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General Corporate and Business LawProduce Business Law/PACA
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The Perishable Agricultural Commodities Act of 1930, known as “the PACA” or just “PACA,” is one of the most important Federal agricultural laws governing the U.S. produce marketing industry. Every domestic and international grower, marketer, broker, and dealer buying or selling produce in America must have a good working knowledge of this law. PACA sets the “rules of the road” when it comes to the marketing of produce in the United States. Indeed, PACA has “gone international” to the extent that this law now forms the foundation for the fair trading standards used by the Dispute Resolution Corporation to resolve disputes between members buying and selling produce between Mexico, the U.S., and Canada.
The PACA was originally enacted by Congress in 1930 and subsequently amended several times over the last approximately eighty-five years as a “strict” and “tough” law to regulate interstate transactions in perishable fruits and vegetables (produce). The law’s purpose is to protect the produce industry by prohibiting unfair trading practices and assuring that only financially responsible participants engage in trading. In 1984, Congress amended the PACA to also establish the concept of the PACA Trust for the purpose of giving produce sellers a legal priority to be paid first, before other creditors of a produce buyer such as lenders who provide secured financing to the buyer.
PACA law has three main features. First, PACA makes it illegal to engage in the produce marketing industry without first obtaining and complying with the USDA’s licensing requirements. Second, PACA makes various types of unfair trading conduct illegal and provides an administrative complaint procedure as an alternative to enforcing PACA in a lawsuit in court. Third, the PACA establishes the PACA Trust to maximize the likelihood that sellers of produce will be paid in full before any other creditors of the buyer.
There are various sources of PACA law, all of which carry the force of law both in judicial proceedings in the state and federal courts and also in administrative proceedings before the U.S. Department of Agriculture (USDA). There is, of course, initially the Federal statute known as the PACA. The USDA’s PACA Branch of its Fruit and Vegetable Division, Agricultural Marketing Service (“AMS”), administers and regulates the PACA. The USDA has promulgated numerous administrative regulations relating to all of the three main features of PACA discussed above. The PACA and the USDA’s regulations thereunder have been interpreted and applied by Federal and state courts and by the USDA in the context of its licensing and complaint proceedings discussed below. Those judicial and administrative interpretations are sources of PACA law and are binding on the produce industry. Finally, PACA law presumes the existence of a valid contract between buyer and seller. Hence, PACA law subsumes relevant state law, including the common law of contracts and state statutes. Most notably, Article 2 of the Uniform Commercial Code (UCC), which governs the sale of goods, generally applies as an important part of PACA law. To the extent the PACA is silent on a subject concerning produce trading, state laws apply and they have the force of law so long as they are not inconsistent with the PACA statute and the USDA’s regulations.
The PACA does not apply to every subject relating to produce. There are several threshold prerequisites for the PACA to apply. There must be “transactions” connected with “perishable agricultural commodities.” The term “transactions” means a purchase or sale, or the negotiation of a purchase or sale, of produce. Thus, generally, PACA will not apply to disputes involving: (a) truckers and ocean carriers relating to claims for payment of freight or breach of transportation contracts; (b) a broker’s commission claim; or (c) many farming activities such as the sale of a farm tractor or a contract to provide farm labor to pack product.
The PACA applies to almost all “perishable agricultural commodities” that are relatively perishable (e.g. melons yes; nuts no). Produce must be “raw” or have had only minimal processing to be subject to PACA law. Hence, the PACA covers fresh and frozen fruits and vegetables. Cooked or canned produce generally are exempt.
Because the PACA was enacted based upon Congressional power under the Commerce Clause of the U.S. Constitution, the transactions of the produce must occur in “interstate commerce” for the Federal PACA law to apply. But, the courts and the USDA have expansively interpreted “interstate commerce” as not just limited to produce that actually crosses a state line. So long as the produce enters the “stream of commerce” with the expectation that it will ultimately move to or through another state, the PACA will apply.
Almost all traders engaged in the produce industry in the U.S. must obtain and maintain a PACA license issued by the USDA. Any business that buys or sells (a “dealer” under the PACA), or negotiates the purchase or sale (in the case of a broker), of “wholesale” quantities of produce (more than one ton in any given day during the year) must be licensed. A “consignment agent” who receives produce for sale on commission, on behalf of another (such as a grower’s agent), must also be licensed regardless of the quantity of produce sold or purchased.
In the case of purchasers or sellers on a retail level, a trader must be licensed by the USDA if they transact produce sales in an invoice amount exceeding $230,000 during a year. Hence, generally restaurants are subject to PACA law. Importantly, PACA does not treat as “dealers” those growers who are selling only their own produce they have produced and hence, growers are not required to obtain a PACA license. Accordingly, marketing companies do not have a remedy under the PACA against growers who fail to perform a marketing agreement but instead, must proceed against the grower in the courts under state contract law. Also, no PACA license is required for most of the food processors and canners that obtain their produce within the state where they are located. Finally, non-residents of the U.S. who are buying or selling produce from outside America are also not deemed subject to PACA’s licensing requirement.
Although not required, growers nonetheless may obtain a PACA license and thereby render themselves subject to PACA’s rules and be entitled to its benefits. For example, growers may desire to become licensed so that they can take advantage of the PACA Trust. PACA-licensed growers may easily protect their eligibility to be PACA trust beneficiaries by including the PACA trust warning on their invoices, as is more fully discussed below.
If a produce trader who is required by PACA to be licensed fails to obtain and maintain a license, the USDA can sanction the consignment agent, dealer, or broker through fines, and obtain a court injunction to prohibit trading without the license. The USDA conducts disciplinary proceedings of PACA licensees before an administrative law judge if the produce trader does not comply with PACA’s requirements. The USDA regularly disciplines licensees for failing to pay for produce on time and in full. Excuses for nonpayment, such as a tough economy or nonpayment by the buyer’s own customers, are typically rejected by the USDA as invalid defenses to a failure to pay in full and on time. The USDA may impose sanctions for other misconduct including, without limitation: the refusal to maintain and produce required records for inspection, misbranding produce and making misrepresentation in produce sales, and improperly employing former licensees or “responsibly connected” persons who have a past history of PACA violations. The USDA may revoke a PACA license if a trader files for bankruptcy without paying all produce sellers in full prior to the filing or deny a license to an applicant as financially unfit based upon a past bankruptcy filing.
The USDA will, in the scope of its disciplinary and reparation proceedings (and as is further discussed below), determine which persons are “responsibly connected” to a produce business, such as managers, partners, directors, officers, and owners of at least ten percent of a licensee’s stock. In the case of a sanction against such a “responsibly connected” person, no other licensee may employ them without posting a bond. If they do employ them without the bond, the PACA licensee employer can itself be disciplined by the USDA and risks loss or suspension of their own license by hiring such person.
The heart of the PACA is the declaration that certain unfair and fraudulent practices are illegal in the produce industry. In general, such conduct includes, but is not limited to: mislabeling, misrepresentation, a shipper’s failure to deliver produce and a receiver’s rejection of produce without reasonable cause, dumping more than 5% of produce in a shipment without verification that it has no commercial value, tampering with USDA inspection certifications, and substituting different produce for that which has already been inspected. Since 1984, the dissipation of PACA Trust assets has, as will be discussed below, been another primary type of unfair conduct that violates the PACA.
The PACA does not just prohibit certain misconduct, but also establishes a system of rules for fair trading in the industry. The USDA, through its regulations, has defined trade and industry terms unique to or commonly used in produce transactions — for example, “price after sale,” “protection,” “good delivery,” and “F.O.B. shipping point.” Some of the major duties of the market participants also are outlined in the USDA’s regulations. For example, consignment agents are required to account for their sales made on behalf of their principal in liquidations and may not use certain sales methods such as averaging or pooling produce without lot numbers.
Brokers are required to promptly issue a written memorandum confirming the details of a sale and disclose which of the parties is obligated to pay their commission. Brokers generally are not liable for a buyer’s failure to pay for produce in a brokered deal. There are additional rules for brokers who operate as a produce buyer for their own account or act in other capacities.
PACA also imposes substantial record-keeping obligations on all licensees to preserve for two years most documents related to the receipt, sale, brokering, accounting for, and disposal of produce. The PACA also generally requires certain agreements (such as a marketing agreement between a grower and a consignment agent) to be in writing before produce is received.
To adjudicate disputes about whether produce complies with the terms of a sale or whether produce was properly dumped, the USDA has established a system of grade, condition, and quality guidelines and tolerances for many types of produce. The agency has also established a nationwide system of trained inspectors to inspect and then certify the produce’s compliance with these standards. The facts in the inspector’s certificate are prima facie proof of their truth. Generally, any dispute regarding the quality, grade or condition of produce should be resolved via a USDA inspection, as other forms of evidence of the condition or quality of the produce are much less significant in a PACA dispute.
The USDA’s AMS division also canvasses the produce industry and reports pricing information in various reports for different markets and locations in the Market News, which is published on most business days. The reported prices in the Market News are generally considered a reasonably reliable measure of the value of produce for purposes of computing damages for PACA violations.
Two specific topics in PACA’s fair trading standards merit special mention. First, one of the key reasons why PACA was originally enacted was the problem of slow payment and non-payment to produce sellers. For this reason, the heart of the PACA prohibits a produce buyer’s failure to “make full payment promptly.” As is defined by the USDA regulations, this requirement means the seller must receive the full contract price usually within ten days after the sale is made. While a longer payment term can be agreed upon, PACA requires that such payment arrangement be clearly specified in writing and in the contract documents if the PACA ten-day default dates is not applicable.
Second, the PACA’s legislative history revealed a concern with addressing certain “sharp” practices by produce buyers who rejected shipments in compliance with the parties’ contract because of a change in market prices or for other unfair reasons. Therefore, the PACA prohibits the buyer’s rejection of a shipment, as well as the seller’s failure to ship per the contract, unless there is “reasonable cause” for these actions. Drawing heavily upon the UCC law of sales, the PACA only allows a buyer to reject a load if the buyer’s rejection is unequivocal, and prompt notice (in the case of fresh produce shipped by truck, within only eight hours or two hours after receiving the results of a USDA inspection) is given to the seller. A buyer is also not allowed to reject a shipment if they diverted the load to a different location, already accepted it (i.e. generally, acceptance of a shipment is not subject to a right of the buyer to change their mind), or unloaded it from the truck, except in a limited manner to allow a USDA inspection to be conducted.
Further, if the buyer accepts the shipment, they may still have a claim against the seller for breach of contract. But, in such a case, the buyer is required to give prompt notice that the produce is in breach of the parties’ contract within a reasonable time (usually not to exceed three days and in less time depending, to a significant degree, upon the perishability of the produce in question) to the seller. The notice is required so that the seller has an opportunity to obtain their own inspection of the load to dispute the alleged breach.
Moreover, a single shipment, such as a trucker’s container, is deemed a “Commercial Unit,” such that the buyer must reject the entire shipment, if at all. The buyer may not pick and choose among the contents of the shipment, rejecting some produce and accepting others, even in a mixed load of different produce from one seller. It is an “all or nothing” deal when it comes to acceptance.
A seller is also required to ship produce in accordance with the parties’ contract per the agreed shipping terms. A seller providing produce on a “F.O.B. shipping point” basis, which is quite common, is required to deliver the produce, at the seller’s cost and at the agreed location, the produce must be in conformity with the contract and, importantly, it must also be in “suitable shipping condition.” PACA law deems the “suitable shipping condition” as a form of express warranty that means the produce, at the shipping point, is in a sufficient shippable condition so as to not abnormally deteriorate by the time it arrives at the agreed destination assuming normal transit time and transportation conditions. For example, produce sold as USDA No. 1 grade may be in full conformity with a contract calling for sale of No. 1 grade even if the produce arrives at the destination and does not grade No. 1 upon arrival, given the perishable nature of the produce while in transit. The warranty of suitable shipping condition applies only to F.O.B. shipping point transactions. It will not apply if the parties’ contract does not designate any destination, the buyer diverts the shipment to a different or more distant location, or there is evidence of abnormal transportation conditions, such as when the air conditioning in a reefer container fails and results in a “hot” load on arrival. In an F.O.B. shipping point sale, the buyer, which assumed all risk of loss to the produce from transportation risks after the shipment left the shipping point, is liable to pay the seller the contract price with the buyer left to proceed against the carrier for the damage to the load from improper handling.
The legislative history to the PACA indicates Congressional concern that lawsuits in court did not provide produce traders with an adequate remedy. Therefore, the PACA provides an administrative remedy known as reparation proceedings to produce industry traders and for growers without a PACA license to enforce PACA’s fair trading standards (but reparation proceedings cannot be used to enforce the PACA Trust).
Reparation proceedings occur in two stages, first an informal and thereafter a formal complaint process. As a first step, a produce seller must institute an informal and inexpensive complaint with the USDA by letter or on the USDA’s prescribed form. Importantly, the reparation proceedings must be filed within nine months after the claim accrued. The time period to start counting the nine months is usually measured from the payment default date when the seller was not timely paid).
After a proper filing is made, the USDA will ask the other party to respond to the claim and then attempt to persuade the parties to voluntarily resolve their dispute. If the parties agree to mediate their dispute, a USDA representative may preside over a face-to-face meeting between the parties to formally discuss settlement. The USDA cannot, however, compel either side to settle in the informal complaint stage. Rather, all settlement agreements must be voluntary. The USDA may render an informal opinion on the merits of the case under PACA law, but such opinion is not binding in the sense that the non-prevailing party is not required to comply with the agency’s opinion issued in the informal complaint proceedings.
If the dispute still is not resolved and after the USDA gives notice of an impasse, the party bringing the informal complaint may move to the second stage of filing a formal complaint with the USDA. This formal complaint must also be filed within nine months after the PACA violation occurred but the prior filing of an informal complaint within the nine months tolls this time. A complaining party who is located outside the United States must file a bond for double the amount of their claim, plus attorneys’ fees, before the USDA will proceed to administer the formal complaint.
A formal PACA complaint is similar to the prosecution of a lawsuit in court. There are formal filings that outline the parties’ positions. The USDA may allow the parties, upon application, to take sworn testimony from witnesses through depositions. If the dispute involves less than $30,000, there is no oral hearing. Instead, the “examiner,” who is an attorney in the USDA’s office of the General Counsel, will determine the dispute under the “documentary procedure,” based on the written evidence submitted by the parties without a “live” appearance at an oral hearing. The scope of what the USDA may hear may, however, be more limited than would be determined in a lawsuit as the USDA will only hear matters under the PACA and not unrelated matters, such as, for example, unrelated contracts concerning transportation, warehousing, or non-core produce issues.
If the dispute exceeds $30,000 and there is a controversy in the evidence, the USDA will receive evidence in an oral hearing conducted by the examiner. Based upon the evidence, the examiner will issue a formal written opinion applying PACA law to the facts of the case, award attorneys’ fees (albeit only for counsel’s appearance at the oral hearing and only against a PACA licensee), and issue a reparation “award” on the merits of the controversy.
If the USDA enters an award for damages in favor of the complaining party, the non-prevailing party must pay that amount within 35 days if they do not appeal to Federal court, as is discussed below. If payment is not timely made, the USDA will revoke the license of the losing party. The USDA’s ability to suspend or revoke a PACA license is the real “teeth” of PACA since a produce trader cannot operate legally in the U.S. without a PACA license. Accordingly, any trader who wants to continue in business is compelled to pay the award in order to maintain their license. If, however, the party who is required to pay the award is insolvent and therefore, faced with the inevitable loss of their PACA license in any case, the sting of a license revocation is not present, at least in the near term, and a reparation award may be of less assistance to the complaining party through PACA proceedings than proceeding with other legal proceedings. The prevailing party in the reparation proceedings may then institute a lawsuit in court after an award is issued to recover a judicial judgment against the opposing party who lost before the USDA. Nevertheless, such judgment will only be collectible to the extent the party who lost in the reparation proceedings is not already insolvent, in bankruptcy, or has not dissipated most of its assets through transfers of its assets to third parties.
The party who has a reparation award entered against it has the option to appeal to a Federal district court. The party must file a notice of appeal within thirty days and post a bond for double the amount of the reparation award plus a sum sufficient to pay for reasonable attorneys’ fees to the opposing party if the reparation award is not reversed. The court will review the USDA’s award de novo, meaning that a jury can hear the case and the parties can resubmit the same evidence as heard by the USDA or even offer new evidence not submitted during the reparation proceedings. The USDA’s award from the formal complaint is not binding on the court, or the jury, but it is prima facie proof of the facts. The party who lost before the USDA may, however, submit evidence to rebut the facts in the USDA’s opinion supporting the award. If the award is upheld, the court may award a reasonable attorney’s fee and the court will enter a judgment. The prevailing party may then, finally, collect on what is owed it from the bond posted by the losing party at the start of the Federal lawsuit.
An aggrieved grower or PACA licensee is not forced to avail themselves of the USDA’s administrative proceedings. Instead, they may proceed with a lawsuit in Federal or state court. A party may have no choice but to sue if more than nine months has expired since the PACA violation occurred because the USDA can only hear reparation proceedings instituted within that time period. Lawsuits are subject to much longer statutes of limitations of several years. A lawsuit may also be preferable to a non-resident party who does not wish to or is not able to post the bond required to initiate the formal PACA complaint before the USDA. In the judicial proceedings, the party may sue not only for their PACA claims, but also bring any available state law claims, such as for breach of contract. State courts have the power (called concurrent subject matter jurisdiction) to hear the Federal PACA claim because Congress did not provide that the Federal courts were an exclusive venue for PACA’s enforcement. The party injured by the PACA violation must choose, or “elect their remedy,” in either the courts or before the USDA in a reparation complaint. But, they cannot simultaneously proceed in both an administrative and a judicial forum.
As important as fair trading guidelines under the PACA is the PACA Trust (the “Trust”). In 1984, in response to an increasing number of “no pay” situations whereby produce sellers were not paid or short paid, being relegated to “the back of the line” as an unsecured creditors when insolvent buyers filed for bankruptcy, Congress created the statutory PACA Trust.
Now, when produce is delivered (the buyer obtains possession, control, or ownership), the seller is deemed to have only transferred legal, but not equitable, title to the produce. The buyer is deemed to be a PACA trustee who holds the produce in trust for the sellers, as PACA Trust beneficiaries. The Trust continues in existence until all sellers of produce to the same buyer are paid in full. The Trust assets include not only the produce itself, but also essentially all of the buyer’s produce business including: all proceeds from the sale of produce, all inventories derived from the produce (i.e. processed produce is property of the Trust, once the seller satisfies all eligibility requirements to remain a trust beneficiary, as is discussed below), and all of the buyer’s accounts receivable from the sale of the produce to third parties.
Produce buyers are not required to segregate proceeds from the sale of produce. The PACA regulations state it is contemplated that that produce buyers will commingle the proceeds of different produce and even the proceeds of non-produce sales together. The unpaid seller is nonetheless protected. The PACA Trust is a “floating” trust that renders all of the buyer’s produce-related assets as property of the Trust. Instead, it is the buyer’s burden to prove its assets are not covered by the Trust by tracing that property to transactions not involving any produce sales from any seller.
As was referenced above, the PACA Trust applies to all sellers of produce to the same buyer, regardless of when they made the sale. A seller who transacted business later in time can essentially have their protection under the Trust relate back to the very first sale of produce by a different seller to the extent that first seller has not been paid in full and there has continuously and always been at least one unpaid seller (i.e. the Trust never terminated). In the case where a buyer’s total assets in trust are insufficient to fully pay all sellers, the Trust beneficiaries share on the buyer’s remaining assets on a pro rata basis.
The PACA Trust protection may be waived, but such a waiver must be unequivocally clear, be in writing, appear in a document separate from the contract, and be signed in advance of the sale of any produce pursuant to such contract.
A seller of produce must take positive action to become an eligible beneficiary of the PACA Trust. A grower’s agent is required by PACA to take all such action on the grower’s behalf. A consignment agent is also required to protect their principal’s PACA Trust rights but only if their agreement so requires.
After the 1995 amendments to the PACA, there are now two different ways for a produce seller to give a required notice of their intention to become a trust beneficiary and thereby, become eligible for Trust protection. The first method applies only if the seller is a PACA licensee (hence, this is a primary reason why otherwise PACA-exempt growers may voluntarily elect to become a PACA licensee). The licensee includes on their paper invoice or electronic invoice a statutorily-prescribed warning that the produce is sold pursuant to PACA with intention to impress a trust upon it. This is referred to as the “invoice method.” The USDA’s regulations provide for the exact language to be used to impress the Trust. Some courts require only substantial compliance with the form of the language used on the invoices. But, a party wishing to guarantee their eligibility for Trust protection should strictly comply with the PACA by including the exact language required by the USDA’s regulation and place that language in bold on the face of their invoices.
The second method of becoming eligible for Trust protection is available to both PACA licensees and also non-licensees. They may not use the “invoice method” but instead, to protect their PACA Trust eligibility, they must send the buyer a “notice of intent to preserve trust benefits” with certain specified details of the sale and also include the USDA’s required language about impressing the produce with the Trust to put the receiver of the produce on notice of the Trust rights claimed. The 1995 amendments to the PACA eliminated the prior requirement that the produce seller also file a copy of the foregoing notice with the USDA. Instead, all that the seller needs prove, as to either the first or second method, is that notice was actually given to the buyer. If the buyer disputes that it actually received the notice, it is the buyer’s burden to prove non-receipt.
The foregoing notice of trust eligibility, under either of the two methods, must be given in a timely manner. The maximum delay between sending the notice (or sending an invoice, if proceeding under the first method) is thirty days from the buyer’s “receipt and acceptance” of the shipment. Previously, some produce sellers tried to be accommodating and entered into oral or written agreements to extend the time for payment by a defaulting buyer who had not complied with the contract’s payment terms. Some courts held that such agreements, at least to the extent they were written, destroyed PACA Trust eligibility. In a 2011 regulation, the USDA established a new regulation allowing a produce seller to enter into a post-default extension agreement with a defaulting buyer to accept partial payments and agree to an elongated payment schedule (i.e. accept late payments) outside the thirty-day window without waiving their PACA Trust eligibility (assuming, of course, that the seller of produce initially provided timely notice of the Trust under one of the two above methods prior to the buyer’s payment default or at least provided notice not more than thirty days after the non-payment).
The PACA prohibits as unlawful any “dissipation” of the PACA Trust prior to the seller receiving full payment on their produce sales. PACA law defines “dissipation” as any act or failure to act that results in the diversion of trust assets to anyone other than the unpaid seller or that would impair the seller’s ability to get paid from the buyer or its assets. Thus, dissipation can encompass payments by the produce buyer of otherwise legitimate (and unrelated) expenses of the buyer’s business to third parties for payroll, rent, and even the light bill.
The PACA gives the USDA the power to itself seek relief in Federal Court to prevent dissipation of the PACA Trust. However, the agency has no practice of taking such action. Hence, enforcement of the PACA Trust is up to the unpaid sellers. Hence, the PACA Trust is not self-effectuating and, instead, is a powerful, but self-help, law.
PACA law has been interpreted to give the unpaid seller the right to sue in the Federal trial court (the U.S. district court) to enforce the PACA Trust. Such enforcement may take the form of an action for damages, to be resolved after prolonged litigation. But, given the seller’s need to move quickly before the defaulting buyer has no assets left, the seller will more normally also seek entry of an injunction to freeze all of the seller’s assets, under threat that the buyer will be held in contempt of Court if they disobey the Court’s injunction (intentional noncompliance with a court’s orders may result in imposition of a fine or even imprisonment). The unpaid seller may request the Court to require the produce buyer to deposit all PACA Trust assets in a segregated bank account pending further Court order. The seller usually requests immediate relief, through a temporary restraining order (which may be done without prior notice to the buyer), followed by a request for a temporary injunction during the pendency of the litigation, which injunction must be determined by the Court with notice to the buyer and based upon the evidence in the record submitted by both parties (which evidence may be submitted at a hearing before the Court).
The practical and drastic effect of a Court restraining order and injunction is to shut down the buyer’s business until the produce seller is paid. The buyer cannot use its bank account or sell any of their assets, including any perishable produce it may have in inventory. When the unpaid seller can prove dissipation, courts generally grant such immediate equitable relief because, otherwise, the buyer could “prefer” its other creditors, by making payments to them, even though they do not have the same priority creditor status that PACA law provides to unpaid produce sellers. If no injunction is granted and the defaulting buyer is not paying for the produce, the end result would be less, or even no, assets left at the end of the lawsuit to pay the produce sellers.
The produce buyer, which buyer is often an incorporated entity, is primarily liable for PACA Trust dissipation. If the corporate buyer attempts to avoid payment of the PACA Trust through a bankruptcy filing, PACA law provides additional protection for the produce seller, as a Trust beneficiary. The assets of the PACA Trust are not assets of the bankruptcy estate and, therefore, the buyer’s business property generally cannot be used to pay other creditors of the buyers until all of the PACA Trust beneficiaries are first paid in full. Consequently, since the 1984 amendments to the PACA, the unpaid produce seller now goes to the “front of the line” and has a priority status in any bankruptcy of a buyer before the buyer’s other creditors can be paid. This priority extends even to debts of secured creditors, such as banks who loaned monies to the buyer even if they previously perfected security interests in all of the buyer’s assets, including its produce inventories. While some bankruptcy courts may allow a trustee in a buyer bankruptcy to administer the PACA Trust assets as part of the bankruptcy estate, the PACA beneficiaries still are entitled to be paid first from those assets as beneficiaries of the PACA Trust. Of course, as to all other, non-produce related assets of the buyer, the unpaid sellers have no special priority and must share with all other, unsecured creditors.
If the corporate buyer has insufficient assets to pay all unpaid sellers in full, whether in or out of bankruptcy, those persons who were in a position to control the finances of the buyer’s assets (such that they could have paid the seller for the produce) are deemed co-trustees and may be personally liable, albeit secondarily to the corporate buyer, for the full balance still owed to the PACA Trust beneficiaries. If those individuals try to avoid this result and obtain a “fresh start” by filing for personal bankruptcy protection, PACA law provides that the Trust liability is not dischargeable (i.e. the Trust duty to pay for all produce in full survives the bankruptcy of the individuals who were in control of the produce buyer’s assets). Those persons in control of the buyer’s assets are generally liable for the unpaid balance owed the sellers for causing a “defalcation” by the buyer in breaching its fiduciary duty as a trustee, although there is some conflict in the law as to whether actual or constructive authority is required to impose personal liability. Court decisions impose this form of secondary liability on the individual (after the buyer business’ primary liability) upon a showing of mere negligence or even without any fault at all by responsible persons who did not cause the corporate buyer to pay for the produce.
A final source of potential recovery for unpaid PACA Trust beneficiaries is to seek to recover against any third party who received PACA Trust assets from the defaulting buyer with knowledge of the produce buyer’s failure to pay for produce purchases. For example, such a third party is often a lender who extended credit to the buyer prior to its default and was then paid back on the loan by the defaulting buyer with produce-related proceeds. PACA law allows the third party, such as a lender, to keep the property it received and not be required to disgorge the PACA Trust assets if the third party was a bona fide purchaser who paid value to the buyer and lacked knowledge of the buyer’s dissipation of the Trust. There is some conflict in PACA law as to the correct standard of knowledge that applies to the third party. Some courts apply a “constructive” knowledge standard, whereby all third parties are essentially automatically on notice of the potential application of the Trust merely because PACA is a law in existence that applies to all produce traders. Other courts require a more stringent standard of “actual” knowledge. To be liable under this latter standard, the third party must have actually known they were receiving Trust assets monies owed to the unpaid produce sellers either through an admission by the third party or facts that establish “red flags” that prove circumstantially that the third party must have known, or should have known but for willful blindness, there was a serious risk that they were receiving PACA Trust assets that were owed to produce sellers.
In the U.S. produce industry, all market participants must be aware of, comply with, and take advantage of the important protections and rights, as well as the obligations and duties, of the PACA. Given that PACA law has many sources and industry-specific, many attorneys are not well acquainted with PACA’s fair trading guidelines, the PACA Trust, or the PACA licensing regime.
For this reason, and given the importance of PACA, produce industry traders are well advised to consult with legal counsel who regularly practices in the field of PACA law.
The foregoing is offered for general information use only and should not be considered to be legal advice applicable to any particular situation. Further, the hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, you should investigate the information on our backgrounds from our website (www.miamibusinesslitigators.com) or by contacting Henkel & Cohen, P.A. to request free written information about our experience and qualifications.
Henkel & Cohen, P.A. is a Miami, Florida boutique business litigation law firm whose partners hold the highest AV rating from Martindale-Hubbell®. For additional biographical and contact information, please visit the firm's website at www.miamibusinesslitigators.com.