Lawyers who collect and distribute money for produce suppliers under the federal Perishable Agricultural Commodities Act, or PACA, cannot be paid from the so-called PACA trust funds unless the claimants consent, according to a March 11 Fifth Circuit opinion.
If some produce suppliers do not consent to paying the lawyer from trust funds, Circuit Judge Gregg Costa said that counsel can be paid as an expense of administration in a bankruptcy case by retention under Section 327, although he conceded there is no guarantee that assets will be available to cover legal fees.
The bankruptcy court authorized retaining a lawyer as special counsel. Without objection, the retention order provided that the lawyer’s fee applications would be paid from funds he collected as proceeds from the supplier’s produce. The lawyer ended up collecting $4 million and submitted fee applications totaling more than $200,000. One PACA creditor objected to the fee request, contending that trust funds could not be invaded to pay attorneys’ fees.
The bankruptcy judge overruled the objection. On the first appeal, the district court reversed and held that the lawyer could not be paid until the objecting PACA claimant was paid in full.
On the next appeal, the first question for the Fifth Circuit was the bankruptcy court’s jurisdiction in view of Stern v. Marshall, because PACA trust funds are not part of the bankrupt estate and litigation would ensue even without bankruptcy.
As a result of Wellness International, Judge Costa said there was explicit consent from those PACA creditors who sought the special counsel’s retention in the first place. For PACA creditors who filed claims later, Judge Costa said they impliedly consented because the docket put them on notice that the “original filers had consented to bankruptcy court adjudication.”
Because the other PACA creditors consented to paying the lawyer, the appeal only dealt with about $15,000, representing the portion of counsel fees attributable to the one objecting supplier.
Judge Costa followed the Second Circuit’s 2001 decision in C.H. Robinson Co. v. Alanco Corp. by holding that there are “no exceptions” to the trust created by PACA. The statute’s “unequivocal language” means that proceeds from the sale of suppliers’ produce can be used only to pay claims until suppliers are paid in full.