Powerful Collection Tools for Unsecured Creditors in Bankruptcy

By: Kirk B. Burkley

This article appeared in the Pennsylvania Association of Credit Managers Newsletter, The Creditor

There are a couple of important statutes that should rest on the credenza of all trade vendors dealing with financially unstable customers, and unsecured creditors. These statutes are the Perishable Agricultural Commodities Act (“PACA”) and Section 503(b)(9) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“Section 503(b)(9)”).

PACA was enacted in 1930, to promote fair trading practices in the produce industry. In particular, Congress intended PACA to protect farmers and growers who were vulnerable to the practices of financially irresponsible buyers. In 1984, Congress amended PACA to create a statutory trust in their favor. The term “perishable agricultural commodity” means fresh fruits and fresh vegetables, whether or not frozen or packed in ice, and includes cherries in brine. Any licensed vendor meeting this definition may have extremely powerful tools to use in collecting a debt.

PACA’s far-reaching powers give PACA claims priority ahead of all other creditors . A beneficiary of a PACA trust is entitled to priority as to all assets of debtor ahead of claims of creditors who have valid security interests, administrative costs and expenses incurred in Bankruptcy Court, and all other priority and general creditors. The trust protects the sellers against financing arrangements made by merchants, dealers, or brokers who encumber or give lenders a security interest in the commodities or the receivables or proceeds from the sale of commodities; thus giving the claims of these sellers precedence over those of secured creditors.

In order to pursue one’s rights under PACA, the creditor must meet very stringent notice requirements. Under all circumstances, the seller must give the buyer written notice of the seller’s intention to preserve its trust benefits. A seller eligible for the statutory trust benefit must preserve its rights by satisfying a notice requirement by either sending notice to the buyer within 30 days of a payment default or, as provided in the 1995 amendment to PACA, including a statutory statement referencing the trust on its invoices. Thirty days is the maximum allowable payment term under PACA regulation 7 C.F.R. § 46.46(e)(2), which provides as follows: “The maximum time for payment for a shipment to which a seller, supplier, or agent can agree and still qualify for coverage under the trust is 30 days after receipt and acceptance of the commodities…” This limitation exists because the statute is intended to protect only those produce sellers making short-term credit arrangements. PACA does not preclude a seller from agreeing in writing to a payment term beyond 30 days, but only disqualifies such a seller from participating in the trust.

In addition to PACA, trade vendors have a new tool for collecting debt in bankruptcy pursuant to Section 503(b)(9) of the bankruptcy code. Under Section 503(b)(9), creditors are granted an administrative priority claim for the “value” of goods delivered to the customer within 20 days before the bankruptcy filing. Typically, there is no deadline for filing a claim under Section 503(b)(9) other than prior to the deadline for voting on a Plan or Reorganization in chapter 11 or as set by the Court. That being said, the sooner it is filed, the sooner the Court can require the customer to pay the claim. Having an administrative priority claim raises the importance of the claim to one that must be paid by the customer as ordered by the Court or, at worst, at the time a Plan of Reorganization is approved. In order for a debtor to confirm a Plan of Reorganization the law requires that all administrative claims be paid in full.

As you can see, if you fall under the definition of a licensed PACA dealer or deliver goods to a bankruptcy customer within 20 days of the date the petition in bankruptcy is filed, you may have additional tools to use in collecting your debt. Any good credit policy should include knowledge of these areas of the law.

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