Overton Distributors, Inc. v. Heritage Bank

*The Honorab le R. Leon Jordan, Senior United States District Judge
for the Eastern District of Tennessee, sitting by designation.
1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2003 FED App. 0292P (6th Cir.)
File Name: 03a0292p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
OVERTON DISTRIBUTORS,
INC.,
Plaintiff-Appellee,
v.
HERITAGE BANK,
Defendant-Appellant.
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No. 02-5261
Appeal from the United States District Court
for the Middle District of Tennessee at Nashville.
No. 00-00284—John T. Nixon, District Judge.
Argued: July 29, 2003
Decided and Filed: August 15, 2003
Before: GILMAN and GIBBONS, Circuit Judges;
JORDAN, Senior District Judge.*
2 Overton Distributors, Inc.
v. Heritage Bank
No. 02-5261
_________________
COUNSEL
ARGUED: Richard L. Colbert, COLBERT & WINSTEAD,
Nashville, Tennessee, for Appellant. Stephen P. McCarron,
McCARRON & DIESS, Washington, D.C., for Appellee.
ON BRIEF: Richard L. Colbert, W. Gregory Miller, J. Frank
Rudy, Jr., COLBERT & WINSTEAD, Nashville, Tennessee,
for Appellant. Stephen P. McCarron, McCARRON &
DIESS, Washington, D.C., for Appellee.
_________________
OPINION
_________________
RONALD LEE GILMAN, Circuit Judge. Overton
Distributors, Inc. supplied produce to Quality Foods of
Tennessee, Inc. between 1993 and 2000. Quality went out of
business in January of 2000, leaving an unpaid debt to
Overton of over $220,000 for produce purchased between
October of 1999 and January of 2000. Overton now seeks to
recover this unpaid debt from Heritage Bank, Quality’s
lender, by invoking the statutory trust provisions of the
Perishable Agricultural Commodities Act (PACA), 7 U.S.C.
§§ 499a-499t, a statute enacted in 1930 to regulate the sale of
perishable agricultural commodities.
In 1996, Quality entered into an agreement with Heritage
Bank that allowed Quality to obtain advances against the
value of its accounts receivable. Approximately 90% of these
accounts receivable arose from the sale or resale of produce
covered by PACA. The owners of Quality filed a Chapter 7
bankruptcy petition in July of 2000. This caused Overton to
sue Heritage to recover its losses, contending that the bank’s
agreement with Quality constituted a breach of Overton’s
statutory trust, and that the bank had received the proceeds of

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No. 02-5261 Overton Distributors, Inc.
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Overton’s produce that were subject to the PACA trust
provisions.
In ruling on the parties’ cross-motions for summary
judgment, the district court held that Overton had properly
preserved its statutory trust benefits under PACA, leaving the
other issues for resolution at trial. The district court
subsequently ruled for Overton following a two-day bench
trial, concluding that the agreement between Quality and
Heritage constituted a breach of Overton’s statutory trust.
Overton, in the court’s opinion, was thus entitled under
PACA to assert a superior claim to the proceeds from the sale
of its produce that were acquired by Heritage from Quality.
For the reasons set forth below, we REVERSE the judgment
of the district court and REMAND with instructions to
dismiss Overton’s complaint.
I. BACKGROUND
A. Factual background
In late 1993, shortly after Overton began selling produce to
Quality, it sent a letter to Quality providing that the latter
would pay Overton’s invoices within 10 days of a 15-day
accrual cycle. That is, all of the invoices were to be paid
within 25 days of Quality’s receipt of the produce. Charlain
Jarman-Hall, one of the principals of Quality, countersigned
the letter and returned it to Overton in early 1994. For the
next four years, Overton’s invoices to Quality reflected these
payment terms. Then, in 1998, Overton’s invoices to Quality
were unilaterally changed to provide that payment was to be
received within 10 days after the end of each calendar month
in which produce was delivered. Cathy Grossman, Overton’s
director of Business Development, changed the payment
terms because Quality’s payments were typically late and
subject to her boss’s criticism. Overton’s invoices at this time
also contained the following statement:
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v. Heritage Bank
No. 02-5261
The perishable agricultural commodities listed on this
invoice are sold subject to the statutory trust authorized
by section 5(c) of the Perishable Agricultural
Commodities Act, 1930 (7 U.S.C. 499e(c)). The seller of
these commodities retains a claim over these
commodities, and any receivables or proceeds from the
sale of these commodities until full payment is received.
Quality consistently paid Overton on an irregular and tardy
basis, often taking between 40 and 60 days to pay an invoice.
Overton regularly called Quality about its slow payments on
the account, but it never required Quality to strictly abide by
any specific terms of payment. Grossman testified that
Overton tolerated Quality’s late payments because Overton
thought that Quality would eventually pay.
Heritage provided banking services to Quality throughout
the latter’s existence. For many of the years in which it
conducted business, Quality had difficulty making its
payments, often writing checks on insufficient funds that
Heritage covered. Quality entered into a financing
arrangement with Heritage in 1996 called the Business
Manager Agreement (BMA). The BMA provided for the sale
of Quality’s accounts receivable to Heritage, with Heritage
advancing Quality payment for those receivables, less a 2.5%
service charge. But the BMA contained numerous provisions
limiting Heritage’s exposure. Quality, for example, remained
liable for all of the advances it received from Heritage should
the proceeds from the accounts receivable not cover the
amount of the funds advanced. Heritage could also reassign
any account receivable to Quality in case of default, it could
debit any of Quality’s accounts without notice to pay any
deficiencies, and it could demand that Quality pay any
shortfall to the bank. Finally, the BMA contained a blanket
security interest on all of Quality’s assets and a representation
that Quality’s receivables were free and clear of all security
interests, liens, and claims of third parties.

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In January of 2000, Quality went out of business, leaving
Overton with more than $220,000 in produce delivered to
Quality for which Overton had never been paid. Heritage,
which had acquired the accounts receivable from Quality’s
resale of the produce, became the focus of Overton’s
attention.
B. Statutory background
One of the purposes of PACA is to protect unpaid sellers of
perishable agricultural commodities. In 1984, Congress
amended PACA to create a statutory trust in their favor.
7 U.S.C. § 499e(c); Endico Potatoes, Inc. v. CIT
Group/Factoring, Inc., 67 F.3d 1063, 1067 (2d Cir. 1995)
(“[D]ue to the need to sell perishable commodities quickly,
sellers of perishable commodities are often placed in the
position of being unsecured creditors of companies whose
creditworthiness the seller is unable to verify.”). The trust
protects the sellers against financing arrangements made by
merchants, dealers, or brokers who encumber or give lenders
a security interest in the commodities or the receivables or
proceeds from the sale of the commodities, thus giving the
claims of these sellers precedence over those of secured
creditors.
The statute and the federal regulations expressly lay out the
steps that a produce seller must take to come within PACA’s
protection. 7 U.S.C. § 499e(c)(3) and (4); 7 C.F.R.
§§ 46.2(aa) and 46.46(e). Under all circumstances, the seller
must give the buyer written notice of the seller’s intention to
preserve its trust benefits. Congress further amended PACA
in 1995 by allowing sellers to provide this notice on the
invoices given to the buyer. If the seller and the buyer use the
default payment terms provided in the regulations (“within 10
days after the day on which the produce is accepted”), this
notice of intent to preserve benefits is all that is necessary.
On the other hand, if the parties agree to payment terms
greater than 10 days after acceptance, but in no event more
6 Overton Distributors, Inc.
v. Heritage Bank
No. 02-5261
than 30 days after acceptance, this agreement must be in
writing. The seller must also disclose these non-statutory
payment terms “on invoices, accountings, and other
documents relating to the transaction.” 7 U.S.C. § 499e(c)(3);
7 C.F.R. § 46.46(e)(1).
Thirty days is the maximum allowable payment term under
PACA regulation 7 C.F.R. § 46.46(e)(2), which provides as
follows: “The maximum time for payment for a shipment to
which a seller, supplier, or agent can agree and still qualify
for coverage under the trust is 30 days after receipt and
acceptance of the commodities . . . .” This limitation exists
because the statute is intended to protect only those produce
sellers making short-term credit arrangements. H.R. Rep. No.
98-543 at 7 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 410
(“[T]he committee does not intend the trust to apply to any
credit transaction that extends beyond a reasonable period.”).
C. Procedural background
Because Quality was insolvent, Overton sued Heritage to
recover the amount of its unpaid invoices owed by Quality.
Overton maintained that it had properly preserved its claim to
trust benefits under PACA, that the BMA between Quality
and Heritage constituted a breach of the PACA trust, and that
Overton was therefore entitled to recover from Heritage.
Heritage responded by arguing that Overton had not properly
preserved its trust benefits, and that, even if it had, the BMA
represented a bona fide sale of the accounts receivable to the
bank, not a security interest that would allow Overton to
claim priority over these funds.
The district court, in partially granting Overton’s motion
for summary judgment, found that Overton had properly
preserved its PACA trust benefits. A two-day bench trial
followed to resolve the remaining issues. In an order dated
January 7, 2002, the district court concluded that the BMA
constituted a breach of the trust. The court also held that

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Heritage’s bona-fide-purchaser defense was without merit. It
therefore ordered Heritage to pay Overton the full amount due
from Quality plus prejudgment interest. This timely appeal
followed.
II. ANALYSIS
A. Standard of review
Heritage appeals both the district court’s bench-trial
decision and its order granting partial summary judgment to
Overton. “In considering a district court’s decision following
a bench trial, this court reviews findings of fact under the
clearly erroneous standard. Conclusions of law, on the other
hand, are reviewed de novo. We also review de novo the
district court’s grant of summary judgment.” Burzynski v.
Cohen, 264 F.3d 611, 616 (6th Cir. 2001) (internal citations
omitted).
Summary judgment is proper where no genuine issue of
material fact exists and the moving party is entitled to
judgment as a matter of law. Fed. R. Civ. P. 56(c). In
considering such a motion, the court must construe all
reasonable factual inferences in favor of the nonmoving party.
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.
574, 587 (1986). The central issue is “whether the evidence
presents a sufficient disagreement to require submission to a
jury or whether it is so one-sided that one party must prevail
as a matter of law.” Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 251-52 (1986).
B. The district court erred in concluding that Overton
had preserved its trust benefits pursuant to the
provisions of PACA
In early 1994, Quality confirmed the payment terms of 10
days within a 15-day accrual by countersigning and returning
Overton’s letter that set forth this understanding. Thus, in
8 Overton Distributors, Inc.
v. Heritage Bank
No. 02-5261
compliance with PACA, payment was due within the 30-day
maximum allowed by the regulations. In addition, Overton
included on all of the relevant invoices a statement of its
intention to preserve its PACA trust benefits. Overton failed,
however, to place the payment terms as agreed to in the 1994
written agreement on these invoices. Instead, the payment
terms on all invoices from 1998 forward were “10 days
EOM,” establishing that the payment was due within 10 days
after the end of each calendar month in which produce was
delivered. Because payments for produce delivered on the
first of the month could be made as late as 40 days after the
date of acceptance, the invoices indicated that Overton was
agreeable to a payment schedule outside of PACA’s
protection.
Overton presented two alternate theories to avoid the
consequences of its failure to comply with PACA’s
requirements: (1) the very fact that the parties’ 1994
agreement and the payment terms on the relevant invoices
differ indicates that the agreement was ambiguous and, as a
result, no agreement at all; and (2) the different terms on the
invoices were the result of a clerical error, and that Overton
should be given the benefit of the doubt due to its good faith
effort to substantially comply with PACA.
In order to bring Overton within the statute’s protection, the
district court adopted both of the above theories. It used the
1998-2000 invoices to find ambiguity in the unambiguous
1994 writing expressing the parties’ agreement, and it
examined the record as a whole to give Overton the benefit of
the doubt. But the statutory language is quite clear. Absent
a written agreement altering the payment terms set in 1994,
all of the subsequent invoices from Overton to Quality were
required to disclose the agreed terms of payment. 7 U.S.C.
§ 499e(c)(3); 7 C.F.R. § 46.46(e)(1).
The parties had clearly agreed in 1994 to terms different
from the standard 10-day payment provision contained in the

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PACA regulations. Consequently, PACA and the regulations
mandate that those terms had to be disclosed on the invoices.
Overton cannot have it both ways. It cannot, on the one hand,
list terms on its invoices that are not only different from those
mutually agreed upon, but also permit payment outside of
PACA’s requirements, and then on the other hand argue that
it has substantially complied with PACA.
There are no Sixth Circuit cases dealing with the
preservation of trust benefits under PACA. The two cases
from other circuits relied on by the district court deal with
oral agreements that extended the payment terms beyond the
standard 10-day statutory provision. Idahoan Fresh v.
Advantage Produce, Inc., 157 F.3d 197 (3d Cir. 1998)
(holding that PACA’s requirement that an agreement to
extend the payment period be in writing relates to the
enforceability of an agreement to extend a payment term, but
does not disqualify an unpaid seller from receiving trust
benefits); Hull Co. v. Hauser’s Foods, Inc., 924 F.2d 777 (8th
Cir. 1991) (holding that oral agreements between produce
sellers and buyers as to payment terms beyond the standard
10 days after delivery had no effect on the seller’s right to
trust protection under PACA). The statute, however, imposes
strict disclosure obligations relating to written agreements
that extend the payment terms, and there is no dispute about
the contents of the parties’ 1994 agreement. As a result, these
cases provide little guidance for the situation presented here.
The Ninth Circuit case of Bowlin & Son, Inc. v. San
Joaquin Food Service, Inc. (In re San Joaquin Food Service,
Inc.), 958 F.2d 938 (9th Cir. 1992), presented facts more
analogous to those before us. In Bowlin, the parties had a
written agreement that extended the payment terms beyond
the standard 10-day statutory provision, but the seller failed
to include these terms on its invoices. Id. at 939. The court
held that the benefits of the trust were lost. Id. at 940. The
Bowlin court also held that the seller’s argument that it had
substantially complied with the statute failed. Id. at 940
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v. Heritage Bank
No. 02-5261
(“Unless the terms of the statute are met, [PACA] specifies
that the benefits of the trust are lost.”). We agree with the
Ninth Circuit’s analysis.
Overton argues that the 1998-2000 invoice-payment terms
are an alteration that rendered the earlier agreement
ambiguous or void. As previously indicated, however, we
find no factual or legal support for Overton’s position. Its
alternative contention that the incorrect terms were placed on
the invoices due to a clerical error is also without merit.
Overton’s Director of Business Development testified that the
change extending the payment term was made in 1998
because Quality’s payments were typically late. This was
consistent with Overton’s practice of not requiring Quality to
abide by any specific terms of payment, which often was
received 40 to 60 days after invoice. Overton was of course
free as a business matter to provide lenient payment terms to
Quality, but by doing so it failed to preserve its trust benefits
under PACA. 7 U.S.C. § 499e(c)(3); 7 C.F.R. § 46.46(e)(2).
Even though the payment terms included on the relevant
invoices had the effect of requiring payment within thirty
days on shipments that happened to be made after the tenth
day of the prior month, Congress’s purpose in enacting PACA
was to protect sellers delivering their produce on essentially
cash terms, not to provide protection to sellers who are
willing to extend payment terms beyond the statutory
maximum. See Hiller Cranberry Prods., Inc. v. Koplovsky,
165 F.3d 1, 12 (1st Cir. 1999) (Selya, J. dissenting) (“Those
courts that have addressed claims involving payment terms of
more than thirty days uniformly have held PACA inapplicable
on the ground that the thirty-day maximum period is to be
imposed as written.”). This interpretation has the significant
commercial advantage of putting third parties such as
Heritage on notice as to whether or not the invoice-payment
terms themselves make the produce sale in question subject
to PACA trust protection, without the onerous requirement of
having to ascertain the precise delivery date of each particular

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shipment. Furthermore, in the case before us, Overton neither
argued that we should ascertain individual delivery dates nor
made any effort to segregate deliveries made within the first
10 days of each billing cycle from those made thereafter.
Because Overton’s 40-day maximum payment term failed
to preserve its trust benefits under PACA, it is not entitled to
assert priority over Quality’s accounts receivable that arose
from the sale of Overton’s produce. We therefore have no
reason to resolve the issue of whether Quality’s BMA with
Heritage was in fact only a security interest in Quality’s
accounts receivable or whether Heritage was a bona fide
purchaser for value of those accounts.
III. CONCLUSION
For all of the reasons set forth above, we REVERSE the
judgment of the district court and REMAND with
instructions to dismiss Overton’s complaint.

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