The Perishable Agricultural Commodities Act (7 U.S.C. §499) “protects businesses dealing in fresh and frozen fruits and vegetable by establishing and enforcing a code of fair business practices and helping companies” in the industry resolve business disputes.  In addition to issuing the necessary PACA licenses, the USDA’s AMS also helps in the resolution of disputes and enforcement.  For example, recently the USDA issues sanctions against violators in Illinois, California and Mississippi by restricting companies who had failed to pay under PACA awarded reparations from operating in the produce industry. If you deal in produce, there is simply no way to avoid PACA.  One of the interesting parts of PACA involves the creation of a trust in bankruptcy cases.  The trust created under the act requires full payment to produce sellers and other beneficiaries even before attorneys’ fees are paid.  The 5th Circuit recently reiterated this in Kingdom Fresh Produce v. Stokes Law Office (14-51079) holding that an attorney marshaling assets and collecting monies was preempted by the trust created for a produce seller under PACA and that the fees earned by finding funds to use in the bankruptcy were secondary to paying the PACA creditor.  While the opinion explains this in detail, it also lays out a history of the Perishable Agricultural Commodities Act and explains it in a good amount of detail that makes for interesting reading, which, of course, is of interest to us here at Food and Beverage Legal News.  So, without further adieu:

We begin with some background on PACA.

The short lifespan of produce makes it a risky business. It has been described as an industry “engaged almost exclusively in interstate commerce, which is highly competitive, and in which the opportunities for sharp practices, irresponsible business conduct, and unfair methods are numerous.” See H.R. Rep. No. 84-1196 (1956), reprinted in 1956 U.S.C.C.A.N. 3699, 3701. Sellers “must entrust their products to a buyer who may be thousands of miles away, and depend for their payment upon his business acumen and fair dealing.” Golman-Hayden Co. v. Fresh Source Prod. Inc., 217 F.3d 348, 351 (5th Cir. 2000); see also Endico Potatoes, Inc. v. CIT Grp./Factoring, Inc., 67 F.3d 1063, 1067 (2d Cir. 1995) (“[D]ue to the need to sell perishable commodities quickly, sellers of perishable commodities are often placed in the position of being unsecured creditors of companies whose creditworthiness the seller is unable to verify.”). Congress thus enacted PACA in 1930 to regulate and “promote fair dealing in the sale of fruits and vegetables,” Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336 F.3d 410, 413 (5th Cir. 2003) (internal citation and quotation marks omitted), in part by making it a violation of federal law for buyers of perishable commodities to “fail . . . [to] make full payment promptly” to sellers. 7 U.S.C. § 499b(4).

In 1984, Congress strengthened the protections of the Act by requiring buyers—often brokers that purchase the produce from farmers and then sell it to grocery stores or restaurants—to hold either the produce or all proceeds or accounts receivable from a subsequent sale of the produce in trust for the benefit of unpaid suppliers until “full payment of the sums owing in connection with such transactions has been received by” the supplier. See id. § 499e(c)(2). These amendments were modeled after the statutory trust provisions that Congress added to the Packers and Stockyards Act in 1976, 7 U.S.C. §§ 196– 197, so courts have often looked to those “parallel” provisions when interpreting PACA’s trust provisions. See In re Monterey House, Inc., 71 B.R. 244, 246 (Bankr. S.D. Tex. 1986); In re Fresh Approach, Inc., 51 B.R. 412, 419– 20 (Bankr. N.D. Tex. 1985); see also Consumers Produce Co. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1382 n.5 (3rd Cir. 1994).

As intended by Congress, which was concerned that suppliers of produce were typically unsecured creditors who lost out when purchasers gave banks a security interest in their accounts receivable –

Congress made the following findings: It is hereby found that a burden on commerce in perishable agricultural commodities is caused by financing arrangements under which commission merchants, dealers, or brokers, who have not made payment for perishable agricultural commodities purchased, contracted to be purchased, or otherwise handled by them on behalf of another person, encumber or give lenders a security interest in, such commodities, or on inventories of food or other products derived from such commodities, and any receivables or proceeds from the sale of such commodities or products, and that such arrangements are contrary to the public interest. This subsection is intended to remedy such burden on commerce in perishable agricultural commodities and to protect the public interest. 7 U.S.C. § 499e(c)(1).

– the PACA trust has had a significant effect in bankruptcy. See In re Lombardo Fruit & Produce Co., 12 F.3d 806, 808–09 (8th Cir. 1993). Although buyers hold legal title to the assets in this “nonsegregated ‘floating’ trust in favor of unpaid sellers,” Bocchi Americas Assocs. Inc. v. Commerce Fresh Mktg. Inc., 515 F.3d 383, 388 (5th Cir. 2008), “the seller retains an equitable interest in the trust assets pending full payment.” C.H. Robinson Co. v. Alanco Corp., 239 F.3d 483, 487 (2d Cir. 2001). The trust assets are thus insulated from the buyer’s bankruptcy estate. See 11 U.S.C. § 541(d) (“Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest, . . . becomes property of the estate . . . only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.” (emphasis added)). Sellers therefore have a “‘superpriority’ right that trumps the rights of the buyer’s other secured and unsecured creditors.” Bocchi, 515 F.3d at 388; see also Golman-Hayden, 217 F.3d at 351 (“We have recognized that PACA is a ‘tough law.’ . . . An investor in a perishable commodities corporation ‘should know at the beginning of his association with such a corporation that he is “buying into” a corporation which is strictly regulated by the federal government through PACA.’” (internal citations omitted)). To the extent PACA funds are insufficient to pay each seller in full, the assets are shared pro rata. See Golman-Hayden, 217 F.3d at 349.

The Ninth Circuit has provided a useful illustration of how this works:

Farmer sells oranges on credit to Broker. Broker turns around and sells the oranges on credit to Supermarket, generating an account receivable from Supermarket. Broker then obtains a loan from Bank and grants Bank a security interest in the account receivable to secure the loan. Broker goes bankrupt. Under PACA, Broker is required to hold the receivable in trust for Farmer until Farmer was paid in full; use of the receivable as collateral was a breach of the trust. Therefore, Farmer’s rights in the Supermarket receivable are superior to Bank’s. In fact, as a trust asset, the Supermarket receivable is not even part of the bankruptcy estate. Boulder Fruit Express & Heger Organic Farm Sales v. Transportation Factoring, Inc., 251 F.3d 1268, 1271 (9th Cir. 2001).

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