Principle #7 –
What’s super about these “super-priority” rights?
As a trust beneficiary, a produce seller has an interest in trust assets that is superior to nearly all other types of creditors. Consequently, a produce seller may file a civil lawsuit in U.S. federal court seeking a temporary restraining order (“TRO”) and judgment against a defaulting firm.
The granting of a TRO freezes the buyer’s bank accounts and seizes its accounts receivable and other trust assets until the seller is paid. Such TROs may be granted quickly, and sometimes without notice to the buyer.
What’s more, if the defaulting firm’s assets are not sufficient to fully pay the seller, the officers, directors, and shareholders of the defaulting firm may be held personally liable for breach of the fiduciary duty owed the produce seller, provided they were in a position to control disposition of trust assets.
Principle #8 –
The PACA trust in bankruptcy
The PACA trust also shines when a defaulting firm files bankruptcy. Because PACA trust assets are not part of the bankruptcy estate, they are paid to PACA trust beneficiaries before other creditors, even secured creditors.
In other words, PACA trust creditors “walk to the front of the line” in a bankruptcy proceeding and will often be the only creditors paid.
When the bankrupt company’s trust assets are not enough to satisfy all the PACA trust debt, the PACA trust creditors each receive their pro rata share of the available assets, and as previously mentioned, the officers, directors, and shareholders of the bankrupt firm may be personally liable for the shortfall. And even if the individual owners or directors file for personal bankruptcy, the obligation to pay the PACA trust creditors in full is mostly likely not dischargeable.
Conclusion
Understanding the fundamental concepts related to the PACA trust will serve as a good primer for the New Hire Academy’s session on this topic.
Look for a similar article in this department related to the session on Transportation Customs and Rules in the January 2014 issue of Blueprints.
Blue Book Services recently launched the “New Hire Academy,” an online training program designed to help new hires learn the fundamentals of the produce industry and avoid costly setbacks. The program consists of five sessions covering: (1) trading customs and rules, (2) the Perishable Agricultural Commodities Act (PACA) trust, (3) sales and account management, (4) Blue Book ratings, and (5) transportation customs and rules.
In this article we recap some of the key points from the session on the PACA trust presented by Jason Read, an attorney with Rynn & Janowsky LLP based in Newport Beach, California. Each of the sessions is available for online viewing at www.producebluebook.com.
Principle #1 –
Introducing the PACA Trust
In 1984 Congress amended the Perishable Agricultural Commodities Act to include what is commonly referred to as the ‘PACA trust’ to help protect produce suppliers from defaulting buyers.
The PACA trust creates a trust relationship between unpaid sellers of perishable agricultural commodities and their buyers, giving produce suppliers what is sometimes referred to as “super-priority” collection rights, provided the produce seller properly preserves its trust rights. As a PACA trustee, sellers are empowered to protect and recover money owed to them in ways that are simply not available to ordinary creditors.
Although often misunderstood, the PACA trust is enforced only in federal civil court. In contrast, the U.S. Department of Agriculture’s PACA branch handles licensing, disciplinary complaints (e.g., misbranding violations), and reparation complaints (e.g., breach of contract disputes), but not PACA trust actions.
Principle #2 –
What is a trust relationship?
A trust relationship may be thought of as one where the ownership and control of certain assets have been separated, such as when a parent arranges for a trustee to manage assets for the benefit of a child. The PACA trust relationship between buyer and seller shares the same basic legal components: the buyer as the trustee responsible for managing trust assets, and the seller as the trust beneficiary.
The buyer, as trustee, is required to manage the trust assets for the benefit of seller with the highest level of care, known as a fiduciary duty. It is important to understand that individual officers, directors, and shareholders who mismanage PACA trust assets may be held personally liable to produce sellers, without protection from the corporate structure.
Principle #3 –
What are PACA trust assets?
Produce buyers are responsible for properly managing PACA trust assets consisting of: (1) their inventory of perishable agricultural commodities, (2) proceeds and accounts receivable from the sale of these commodities, and (3) food items derived from these commodities.
The definition of “perishable agricultural commodities” includes fresh and frozen fruits and vegetables of every kind, plus mushrooms, edible flowers, sugar cane, garlic, cactus leaves, herbs, and cherries in brine. Dried and processed fruit and vegetables are not subject to the PACA trust; nor are coconuts, fresh minced garlic, sugar beets, nuts, or juices.
Principle #4 –
Are my sales eligible for trust protection?
To qualify as a PACA trust beneficiary, a seller will first need to show that a transaction was eligible for trust protection. A transaction is eligible so long as the sale involves interstate or foreign commerce, and the buyer either has a valid PACA license, or is operating subject to a PACA license (and therefore should have one).
Buyers in the United States or U.S. territories that purchase 2,000 pounds of perishable agricultural commodities in a single day are subject to PACA licensing, as are retailers with cumulative annual purchases in excess of $230,000. Sales to restaurants in these quantities may also be eligible for trust protection even though no PACA license is required. And although it may come as a surprise to some, foreign sellers are eligible for PACA trust protection when selling to buyers within the United States.
Principle #5 –
Payment terms greater than 30 days? Just say no.
Sellers wishing to invoke the PACA trust must comply with very specific requirements. First, payment terms must not exceed 30 days. Congress intended the trust to apply only to short-term payment transactions. The regulations specifically set forth 10-day payment terms (i.e., 10 days from acceptance of the produce) as the standard, sometimes referred to as “PACA Prompt.”
When terms greater than 10 days (but less than 30 days) are agreed to, these extended terms must be memorialized in a pre-transaction written agreement, and must be properly noted on all invoices and billing statements to avoid the risk of forfeiting PACA trust rights.
In no event may a seller extend payment terms beyond 30 days prior to the buyer’s default on the original terms and still qualify for trust protection.
Principle #6 –
PACA licensees can do this the easy way or the hard way…
Sellers looking to invoke their PACA trust rights must first prove they have given the buyer timely and proper notice that the sale is subject to PACA trust protection.
There are two different ways to provide this notice. By far, the easiest way is to simply include the following language in its entirety on your invoices—
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 and other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.
This method is only available to PACA licensees. Unlicensed sellers, typically growers and foreign sellers, need to provide their buyers with separate written trust notices within 30 days of their invoices becoming past due. This latter method is tedious, but done correctly, it will meet the notice requirement of the PACA trust.
Principle #7 –
What’s super about these “super-priority” rights?
As a trust beneficiary, a produce seller has an interest in trust assets that is superior to nearly all other types of creditors. Consequently, a produce seller may file a civil lawsuit in U.S. federal court seeking a temporary restraining order (“TRO”) and judgment against a defaulting firm.
The granting of a TRO freezes the buyer’s bank accounts and seizes its accounts receivable and other trust assets until the seller is paid. Such TROs may be granted quickly, and sometimes without notice to the buyer.
What’s more, if the defaulting firm’s assets are not sufficient to fully pay the seller, the officers, directors, and shareholders of the defaulting firm may be held personally liable for breach of the fiduciary duty owed the produce seller, provided they were in a position to control disposition of trust assets.
Principle #8 –
The PACA trust in bankruptcy
The PACA trust also shines when a defaulting firm files bankruptcy. Because PACA trust assets are not part of the bankruptcy estate, they are paid to PACA trust beneficiaries before other creditors, even secured creditors.
In other words, PACA trust creditors “walk to the front of the line” in a bankruptcy proceeding and will often be the only creditors paid.
When the bankrupt company’s trust assets are not enough to satisfy all the PACA trust debt, the PACA trust creditors each receive their pro rata share of the available assets, and as previously mentioned, the officers, directors, and shareholders of the bankrupt firm may be personally liable for the shortfall. And even if the individual owners or directors file for personal bankruptcy, the obligation to pay the PACA trust creditors in full is mostly likely not dischargeable.
Conclusion
Understanding the fundamental concepts related to the PACA trust will serve as a good primer for the New Hire Academy’s session on this topic.
Look for a similar article in this department related to the session on Transportation Customs and Rules in the January 2014 issue of Blueprints.
Doug Nelson is vice president of the Special Services department at Blue Book Services. Nelson previously worked as an investigator for the U.S. Department of Agriculture and as an attorney specializing in commercial litigation.
