Sep 7, 2020

PACA offers trust help from buyer default, bankruptcy

The 1984 amendments to the Perishable Agricultural Commodities Act (PACA) established a trust to protect fruit and vegetable growers who weren’t paid for their product.

Does the trust fund reflect current market practices? Is the process for using the trust fund adequate? These are good questions, but PACA is still law and the trust fund still offers protections.

The PACA trust provisions give sellers of fresh and frozen fruits and vegetables priority in obtaining unpaid money if buyers become insolvent or file for bankruptcy.

“There is always a long line of creditors when a company goes bankrupt,” said Elizabeth Rumley, senior staff attorney with The National Agricultural Law Center. “The PACA trust can provide sellers with priority on money that’s available.”

Rumley spoke on PACA at the Great Lakes Fruit, Vegetable and Farm Market EXPO in Grand Rapids, Michigan. The National Agricultural Law Center is a unit of the University of Arkansas Division of Agriculture and is a leading source for agricultural and food law research and information.

Under PACA, growers who sell produce to many types of buyers are eligible to participate in the trust. Buyers must maintain the trust funds for fruits and vegetables received but not yet paid for. If there is a business failure or bankruptcy, the buyer’s assets are not available to other creditors until all valid trust claims have been satisfied.

PACA requires anyone who buys or sells more than 2,000 pounds of fresh or frozen fruits and vegetables in any day to be licensed. A person who negotiates the sale of fruits and vegetables on behalf of another person must also be licensed. A retailer whose after-invoice costs of fresh and frozen fruits and vegetable purchases exceed $230,000 in a calendar year or a seller whose sales exceed $230,000 of fresh and frozen fruits and vegetable in a year must both be licensed.

The USDA’s Agricultural Marketing Service (USDA/AMS) implements PACA. Licenses are available from the USDA at www.ams.usda.gov.

Growers can choose to be licensed even if not required to be. In order to take advantage of PACA trust protections, Rumley said, “if sellers are required to be licensed or choose to be licensed they must have this language on their invoice:

“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. 499(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.”

Non-licensed growers must also take steps to preserve their rights as trust beneficiaries. “If you’re not licensed, you can still be protected but it’s a little trickier,” Rumley said.

Non-licensed growers must provide a written notice to the buyer. It must include a statement that it’s a “notice of intent to preserve trust benefits” and include the names and addresses of the seller, commission merchant, or agent, and the debtor. The written notice must include the transaction date, commodity, invoice price, payment terms, and amount past due and unpaid. Notification must be given within 30 days from the day payment was due or 30 days from being notified a submitted payment was returned for insufficient funds.

Both licensed and unlicensed growers must agree to payment terms – if the terms are different from PACA’s prompt payment terms (usually 10 days) – in writing with the buyer before entering into the transaction. Payment terms cannot exceed 30 days from the product acceptance date, or the trust protections will no longer apply.

Attorney fees and finance charges can be part of a PACA trust claim if they are part of the contract between buyer and seller. “You can receive the cost of that product and can also receive the cost of interest and lawyer fees,” Rumley said.

PACA trust beneficiaries have significantly more protections in general, debt-recovery cases than other creditors. These protections prevent a buyer from further transferring PACA trust assets and allow beneficiaries to apply for temporary restraining orders to freeze debtor assets. Beneficiaries can also recover trust assets transferred to third parties.

PACA trust beneficiaries can also hold the buyer’s principals or shareholders personally liable for any shortfall in the PACA trust. In a bankruptcy, what beneficiaries are owed can be withheld from the bankruptcy estate which means faster payment. After bankruptcy judgment is entered, trust beneficiaries have a superior claim to trust assets over other creditors including the IRS.

Not all attorneys are familiar with PACA and it’s important to remember these are perishable commodities. “Time is important,” Rumley said. “Establishing a relationship with an attorney is important so you can get advice quickly.”

The USDA/AMS has established a dispute resolution component in PACA. “Disputes regarding the quality, grade or condition of product are frequently resolved with a USDA inspector,” Rumley said.

The PACA Division of USDA/AMS can investigate potential PACA violations. “Anyone can submit a complaint,” Rumley said.

Several states have also passed their own PACA-type legislation. “If you buy produce or grow and sell produce in these states, there are other rules as well,” Rumley said. The list of states includes Florida, Georgia, Idaho, Minnesota, New Jersey, New York, Oregon, Texas, Utah and Washington.

More information on PACA is available at http://nationalaglawcenter.org/ research-by-topic/paca/ and
www.ams.usda.gov.

— Dean Peterson, FGN correspondent