A creditor with a trust claim under the Perishable Agricultural Commodities Act, known as PACA, does not have the ability to bar approval of the use of cash collateral and thereby compel immediate payment of the claim, Chief Bankruptcy Judge Scott W. Dales of Grand Rapids, Mich., said in his Nov. 1 opinion.
A fresh produce supplier with a PACA trust claim contended that all of the chapter 11 debtor’s property was impressed with a trust taking the property outside of the estate, thus making it ineligible for use in securing financing. Dissecting PACA, 7 U.S.C. § 499a et seq., Judge Dales explained why the theory did not hold water and why the PACA creditor was entitled to nothing more than adequate protection.
Designed to protect farmers and producers of fresh produce, Congress originally adopted PACA in 1930 to impose a floating trust on a purchaser’s inventory and proceeds. As Judge Dales said, producers “may enjoy the benefits of being the trust’s beneficiaries,” but “produce buyers and others involved in processing and marketing must shoulder the burdens of fiduciary duties associated with the so-called ‘PACA trust.’”
As a result, Judge Dales said, “a PACA claimant . . . has a trust claim against the qualifying inventory and proceeds that trumps the claims and even the liens of the buyer’s creditors — secured, unsecured, and priority, it matters not.”
Further complicating the debtor’s request to use cash collateral, Judge Dales cited cases finding that non-perishable assets can be impressed with a PACA trust if, in the past, PACA proceeds were used to purchase or pay the debt on non-perishable assets. Consequently, all of a debtor’s property, perishable or not, could be impressed with the trust, thereby, theoretically, taking all of the debtor’s property out of the estate and rendering reorganization impossible.
Judge Dales said that courts expressing the broad view were either painting with too broad a brush or their statements were dicta. Instead, he read the PACA statute and implementing regulations to “contemplate” the “continued operations of the PACA trustee [meaning, the debtor].” A PACA creditor, he said, “cannot hold the trustee or the debtor in possession hostage in bankruptcy.”
The notion that PACA trust property is outside of the estate, Judge Dales said, ignores the broad definition of estate property in Section 541(a) and the authority of a debtor under Section 363 to use estate property. The debtor’s equitable interest in PACA trust assets brings the property into the estate.
Furthermore, a producer’s interest in PACA trust property is limited by the amount of its claim. Even if there is a floating trust over all of the debtor’s property, the PACA creditor has no right to prevent the debtor’s use of property absent proof establishing the right to an injunction or showing a lack of adequate protection under Section 363(c).
In other words, Judge Dales said, a debtor can use PACA trust property “as long as it provides adequate protection.”
Because the value of estate property “far exceeds” the supplier’s claim, the debtor had carried its burden of proving that the supplier was adequately protected, even if all estate property was impressed with the PACA trust, Judge Dales said.
“[T]he differences between PACA and secured claims vanish as a practical matter,” Judge Dales said.
As a result, Judge Dales approved final use of cash collateral, to which all parties had agreed apart from the PACA objector.