Using The Paca Trust To Collect Past Due Invoices

The Perishable Agricultural Commodities Act, known as “PACA,” was enacted in 1930 to help prevent unfair and fraudulent practices in the marketing of fresh and frozen fruits and vegetables in interstate and foreign commerce. In 1984, the PACA was amended, by adding what is commonly referred to as the PACA Trust Statute, to assure that sellers of produce are paid by imposing on all buyers of produce a trust on all produce-related assets. Produce related assets include produce inventory, all products derived from the produce, all accounts receivable generated from the sale of produce, all proceeds received from the sale of the produce, and all assets of any kind purchased with or commingled with produce-related assets. This trust must be maintained for the benefit of the unpaid seller who provided the produce until full payment has been made. Failure by the buyer to maintain the trust, dissipation by the buyer of trust assets and failure of the buyer to make full payment promptly to the seller is unlawful.

In order to use the powerful remedies provided by the PACA Trust Statute, a seller must first preserve its trust rights. This is done in one of two ways. The first way is to send to the buyer a document entitled “Notice to Preserve Trust Benefits” within thirty (30) days after expiration of the parties’ payment terms. The second way to preserve a seller’s trust rights, provided the seller is licensed under the PACA, is by including certain language required by the PACA Trust Statute on the face of each invoice that notifies the buyer that the produce is sold subject to the trust.

As long as a seller has preserved its trust rights, it can use the PACA Trust Statute very effectively to collect past due invoices. The PACA Trust Statute allows an unpaid seller of produce to file suit against the buyer in the federal district court that has jurisdiction over the geographic location where the buyer conducts its business and seek a restraining order from the Court to freeze all assets of the buyer including its bank accounts. In order to obtain such a restraining order, the seller must provide evidence to the Court that the buyer is having serious financial problems and cannot pay for the produce. This can be done by providing an affidavit from a representative of the seller, who is usually a principal of the company or a controller or sales manager, who has personal knowledge of the transactions between the seller and the buyer, as well as the status of the buyer’s financial situation. As to the buyer’s financial condition, the affidavit should include statements, if applicable, as to: (1) the buyer’s inability to pay the seller, as evidenced by bounced checks and/or statements made by representatives of the buyer stating that the buyer is unable to pay the seller or any of its debts, (2) the filing by other unpaid sellers of produce to the same buyer, of any informal or formal complaints with the U.S. Department of Agriculture, (3) knowledge that other sellers are owed money by the same buyer, and (4) knowledge or information that the buyer is on the verge of shutting down its business. This affidavit is submitted to the Court with other legal documents that explain to the Court why the restraining order should be promptly issued and without notice to the delinquent buyer.

Generally speaking, if this kind of affidavit is submitted together with these other documents, the Court is very willing to issue the requested restraining order. Once the restraining order is issued by the Court, the seller may proceed to freeze the buyer’s bank accounts as well as any other assets it can identify. And the buyer as well is under a strict duty not to dissipate, transfer, sell or otherwise dispose of any of its assets except for payment to the seller without agreement of the parties or a further order of the Court. Quite often, once the buyer’s assets have been frozen, the buyer is very willing to enter into a settlement agreement with the seller that can be set out in a court order. This court order can provide for a judgment against the buyer and include a payment schedule for the buyer to pay the debt in full, or at least allow the seller to obtain a judgment in the event the buyer defaults in making any of the scheduled payments.

Overall, The PACA Trust Statute is a very powerful tool which when used properly, gives produce sellers a unique and unprecedented opportunity to collect its delinquent accounts, especially when a buyer is on the verge of going out of business.