PACA Trust fundamentals: A review and refresh

As Kroger discovered this summer, the produce industry cherishes the statutory trust created for its benefit under the Perishable Agricultural Commodities Act (the PACA) as if it were a constitutional right.

Enacted in 1984, the PACA trust was a remarkable legislative win for the produce industry.

The PACA provides that—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. Sec. 499e(2))

In other industries, when invoices go unpaid the supplier is simply owed money. Produce suppliers that properly invoke their trust rights, however, are not simply owed money—under the trust, the receiver is holding the supplier’s money.

The difference is pivotal. In the eyes of the law, it’s as if the delinquent buyer is holding the produce supplier’s wallet. The supplier’s wallet is not a part of the buyer’s assets—it is not the buyer’s money and needs to be returned to the supplier before the interests of ordinary, or even secured creditors, are considered.

This fundamental difference allows creditors to seek temporary restraining orders, or TROs, in federal court against delinquent firms and allows produce suppliers to enjoy “Super-Priority” rights in bankruptcy court, which has saved the industry untold millions over the years.

As Kroger discovered this summer, the produce industry cherishes the statutory trust created for its benefit under the Perishable Agricultural Commodities Act (the PACA) as if it were a constitutional right.

Enacted in 1984, the PACA trust was a remarkable legislative win for the produce industry.

The PACA provides that—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. Sec. 499e(2))

In other industries, when invoices go unpaid the supplier is simply owed money. Produce suppliers that properly invoke their trust rights, however, are not simply owed money—under the trust, the receiver is holding the supplier’s money.

The difference is pivotal. In the eyes of the law, it’s as if the delinquent buyer is holding the produce supplier’s wallet. The supplier’s wallet is not a part of the buyer’s assets—it is not the buyer’s money and needs to be returned to the supplier before the interests of ordinary, or even secured creditors, are considered.

This fundamental difference allows creditors to seek temporary restraining orders, or TROs, in federal court against delinquent firms and allows produce suppliers to enjoy “Super-Priority” rights in bankruptcy court, which has saved the industry untold millions over the years.

Doug Nelson is vice president of the Trading Assistance department at Blue Book Services. Doug previously worked as an investigator for the U.S. Department of Agriculture and as an attorney specializing in commercial litigation. He can be reached at dnelson@bluebookservices.com

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