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Passive Investors With the Right to Control a Company Are Subject to Liability Under the Perishable Agriculture Commodities Act

January 2012

In Ruby Robinson Co. v. Herr, the Fifth Circuit Court of Appeals recently reconfirmed that shareholders with the authority to control a business are subject to liability under the federal Perishable Agriculture Commodities Act (“PACA”) even where they did not exercise their right to control day-to-day operations. http://www.ca5.uscourts.gov/opinions/unpub/10/10-20788.0.wpd.pdf.

PACA regulates the buying and selling of fresh and frozen fruits and vegetables to prevent unfair trading practices and to assure that sellers will be paid promptly.  7 U.S.C. §§ 499A-499T.  Under PACA, when fruits and vegetables are sold on credit, and the seller satisfies certain technical requirements under the statute, the proceeds of the sales become part of a trust that a buyer has the fiduciary duty to preserve until fully paid.  Liability first attaches to licensed company.  However, if such company does not fully satisfy the claims, shareholders, officers, and directors of the company that are in a position of control may be secondarily liable of they had some role in the breach of the trust.

In Ruby Robinson, the debtor did not satisfy all PACA related claims.  As a result, the PACA creditors looked to the debtor’s shareholders to pay the outstanding balance.  Two of the three shareholders argued that they were not liable because they were solely investors and the control of the day-to-day operations was the responsibility of the other shareholder.  The Fifth Circuit disagreed.  Under the stock purchase agreement, each shareholder had contractual authority to control the debtor and the PACA trust assets.  The fact that the shareholders did not exercise their authority was not relevant because PACA was intended to compel persons in control to protect the trust assets.  The purpose of PACA would be thwarted if persons in control could avoid secondary liability simply by failing to assume their responsibilities.

The Fifth Circuit’s decision serves as a reminder that passive participation in an investment does not shield you from liability under PACA if you have the ability to exercise control over a company (even if you never actual do).  In fact, your failure to exercise control could be recognized as the breach of your fiduciary duties under PACA.