By Bernstein-Burkley, P.C.
The federal government enacted the Perishable Agricultural Commodities Act, 7 U.S.C. § 499e et seq. (“PACA”), in 1930 to regulate the buying and selling of fresh and frozen produce in the United States. Its purpose is to prevent unfair practices and to ensure prompt payment by the purchasers to the suppliers through the establishment of a PACA trust. The trust is created with all of the purchaser’s proceeds received from the sale of the produce, and provides for the supplier’s right to payment before all other creditors – including secured lenders with blanket liens.
All lenders, therefore, should be mindful of PACA when doing business with a borrower who is a purchaser subject to PACA and the trust that it creates. The trust must be properly established by the supplier, with written notice to the purchaser that the goods sold are subject to PACA. Breach of the PACA trust may result in harsh interest rates, penalties and attorneys’ fees awarded to the supplier. Officers and directors with control of the financial affairs of the purchaser may also be found liable for the breach of trust if they knowingly dissipate the trust assets.
Banks and other depository institutions must be aware if they are holding their borrowers’ money in trust for PACA suppliers. Lenders may not garnish a PACA trust for repayment of any of the borrower’s other obligations. Additionally, any creditor (other than a PACA supplier) who is paid with PACA trust assets may be required to return those assets to the PACA trust if they knew, or should have known, that the source of the funds was a PACA trust.
Finally, a PACA supplier also has this same “super-priority” position in bankruptcy. Bankruptcy courts have held that PACA trust assets are not part of the debtor’s estate, because the assets are being held in trust for the PACA suppliers. Therefore, a large part of the debtor’s assets may not be available for distribution to other creditors, including secured lenders. PACA suppliers are also not subject to avoidance and would not be required to reimburse the debtor’s estate through recovery in a preference action.