The Perishable Agricultural Commodities Act and Bankruptcy Claims

The Perishable Agricultural Commodities Act (“PACA”)[1] was enacted by Congress in 1930 to protect suppliers and sellers of perishable agricultural commodities and products.

In 1984 Congress amended PACA to establish a statutory trust for the benefit of all unpaid suppliers and sellers of perishable agricultural commodities. When a wholesale buyer or purchaser of agricultural commodities (e.g. grocery store) files bankruptcy, PACA provides the buyer’s unpaid suppliers of perishable agricultural commodities superior rights over the buyer’s other creditors through the establishment of a trust.   

The trust is established upon delivery of perishable agricultural commodities to the buyer. The trust continues until the perishable agricultural commodities are paid for in full. The perishable agricultural commodities subject to the trust do not need to be traced, and the buyer’s proceeds from the sale of the perishable agricultural commodities and any comingled produce purchased with the proceeds are all subject to the trust. Pursuant to PACA, proceeds from the sale of any perishable agricultural commodity shall be held in trust for the benefit of an unpaid supplier. 7 U.S.C. § 499e(c)(2)

To fall within the protections of PACA, the supplier or seller of perishable agricultural commodities must sell perishable agricultural commodities that fall within the definition of the statute. PACA defines perishable agricultural commodities as “fresh fruit and fresh vegetables of every kind and character,” whether or not frozen or packed in ice, and cherries in brine. 7 U.S.C. § 499a(b)(4). The statute does not explicitly define “fresh fruit” or fresh vegetables”, therefore courts have looked to the regulations promulgated by the United States Department of Agriculture (“UDSA”). The USDA definition of “fresh fruits and vegetables” does not include any perishable fruits and vegetables that have been “manufactured into articles of food of a different kind or character.”  Therefore, items such as frozen onion rings, breaded cauliflower, pickles and other products whose fresh ingredients constitute less than 90 percent of their weight do not qualify as "perishable agricultural commodities." Endico Potatoes Inc. v. CIT Group/Factoring Inc., 67 F.3d 1063 (2d Cir. 1995).

Once a supplier of agricultural commodities has established that they fall within the protection of PACA, the supplier must determine whether they can file a PACA claim. Accordingly, a PACA supplier must have timely perfected its interest, though perfection is relatively simple. To perfect, a PACA creditor must comply with §499e(c)(3). To perfect a claim, a PACA creditor must either (1) provide notice in writing to the buyer of its intent to preserve the benefits of the PACA trust, along with “information in sufficient detail to identify the transaction subject to the trust” or (2) on its usual billing or invoice statement, provide the terms of payment and boilerplate language established by the Secretary of Agriculture stating that the commodities on the invoice are sold subject to the PACA trust. Written notice of the intent to preserve the PACA trust must be given by the PACA creditor to the buyer within 30 calendar days after (i) 10 days following acceptance of the perishable commodities or products, as prescribed by the Secretary of Agriculture, (ii) the expiration of the payment due date agreed upon in writing by the parties, or (iii) the time the supplier, seller or agent has received notice that the payment instrument promptly presented for payment has been dishonored.

The amount of a PACA claim is not limited to the cost of the commodity itself. Instead, “full payment of the sums owing in connection with the [commodities] transaction” can be part of the PACA claim. 7 U.S.C. § 499(e)(c)(2). When calculating the amount of a PACA claim, a creditor should include any and all costs associated with the transaction, including shipping costs, freight charges and taxes. Thus, a PACA creditor's only burden is proving the balance due.

The PACA trust which consist of the PACA creditor’s produce and proceeds from the sale of such produce are not technically a part of the debtor’s bankruptcy estate, and therefore not subject to bankruptcy’s priority scheme.  In re Country Club Market Inc., 175 B.R. 1005, 1007-08 (D. Minn. 1994); on remand, 175 B.R. 1011; see, also, In re Fair, 134 B.R. 672, 675 (Bankr. M.D. Fla. 1991).  PACA creditors receive an interest in trust property ahead of administrative creditors who otherwise stand first in priority. Since PACA creditors are beneficiaries of the trust, they are “entitled to priority in payment as to all of the assets of the bankrupt, ahead of the claims of creditors who have valid security interest, ahead of the administrative costs and expenses incurred and ahead of all other priority and general creditors.” In re Fresh Approach, 51 B.R. 412, 418-19 (Bankr. N.D. Tex. 1985. Therefore, a PACA claim is entitled to payment ahead of all other creditors in the bankruptcy proceeding, including secured creditors.

PACA provides a comprehensive scheme for the protection of produce suppliers. Although PACA is limited to such suppliers that fall within its scope, its provisions are clear. Upon delivery of perishable agricultural commodities, a statutory constructive trust arises. All a supplier needs to do is perfect its interest, which is made even easier by boilerplate language on its invoice. Although PACA is not set forth in Title 11 of the U.S. Bankruptcy Code, the true benefit of PACA lies therein. PACA allows an otherwise unsecured supplier to perfect its interest and obtain super-priority administrative status simply by printing on their invoice that the commodities on the invoice are sold subject to the PACA trust.

Debtors’ and creditors’ rights, obligations, and potential liabilities under the Bankruptcy Code can be hard to navigate. If you are a supplier or seller of perishable agricultural commodities and need assistance understanding how to safely proceed in Bankruptcy Court, contact the experienced litigation attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices

[1] 7 U.S.C. § 499 Perishable Agricultural Commodities Act