PRODUCE LAW 101: THE PACA TRUST AND HOW IT WORKS
“PACA Trust” is one of the most used, yet least understood terms in the produce industry. Congress amended the Perishable Agricultural Commodities Act (PACA) in 1984 to include the statutory trust provisions. These provisions resulted in the collection of millions of dollars in past due receivables with little or no understanding of what the trust is and how it actually works. The PACA Trust operates according to general trust law. Sellers who learn these general trust law principles will better understand the trust and how it operates, thereby increasing the rate of success in the recovery of past due receivables.
Prior to the PACA trust, if a produce buyer became insolvent, produce sellers had to stand in line behind secured creditors, such as banks, for payments. As last in line, produce sellers often received no money for their produce. Congress wanted to fix this problem because it was concerned that non-payment to produce suppliers was threatening the financial stability of the produce industry. Their goal was simple, to ensure that produce buyers used the proceeds of produce to pay the sellers of that produce. Congress also sought to prevent produce buyers from using the proceeds of produce, for which the produce sellers had not received payment, to pay their non-produce related expenses.
Congress could have followed state imposed remedies and given the produce sellers a lien on the buyer’s inventory or requiring that buyers be bonded. Instead, Congress chose to impose a trust on the parties to a produce sales transaction. This unique choice creates a fiduciary relationship between produce sellers and produce buyers. It gives produce sellers the most potent collection tool afforded any industry-a trust, which provides them with superior creditor rights over other creditors.
A trust is an obligation imposed by agreement or law, where one person holds and controls property for the benefit of another. A trust must have four elements: a trustee; trust assets; trust beneficiaries; and a trust purpose. These elements are best illustrated by an example. Suppose you just came into a $100,000 windfall from the sale of a hot stock (the trust asset) and wish to use the money for the benefit of your daughter (the trust beneficiary) to pay for her college education (the trust purpose). In order to ensure that the money is used only for her benefit and education, in case something happens to you, a trust could be set up. You first would need a person or entity to hold the $100,000 as a fiduciary for the benefit of your daughter (the trustee). You could choose the trust department of your bank.
The PACA Trust is a similar trust. Its terms are set up by law. Since a federal statute (PACA) set up the trust, it is called a statutory trust. The purpose is to protect unpaid produce sellers. The trustee is the produce buyer. The trust assets are the buyer’s produce inventory, products made from produce and proceeds from their sale. The trust beneficiaries are all unpaid produce sellers, who properly preserved their rights as PACA trust beneficiaries.
Produce sellers must preserve their PACA trust rights to become PACA trust beneficiaries. This is done by sending a document entitled Notice of Intent to Preserve Trust Benefits to the buyer within thirty (30) days after expiration of the parties’ payment terms. Alternatively, a produce seller, who is licensed under PACA, may preserve its trust rights by including language required by the PACA statute on the face of its invoice to notify the buyer that the produce is sold subject to the trust.
PACA law mandates that the produce buyer/trustee must maintain sufficient PACA trust assets to pay PACA trust claims as they become due. If non-PACA trust assets are commingled with PACA trust assets, under trust law, all of the assets are impressed with the PACA trust. The buyer/trustee has the burden of proving which assets are not subject to PACA.
Although Congress set up the PACA trust to protect assets for the benefit of produce sellers, it failed to provide administrative or enforcement mechanisms. General trust law fills the gap. Our earlier example can illustrate how trust law is used to enforce the trust. Suppose the banker/trustee is not paying the daughter’s educational bills and is spotted in a casino telling people, “I just received a spoiled brat’s $100,000 college fund. Let the games begin!” What can the daughter do to prevent the banker from dissipating her money? Trust law gives her four strong remedies.
First, under trust law, the banker/trustee has a duty to maintain the trust assets for the daughter’s college education. The trustee’s failure to maintain trust assets may cause the daughter irreparable injury. As a result, she can ask a court to grant an injunction in the form of a Temporary Restraining Order (TRO) that orders the banker to maintain the trust. An injunction freezes not only the trust assets but all assets of the bank or banker and prevents the bank or banker from transferring assets. A TRO is only available because of trust law. If a dispute can be solved by payment of money, courts cannot issue injunctions. However, the duty and failure to maintain the trust gives rise to the right to a TRO.
Second, after the injunction is issued, the daughter may find the bank does not have enough money to cover her trust claims. If this happens, she can look to the banker and other individual officers and shareholders of the bank for payment. This is called “personal liability.” Again, this right occurs under trust law because the bank is a fiduciary to the daughter. But the bank cannot act on its own. It can only act through its employees. Those employees that caused the bank to violate its fiduciary duties are personally liable to the daughter/trust beneficiary.
Third, in an attempt to discharge the debt owed to the daughter resulting from dissipating trust assets, the banker may file for personal bankruptcy protection. Since the personal debt arose due to his failure to perform his fiduciary trust duties, this debt is exempt from being dischargeable in bankruptcy. That is, even if the banker’s other debts are discharged, the trust debt remains with him for life or until it is paid.
Fourth, if the banker transferred trust assets to anyone else, the daughter can trace these assets into the hands of third parties and sue for recovery of these monies. This right is one of the most powerful remedies in a trust beneficiaries’ arsenal. This right of recapturing assets allows trust beneficiaries to sue lenders and other creditors of the trustee who have received trust assets ahead of trust beneficiaries. The third party may avoid liability if it can prove the transfer was for value and it didn’t know it received the transfer in breach of trust.
These four rights are available to unpaid produce sellers who properly preserved their PACA trust rights as PACA trust beneficiaries. If the PACA trust assets are being dissipated, a Temporary Restraining Order can be sought. If the buyer does not have enough money to pay, the principals of the corporation can be held personally liable and this debt is not dischargeable in bankruptcy. Finally, the PACA trust beneficiary may sue other parties that received PACA trust assets from the buyer.
Congress was kind to the produce industry by giving sellers trust protection when buyers do not pay. When these rights are used properly, produce sellers have an unprecedented opportunity to recover monies when their buyers go out of business.