What is PACA?
PACA is an acronym for the Perishable Agricultural Commodities Act of 1930, a Federal Law ("PACA statute"), which provides a comprehensive scheme for the regulation of buyers and sellers of fruits and vegetables. It also refers to the division of the United States Department of Agriculture ("PACA division"), which administers the PACA statute and regulates the produce industry.
What does PACA regulate?
The PACA statute regulates interstate sales of fresh and frozen fruits and vegetables. It provides a code of fair play to aid agriculture traders in enforcing their contracts. The PACA statute requires traders to comply with the terms of their contracts. Suppliers must ship the quantity and quality of produce specified. Buyers must accept shipments that meet contract specifications and pay promptly after acceptance. PACA prohibits buyers and sellers from using unfair trade practices.
What are unfair trade practices?
Rejecting without reasonable cause produce bought or contracted to be handled on consignment.
Failing to pay promptly the agreed price of produce that complies with contract terms.
Discarding, dumping or destroying without reasonable cause any produce received to be sold on behalf of another firm.
Failing or refusing to truly and correctly account or to make full payment promptly for produce shipped on consignment or on joint account.
Misbranding or misrepresenting grade, quality, quantity, weight, state or country of origin of fruits and vegetables.
Making false or misleading statements regarding the sale of produce.
Altering inspection certificates.
Who does PACA regulate?
The PACA statute and PACA division regulate any person or entity who deals in fresh and frozen fruits and vegetables and is subject to license, whether or not they have a PACA license.
Who is subject to a PACA license?
Once a person or entity buys or sells perishable agricultural commodities in interstate or foreign commerce in an aggregate amount of 2,000 pounds or more on one day, they are subject to license from that day forward. Produce growers are exempt from licensing as long as they only sell produce of their own production. Retailers and frozen food brokers representing sellers are exempt from licensing until they purchase and negotiate sales of $230,000 or more worth of fruits and vegetables in a calendar year. Restaurants that purchase fruits and vegetables worth $230,000 or more in a calendar year may or may not be retailers and subject to the PACA statute. Recent court cases have come to differing opinions as to whether restaurants are covered under PACA.
What commodities are covered under PACA?
PACA covers perishable agricultural commodities, which are defined by the PACA statute as fresh fruits and fresh vegetables of every kind and character, whether or not frozen or packed in ice. The U.S. Department of Agriculture's (USDA) regulations define fresh fruits and fresh vegetables as all produce in fresh form generally considered as perishable fruits and vegetables. In determining what is a fruit or vegetable, the USDA uses the general or popular conception of what falls into the category of fresh fruits and vegetables. The USDA on its PACA website lists 50 pages of commodities it asserts are covered by PACA. The list does not follow what would be botanically classified as a type of fruit or vegetable, but what is generally considered fresh fruits and vegetables. For example, mushrooms are covered by PACA and they are not fruits or vegetables, they are a fungus.
Nuts, on the other hand, are botanically classified as a variety of fruit. The USDA does not recognize nuts as covered by PACA because they are not generally considered as perishable fruits or vegetables. The USDA's determination of commodities covered by PACA is authority only for the purposes of determining whether the USDA has authority to regulate sales of that commodity. Courts are free to make their own interpretation. In an unpublished case, a United States District Court Judge in Kansas City ruled that nuts are perishable agricultural commodities because they are botanically classified as a type of fruit and Congress intended for fruit of every kind and character-including nuts -to be subject to PACA.
PACA does not apply if the commodities have been manufactured into articles of food of a different kind or character. The following are examples of operations that do not change the commodity into a food of a different kind or character:
Water, steam, or oil blanching;
Chopping, color adding, curing, cutting, dicing, drying for the removal of surface moisture;
Fumigating, gassing, heating for insect control, ripening and coloring;
Removal of seeds, pits, stems, calyx, husk, pods, rind, skin, peel, etc.;
Polishing, precooling, refrigerating, shredding, slicing, trimming, washing with or without chemicals;
Waxing, adding of sugar or other sweetening agents;
Adding ascorbic acid or other agents used to retard oxidation; or
Mixing of several kinds of sliced, chopped, or diced fruits or vegetables for packaging in any type of containers.
Other courts have held that PACA only covers products that have been subject to very minimal processing, which does not transform them into different foods and contain more than 90% fruits or vegetables.
Must the produce be sold in interstate commerce for PACA to apply?
The PACA statute only applies to perishable agricultural commodities sold in interstate commerce or foreign commerce. The PACA statute contains two definitions of interstate or foreign commerce. The first definition deals with the actual movement of produce and the transaction itself. PACA applies to a transaction if: (1) the produce moves from one State to another; (2) the sale point and destination are in the same State, but the produce travels through another State during transit; or, (3) the sale point and destination are in the same State, but the transaction occurs across State lines, i.e. between a buyer and a seller residing in different States. The second definition, on the other hand, examines the impact of the transaction on the current of interstate commerce, rather than the actual movement of produce. PACA applies if the transaction involves produce (or the processed products of produce) that is normally placed into or removed from the current of interstate commerce. Here, the PACA statute takes into account the expectation of the parties. PACA applies if the produce is the type of produce or packed in a manner normally shipped from one State to another or the seller has reason to believe that the produce will be placed into the current of interstate commerce by the buyer.
What power does the PACA division have over a company engaging in unfair trade practices?
The PACA license is the key to enforcement of the PACA statute. If the PACA division receives a written complaint that a company is violating PACA by engaging in unfair trade practices, PACA will conduct an investigation of the company. PACA may then bring a disciplinary action before an administrative law judge, seeking to have the produce company's PACA license suspended or revoked. The 1995 amendments to PACA also allowed the PACA division to impose a civil fine against a PACA violator.
What remedies are available to a produce supplier if the buyer fails to pay or comply with the terms of the contract?
The PACA statute establishes a contract dispute forum through the PACA division. Produce traders who suffer damages resulting from a PACA statute violation can file an informal reparation complaint with the PACA division. The informal complaint requires a $100 filing fee and must be filed within nine months of the contract violation. Many complaints are settled informally with the PACA division mediating a resolution between the parties. If a settlement is not reached, a formal complaint may be filed for a $500 filing fee. The formal complaint is handled as an administrative procedure before the Secretary of Agriculture. Based on the evidence, the Secretary will issue a decision and may award a party monetary damages, plus interest. If the award is not paid within 30 days, the PACA division automatically suspends the party's PACA license until the award is paid. This result is of grave consequences to an operating produce company because it terminates their ability to operate legally. However, if the company is out of business, the reparation award is of little value.
What are the prompt payment requirements established by PACA?
The PACA statute requires all produce buyers to make full payment promptly. The PACA regulations set forth various prompt payment requirements depending on whether the transaction is a sale, consignment or agency relationship. The most common payment requirements are: 10 days from date of acceptance of the goods for purchases; and, with regard to consignments, 10 days after final sale or 20 days after acceptance, whichever comes first.
Can a different payment term be established?
The PACA statute allows parties to agree to a payment term other than those set forth in the PACA regulations. A different payment agreement must be entered into in writing between the parties prior to transactions, be listed on all invoices and accountings seeking payment, and are limited to thirty days from the date of acceptance of the goods. The mere inclusion of the payment term on invoices does not satisfy this requirement.
Is PACA's prompt pay provision preferable over a separate extended payment agreement?
Meuers Law Firm, P.L. recommends that all produce suppliers use the PACA regulations' prompt payment terms. The PACA prompt payment regulations are preferable because they require quick payment by customers. Additionally, written payment agreements may cause suppliers to lose their rights as a PACA trust beneficiary. PACA trust rights may be lost if an invoice reflects a payment term different than the written agreements. PACA prompt pay provisions also greatly reduce the amount of paperwork necessary to comply with PACA trust rights and thereby improve a seller's chances of recovery on an outstanding account balance.
Can I change from a written agreement to PACA prompt pay?
Yes. But to change from a written agreement to PACA prompt pay, the written agreement must first be revoked.
Is there any chance of recovery if a produce buyer goes out of business or becomes insolvent?
In 1984, the PACA statute was amended to include a statutory trust ("PACA trust") to assist produce suppliers to obtain recovery from insolvent buyers. The PACA statutory trust imposes a duty on the produce buyer to hold its produce-related assets in trust and gives the suppliers who sold those goods priority to those assets over all other creditors. In other words, the produce buyer is legally obligated to keep its produce inventory and receivables from the sale of produce available for the sole purpose of paying the produce supplier.
How does the PACA trust work?
In the event of a business failure, PACA trust assets are not available for general distribution to other creditors until valid trust claims have been fully satisfied.
What assets are part of the PACA trust?
The PACA trust is imposed on the buyer's entire inventory of produce and products derived from produce, receivables or proceeds from the sale of produce or products, assets comingled with proceeds from the sale of produce and assets purchased with proceeds from the sale of produce or from a comingled account (PACA trust assets).
Must a seller prove what assets are subject to the PACA trust?
The PACA trust is considered a "floating trust" and therefore the unpaid seller is under no duty to trace which assets are subject to the PACA trust. All of the buyer's assets are assumed to be PACA trust assets and the burden is on the buyer or person challenging the trust status of assets to prove which assets are not part of the PACA trust.
Who owns the PACA trust assets?
The PACA trust assets are owned by the suppliers who properly preserved their PACA trust rights. The produce buyer is merely the trustee holding the PACA trust assets for the suppliers' benefit.
When does PACA trust protection begin?
The supplier becomes eligible to participate in the PACA trust when ownership, possession or control of the produce is transferred to the buyer. The supplier loses the benefit of the trust unless the seller provides the buyer with notice of its intent to preserve trust benefits within thirty days after payment is due.
How does a seller provide notice of intent to preserve trust benefits?
Suppliers have two options to provide notice of intent to preserve their trust benefits. First, the seller may send the buyer a written document entitled "Notice of Intent to Preserve PACA Trust Benefits". The trust notice must contain sufficient detail to allow the buyer to identify the transactions subject to the trust and must be given to the buyer within thirty days from the date payment was past due or receipt of notification that a payment instrument was dishonored.
Second, produce suppliers who have a PACA license may use their invoice or other billing document as the trust notice if it contains verbatim the following language:
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 or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.
This language must be prominently displayed on the front of the invoice, preferably in large bold letters. Since the invoice containing this language serves as the trust notice, each invoice should include sufficient detail to allow the buyer to identify the transactions subject to the trust. Each invoice must be sent to the buyer within thirty days after expiration of the payment term or the date of receipt of notice that a check was dishonored.
Can I preserve my trust benefits through Electronic Data Interchange ("EDI")?
EDI invoice transmissions which adhere to all the requirements outlined above for preserving trust benefits through "paper" invoices, are also protected.
How can the supplier prove the buyer received the invoice?
The law requires the supplier to send the trust notice to the buyer. Ideally, a supplier should have written proof the invoice was sent to or received by the buyer. As a practical matter, the testimony of the employee who actually sent the invoice following the supplier's customary business practices should be sufficient to prove the invoice was sent.
Once a supplier preserves its trust rights, must it take any other action to enforce its PACA trust rights to obtain payment from an insolvent buyer?
The PACA trust is not self-enforcing. It is a self-help tool. The PACA division will not enforce a supplier's PACA trust claims. An unpaid supplier must act to obtain payment from a produce buyer's PACA trust assets in the United States District or Bankruptcy Court. Enforcement of a supplier's PACA trust rights is a five-step process which includes: proving the supplier has a valid PACA trust claim; preventing a buyer from further transferring PACA trust assets; collecting the buyer's PACA trust assets; recovering trust assets transferred to third-parties; and holding the principals or shareholders of the buyer personally liable for any shortfall in the PACA trust.
How can a buyer be prevented from transferring PACA trust assets?
If a produce buyer's PACA trust is being dissipated or threatened with dissipation, U.S. District Courts are empowered to issue injunctions to freeze the buyer's assets and prevent the transfer of any PACA trust assets without further court order. Obtaining an injunction is a harsh remedy. The supplier must prove to the court that the buyer did not maintain trust assets in a manner which would ensure they are freely available to satisfy its outstanding obligations to produce suppliers. Additionally, the supplier may be required to show the buyer unlawfully diverted PACA trust assets to non-PACA trust creditors.
Can a produce supplier recover PACA trust assets transferred to a third party?
Often when a produce buyer is having financial difficulties, it is put in the position where the only money it has is PACA trust assets. To survive, the buyer will pay the PACA trust assets to non-PACA creditors or its bank. The bank may also receive money through foreclosure of its security interest or set-off. These recipients of PACA trust assets must return those assets to the produce suppliers, unless the recipient can establish that it was a bona fide purchaser for value when it received the assets. A bona fide purchaser for value must have received PACA trust assets for value and without notice of the fact the funds were transferred in breach of the PACA trust. The produce supplier's success in this type of action turns on the recipient's knowledge of whether a trust existed and whether it had reason to believe the payments were in violation of the trust obligations. A supplier can secure its position by informing potential recipients that a buyer is in violation of its PACA trust obligations and any money received may be subject to return to produce suppliers.
Are the principals of a company personally liable for PACA trust obligations?
If a produce buyer's assets are insufficient to satisfy its PACA trust obligations, the principals of the entity, even if the entity is a corporation or limited liability company that shields the principals from liability, are secondarily liable for the debts if they had some role in causing the company to breach the PACA trust or had the ability to control the PACA trust assets. The produce buyer, as the trustee of the PACA trust, is charged with maintaining sufficient trust assets to make full payment to its produce suppliers as their invoices become due.
What type of involvement in a produce company establishes PACA trust liability?
Court decisions show minimum and maximum levels of personal involvement in a produce company necessary to establish personal legal responsibility for the PACA trust obligations. The maximum level of personal involvement is where the individual is the sole shareholder, officer or director of the company and performs all of the company's duties. These individuals have repeatedly been found to have clear legal responsibility for the company's PACA trust duties. However, mere ownership of stock in and of itself is not sufficient to make an individual liable if the breach of trust occurred without their knowledge or consent.
Can one PACA trust beneficiary receive payment of trust assets to the detriment of the others?
If sufficient trust assets are not available to pay all PACA trust creditors' claims in full, the remaining PACA trust assets must be paid pro-rata to those with valid claims. However, no rule requires all PACA trust creditors to be paid at the same time. Accordingly, those trust creditors who take prompt action routinely have the best recovery rates.
If payment must be made to all PACA creditors pro-rata, can a supplier simply wait for a distribution?
The PACA trust is not self-enforcing. To obtain a maximum recovery, many avenues must be explored and pursued through the court system. This often involves recovering assets in the hands of third parties. A direct correlation exists between how quickly the creditor acts after the trust is found to be under funded and the percentage of claims recovered. The PACA statute provides for no enforcement mechanism and the PACA division has no role in enforcing unpaid PACA trust claims. Therefore, it is up to each individual PACA trust creditor to enforce its claim. Unless PACA creditors enforce their rights, no money will be recovered for distribution. While every produce buyer is charged with maintaining the trust, the supplier who takes no action relies on a buyer who has already proven it will not honor its obligations to voluntarily pay the trust claim.
Do I need to hire an attorney to enforce my PACA trust rights?
To bring a PACA trust enforcement action in Federal Court, a corporation must be represented by an attorney. Additionally, PACA trust claims are generally scrutinized by a bank or a committee of unsecured creditors who each have their own lawyers. Because these creditors only get what's left after PACA claims are paid, they have an incentive to invalidate PACA trust claims. The hiring of an attorney well-versed in PACA law will greatly assist a supplier in promptly and accurately proving a suppliers standing as a PACA trust creditor. An attorney experienced in PACA law is equipped to fend off any claims objections and can maximize your recovery.
Is a supplier entitled to recovery of attorneys' fees, costs and interest?
The general rule in American law is that a party is not entitled to attorneys' fees and costs unless they are provided for by law or the parties' contract. The PACA statute does not provide for attorneys' fees. A supplier may contract for payment of attorneys' fees and costs by making these costs and fees a term of the contract between the parties. Courts will grant attorneys' fees and costs as part of a PACA trust claim if they are a term of the contract between the parties.
Is a supplier entitled to reimbursement of its attorneys, fees from other PACA trust creditors who attempt to "free ride" on a trust enforcement action?
Courts have held that under the "common fund doctrine" a PACA trust beneficiary who recovers a common fund for the benefit of others is entitled to be reimbursed its reasonable attorneys' fees from the fund as a whole.
What are the effects of a buyer filing for bankruptcy on PACA trust claims?
The buyers filing for bankruptcy will have no effect on a PACA trust claim other than the Court in which the claim must be filed. Because the produce buyer is simply holding PACA trust assets in trust until the sellers' invoice becomes due, these funds never become property of the bankruptcy estate and the Bankruptcy Court has no jurisdiction over the PACA trust assets. Courts have unanimously held that PACA trust assets are not part of a debtor's bankruptcy estate. PACA claims are outside of the normal claims and priority process in bankruptcy.
If a PACA claim is outside of the normal bankruptcy process, must a supplier deal with all of the bankruptcy rules and regulations?
Even though PACA trust assets are not property of the bankruptcy estate, courts may order PACA assets to be administered by the Bankruptcy Court. A PACA trust beneficiary must be on guard to protect its interests and prevent PACA trust assets from being swallowed up in administrative fees and costs for the bankruptcy case. Quick action is essential in every bankruptcy case to avoid the loss of rights.
Can a produce debtor discharge a PACA trust claim in bankruptcy?
Yes - unless a supplier acts to prevent discharge of its claim early in the case. The bankruptcy code provides that debts which result from fraud or defalcation while acting in a fiduciary capacity are not dischargeable in bankruptcy. Courts have held that the failure to maintain trust assets constitutes defalcation and the debt is not dischargeable. Accordingly, the bankruptcy will have no effect on a PACA trust claim - but only if the supplier properly files the necessary documents to prevent the claim from being discharged.
Can a debtor with PACA trust debts effectively reorganize?
If all of the debtor's assets are impressed with the PACA trust, reorganization will obviously be difficult since the debtor has no right to use the assets for any purpose other than paying PACA trust creditors. Reorganization is only possible if the debtor can provide the trust beneficiaries with adequate protection that their trust assets will not be dissipated and provide for prompt payment outside of the plan for reorganization.