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 branch of the
United States Department of Agriculture ("PACA branch"),
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. Sellers 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 branch regulate anyone who deals in fresh and frozen
fruits and vegetables which are subject to license.
Who is subject to a PACA license?
Any person or company who buys or sells perishable agricultural commodities
in interstate or foreign commerce in an aggregate amount of 2,000 pounds
or more on any day must obtain a PACA license. Produce growers are exempt
from licensing as long as they only sell products 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 $230,000 or more worth of fruits and vegetables 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?
The PACA statute defines perishable agricultural commodities as fresh
fruits and vegetables of every kind and character, whether or not frozen
or packed in brine. A United States District Court Judge in Kansas City
ruled that nuts are perishable agricultural commodities. Other courts
have held that PACA only covers products that have been subject to very
minimal processing which does not transform them into different goods
and contain more than 90% fruits or vegetables. Dried prunes and apricots
have been found not to be perishable agricultural commodities.
Must the produce be sold in interstate commerce
for PACA to apply?
The PACA statute covers perishable agricultural commodities sold in
interstate commerce. The traditional view was that interstate commerce
meant that the produce had to cross state lines somewhere from the time
when it was grown until the time it was eaten. However, recent federal
court decisions have held differently and it is generally accepted that
PACA applies if the commodities involved are the type typically sold
in interstate commerce.
What power does the PACA branch have over a company
engaging in unfair trade practices?
The PACA license is the key to enforcement of the PACA statute. If the
PACA branch 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 branch to impose a civil fine against a PACA violator.
What remedies are available if a buyer fails to
pay or live up to the terms of the contract?
The PACA statute establishes a contract dispute forum through the PACA
branch. Produce traders who suffer damages resulting from a PACA statute
violation can file an informal reparation complaint before the PACA
branch. The informal complaint requires a $60 filing fee and must be
filed within nine months of the contract violation. Many complaints
are settled informally with the PACA branch mediating a resolution between
the parties. If a settlement is not reached, a formal complaint may
be filed for a $300 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 monetary
damages, plus interest. If the award is not paid within 30 days, the
PACA branch 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; 20 days after acceptance for open sales
or price after sale; consignments are due 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 invoice and accountings between the parties, 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. A sample payment agreement and related information are
attached as Exhibit "A".
Is PACA's prompt pay provision preferable over
a separate extended payment agreement?
Meuers Law Firm, P.L. recommends all produce sellers 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 sellers 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 your written agreement, you first must revoke
the written agreement. Attached as Exhibit
"B" is a sample letter revoking the written agreement.
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 sellers 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 all of the buyer's produce inventory and
other products derived from produce. It also covers any receivables
or proceeds from the sale of such commodities or products and any other
assets purchased with "produce money".
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 trust.
All of the buyer's assets are assumed to be PACA trust assets and the
burden is on the buyer to demonstrate which, if any, are not part of
the PACA trust.
Who owns the PACA trust assets?
The PACA trust assets are owned by the sellers, which properly preserved
their PACA trust rights. The produce buyer is merely the trustee holding
the assets for the sellers' benefit.
When does trust protection begin?
The PACA trust goes into effect as soon as a buyer takes ownership of
the produce. However, the seller 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?
Sellers have two options to provide notice 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. A sample PACA trust notice is attached as Exhibit "C".
Second, the 1995 PACA amendments provide produce sellers who
have a PACA license with an alternative method to preserve their trust
rights. This alternative method allows the PACA licensee to 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 now
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 of any check being
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 seller prove the buyer received the
invoice?
It is very easy for a buyer to dodge a seller's trust protection by
claiming it never received the invoice containing the trust language.
But, the law only requires the seller to send the trust notice. Ideally,
a seller 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 mails the invoice following the seller's customary business
practices should be sufficient to prove the invoice was sent. If a buyer
appears to be in financial trouble, it would be prudent for the seller
to send a copy of the invoice containing the trust language or a trust
notice within 30 days after payment is due by a method which provides
for a receipt, such as via fax or certified mail. If you transit invoices
through EDI, the acknowledged receipt sent by the produce buyer
or on the produce buyer's behalf by an affiliated or third party computer
service provider constitutes acknowledgment of such PACA notice, regardless
of whether such notice is re-transmitted by such computer service provider
to the produce buyer's accounts payable department.
Once a seller preserves its trust rights, must
it take any other action to obtain payment from an insolvent buyer?
The PACA trust is not self-enforcing. It is a self-help tool. The PACA
branch will not enforce your trust claims. An unpaid PACA trust beneficiary
must act to obtain payment from the trust from a produce buyer trustee
who failed to maintain the trust in the United States District Court.
Enforcement of a PACA trust beneficiary's rights is a five-step process
which includes: proving the seller 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 seller 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 the outstanding obligations of produce sellers. Additionally,
the seller may be required to show the buyer committed acts which diverted
trust assets, from their only legal purpose, payment of produce suppliers.
Can a produce seller 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 your money, the PACA
trust assets. To survive, the buyer ends up paying the PACA trust funds
over to non-produce 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 PACA
trust beneficiaries 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 trust property for value and
without notice of the fact the funds were transferred in breach of the
PACA trust. The PACA trust beneficiary'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 payment were in violation of the trust
obligations. A trust beneficiary can secure its position by informing
potential recipients that a buyer is in violation of its PACA trust
obligations and any money received must be returned to PACA creditors.
Are the principals of a corporation personally
liable for PACA trust debts?
If a produce buyer's assets are insufficient to satisfy its PACA trust
obligations, the company's principals are secondarily liable for the
debts if they had some role in causing the corporate trustee 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 PACA
creditors as bills 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 seller 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 your claim
recovered. The PACA statute provides for no enforcement mechanism and
trust notices no longer need to be served on the PACA branch. Therefore,
it is up to each individual PACA trust creditor to enforce its claim.
Unless PACA creditors enforce their claims, no money will be recovered
for distribution. While every produce buyer is charged with maintaining
the trust, the seller 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, their sole mission is to knock out
PACA trust claims. The hiring of an attorney well-versed in PACA law
will greatly assist a seller in promptly and accurately proving their
standing as a PACA trust beneficiary. Such an attorney is equipped to
fend off any claims objections and can maximize your recovery.
Is a seller 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 seller may contract for payment of attorneys' fees and costs
by making these costs and fees another term of the contract between
the parties. United States District Courts have recently upheld the
award of attorneys' fees to PACA litigants when the provision for attorneys'
fees is listed on the invoice. Attached as Exhibit
"D" is attorney fee and other language recommended for
invoices.
Is a seller entitled to reimbursement of its attorneys,
fees from other PACA trust creditors who attempt to "free ride"
on the trust enforcement action?
Courts have held the PACA trust beneficiary who recovers a common
fund for the benefit of persons other than himself is entitled to be
reimbursed their reasonable attorneys' fees from the fund as a whole.
What are the effects of a buyer's filing bankruptcy
on PACA trust claims?
Filing of bankruptcy can have no effect on a PACA trust claim. Because
the produce buyer/debtor is simply holding your money until your invoice
becomes due, these funds never become property of the debtor's 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 seller 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 trustee
and bankruptcy court. The PACA trust beneficiary must be on guard to
protect their interests and prevent their PACA trust assets from being
swallowed up in administrative fees and costs for the bankruptcy process.
Quick action is essentially in every bankruptcy case to avoid the loss
of your rights.
Can a produce debtor discharge a PACA trust claim
in bankruptcy?
Yes - unless you act to prevent it very 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 your claim - but only if you properly file 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.
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