PACA Claims and the Bankruptcy Code Getting Paid Has Never Been So Easy

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Jun 2000

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The Perishable Agricultural Commodities Act (PACA) grants protection to those who sell perishable
agricultural commodities. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §499</a>, et seq. Indeed, Congress saw fit to protect produce suppliers
and created a comprehensive act to protect their interests. This protection extends as far as statutory
constructive trusts for those products qualifying as perishable agricultural commodities.

PACA even affects a purchaser's bankruptcy proceeding due to the overwhelming protection granted
therein. In fact, a PACA claim can greatly affect a bankruptcy proceeding, including automatically
preserved rights, benefits and defenses. All this, and provisions designed for layman compliance. Could
it be any easier?

<h3>PACA's Provisions</h3>

Pursuant to PACA, proceeds from the sale of any perishable agricultural commodity, as well as
intermediate products and proceeds from their sale, shall be held in trust for the benefit of an unpaid
supplier. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §499e(c)(2)</a>. Perishable agricultural commodities are defined as "fresh fruits and
vegetables of every kind and character, whether or not frozen or packed in ice...as defined by the secretary
[of the U.S. Department of Agriculture] in accordance with trade usage." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §499a(b)(4)</a>.

PACA's trust provisions apply, however, only to transactions involving unprocessed or minimally
processed fruits and vegetables. 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." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Potatoes Inc. v. CIT Group/Factoring Inc., 67 F.3d 1063 (2d Cir. 1995)</a>
(which demonstrates the depth of analysis used in determining a product's qualification under PACA).

To simplify procedural matters and further protect PACA claimants, a PACA trust is created upon mere
delivery of qualified products and extinguished only upon payment or a supplier's failure to timely perfect
its interest in the PACA trust. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §499e(c)(2)</a> & (3). Accordingly, a PACA claimant must timely
perfect its interest, though perfection is relatively simple. To perfect, a PACA claimant must comply with
§499e(c)(3), which states:

<blockquote>
An unpaid supplier, seller or agent shall lose the benefits of such trust unless such person has given
written notice of the intent to preserve the benefits of the trust to the commission merchant, dealer
or broker within 30 calendar days (i) after expiration of the time prescribed by which payment must
be made, as set forth in regulations issued by the secretary; (ii) after expiration of such other time
by which payment must be made, as the parties have expressly agreed to in writing before entering
into the transaction; (iii) after the time the supplier, seller or agent has received notice that payment
instrument promptly presented for payment has been dishonored.
</blockquote>

However, §499e(c)(3) does not provide the only method of perfecting and preserving a PACA trust.
In fact, to make things easier, a supplier need only print boilerplate language on its ordinary and usual
billing or invoice statements that provides notice of the intent to preserve the trust. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §499e(c)(4)</a>.
Specifically, the bill or invoice statement must contain the following language:

<blockquote>
The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust
authorized by §5(c) of the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Agricultural Commodities Act, 1930 (7 U.S.C. §499e(c)</a>).
</blockquote>

<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §499e(c)(4)</a>.

Additionally, PACA trusts, unlike other statutory trusts, circumvent the need to trace assets. Instead,
PACA trusts have a "floating" characteristic, which means that the trust applies to all of a debtor's
produce-related inventory and proceeds thereof, regardless of any commingling or whether another produce
supplier was the source of the inventory. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Potatoes, 67 F.3d at 1067</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Monterey House Inc., 71
B.R. 244, 247 (Bankr. S.D. Tex. 1986)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Fresh Approach, 51 B.R. 412, 422 (Bankr. N.D. Tex. 1985)</a>;

citing H.R. Rep. No. 543, 98th Cong., 1st Sess., pt. 5 (1983), reprinted in 1984 U.S. Code Cong. & Admin.
News 409; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… C.F.R. §46.46(c) (1984)</a>.

Thus, a PACA claimant's only burden is proving the balance due and the existence of a floating pool
of commingled produce-related inventories, as the debtor has the burden to show which assets, if any, are
not subject to the trust. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Approach, 51 B.R. at 422</a>; citing <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Frosty Morn Meats Inc., 7 B.R. 988,
1013 (M.D. Tenn. 1980)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Gotham Provision Co. Inc., 669 F.2d 1000, 1011 (5th Cir. 1982)</a>.

PACA's trust provisions and benefits were obviously legislated with a PACA claimant's interests in
mind. These interests, however, reach further than the trust benefit contemplated therein. In fact, PACA
trust benefits are truly realized in bankruptcy.

<h3>PACA's Effect on Bankruptcy Matters</h3>

PACA's statutory trust has particularly beneficial aspects in bankruptcy. Specifically, preserving and
perfecting a PACA claim, as opposed to a secured claim, may be done without any concern of the
automatic stay. PACA claimants need not obtain relief from the automatic stay prior to filing a notice of
intent to preserve the PACA trust. PACA trust funds, after all, are not property of the estate. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Monterey
House Inc., 71 B.R. at 248</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Prange Foods Corp., 63 B.R. 211, 217 (Bankr. W.D. Mich. 1986)</a>.
Additionally, a PACA claimant's failure to obtain relief from the automatic stay does not affect the ability
to share in PACA trust funds as such funds are not property of the estate. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… & E Enterprises Inc. v. Milton
Poulos Inc., 947 F.2d 1351, 1353 (9th Cir. 1991)</a>.

Further, as opposed to most trade vendors, PACA claimants receive an interest in trust property that
primes administrative claimants who otherwise stand first in priority. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Approach, 51 B.R. at 420</a>.
Fresh Approach specifically held that a bankruptcy estate succeeds only to the title and rights in the
property that a debtor possesses and, "as a result, the beneficiary of such a trust would be entitled to priority
in payment as to all the assets of the bankrupt, ahead of the claims of creditors who have valid security
interests, ahead of the administrative costs and expenses incurred and ahead of all other priority and general
creditors." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 418-19</a>. In fact, by filing a notice of intent, a PACA claimant preserves and protects its
interest, as trust assets do not constitute part of a bankruptcy estate. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Country Club Market Inc., 175
B.R. 1005, 1007-08 (D. Minn. 1994); on remand, 175 B.R. 1011</a>; see, also, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Fair, 134 B.R. 672, 675 (Bankr. M.D. Fla. 1991)</a>.

Since PACA trust funds are not property of the estate, another benefit received in bankruptcy is an
otherwise unanticipated preference defense. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Approach, 51 B.R. at 423-24</a>. In Fresh Approach, a
debtor attempted to avoid the perfection of an unpaid supplier of its interest in a PACA trust as a
preferential transfer. Although the requirements for avoidance and recovery of preferential transfers were met, the court held that the debtor could not avoid PACA trust payments because such payments did not
involve the transfer of an interest of the debtor-in-property. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Approach, 51 B.R. at 423</a>.

Specifically, Fresh Approach held that a supplier's interest in a PACA trust arises upon the date of
delivery rather than the date of perfection and, therefore, that the words "shall lose" and "preserve" in
§499e(c) refer to rights in existence prior to perfection. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 423</a>. Thus, a supplier is retaining rights rather
than receiving a transfer. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; In short, a beneficial trust interest arises, by operation of law, upon delivery
of qualifying produce, and said interest exists unless and until either the claim is satisfied or the supplier
fails to take the necessary steps to perfect. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…;

Accordingly, since a debtor can never hold more than bare legal title to PACA inventory and/or
proceeds, no transfer of a beneficial interest can take place. A debtor, therefore, cannot have the requisite
interest in property to avoid otherwise preferential transfers as ordering the return of payments from a
PACA trust would defeat PACA's purpose. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Club Market, 175 B.R. at 1010</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Approach,
51 B.R. at 423</a>; citing <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Casco Electric Corp., 28 B.R. 191, 195 (Bankr. E.D.N.Y. 1983)</a> aff'd., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
B.R. 731 (E.D.N.Y. 1983)</a>. Consequently, though Congress may not have foreseen PACA's bankruptcy
benefits, "PACA was not intended to protect those in debtor's shoes, but rather to prevent the chaos and
disruption in the flow of perishable agricultural commodities sure to result from an industrywide
proliferation of unpaid obligations." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Club Market, 175 B.R. at 1008</a>; citing <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Approach, 51 B.R. at 420</a>.

<h3>Conclusion</h3>

PACA provides a comprehensive scheme for the protection of produce suppliers. Although PACA is
limited to such suppliers, its provisions are clear. Upon delivery of perishable agricultural commodities, a
statutory constructive trust arises. All a supplier need do is perfect its interest, which is made even easier
by boilerplate language. Further, although PACA is not set forth in Title 11 as a bankruptcy provision, the
true benefit of PACA lies therein. After all, how else may an otherwise unsecured trade vendor perfect its
interest without violating the stay, obtain super-priority administrative status, and establish a valid
preference defense exclusive of §547's provisions? Perhaps even more beneficial to suppliers is that PACA
is designed for use by laymen, many of whom do not even realize the purpose of the paragraph printed on
their invoice. Thus, upon application of the appropriate facts and circumstances, getting paid has never been
so easy.

Journal Authors

Bruce H. White

William L. Medford

Journal Date

Thursday, June 1, 2000 - 12:00