On April 11, 2011, the U.S. Department of Agriculture ("USDA") issued a final rule allowing produce sellers to enter into post-default payment plans with buyers without forfeiting the important Trust protections created by the Perishable Agricultural Commodities Act ("PACA"). The final rule is published in the April 12, 2011 edition of the Federal Register, pages 20217 through 20. The USDA amended Section 46.46 of its regulations in Chapter 7 of the Code of Federal Regulations, by revising subsection (e)(2) and also adding a new subsection (e)(3), which together state as follows:
(e) . . .
(2) The maximum time for payment for a shipment to which a seller, supplier, or agent can agree, prior to the transaction, and still be eligible for benefits under the trust is 30 days after receipt and acceptance of the commodities as defined in § 46.2(dd) and paragraph (a)(1) of this section.
(3) If there is a default in payment as defined in § 46.46(a)(3), the seller, supplier, or agent who has met the eligibility requirements of paragraphs (e)(1) and (2) of this section will not forfeit eligibility under the trust by agreeing in any manner to a schedule for payment of the past due amount or by accepting a partial payment.
The USDA’s new regulation reverses the result reached in a line of prior Federal Court decisions holding that any post-default agreement entered into would waive PACA Trust benefits.
PACA’s Trust Protections and the Requirement of Prompt Payment; and Prior Court Decisions Finding that Post-Default Payment Plans Waived Trust Protection, such that New Regulation was Needed
PACA creates a form of non-segregated, "floating trust" whereby in cases where a seller gives timely notice of their intent to preserve their PACA trust rights, buyers of produce are deemed by operation of law to be trustees who hold both the produce itself and all proceeds from the sale or other disposition of such produce in trust for the benefit of the sellers until the sellers receive full payment. To preserve the PACA trust, the produce seller must give the buyer written notice of their intent to preserve the trust within thirty days of the produce transaction, which notice can be satisfied by specified language in bills or invoices for the transaction.
Given the highly perishable nature of produce and the speedy loss in the value of the collateral for the sale over time, Congress created the PACA trust to prevent the dissipation of proceeds from produce sales to help assure that the seller is paid in full. Otherwise, the buyer will not only be liable for the unpaid difference on the invoice price and such liability can extend to later purchasers of the produce, the proceeds from all such transactions, and even to the principals of each buyer who may be personally liable for dissipation of PACA trust assets. Additionally, the USDA reserves the right to sanction buyers who violate the PACA trust including civil penalties and even suspension or revocation of the buyer’s PACA license, without which they cannot engage in the produce business in the U.S.
The PACA trust was passed into law to protect short term extensions of credit made by produce sellers who ship perishable produce to buyers prior to receiving full payment. To be eligible for PACA trust protection, the terms of the deal must be for "prompt" payment which is usually defined as ten days but may not extend beyond thirty days.
In the last two decades, a number of Federal appellate courts in the Second, Third, Seventh and Eighth Circuits as well as some Federal district courts had held that PACA trust protection was waived and therefore lost when sellers entered into an oral or written agreement after a payment default whereby the seller agreed to allow the defaulting buyer to pay the outstanding invoice for the produce sale over time, in a time period exceeding thirty days, or accepted partial payments made over thirty days after the sale. Many of the court decisions focused on the thirty-day maximum time period for payment under Section 46.46(e)(2) of the regulations to hold that any agreement allowing for later payments either voided the prior eligibility for trust benefits or such extended payment plan violated the prompt payment requirement of PACA. Given that PACA was enacted principally to protect produce sellers from nonpayment in the case of defaulting buyers, the USDA believed that amendment of its regulations was essentially to avoid a seller’s inadvertent loss of PACA trust benefits merely by accepting late payments or working with a defaulting buyer who claimed the need for an extended payment plan.
Highlights of the New Regulation Allowing Post-Default Payment Plans
To address the basis for prior court decisions that Section 46.46(e)(2) placed a maximum time period on payment of only thirty days, the USDA amended this subsection to confirm that the thirty-day limitation only applied to agreements made "prior to the transaction." This language, when coupled with the new subsection (e)(3) clarifies that a produce seller who has correctly established their PACA trust rights at or before making a sale – by agreeing to payment terms of not more than thirty days and by giving written notice of the intention to preserve PACA trust benefits – will not be deemed later to have forfeited or waived their rights to hold all buyers liable as PACA trustees simply because they agreed to a payment plan after a payment default whereby the buyer makes or agrees to make partial payments after thirty days.
As anyone in the produce industry knows, most business is transacted orally, by telephone, and not in writing, whether by email, electronic ordering or otherwise. In response to comments to the proposed rulemaking that a requirement that any post-default agreements for payment plans be in writing, the USDA made clear with the language in new section (e)(3) that an agreement made "in any manner," orally or in writing, will not waive the PACA trust. This same new subsection also explicitly allows a produce seller to accept a partial payment on the bill after thirty days without waiving PACA trust benefits even without an express agreement by the seller that such payment is allowable.
Implications of the New Regulation on Post-Default Dealings between Buyers and Sellers in the Produce Industry
PACA trust issues aside, a produce seller is usually well advised to get any post-default agreement to accept late payments in writing signed by the buyer. Otherwise, without an objective writing which the USDA or the courts can later enforce, a produce buyer may be able to claim the seller agreed to different or longer payment terms than were intended by the seller. Of course, sellers are not required to enter into any payment plans and may instead seek to immediately after a default enforce their PACA trust rights through the filing of an informal and then a formal complaint with the USDA or to proceed directly through the courts. Finally, produce sellers may wish to seek legal counsel before agreeing to any payment plan to assure that the final embodiment of such agreement, even if contained only in an exchange of emails, protects the sellers’ options in case the buyer also defaults on the payment plan.
This new regulation will also give produce buyers more freedom to contract for payment plans with sellers. Buyers who pay late risk sanction by the USDA regardless of whatever payment arrangements are made with the seller. However, if the seller does not file a PACA complaint or sue, and instead agrees to accept payments over an extended time, it is also true that USDA sanctions are much less likely since the agency cannot sanction violations not brought to its attention. The new USDA regulation allows sellers to be more willing to agree to payment plans than they normally would have because of the prior law at least making it unclear, if not outright risky, to valuable PACA trust rights if the thirty day payment period was extended.