PACA Claims in Bankruptcy

PACA Claims in Bankruptcy

It should come as no surprise that sellers of fresh or frozen produce expect to be paid for their products, but getting buyers to live up to their end of the bargain has not always been easy. The federal Perishable Agricultural Commodities Act (PACA), enacted in 1930, created ethical standards for wholesale transactions between sellers and purchasers of fruits and vegetables. Subsequent amendments to the law improved the ability of sellers to preserve their right to payment through a PACA trust essentially providing that merchants, dealers or brokers receiving perishable agricultural commodities hold them in trust until the seller has been paid in full. A harsh reality for sellers is the threat of a purchaser filing a petition in bankruptcy, so it is important for sellers to have an understanding of their rights and how to protect and assert them.

PACA claims and the PACA trust

PACA seeks to avoid what had been a common practice among purchasers of agricultural commodities of using the products or the anticipated revenue to be earned on them to secure financing from lenders even before the sellers had been paid for them. The law was amended in in 1984 to address this practice, creating the PACA trust.

The amendment creates a floating trust arising from the purchase of perishable agricultural commodities until the seller has been paid in full for them. The trust also applies to money made on the sale of the commodities to a third party by the original purchaser.

Benefit and procedures for asserting a PACA trust

The PACA trust gives a seller of perishable produce priority as to the produce subject to the trust or to cash received by a buyer that sold the produce after taking delivery. The priority over other creditors offers protection if the buyer defaults, becomes insolvent or files for bankruptcy. Federal district courts have jurisdiction to hear claims by sellers seeking to obtain payment or otherwise enforce their rights under a PACA trust.

The law requires sellers and buyers to be licensedin order to engage in the produce business and Failure to be licensed under PACA is punishable by a fine imposed by the Agricultural Marketing Service of the U.S. Department of Agriculture. A licensed seller may assert its rights under PACA simply by including a specific notice on its invoice alerting a buyer that the sale is subject to a trust claim until full payment is made. Unlicensed sellers may assert a trust, but they must do so through a written notice separate from the invoice.

It is a common practice in the produce industry for a buyer to take delivery and immediately sell the produce to a third party. If a seller does not get paid according to the terms of its invoice or contract, it can enforce its trust rights through a court action and a temporary restraining order freezing the debtor?s assets and bank accounts.

Bankruptcy and PACA claims

Sellers that follow the notice procedures for preserving their trust rights have priority in the event of a bankruptcy filing by the debtor. Their status as a prioritycreditor applies not only to the specific fruits or vegetables sold as part of the original transaction.

Unlike other creditors whose claims are secondary to those holding a security interest in the assets of the debtor, produce sellers preserving their rights under PACA may file a proof of claim in a bankruptcy proceeding asserting priority over all creditors as to trust assets. Trust assets held by the debtor include the following:

  • Produce inventory
  • Products created or derived from the produce
  • Deposit accounts holding money derived from the sale of produce

  • All produce sellers with preserved rights under PACA must be paid before trust assets can be used to satisfy the claims of other creditors of the debtor in the bankruptcy proceeding.

    Produce sellers need knowledgeable legal advice

    The protections afforded sellers of perishable frozen and fresh produce can easily be lost by not following the procedures to preserve their rights or by inadvertently giving them up. Sellers who grant buyers payment terms in excess of 30 days from the delivery date lose their rights to assert a trust under PACA. It can also be lost if there is a discrepancy between the payment terms the shipper?s invoice and any written contract or order confirmation with the buyer.

    Sellers can protect the rights available to them under PACA by reviewing their company invoicing and sales policies and procedures with an attorney experienced in handling produce claims under the federal statute. The attorney?s advice and skills are invaluable when asserting rights as a creditor with a PACA trust priority in bankruptcy proceedings.