Both sellers and buyers of perishable agricultural commodities need to be careful to comply with PACA’s rules and regulations. Directors and officers of buyers of perishable agricultural commodities subject to PACA must be aware of their fiduciary duties in order to avoid potential individual liability. Finally, parties need to be aware of the defenses to alleged PACA trust claims. PACA trust claims are not automatic and sellers may lose the benefits under a PACA trust if they take or fail to take certain actions.
What is the Perishable Agricultural Commodities Act?
The Perishable Agricultural Commodities Act (PACA)1 was enacted in 1930. The purpose of PACA is to protect growers, producers, sellers, and suppliers of perishable agricultural commodities from buyers and dealers (including commission merchants and brokers) who either reject shipments or simply fail to pay. PACA defines the term “perishable agricultural commodity” as “fruits and fresh vegetables of every kind and character [whether or not frozen or packed in ice]." PACA’s application is limited to sales to commission merchants, brokers and dealers.2 Courts have held that restaurants may qualify as dealers under PACA.3
How are growers, producers, sellers, and/or suppliers protected under PACA?
A significant protection under PACA for growers, producers, sellers, and/or suppliers of perishable agricultural commodities (seller or sellers) is a “floating, non-segregated trust” imposed on goods covered under PACA sold to buyers for the benefit of the seller. A “floating, non-segregated trust” is a trust holding all commodities, products, receivables, and proceeds thereof received for the benefit of all unpaid sellers or suppliers. The trust is imposed on:
- All perishable agricultural commodities received by the commission merchant, dealer or broker
- All inventories of food or products derived from such perishable agricultural commodities
- Any receivables or proceeds from the sale of such perishable agricultural commodities4
In order for a seller to take advantage of the protections afforded by PACA, the seller must “opt-in” to the trust and, thereafter, receive its protections. The seller of the perishable agricultural commodities is the beneficiary of the trust and holds a lien thereon.
Failure to maintain the PACA trust and make full payment promptly to trust beneficiaries is unlawful. Purchasers of perishable agricultural commodities are required to maintain trust assets in such a manner that the assets are freely available to satisfy outstanding obligations owed to sellers. Any act or omission inconsistent with this responsibility, including the diversion of trust assets or the impairment of a seller’s right to obtain payment, is forbidden. Upon a showing that the PACA trust is being dissipated or threatened with dissipation, sellers of goods governed by PACA may seek and obtain an immediate injunction. The trustee of the PACA trust (e.g. a corporate officer or director of the purchaser) has a fiduciary duty to the beneficiaries of the PACA trust and is required to preserve the assets of the trust so that the beneficiaries may recover the money owed to them.
Priority and extent of PACA liens
A holder of a valid PACA trust claim has priority over any secured creditor on the buyer’s trust-related assets to the extent of the claim.5 “Assets of the trust,” can also include any fixed assets that were procured through the use of PACA trust receivables or proceeds. The common thread that runs throughout is that the asset must, in some way, be tied to trust assets.
If a secured lender has received PACA trust property in error, courts have ruled that such secured lender may be forced to return the trust property to PACA beneficiaries unless it can be established that:
- No PACA lien existed when the property was transferred
- Even though a PACA lien existed, the transfer of such property did not include trust assets
- Although a PACA lien existed when the property was transferred, and the property included trust assets, all unpaid sellers were paid in full at the time of the transfer
If a secured lender is not able to prove either (1) through (3), or that it is a bona fide purchaser, the secured lender will be forced to return the trust property. The buyer has the burden of showing that disputed assets were not acquired with proceeds from the sale of PACA trust assets.
PACA notice provisions
PACA sets forth certain notice requirements that the seller must give in order to preserve a trust claim.
Seller that is not licensed by the U.S. Department of Agriculture:
To the extent that the seller is not licensed by the U.S. Department of Agriculture as a PACA licensee, the unpaid supplier, seller or agent shall lose the benefits of the PACA trust unless such person has given written notice of their intent to preserve the benefits of the trust to the commission merchant, dealer or broker within 30 calendar days:
- After expiration of the time prescribed by which payment must be made, as set forth in the PACA regulations
- After expiration of such other time by which payment must be made, as the parties have expressly agreed to in writing before entering into the transaction
- After the time the supplier, seller or agent has received notice that the payment instrument promptly presented for payment has been dishonored.
The written notice to the commission merchant, dealer or broker shall set forth information in sufficient detail to identify the transaction subject to the trust. When the parties expressly agree to a payment time period different from that established by the PACA regulations, a copy of any such agreement shall be filed in the records of each party to the transaction and the terms of payment shall be disclosed on invoices, accountings and other documents relating to the transaction.6
Seller that is licensed by the U.S. Department of Agriculture:
In addition to the method of preserving the benefits of the PACA trust specified directly above, a licensee that is licensed by the U.S. Department of Agriculture may use ordinary and usual billing or invoice statements to provide notice of the licensee’s intent to preserve the PACA trust.7 The bill or invoice statement must include and contain on the face of the statement the following:
“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 trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.”
There is a split of court authority on whether or not PACA’s eligibility and notice requirements should be construed strictly. The current trend in the case law tips in favor of a “substantial compliance” standard.
Waiver of PACA protections
PACA regulations state that an eligible PACA seller’s payment terms cannot exceed 30 calendar days after the buyer’s receipt and acceptance of the goods. A seller may lose its PACA protections if the seller enters into a written (and in the Second Circuit even an oral) agreement with the buyer that extends the payment terms by the buyer beyond the 30-day period permitted under PACA. The Second, Third, Fifth, Sixth, Seventh, and Eighth Circuit Courts of Appeal have so ruled.
Treatment of PACA trust assets in bankruptcy
Cases construing PACA consistently hold that PACA trust assets are not property of a debtor’s bankruptcy estate under section 541 of the Bankruptcy Code.8 Therefore, the distribution of assets to beneficiaries of a PACA trust falls outside of the priority scheme established by the Bankruptcy Code (i.e., trust beneficiaries may be paid outside of, and prior to, a confirmed plan of reorganization). However, the disposition of PACA trust assets is subject to the jurisdiction of the bankruptcy court. Holders of PACA trust claims should seek adequate protection of their alleged interests in PACA trust assets at the beginning of a bankruptcy case.
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1 7 U.S.C. § 499 et seq.
2 “Dealer,” is defined in PACA to mean “any person engaged in the business of buying or selling in wholesale jobbing quantities, as defined by the Secretary of Agriculture, any perishable agricultural commodity in interstate or foreign commerce.” PACA further provides that “no person buying any such commodity solely for sale at retail shall be considered as a ‘dealer’ until the invoice cost of his purchases of perishable agricultural commodities in any calendar year are in excess $230,000.” 7 U.S.C. § 499a(b)(6)(B).
3 See, Bowie Produce Co. v. Magic Am. Café. Inc. (In re Magic Rests., Inc.), 197 B.R. 455, 457 (Bankr. D. Del 1996) (finding that debtor restaurants were “dealers” under PACA because they purchased in excess of $230,000 of perishable agricultural commodities per year and utilized such commodities in menu items sold in their restaurants). The United States Department of Agriculture defines a retailer as “a person engaged in the business of selling to consumers only.” 7 C.F.R. § 46.2(j); see In re Magic Rests., 197 B.R. at 455.
4 7 U.S.C. § 499e(c)(2).
5 In re Arctic Exp., Inc., 636 F.3d 781, 799 (6th Cir. 2011).
6 7 U.S.C. § 499e(c)(3).
7 7 U.S.C. § 499e(c)(4).
8 See, e.g., Morris Okun, Inc. v. Harry Zimmerman, Inc., 8I4 F Supp. 346, 348 (S.D.N.Y 1993); In re WL. Bradley Co., 75 RR. 505, 513 (Banker. E.D Pa. 1987).
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