[Federal Register Volume 76, Number 70 (Tuesday, April 12, 2011)]
[Rules and Regulations]
[Pages 20217-20220]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8718]



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Rules and Regulations
                                                Federal Register
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Federal Register / Vol. 76, No. 70 / Tuesday, April 12, 2011 / Rules 
and Regulations

[[Page 20217]]



DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

[Document Number AMS-FV-09-0047]

7 CFR Part 46


Perishable Agricultural Commodities Act: Impact of Post-Default 
Agreements on Trust Protection Eligibility

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Final rule.

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SUMMARY: The Department of Agriculture (USDA) is amending the 
regulations under the Perishable Agricultural Commodities Act (PACA) to 
allow, if there is a default in payment as defined in the regulations, 
a seller, supplier, or agent who has met the PACA trust eligibility 
requirements to enter into a scheduled agreement for payment of the 
past due amount without foregoing its trust eligibility. USDA is also 
amending 7 CFR 46.46(e)(2) by adding the words ``prior to the 
transaction.'' This change clarifies that the 30-day maximum time 
period for payment to which a seller can agree and still qualify for 
coverage under the trust refers to pre-transaction agreements.

DATES: Effective Date: April 13, 2011.

FOR FURTHER INFORMATION CONTACT: Phyllis L. Hall or Josephine E. 
Jenkins, Trade Practices Section, 202-720-6873.

SUPPLEMENTARY INFORMATION:

Background of PACA Trust Provisions

    Under the 1984 amendment, perishable agricultural commodities, 
inventories of food or other derivative products, and any receivables 
or proceeds from the sale of such commodities or products, are to be 
held in a non-segregated floating trust for the benefit of unpaid 
sellers. This trust is created by operation of law upon the purchase of 
such goods, and the produce buyer is the statutory trustee for the 
benefit of the produce seller. To preserve its trust benefits, the 
unpaid supplier, seller, or agent must give the buyer written notice of 
intent to preserve its rights under the trust within 30 calendar days 
after payment was due. Alternatively, as provided in the 1995 
amendments to the PACA, a PACA licensee may provide notice of intent to 
preserve its trust rights by including specific language as part of its 
ordinary and usual billing or invoice statements.
    The trust is a non-segregated ``floating trust'' made up of all of 
a buyer's commodity-related assets, under which there may be a 
commingling of trust assets. As each supplier gives ownership, 
possession, or control of perishable agricultural commodities to a 
buyer, and preserves its trust rights, that supplier becomes a 
participant in the trust. Thus, trust participants remain trust 
beneficiaries until they have been paid in full.
    Under current 7 CFR 46.46(e)(2), only transactions with payment 
terms of 30 days from receipt and acceptance, or less, are eligible for 
trust protection. Section 46.46(e)(1) of the regulations (7 CFR 
46.46(e)(1)) requires that any payment terms beyond ``prompt'' payment 
as defined by the regulations, usually 10 days after receipt and 
acceptance in a customary purchase and sale transaction, must be 
expressly agreed to, and reduced to writing, before entering into the 
transaction. A copy of the agreement must be retained in the files of 
each party and the payment due date must be disclosed on the invoice or 
billing statement.
    Over the past few years, several federal courts have invalidated 
the trust rights of unpaid creditors because these creditors agreed in 
writing, and in some cases, by oral agreement, after default on 
payment, to accept payments over time from financially troubled buyers. 
In general, these courts have invalidated the seller's previously 
perfected trust rights because the agreements were deemed to extend 
payment terms beyond 30 days.\1\
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    \1\ See, Paris Foods Corp. v. Foresite Foods, Inc., No. 1:05-cv-
610-WSD, 2007 WL 568841 (N.D. Ga. Feb. 20, 2007); Bocchi Americas 
Assoc. v. Commerce Fresh Mktg., Inc., No. Civ. A. H0402411, 2005 WL 
3164240 (S.D. Tex. Nov. 28, 2005); American Banana Co. v. Republic 
Nat. Bank of N.Y., 362 F.3d 33 (2nd Cir. 2004); Patterson Frozen 
Foods, Inc. v. Crown Foods, Int'l, 307 F.3d 666, 667 (7th Cir. 
2002); Greg Orchards Produce, Inc. v. P. Roncone J., 180 F.3d 888, 
892 (7th Cir. 1999); Idahoan Fresh v. Advantage Produce, Inc., 
157F.3d 197, 205 (3d Cir. 1998); In re Lombardo Fruit and Produce 
Co., 12 F.3d 806, 809 (8th Cir. 1993); and Hull v. Hauser's Foods, 
Inc., 924 F.2d 777, 781-82 (8th Cir. 1991).
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    The court decisions at issue have held that any post-default 
agreement, whether oral or written, that extends the buyer's obligation 
to pay the seller's invoices beyond 30 days after receipt and 
acceptance of the produce abrogates the produce seller's PACA trust 
rights. These decisions have held that (1) when a seller enters into 
the post-default agreement, the agreement modifies any valid payment 
agreement entered into prior to the transaction and therefore voids the 
trust protection,\2\ and (2) post-default agreements that allow for 
installment payments exceeding 30 days from receipt of produce violate 
the PACA prompt-pay provisions.\3\
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    \2\ See American Banana Co., 362 F.3d at 33; Patterson Frozen 
Foods, 307 F.3d at 669.
    \3\ American Banana Co., 362 F.3d at 46.
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    Many of the court decisions at issue have been based on an 
interpretation of Sec.  46.46(e) of the regulations (7 CFR 46.46(e)). 
Section 46.46(e)(1) (7 CFR 46.46(e)(1)) requires that parties who elect 
to use different times for payment must reduce their agreement to 
writing before entering into the transaction. Current Sec.  46.46(e)(2) 
(7 CFR 46.46(e)(2)) states that the maximum time for payment for a 
shipment to which a seller can agree and still qualify for coverage 
under the trust is 30 days after receipt and acceptance of the 
commodities. It is our interpretation that Sec.  46.46(e)(2), like 
paragraph (e)(1) of the regulations (7 CFR 46.46(e)(1) and (e)(2)), 
addresses pre-transaction agreements only.
    This interpretation of our regulations is consistent with the 
Secretary's unwillingness to impute a waiver of trust rights as 
illustrated in the policies established by the Secretary and upheld by 
the courts in the context of the trust provisions of the Packers and 
Stockyards Act (7 U.S.C. 181 et seq.), after which the PACA trust 
provisions are largely modeled.\4\ In the context of the PACA trust, 
the right to make a claim against the trust are vested in the seller, 
supplier, or agent who has met the eligibility requirements of 
paragraphs (e)(1) and (2) of Sec.  46.46 (7

[[Page 20218]]

CFR 46.46(e)(1) and (2)). The seller, supplier, or agent remains a 
beneficiary of the PACA trust until the debt owed is paid in full as 
stated in section 5(c)(4) of the statute. An agreement to pay the 
antecedent debt in installments is not considered payment in full. 
Thus, we do not believe that a post-default payment agreement should 
constitute a waiver of a seller's previously perfected trust rights.
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    \4\ See, e.g., In re Gotham Provision Co., Inc., 669 F.2d 1000, 
1007 (5th Cir. 1982).
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Notice of Proposed Rulemaking

    In response to the Fruit and Vegetable Advisory Committee's request 
that the Secretary of Agriculture address the impact of post-default 
payment agreement on PACA trust eligibility, a proposed rule to amend 
PACA regulations was published in the Federal Register on June 8, 2010, 
[75 FR 32306].\5\ The proposal sought to amend Title 7, Part 46 to 
ensure that qualified PACA trust beneficiaries maintain their trust 
protection after entering into a post-default agreement. The comment 
period initially closed on August 9, 2010. However, the comment period 
was reopened and extended an additional 30 days. The reopening of the 
comment period was published in the Federal Register on August 23, 
2010, [75 FR 51693]. The comment period closed a second time on 
September 22, 2010.
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    \5\ To view the proposed rule and the comments we received, go 
to http:/www.regulations/gov.
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    The proposal sought to amend 7 CFR 46.46(e)(2) by adding the words 
``prior to the transaction.'' This change would clarify that the 30-day 
maximum time period for payment for a shipment to which a seller can 
agree and still qualify for coverage under the trust relates back to 
paragraph (e)(1) which refers to pre-transaction agreements.
    The proposal also added a new paragraph (e)(3) to 7 CFR 46.46. The 
new paragraph provided that in circumstances of a default in payment as 
defined in Sec.  46.46(a)(3), a seller, supplier, or agent who has met 
the eligibility requirements of Sec.  46.46 paragraphs (e)(1) and (2) 
could agree in writing to a schedule for payment of the past due amount 
and still remain eligible under the trust. The post-default payment 
agreement could not extend beyond 180 days from the default date.

Comments

    AMS received 130 timely comments. The commenters substantially 
approved of the proposed rule, except in regard to the limits on the 
length of post-default payment agreements and on collection activities. 
They expressed concerns that the suggested wording in the proposed 
regulation may itself create the same confusion, uncertainty, and need 
for costly litigation that the new regulation aims to eliminate. 
Eighty-nine of the 130 commenters offered alternative language for the 
amendment, four of which included the rationale for the suggested 
alternative language. These 89 commenters favored the removal of the 
requirement of a written post-default agreement and recommended the 
deletion of the last three sentences of Sec.  46.46(e)(3) of the 
proposed rule which (1) set a 180-day limitation on post-default 
agreements, (2) limited collection activities in cases of bankruptcy 
and civil actions, and 3) stated that the remaining unpaid amount under 
the scheduled payment agreement continued to qualify for trust 
protection.
    Twenty-three of the 130 comments raised legitimate concerns about 
the proposed changes to the regulations, stating:
    1. It is contrary to the law--only full payment ends a supplier's 
trust rights. The commenters suggested that the proposed rule conflicts 
with the statutory language that a trust creditor remains eligible for 
trust benefits until it has received full payment.
    2. The regulation cements a post-default waiver rule in the 
regulations. The commenters reason that if the Secretary acknowledges 
in the regulations that some post-default agreements can forfeit trust 
rights, this could be interpreted by the courts to prohibit all post-
transaction agreements.
    3. The proposed regulation will result in more problems than 
currently exist. The comments noted that there is no problem in the 
industry with post-default agreements to collect trust assets outside 
of litigation, so, no regulatory action is required over such 
agreements.
    4. Routine past due collection efforts will jeopardize trust 
rights. The language in the proposed rule would necessitate that every 
time there is a past due debt, sellers will have to consult a PACA 
lawyer.
    5. All claims in trust cases would be subject to extensive 
litigation about post-default collection efforts. Commenters noted that 
initially, produce suppliers try to resolve past due payments over the 
phone, thus, under the proposed rule, every subsequent trust claim will 
be the subject of the same expensive litigation to determine if there 
was a forfeiture due to an oral post default agreement.
    We recognize the serious nature of the concerns the comments raise: 
That the proposed regulation, as written, is contrary to the plain 
language of the statute that trust creditors remain eligible until 
fully paid; that the proposed regulation could be interpreted broadly 
to prohibit all post-transaction agreements; that it creates new 
problems; that routine collection activities could jeopardize trust 
rights and give rise to extensive litigation. Because we agree with 
these comments, we are revising the regulation.
    Twenty-eight of the 130 commenters specifically requested that the 
180-day cap for post-default payment plans be stricken from the 
proposed rule, indicating that it may be unrealistic under a multitude 
of circumstances, and that the time limitation would create new 
challenges to the trust eligibility of a creditor who attempts to 
collect on a past due debt. We agree.
    In addition, we agree that Congress intended that the seller, 
supplier, or agent remains a beneficiary of the PACA trust until the 
debt owed is paid and, recognizing that a 180-day limitation would 
create a new time limitation and new opportunity for litigation and 
misinterpretation of the regulations. Therefore, we are removing the 
180-day limitation of post default agreements from the final rule.
    Commenters noted that initially, produce suppliers try to resolve 
past due payments over the phone, thus, under the proposed rule, every 
subsequent trust claim will be the subject of the same expensive 
litigation to determine if there was a forfeiture due to an oral post 
default agreement. Because we agree with the comments that it is 
typical for produce suppliers to attempt to resolve past due payments 
over the telephone and, a requirement for a written post-default 
agreement would be burdensome and unnecessary, we are removing the 
requirement that a post-default agreement must be in writing from the 
final rule.
    It is our interpretation of the statute and regulations that post-
default agreements are not an extension of the 30-day maximum time 
period for pre-transaction agreements that would result in a waiver of 
the seller's trust rights; post-default payment agreements are an 
attempt to collect a debt that remains due until fully paid. The 
Secretary has long recognized a significant difference between the 
relative positions of buyers and sellers before a transaction, versus 
their positions after a buyer defaults on payment. The Secretary has 
observed that ``produce sellers are not in an equal bargaining position 
with produce purchasers who are in possession of the produce seller's 
perishable agricultural

[[Page 20219]]

commodities.'' \6\ After a buyer has defaulted on payment, the seller 
is at the buyer's mercy since produce deteriorates rapidly, leaving no 
collateral. Any agreement reached after default is not an arm's length 
transaction. The trust is intended to provide protection to the unpaid 
seller whose bargaining position has changed for the worse after 
delivering its produce to a buyer. We do not believe that a seller's 
perfected trust rights should be lost because the seller enters into a 
payment arrangement, in an attempt to collect a debt, after the buyer 
has violated the PACA's prompt payment requirement.
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    \6\ See In re: Scamcorp, Inc., 57 Agric. Dec. 527, 563 (1998).
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    We also agree with the comments from a California law firm that 
specializes in PACA law regarding the proposal to limit collection 
activities in cases of bankruptcy and civil actions. The commenter 
reminded us that limits on collection activities in cases of bankruptcy 
and civil actions are ``already amply controlled under existing laws 
and procedures administered by the United States district and 
bankruptcy courts* * *.'' Because laws already exist to ensure that a 
buyer in bankruptcy and civil actions cannot continue to make 
preferential payments to select creditors, we are eliminating the third 
and fourth sentences in Sec.  46.46, paragraph (e)(3) of the final 
rule.
    One commenter, a New Jersey based attorney specializing in PACA, 
recommended that the Secretary withdraw the proposed new regulation and 
solicit further suggestions for alternate language. USDA opted not to 
implement this recommendation. This commenter also included a 
suggestion for changes to Sec.  46.46 (c)(1), Sec.  46.2(aa)(11). The 
commenter suggested a new paragraph in Sec.  46.46 to address payment 
terms with a debtor who has entered into a post-default agreement. We 
do not adopt the suggestion, as it presents significant problems of 
implementation and interpretation by bringing separate, subsequent 
transactions into the analysis. USDA also opted not to adopt this 
suggestion because it is beyond the scope of the proposed rule.
    The courts have expressed concern that post-default agreements 
could undermine the enforcement of the prompt pay provisions of the 
PACA. No commenters echoed the courts' concerns. When a buyer defaults 
on payment for produce, it has committed a violation of section 2(4) of 
the PACA (7 U.S.C. 499b(4)). The defaulting buyer's license is then 
subject to suspension or revocation, or the buyer may be assessed a 
civil penalty for its violations of the PACA. Allowing a seller who has 
perfected its trust rights to enter into a post-default payment 
agreement with the defaulting buyer does not negate the buyer's 
violations of the Act. The trust is a means to protect the seller's 
right to payment for produce, not to enforce the prompt payment 
provisions of the Act. The Secretary can still initiate an enforcement 
action against the buyer to seek the appropriate sanction for 
violations of the Act without regard to any post-default agreement 
entered into between the unpaid seller and the buyer in default.
    Based on full consideration of comments received during the initial 
and reopened comment periods, USDA has determined that it is 
appropriate to simplify the language of the final rule in order to 
avoid creating any additional confusion, uncertainty, and unnecessarily 
protracted, costly litigation about post-default agreements and 
collection efforts. New Sec.  46.46(3) will be amended to delete the 
last three sentences of the proposal, and permit post-default 
agreements made in any manner. Furthermore, accepting partial payments 
after default would not affect a seller's trust rights.
    No comments addressed the proposal to amend Sec.  46.46(e)(2) by 
adding the words ``prior to the transaction.'' This change would 
clarify that the 30-day maximum time period for payment for a shipment 
to which a seller can agree and still qualify for coverage under the 
trust relates back to paragraph (e)(1) which refers to pre-transaction 
agreements. Therefore, this change is finalized as proposed.

Executive Orders 12866 and 12988

    This final rule has been determined to be not significant for the 
purposes of Executive Order 12866, and therefore, has not been reviewed 
by the Office of Management and Budget. This final rule has been 
reviewed under Executive Order 12988, Civil Justice Reform, and is not 
intended to have retroactive effect. This final rule will not preempt 
any State or local laws, regulations, or policies, unless they present 
an irreconcilable conflict with this rule. There are no administrative 
procedures that must be exhausted prior to any judicial challenge to 
the provisions of this final rule.

Effects on Small Businesses

    Pursuant to requirements set forth in the Regulatory Flexibility 
Act (RFA) (5 U.S.C. 601 et seq.), USDA has considered the economic 
impact of this final rule on small entities. The purpose of the RFA is 
to fit regulatory actions to the scale of businesses subject to such 
actions in order that small businesses will not be unduly or 
disproportionately burdened. The Small Business Administration (SBA) 
has defined small agricultural service firms (13 CFR 121.601) as those 
whose annual receipts are less than $7,000,000. There are approximately 
14,400 firms licensed under the PACA, a majority of which could be 
classified as small entities.
    The final regulations would clarify that a trust beneficiary who 
has perfected its trust rights does not forfeit those rights by 
entering into a post-default agreement to accept partial or installment 
payments on the amount past due. This language would provide companies 
of all sizes with clear regulatory guidance on this matter, thereby 
reducing the time and expense associated with litigating matters 
involving post-default agreements and trust right preservation under 
the PACA. Therefore, we believe that this final rule will not have a 
significant economic impact on a substantial number of small entities.

Paperwork Reduction Act

    In accordance with OMB regulations (5 CFR part 1320) that implement 
the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), the 
information collection and recordkeeping requirements that are covered 
by this final rule are currently approved under OMB number 0581-0031.

E-Government Act Compliance

    USDA is committed to complying with the E-Government Act, which 
requires Government agencies in general to provide the public the 
option of submitting information or transacting business electronically 
to the maximum extent possible. Forms are available on our PACA Web 
site at http://www.ams.usda.gov/paca and can be printed, completed, and 
faxed. Currently, forms are transmitted by fax machine, postal delivery 
and can be accepted by e-mail.

List of Subjects in 7 CFR Part 46

    Agricultural commodities, Definitions, Accounts and records, Duties 
of licensees, Statutory trust.

    For the reasons set forth in the preamble, 7 CFR part 46 is amended 
as follows:

PART 46--[AMENDED]

0
1. The authority citation for part 46 continues to read as follows:


[[Page 20220]]


    Authority:  7 U.S.C. 499a-499t.

0
2. In Sec.  46.46, paragraph (e)(2) is revised, paragraphs (e)(3) and 
(4) are redesignated as paragraphs (e)(4) and (5), and a new paragraph 
(e)(3) is added as follows:


Sec.  46.46  Statutory trust.

* * * * *
    (e) * * *
    (2) The maximum time for payment for a shipment to which a seller, 
supplier, or agent can agree, prior to the transaction, and still be 
eligible for benefits under the trust is 30 days after receipt and 
acceptance of the commodities as defined in Sec.  46.2(dd) and 
paragraph (a)(1) of this section.
    (3) If there is a default in payment as defined in Sec.  
46.46(a)(3), the seller, supplier, or agent who has met the eligibility 
requirements of paragraphs (e)(1) and (2) of this section will not 
forfeit eligibility under the trust by agreeing in any manner to a 
schedule for payment of the past due amount or by accepting a partial 
payment.
* * * * *

    Dated: April 5, 2011.
Ellen King,
Acting Administrator, Agricultural Marketing Service.
[FR Doc. 2011-8718 Filed 4-11-11; 8:45 am]
BILLING CODE 3410-02-P