo should be held 13
personally liable for dissipating the PACA trust assets, (2) 14
exhaustion of Dom’s assets (if any), that were tied up in 15
litigation with Platinum, was not required prior to holding 16
Gargiulo personally liable, and (3) plaintiffs were entitled to 17
an award of attorneys’ fees and interest based on language 18
contained in their invoices. The district court adopted the 19
magistrate judge’s report and recommendation and granted summary 20
judgment for plaintiffs. On the consent of the parties, the 21
magistrate judge awarded plaintiffs $1,704,680.75 in principal, 22
interest and attorneys’ fees in an order and final judgment 23
pursuant to Fed.R.Civ.P. 54(b) certifying that there was no just 24

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reason for delaying entry of final judgment against defendants. 1
On appeal, defendants concede that Dom’s is liable for 2
the principal amount and interest due on unpaid invoices, but 3
challenge the district court’s determination that Gargiulo is 4
personally liable for Dom’s PACA-related debts. Defendants also 5
challenge the district court’s award of attorneys’ fees. 6
DISCUSSION 7
Federal jurisdiction is based on the action being 8
brought pursuant to PACA, a federal statute. See 7 U.S.C. 9
§ 499e(c)(5). We have appellate jurisdiction from the final 10
judgment entered after the Fed.R.Civ.P. 54(b) certification. 11
We review the district court’s grant of summary 12
judgment de novo, viewing the evidence in the light most 13
favorable to the nonmoving party. Greenidge v. Allstate Ins. 14
Co., 446 F.3d 356, 360-61 (2d Cir. 2006). Summary judgment is 15
proper only if “there is no genuine issue as to any material 16
fact” and the moving party is “entitled to a judgment as a matter 17
of law.” Fed.R.Civ.P. 56(c). Because the relevant facts on this 18
appeal are undisputed , we review only the district court’s 19
conclusions of law. 20
A. PACA 21
We recently reviewed the history of PACA and its trust 22
provisions in “R” Best Produce v. Shulman-Rabin Mktg. Corp., 467 23
F.3d 238, 241-42 (2d Cir. 2006); see also Am. Banana Co. v. 24

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Republic Nat’l Bank of N.Y., 362 F.3d 33, 36-38 (2d Cir. 2004). 1
Congress enacted PACA in 1930 to regulate the interstate sale and 2
marketing of perishable agricultural commodities. See Am. Banana 3
at 36. The statute provides growers and sellers of agricultural 4
produce with “a self-help tool enabling them to protect 5
themselves against the abnormal risk of losses resulting from 6
slow-pay and no-pay practices by buyers or receivers of fruits 7
and vegetables.” D.M. Rothman & Co. v. Korea Commercial Bank of 8
N.Y., 411 F.3d 90, 93 (2d Cir. 2005) (alterations and internal 9
quotation marks omitted). Under the relevant provision, 10
perishable commodities or proceeds from the sale of those 11
commodities are held in trust by the buyer for the benefit of the 12
unpaid seller until full payment is made: 13
Perishable agricultural commodities received by a 14
commission merchant, dealer, or broker . . . and any 15
receivables or proceeds from the sale of such commodities 16
. . . shall be held by such commission merchant, dealer, 17
or broker in trust for the benefit of all unpaid 18
suppliers or sellers of such commodities or agents 19
involved in the transaction, until full payment of the 20
sums owing in connection with such transactions has been 21
received by such unpaid suppliers, sellers, or agents. 22
7 U.S.C. § 499e(c)(2). As a PACA trustee, a produce buyer is 23
charged with a duty “to insure that it has sufficient assets to 24
assure prompt payment for produce and that any beneficiary under 25
the trust will receive full payment.” D.M. Rothman, 411 F.3d at 26
94 (internal quotation marks omitted). PACA affords produce 27
sellers “a highly unusual trust beneficiary status that permit[s] 28

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them, in the case of defaults, to trump the buyers’ other 1
creditors, including secured ones.” Am. Banana, 362 F.3d at 38. 2
B. Personal Liability Under PACA 3
An individual who is in a position to control the 4
assets of the PACA trust and fails to preserve them, may be held 5
personally liable to the trust beneficiaries for breach of 6
fiduciary duty. See Weis-Buy Servs. v. Paglia, 411 F.3d 415, 7
420-21 (3d Cir. 2005); Patterson Frozen Foods v. Crown Foods 8
Int’l, 307 F.3d 666, 669 (7th Cir. 2002); Golman-Hayden Co. v. 9
Fresh Source Produce, 217 F.3d 348, 351 (5th Cir. 2000); Hiller 10
Cranberry Prods. v. Koplovsky, 165 F.3d 1, 8-9 (1st Cir. 1999); 11
Sunkist Growers v. Fisher, 104 F.3d 280, 282-83 (9th Cir. 1997); 12
accord Bronia, Inc. v. Ho, 873 F.Supp. 854, 860-61 (S.D.N.Y. 13
1995); Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F.Supp. 14
346, 348-50 (S.D.N.Y. 1993). Gargiulo concedes that as Dom’s 15
President, sole shareholder and sole director, he was in a 16
position of control over the PACA trust assets and that, as such, 17
he can be held personally liable for any breaching of Dom’s 18
fiduciary duties. However, Gargiulo argues that he is not 19
personally liable at this time because (1) he did not “dissipate” 20
the PACA trust assets, and (2) plaintiffs have not exhausted 21
Dom’s corporate assets. We reject both arguments. 22
I. Dissipation of Trust Assets 23
PACA trustees “are required to maintain trust assets in 24

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a manner that such assets are freely available to satisfy 1
outstanding obligations to sellers of perishable agricultural 2
commodities.” 7 C.F.R. § 46.46(d)(1) (emphasis added). PACA 3
regulations provide that “[a]ny act or omission which is 4
inconsistent with this responsibility, including dissipation of 5
trust assets, is unlawful.” Id. “Dissipation” is defined as 6
“any act or failure to act which could result in the diversion of 7
trust assets or which could prejudice or impair the ability of 8
unpaid suppliers, sellers, or agents to recover money owed in 9
connection with produce transactions.” Id. § 46.46(a)(2) 10
(emphasis added). Thus, to determine whether a PACA trustee’s 11
actions or omissions constitute a breach of fiduciary duty, we 12
examine whether the trustee “in any way encumbered the funds or 13
rendered them less freely available to PACA creditors.” D.M. 14
Rothman, 411 F.3d at 99 (alterations and internal quotation marks 15
omitted). 16
Defendants contend that they did not dissipate PACA 17
trust assets because Dom’s factoring agreement with Platinum was 18
commercially reasonable and any loss of assets was due solely to 19
Platinum’s breach of the agreement. We have held that a PACA 20
trustee does not commit a per se breach of fiduciary duty when 21
trust funds are used to conduct a commercial transaction with a 22
non-PACA party. E. Armata, Inc. v. Korea Commercial Bank of 23
N.Y., 367 F.3d 123, 133 (2d Cir. 2004) (citation omitted). 24

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Armata was a PACA suit against a third-party bank that charged 1
fees for maintaining a checking account for the PACA trustee 2
produce buyer. Id. at 126-27. The PACA trustee was not a 3
defendant in that suit. Id. at 127. The Armata Court was only 4
concerned with the liability of the third-party bank. Id. We 5
determined that, in order to hold a third-party transferee in 6
breach of trust for receipt of PACA funds there first must be a 7
determination that the transfer of funds itself to the bank was 8
in breach of trust. Id. at 128-29. It was in that setting that 9
we held that a PACA trustee’s payment of “commercially 10
reasonable” interest and fees in support of its duty to maintain 11
trust assets as “freely available” to repay its PACA creditors 12
does not constitute a breach of trust under PACA. Id. at 134. 13
We noted that there was nothing unusual about having funds 14
available for PACA creditors without some relationship with a 15
bank. Id. We remanded in Armata for the district court to 16
determine in its analysis of the facts the commercial 17
reasonableness of the agreement between the PACA trustee and the 18
bank. Id. We declined to hold that no breach of a PACA trust 19
can occur with respect to funds that are eventually paid to PACA 20
creditors. Id. at 131. 21
We have never held that a PACA trustee can escape all 22
liability for entering into a transaction that results in a large 23
loss of PACA assets merely by showing that the transaction was 24

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commercially reasonable on its face. Nothing in E. Armata 1
suggests that, simply by entering into a commercially reasonable 2
transaction, a PACA trustee necessarily avoids breaching its 3
fiduciary duty. Instead, whether a transaction is commercially 4
reasonable is simply one factor that may be relevant in 5
determining whether a PACA trustee has met its ultimate burden of 6
proving that trust assets remained freely available to 7
plaintiffs. We hold that regardless of whether the factoring 8
agreement in this case was commercially reasonable on its face, 9
defendants are, as a matter of law, liable to plaintiffs because 10
the factoring agreement here, unlike the banking agreement in 11
Armata, was with a party having arguable claims of more than one 12
million dollars against the PACA trustee. Thus, there can be no 13
factual dispute that the factoring agreement jeopardized the 14
trust funds and made them unavailable for timely payment to 15
plaintiffs. See Bronia, 873 F.Supp. at 861 (“Relinquishing 16
control of the commodities without securing payment is 17
dissipation of the trust assets.” (internal quotation marks 18
omitted)). Unlike Armata, where summary judgment was improper 19
because the commercial reasonableness of the agreement with the 20
bank had not been determined, 367 F.3d at 134, an examination of 21
all the pleadings in our case makes clear that the district 22
court’s determination that the agreement with Platinum 23
jeopardized the PACA trust assets was correct. There being no 24

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material factual issue in dispute, summary judgment was proper. 1
II. Exhaustion of Corporate Assets 2
Gargiulo, as PACA trustee, failed to preserve the trust 3
assets, thus rendering him personally liable to plaintiffs. See 4
Morris Okun, 814 F.Supp. at 348 (noting that PACA imposes 5
liability on a trustee “who uses the trust assets for any purpose 6
other than repayment of the supplier,” including the use of trust 7
assets “for legitimate business expenditures, such as the payment 8
of rent, payroll, or utilities” (emphasis added)). However, 9
Gargiulo argues that the district court prematurely held him 10
personally liable because Dom’s assets have not been exhausted. 11
According to Gargiulo, Dom’s assets include more than one million 12
dollars that Platinum owes Dom’s under the factoring agreement 13
and millions of dollars in uncollected accounts receivable. 14
Gargiulo cites cases from other circuits holding that 15
under PACA the corporate trustee is primarily liable and that 16
“others may be held secondarily liable if they had some role in 17
causing the corporate trustee to commit the breach of trust.” 18
Golman-Hayden, 217 F.3d at 351; see also Sunkist Growers, 104 19
F.3d at 283. Gargiulo argues that these cases require PACA trust 20
beneficiaries to await the results of Dom’s collateral litigation 21
and collection efforts before they can hold him personally 22
liable. We disagree. To hold Gargiulo, the person in control of 23
the trust assets, liable, plaintiffs need only show that “the 24

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assets of the licensed commission merchant, dealer, or broker are 1
insufficient to satisfy the PACA liability.” Golman-Hayden, 217 2
F.3d at 351. When PACA trust assets are tied up in litigation, 3
or in the form of uncollected accounts receivable, they are 4
insufficient to satisfy the PACA liability because they are not 5
“freely available” for “prompt payment” to trust beneficiaries as 6
the PACA regulations require. 7 C.F.R. § 46.46(d)(1), (e). 7
Accordingly, we agree with the district court that plaintiffs 8
need not wait for the conclusion of Dom’s litigation or 9
collection efforts before seeking recovery directly from 10
Gargiulo. 11
III. Attorneys’ Fees 12
Defendants’ final argument concerns the district 13
court’s award of plaintiffs’ attorneys’ fees. Defendants do not 14
appeal the district court’s award of interest on the principal. 15
The district court held that the invoices plaintiffs sent to 16
defendants providing for the recovery of attorneys’ fees in the 17
event of non-payment were enforceable against defendants. On 18
appeal, defendants argue that the attorneys’ fees provisions in 19
the invoices are unenforceable because the parties never 20
discussed or agreed to them. Moreover, defendants argue that for 21
Gargiulo to be held personally liable for plaintiffs’ attorneys’ 22
fees they must be included as part of the PACA trust. 23
As the district court properly noted, “additional terms 24

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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.
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are to be construed as proposals for addition to the contract.” 1
N.Y. U.C.C. § 2-207(2). Defendants do not dispute that New York 2
law is controlling. When the parties are two merchants, the 3
additional terms become part of the contract unless the party 4
opposing those terms can establish one of three exceptions: “(a) 5
the offer expressly limits acceptance to the terms of the offer; 6
(b) they materially alter it; or (c) notification of objection to 7
them has already been given or is given within a reasonable time 8
after notice of them is received.” Id. The only exception at 9
issue in this case is whether the attorneys’ fee provision in 10
plaintiffs’ invoices “materially alter[ed]” the terms of their 11
contracts with Dom’s. As the party opposing the inclusion of 12
additional terms, Dom’s bears the burden of proving that the 13
attorneys’ fees provision in plaintiffs’ invoices was a material 14
alteration. See Bayway Ref. Co. v. Oxygenated Mktg. & Trading 15
A.G., 215 F.3d 219, 223 (2d Cir. 2000). 16
Under New York law, a “material alteration is one that 17
would ‘result in surprise or hardship if incorporated without the 18
express awareness by the other party.’” Id. at 224 (quoting N.Y. 19
U.C.C. § 2-207 cmt. 4).2 We have noted that surprise includes 20

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“both the subjective element of what a party actually knew and 1
the objective element of what a party should have known.” Id. 2
“To carry the burden of showing surprise, a party must establish 3
that, under the circumstances, it cannot be presumed that a 4
reasonable merchant would have consented to the additional term.” 5
Id. As the district court concluded, defendants failed to offer 6
any evidence to demonstrate either objective or subjective 7
surprise over the attorneys’ fee provision in plaintiffs’ 8
invoices. 9
Finally, the district court adopted the magistrate 10
judge’s report and recommendation finding that defendants 11
conceded that attorneys’ fees can be included in the PACA trust. 12
Defendants now seek to withdraw that concession, asserting in 13
their reply brief that Gargiulo cannot be held personally liable 14
for plaintiffs’ attorneys’ fees because the fees in this case are 15
not part of the PACA trust. Defendants have waived this argument 16
because (1) they failed to object to the magistrate judge’s 17
purported error that they conceded the issue, see Cephas v. Nash, 18
328 F.3d 98, 107 (2d Cir. 2003) (noting that “a party’s failure 19
to object to any purported error or omission in a magistrate 20
judge’s report waives further judicial review of the point”), and 21
(2) defendants raised this argument for the first time in their 22
reply brief, see F.T.C. v. Verity Int’l, Ltd., 443 F.3d 48, 65 23
(2d Cir. 2006) (“Because the defendants-appellants did not 24

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contest the district court’s . . . determination until their 1
reply brief, and then only cursorily, we deem it waived on 2
appeal.”). 3
Putting aside the waiver issue, we agree with our 4
sister circuits that where the parties’ contracts include a right 5
to attorneys’ fees, they can be awarded as “sums owing in 6
connection with” perishable commodities transactions under PACA. 7
7 U.S.C. § 499e(c)(2). See Country Best v. Christopher Ranch, 8
LLC, 361 F.3d 629, 632 (11th Cir. 2004); Middle Mountain Land & 9
Produce v. Sound Commodities, 307 F.3d 1220, 1222-25 (9th Cir. 10
2002); see also Movsovitz & Sons of Fla. v. Axel Gonzalez, Inc., 11
367 F.Supp.2d 207, 215 (D.P.R. 2005); JC Produce v. Paragon 12
Steakhouse Rests., 70 F.Supp.2d 1119, 1123 (E.D. Cal. 1999). 13
Accordingly, because plaintiffs’ invoices created an enforceable 14
contract providing for attorneys’ fees, Gargiulo is personally 15
liable to plaintiffs for those fees as “sums owing in connection 16
with” perishable commodities transactions under PACA. 17
We agree with the district court that plaintiffs’ 18
invoices providing for attorneys’ fees created an enforceable 19
contract entitling plaintiffs to recover those fees from 20
defendants as “sums owing in connection” with perishable 21
commodities transactions under PACA. We also agree with the 22
district court that Gargiulo is personally liable to plaintiffs 23
at this time because Gargiulo was in a position of control over 24

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the PACA trust assets and dissipated those assets, and sufficient 1
corporate assets of Dom’s were not “freely available” to 2
plaintiffs. 3
Accordingly, the judgment of the district court entered 4
on December 2, 2005, awarding $1,704,680.75 in principal, 5
interest and attorneys’ fees to plaintiffs under the Perishable 6
Agricultural Commodities Act, 7 U.S.C. § 499a et seq., is 7
affirmed. 8

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