New Jersey Federal Court Uses Rarely Invoked Commodities Law To Prohibit A Restaurant From Paying Anyone Other Than Its Produce Supplier Until Its Overdue Invoices Are Paid In Full

August 7, 2023

By: Carl L. Engel

On August 2, 2023, the U.S. District Court for the District of New Jersey, in the case Gargiulo Produce v. Acai Café LLC, entered a restraining order to prohibit a restaurant from paying any of its creditors before paying the wholesale-produce supplier that had sold it inventory for which it was not paid.  The court found that under the U.S. Perishable Agricultural Commodities Act (“PACA”), revenue that was generated from the sale of food made from the produce automatically became property of the supplier, and was simply held by the restaurant in trust until the supplier was paid for its deliveries.  Therefore, the court forbade the restaurant from using funds to pay other creditors until it first paid the supplier's overdue invoices.

Gargiulo Produce is a produce wholesaler and a licensed dealer under PACA.  Acai Café is a restaurant that serves smoothies and “bowls” made with fresh fruit.  Between December 3, 2022, and April 12, 2023, Gargiulo Produce sold and delivered wholesale fruit to Acai Café at a total price of $13,041.80, pursuant to a written contract between them.  Acai Café accepted delivery of the fruit, at which point Gargiulo Produce “became a beneficiary in a floating, non-segregated statutory trust designed to assure payment to produce suppliers,” called a “PACA Trust.”  In other words, the $13,041.80 became property of Gargliulo Produce automatically, and Acai Café was simply holding it in trust until it was paid to Gargliulo Produce.

On July 27, 2023, Gargiulo Produce sued Acai Café for the money owed for the produce, and asked the court to enter a temporary restraining order to prohibit Acai Café from making payments to vendors and creditors “other than those who have preserved trust benefits under the PACA.”  In support of their motion for the restraining order, Gargiulo Produce’s administrator certified in an affidavit that Acai Café had sent it checks which had bounced, and had stated that payment would not be forthcoming.

On August 2, 2023, the court granted the motion and entered a restraining order which prohibited Acai Café from making payment to anyone other than Gargiulo Produce until the entire $13,041.80 had been repaid, along with Gargiulo Produce’s interest, court costs, and attorneys’ fees.  In reaching its decision, the court reasoned that Congress had created the PACA Trust “to ensure payment to suppliers.”  Specifically, PACA requires that “all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held in trust for the benefit of all unpaid suppliers or sellers of such commodities, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers.” 

The court found that there was no dispute that Gargiulo Produce had delivered perishable food to Acai Café for which it had not been paid, and that it was unlikely that Acai Café would pay the amounts owed to Gargiulo Produce without an order prohibiting it from making payments to anyone else.  It noted also that Acai Café would be impacted only minimally, because “PACA Trust funds cannot be used for any purpose other than to pay unpaid produce suppliers.”  The court, however, has given Acai Café the opportunity to argue for the dissolution of the temporary restraint at a hearing scheduled for August 16, 2023.

This case illustrates an important avenue of relief for American farmers and produce wholesalers.  Under PACA, once a purchaser of wholesale produce (a restaurant, for example) sells that produce to customers, the proceeds from the sale are “held in trust” for any unpaid produce suppliers.  In other words, the money becomes the property of the unpaid supplier upon its receipt by the purchaser from the customer, and is merely being held by the purchaser until the supplier is paid.  Because the money legally belongs to the unpaid supplier, the supplier's debt takes priority over other creditors who are owed money by the purchaser.