Legal News

Bankrupt Customer? You May Be Able to Get Paid

Bankruptcies are not infrequent occurrences in the food and retail industries. For example, the liquidation of the Furr’s supermarket chain and the reorganization of Fleming, the big wholesaler. In most cases trade creditors either get nothing or just cents on the dollar. Moreover, bankruptcy trustees have become much more aggressive at asserting preference claims or denying reclamation claims. What’s an unsecured creditor, namely you, to do?

Well in most cases there isn’t much you can do except keep your eyes out for troubled accounts and think COD. However, distributors of fresh fruits and vegetables are a special case. Thanks to the Perishable Agricultural Commodities Act, known as the PACA, distributors of fresh fruits and vegetables are a special class of creditors who stand almost at the front of the creditor’s line right behind those friendly folks at the IRS. In fact, produce vendors stand in front of the secured creditors such as banks! The PACA does this by creating a “trust” in the products sold by the fruit and vegetable vendors. The trust consists either of the products themselves or the payment for the products.

Vendors claiming a preference under the PACA usually do so on the Proof of Claim form filed during the bankruptcy. Keep in mind that recovery under the PACA is limited to fresh fruits and vegetables including frozen and fresh cut varieties. Canned and other types of processed fruit and vegetable products are not covered by the PACA. Furthermore, payment terms cannot exceed 30 days. If a vendor’s invoice for lettuce is Net 45, then there will be no PACA preference claim.

There are other technical requirements pertaining to PACA coverage, whether or not bankruptcy is involved. Zackler & Associates can help both produce vendors and buyers review their PACA compliance issues and how to assert their rights under the PACA.


Yes, There are Criminal Prosecutions for Violation of the FDCA Act

Although it’s extremely rare, every now and then there is a criminal prosecution for violation of the Food, Drug & Cosmetic Act (“FDCA”). Recently, Robert Lingon, the owner of a health food company, pled guilty to mail fraud for marketing “low fat” donuts that were, in fact, conventional, very high fat donuts. While we doubt that any readers of Food & Marketing Law Update would ever engage in an intentional violation of the FDCA, Mr. Lingon’s conviction does prompt a few observations:

  • Violations of the FDCA can be prosecuted as other crimes such as mail fraud or even racketeering.
  • Most criminal prosecutions require willful misconduct; however, the FDCA is written as a “strict liability” statute. (See “Ask Allan” in the Winter 2003 issue of Food & Marketing Law Update for a discussion of willful misconduct, strict liability as well as recklessness, and negligence.) Nevertheless, when a strict liability crime is involved, most prosecutors are reluctant to pursue criminal charges because most juries are reluctant to convict a defendant for a “no fault” crime.
  • When criminal charges are filed we are not talking about technical misunderstandings of FDA rules or “pushing the envelope” on issues such as health claims on a label. Rather we’re talking about deliberate misbranding or use of illegal or dangerous ingredients. For example, some of our readers may recall that two executives of the Beechnut Baby Food Co. went to prison several years ago for deliberately using colored sugar water in what was suppose to be apple juice.

Of course, there is always the potential for civil liability both in terms of the FDA’s authority to seek injunctive relief and third party product liability lawsuits. These types of civil actions are usually based on strict liability.

Comment: Although we don’t expect to see very many (if any) food or dietary supplement executives or their companies doing the “perp walk,” in the age of bioterrorism and BSE we expect that some cases (which in the past would have been handled using only civil remedies) in the future may result in criminal prosecution.


Rigged Frozen Coke Marketing Test Prompts Settlement Offer and Criminal Investigation

Soft drink giant Coca Cola is feeling the fallout from evidence that its employees rigged market acceptance tests of Frozen Coke. A lawsuit filed by a former Coke manager alleged that Coke marketing employees improperly influenced marketing tests conducted in Burger King restaurants three years ago by paying customers to purchase Value Meals featuring Frozen Coke in test markets. The inflated sales data generated from the tests prompted Burger King franchisees to purchase over $65 Million in Frozen Coke equipment for their restaurants. Sales of Frozen Coke in Burger King outlets have not met franchisees’ expectations. Coke has admitted that its employees rigged the tests and have offered over $20 million to Burger King and its franchisees to settle any claims.

The accusations have also prompted a criminal investigation from a Federal Grand Jury in Atlanta. Coke acknowledged the criminal probe in July and has pledged to cooperate with the government. Burger King has also acknowledged receiving subpoenas from the Grand Jury.

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