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The PACA Primer – An Introduction and Overview of the Perishable Agricultural Commodities Act and PACA Law

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The PACA Primer – An Introduction and Overview of the Perishable Agricultural Commodities Act and PACA Law

By: Tim Henkel, Esquire, Partner, Henkel & Cohen, P.A., Miami, Florida

 

Introduction

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 Purposes of PACA

The PACA was originally enacted by Congress in 1930 and subsequently amended several times over the last approximately eighty years as a "strict" and "tough" law to regulate interstate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 as a whole 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 the produce buyer, including lenders who provide secured financing to the buyer.

The Three Main Features of PACA

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 method to enforce PACA law 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.

The Sources of PACA Law

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 enforces the PACA. The USDA has promulgated numerous administrative regulations relating to all three main features of PACA. 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) governing the sale of goods generally applies as an important part of PACA law. To the extent PACA is silent on a subject concerning produce trading, state laws apply and have the force of law so long as they are not inconsistent with the PACA statute and the USDA's regulations.

Prerequisites for PACA's Application

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). In other words, the 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 is not.

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 PACA law to apply. The courts and the USDA have expansively interpreted "interstate commerce" as not just limited to produce that actually crosses a state line. Instead, so long as the produce enters the "stream of commerce" with the expectation that it will ultimately move to or through another state, PACA will apply.

The PACA License

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, for or 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, although there is some uncertainty on PACA's application to restaurants buying only for their own account. Importantly, PACA does not treat growers who are selling only their own produce that they have produced as "dealers," and hence growers are not required to obtain a PACA license. Accordingly, marketing companies do not have a remedy under PACA against growers who fail to perform a marketing agreement but instead, must proceed through 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 may nonetheless obtain a PACA license and thereby render themselves subject to PACA's rules. Growers may desire to become licensed so that they can take advantage of the PACA Trust because licensed growers may protect their eligibility to be 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 a license. As to PACA licensees, the USDA conducts disciplinary proceedings before an administrative law judge (ALJ) 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 a defense to violation of the PACA. The ALJ 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 to 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 or, in other circumstances, employ them without posting a bond. Otherwise, the employing-licensee can itself be disciplined and risk loss or suspension of its own license by hiring such person.

PACA's Fair Trading Standards

The heart of the PACA is the declaration of certain unfair and fraudulent misconduct illegal. 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 the 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.

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 or commonly used in produce transactions --for example, "price after sale," "protection," 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 the sales made on behalf of their principal in liquidations and 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 law 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. 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 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. Otherwise, the default PACA payment term is ten days.

Second, 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 the market's pricing 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 change of 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 so as to allow a reasonably quick inspection 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 at the seller's cost the produce to the agreed location from where the produce will be shipped, 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 such grade even if the produce arrives at the destination and does not grade No. 1, 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 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 Administrative Remedy under PACA for Unfair Trading Practices

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 not for enforcement of the PACA Trust).

Reparation proceedings occur in two stages, one informal and one formal. As a first step, a produce seller may institute an informal and inexpensive complaint with the USDA by letter. Importantly, the reparation proceedings must be filed within nine months after the claim accrued (i.e. 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. All settlement agreements must be voluntary. The USDA may render an informal opinion on the merits of the case under PACA law, 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, 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 non-U.S. complaining party (other than Canadians) must file a bond for double the amount of their claim, plus attorneys' fees, before the USDA will proceed. 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 based only on the written evidence submitted by the parties without a "live" appearance at an oral hearing.

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, 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 suspect or revoke a 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 really present and a reparation award will be of limited assistance to the complaining party through PACA 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 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 is not binding on the court, or the jury, but it is prima facie proof. The party who lost before the USDA may, however, submit evidence to rebut the facts in the USDA's opinion. 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 posted bond.

An aggrieved grower or PACA licensee is not forced to avail themselves of the USDA's administrative proceedings. Instead, they may proceed directly through 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 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 filing. But, they cannot simultaneously proceed in both an administrative and a judicial forum.

The Characteristics and Impact of the PACA Trust

The only more, or at least equally, important provision in the PACA than the fair trading guidelines is the PACA Trust (the "Trust"). In 1984, in response to an increasing number of "no pay" situations wherein produce sellers were relegated to "the back of the line" as an unsecured creditors when insolvent buyers filed for bankruptcy, Congress created the statutory PACA Trust.

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 (but the Trust does not extend to later purchasers of the produce).

Produce buyers are not required to segregate proceeds from the sale of produce. The PACA regulations state that 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. 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. In the case where a buyer's total assets in trust are insufficient to fully pay all sellers, the Trust beneficiaries share 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 the contract.

Fixing Eligibility for PACA Trust Protection

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 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, a primary reason why otherwise exempt growers may voluntarily elect to become a 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. They should use the exact language required by the USDA 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 non-licensees. They may not use the "invoice method" but instead, protect their PACA Trust eligibility by sending the buyer a "notice of intent to preserve trust benefits" with details of the sale and also including the USDA's required language about impressing the produce with the Trust to put the receiver of the produce on notice of the Trust. The 1995 amendments eliminated the prior PACA 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 new regulation adopted in 2011, the USDA reversed that result. The new regulation allows 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 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 nonpayment).

Enforcement of the PACA Trust by a Seller to Collect the Sales Price

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 expenses 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 regular practice of taking such action and certainly not doing so in the speedy manner needed in most circumstances to lock up a defaulting buyer's remaining assets before they are paid out by the buyer to third parties other than the unpaid produce sellers. Hence, enforcement of the PACA Trust is up to the unpaid sellers. It is not self-effectuating and, instead, is a powerful, but self-help, law.

PACA law has been interpreted to give the unpaid seller, not just the USDA, the right to sue in the Federal trial court (the 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 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 an immediate injunction, called a temporary restraining order, followed by a request for an injunction during the pendency of the litigation.

The practical and drastic effect of a Court injunction is to shut down the seller's business. 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 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 for making payment to 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 Trust beneficiaries. The assets of the PACA Trust are not assets of the bankruptcy estate and, therefore, that property 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 over all of the buyer's other creditors. This priority extends even to debts of secured creditors, such as lenders to the insolvent 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 powerful PACA Trust. Of course, as to all other, non-produce related assets of the buyer, the unpaid sellers have no special priority and share with all other, unsecured creditors.

If the corporate buyer has insufficient assets to pay all unpaid sellers in full, whether in or our out of bankruptcy, those persons who are deemed "responsibly connected" to the insolvent buyer may be personally liable, 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). The "responsibility connected" persons are generally, subject to some conflict in PACA law, liable for the unpaid balance owed the sellers for causing a "defalcation" by the buyer in breaching its fiduciary duty as a trustee. Court decisions impose this form of secondary liability (after the buyer's primary liability) through mere negligence or even without any fault at all by the "responsibility connected" person.

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. 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, in this case the 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 and lacked knowledge of the buyer's dissipation of the Trust. PACA law is in conflict as to the correct standard of knowledge that applies to the third party. Some courts apply a "constructive" knowledge standard, wherein 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 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 to this effect or facts that establish "red flags" that the third party must have known there was a serious risk that they were receiving PACA Trust assets that were owed to produce sellers.

Conclusion – Know Your PACA Rights and Obligations

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 license. For this reason, and given the importance of PACA, produce industry traders are well advised to consult with legal counsel who 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 the website (www.producebusinesslaw.com) or by contacting Henkel & Cohen, P.A. to request free written information about our experience and qualifications.

 

About Henkel & Cohen

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.

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