Opinion ID: 8414542
Heading Depth: 1
Heading Rank: 1

Heading: The PACA Trust

Text: “Congress enacted PACA in 1930 to prevent unfair business practices and promote financial responsibility in the fresh fruit and produce industry.” Boulder Fruit, 251 F.3d at 1270. Congress amended PACA in 1984 “ ‘to remedy [the] burden on commerce in perishable agricultural commodities and to protect the public interest’ caused by accounts receivable financing arrangements that ‘encumber or give lenders a security interest’ in the perishable agricultural commodities superior to the growers.” Id. (alteration in original) (quoting 7 U.S.C. § 499e(c)(l)). PACA attempts to remedy this burden through the creation of a statutory trust: Perishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents. 7 U.S.C. § 499e(c)(2). “This provision imposes a ‘nonsegregated floating trust’ on the commodities and their derivatives, and permits the commingling of trust assets without defeating the trust.” Endico Potatoes, 67 F.3d at 1067 (citation omitted). “[G]eneral trust principles [apply] to questions involving the PACA trust, unless those principles directly conflict with PACA.” Boulder Fruit, 251 F.3d at 1271. And, because “[ordinary principles of trust law apply to trusts created under PACA, ... the trust assets are excluded from the estate should the dealer [ie., the PACA trustee] go bankrupt.” Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 282 (9th Cir. 1997). Under general trust principles, a breach of trust occurs when there is “a violation by the trustee of any duty which as trustee he owes to the beneficiary.” Boulder Fruit, 251 F.3d at 1271 (quoting Restatement (Second) of Trusts § 201 (1959)). Federal regulations set forth a PACA trustee’s primary duties, requiring the trustee “to maintain trust assets in a manner that such assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities.” Id. (quoting 7 C.F.R. § 46.46(d)(1)). The duty to maintain trust assets is broad, such that “[a]ny act or omission which is inconsistent with this responsibility, including dissipation of trust assets, is unlawful and in violation of [PACA].” Id. (second alteration in original) (quoting 7 C.F.R. § 46.46(d)(1)). Because the non-segregated floating trust under PACA permits the commingling of trust assets and permits the PACA trustee to convert trust assets into proceeds, the transferees of trust assets, such as Agricap here, “are liable only if they had some role in causing [a] breach or dissipation of the trust.” Boulder Fruit, 251 F.3d at 1272; see also Restatement (Second) of Trusts § 283. (1959) (“If the trustee transfers trust property to a third person ... [without] -committing] a breach of trust, the third person holds the interest so transferred or created free of the trust, and is under no liability to the beneficiary.”). Against this backdrop, the current parties and all circuit courts addressing the issue agree that a PACA trustee’s true sale of accounts receivable for a commercially reasonable discount from the accounts’ face value is not a dissipation of trust assets and, therefore, is not a breach of the PACA trustee’s duties. See Nickey Gregory, 597 F.3d at 598 (“The assets of the trust would thus have been converted into cash and the receivables would no longer have been trust assets. Obviously, under this scenario, [the factoring agent] would own the accounts receivable and would be able to do with them what it wished.”); Reaves Brokerage, 336 F.3d at 413-14; Boulder Fruit, 251 F.3d at 1271-72; Endico Potatoes, 67 F.3d at 1067-68. Such a sale is merely a conversion of trust assets from accounts receivable into cash. These circuits also agree that any purported security interest for a lender in PACA-trust assets is inferior to the trust beneficiaries’ claims and rights. See, e,g., Nickey Gregory, 597 F.3d at 598-99 (“Thus, if the accounts receivable were held ... as collateral to secure repayment of a loan, they would also have been held for the benefit of produce sellers, and the produce sellers would have effectively enjoyed a first-creditor position in them.”); Endico Potatoes, 67 F.3d at 1069 (“Because [the fac toring agent] held only a security interest ... its interest is subject to the rights of the PACA trust beneficiaries.... [The factoring agent] must ... disgorge amounts collected on the accounts after [the distributor’s] bankruptcy filing to the extent necessary to satisfy claims of PACA trust beneficiaries,”). In fact, in Boulder Fruit, notwithstanding the absence of discussion of a “true-sale” or “transfer-of-risk” test, the Ninth Circuit provided an illustration making clear that use of PACA-trust assets as collateral to secure a debt could not create a priority security interest for a lender greater than the position enjoyed by PACA trust beneficiaries: Farmer sells oranges on credit to Broker. Broker turns around and sells the oranges on credit to Supermarket, generating an account receivable from Supermarket, Broker then obtains a loan from Bank and grants Bank a security interest in the account receivable to secure the loan. Broker goes bankrupt. Under PACA, Broker is required to hold the receivable in trust for Farmer until Farmer was paid in full; use of the receivable as collateral was a breach of the trust. Therefore, Farmer’s rights in the Supermarket receivable are superior to Bank’s. In fact, as a trust asset, the Supermarket receivable is not even part of the bankruptcy estate. Boulder Fruit, 251 F.3d at 1271.