Kroger’s announcement this summer of extended payment terms that would have made the Perishable Agricultural Commodities Act (the PACA) trust inapplicable to its purchases was met with an uproar, which the retailer, to its credit, took to heart and reconsidered its plans.
In the wake of this incident, it seems a good time to review the PACA trust to help ensure you are doing what’s necessary to enjoy its benefits. In a trust, ownership and control of the trust assets are separated, and the party in control of the assets is required to responsibly hold the trust assets for the benefit of the owner.
Regulations define the supplier’s PACA trust assets as follows—The trust is made up of perishable agricultural commodities received in all transactions, all inventories of food or other products derived from such perishable agricultural commodities, and all receivables or proceeds from the sale of such commodities and food or products derived therefrom. (7 C.F.R. Sec. 46.46(b))
And define trust benefits as follows—When a seller, supplier or agent who has met the eligibility requirements of paragraphs (e) (1) and (2) of this section, transfers ownership, possession, or control of goods to a commission merchant, dealer, or broker, it automatically becomes eligible to participate in the trust. Participants who preserve their rights to benefits in accordance with paragraph (f) of this section remain beneficiaries until they are paid in full. (7 C.F.R. Sec. 46.46(c))
If you are a produce supplier, this all probably sounds well and good. But what do you need to know about paragraphs (e) and (f )?
Not surprisingly, there is some devil in the details.
Perhaps the most well-known provision of paragraph (e), which concerns payment terms, is the second (e)(2), which simply provides that in order to invoke the trust, your payment terms cannot exceed thirty (30) days (this requirement was front and center during this summer’s go-round with Kroger).
But the most overlooked provision is (e)(1): (e) Prompt payment and eligibility for trust benefits. (7 C.F.R. 46.46(e)) (1) The times for prompt accounting Sec. 46.2(z) and (aa). Parties who elect to use different times for payment must reduce their agreement to writing before entering into the transaction and maintain a copy of their agreement in their records, and the times of payment must be disclosed on invoices, accountings, and other documents relating to the transaction.
(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.
As (e)(1) makes clear, the rules with respect to payment terms are, unfortunately, not quite as simple as “just don’t exceed 30 days.” Section 46.2(aa)(4), for instance, provides that “Payment for produce purchased by a buyer,” is due by default “within 10 days after the day on which the produce is accepted.”
So, if you’re selling produce on different terms (21-day terms are not uncommon), then in order to comply with the rule, you need to reduce this agreement (as to payment terms) in writing before entering into the transaction and maintain a copy of this agreement.
What’s more, the rule requires that payment terms be disclosed on invoices, accountings, and other documents relating to the transaction to avoid the risk of forfeiting PACA trust rights.
Although none of this is particularly burdensome, it does require attention to administrative detail—which can all too easily get lost in the fast-paced shuffle of the produce industry.
