Source: https://mcdonaldhopkins.com/insights/alerts/2013/08/14/franchises-alert-attention-restaurant-operators-the-perishable-agricultural-commodities-act-may-apply-to-you
Timestamp: 2019-04-23 06:29:49+00:00

Document:
Both sellers and buyers of perishable agricultural commodities need to be careful to comply with PACA’s rules and regulations. Directors and officers of buyers of perishable agricultural commodities subject to PACA must be aware of their fiduciary duties in order to avoid potential individual liability. Finally, parties need to be aware of the defenses to alleged PACA trust claims. PACA trust claims are not automatic and sellers may lose the benefits under a PACA trust if they take or fail to take certain actions.
What is the Perishable Agricultural Commodities Act?
How are growers, producers, sellers, and/or suppliers protected under PACA?
In order for a seller to take advantage of the protections afforded by PACA, the seller must “opt-in” to the trust and, thereafter, receive its protections. The seller of the perishable agricultural commodities is the beneficiary of the trust and holds a lien thereon.
Failure to maintain the PACA trust and make full payment promptly to trust beneficiaries is unlawful. Purchasers of perishable agricultural commodities are required to maintain trust assets in such a manner that the assets are freely available to satisfy outstanding obligations owed to sellers. Any act or omission inconsistent with this responsibility, including the diversion of trust assets or the impairment of a seller’s right to obtain payment, is forbidden. Upon a showing that the PACA trust is being dissipated or threatened with dissipation, sellers of goods governed by PACA may seek and obtain an immediate injunction. The trustee of the PACA trust (e.g. a corporate officer or director of the purchaser) has a fiduciary duty to the beneficiaries of the PACA trust and is required to preserve the assets of the trust so that the beneficiaries may recover the money owed to them.
A holder of a valid PACA trust claim has priority over any secured creditor on the buyer’s trust-related assets to the extent of the claim.5 “Assets of the trust,” can also include any fixed assets that were procured through the use of PACA trust receivables or proceeds. The common thread that runs throughout is that the asset must, in some way, be tied to trust assets.
If a secured lender is not able to prove either (1) through (3), or that it is a bona fide purchaser, the secured lender will be forced to return the trust property. The buyer has the burden of showing that disputed assets were not acquired with proceeds from the sale of PACA trust assets.
PACA sets forth certain notice requirements that the seller must give in order to preserve a trust claim.
After the time the supplier, seller or agent has received notice that the payment instrument promptly presented for payment has been dishonored.
There is a split of court authority on whether or not PACA’s eligibility and notice requirements should be construed strictly. The current trend in the case law tips in favor of a “substantial compliance” standard.
PACA regulations state that an eligible PACA seller’s payment terms cannot exceed 30 calendar days after the buyer’s receipt and acceptance of the goods. A seller may lose its PACA protections if the seller enters into a written (and in the Second Circuit even an oral) agreement with the buyer that extends the payment terms by the buyer beyond the 30-day period permitted under PACA. The Second, Third, Fifth, Sixth, Seventh, and Eighth Circuit Courts of Appeal have so ruled.
Cases construing PACA consistently hold that PACA trust assets are not property of a debtor’s bankruptcy estate under section 541 of the Bankruptcy Code.8 Therefore, the distribution of assets to beneficiaries of a PACA trust falls outside of the priority scheme established by the Bankruptcy Code (i.e., trust beneficiaries may be paid outside of, and prior to, a confirmed plan of reorganization). However, the disposition of PACA trust assets is subject to the jurisdiction of the bankruptcy court. Holders of PACA trust claims should seek adequate protection of their alleged interests in PACA trust assets at the beginning of a bankruptcy case.
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1 7 U.S.C. § 499 et seq.
2 “Dealer,” is defined in PACA to mean “any person engaged in the business of buying or selling in wholesale jobbing quantities, as defined by the Secretary of Agriculture, any perishable agricultural commodity in interstate or foreign commerce.” PACA further provides that “no person buying any such commodity solely for sale at retail shall be considered as a ‘dealer’ until the invoice cost of his purchases of perishable agricultural commodities in any calendar year are in excess $230,000.” 7 U.S.C. § 499a(b)(6)(B).
3 See, Bowie Produce Co. v. Magic Am. Café. Inc. (In re Magic Rests., Inc.), 197 B.R. 455, 457 (Bankr. D. Del 1996) (finding that debtor restaurants were “dealers” under PACA because they purchased in excess of $230,000 of perishable agricultural commodities per year and utilized such commodities in menu items sold in their restaurants). The United States Department of Agriculture defines a retailer as “a person engaged in the business of selling to consumers only.” 7 C.F.R. § 46.2(j); see In re Magic Rests., 197 B.R. at 455.
4 7 U.S.C. § 499e(c)(2).
5 In re Arctic Exp., Inc., 636 F.3d 781, 799 (6th Cir. 2011).
6 7 U.S.C. § 499e(c)(3).
7 7 U.S.C. § 499e(c)(4).
8 See, e.g., Morris Okun, Inc. v. Harry Zimmerman, Inc., 8I4 F Supp. 346, 348 (S.D.N.Y 1993); In re WL. Bradley Co., 75 RR. 505, 513 (Banker. E.D Pa. 1987).

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