Sellers of fresh produce expect to get paid and, indeed, are protected under the Perishable Agricultural Commodities Act (PACA) should a buyer not pay for produce purchased in interstate or foreign commerce. Perhaps the most important of the protections offered by PACA is the trust provision of the Act, which requires buyers to hold produce assets, including money received from the sale of produce, in trust for the benefit of the unpaid supplier.
DISTINCTIVE LAW
Under the PACA trust, the produce buyer doesn’t just owe money to the produce supplier; rather, under the law, the produce buyer holds the produce supplier’s money (and other assets). This distinction is important and unique to the produce industry. Among other things, it affects how bankruptcy and other liquidation proceedings are conducted.
Yet, the PACA trust provision does not specify how the statute is to be administered. There are a number of gaps with respect to administering the law and enforcing trust rights, especially when multiple trust beneficiaries are involved. As a result, attorneys and the courts system have looked to the common law of trusts for remedies. Lawyers involved in such cases worked together to create what is known to attorneys as the “PACA trust claims procedure.” It has expanded and evolved over the years and is sometimes regarded as a ‘mini produce bankruptcy’ proceeding, though its use is not limited to bankrupt debtors. This article describes how the PACA trust claims procedure works, and when it is used.
THE CLAIMS PROCEDURE
When a produce buyer files bankruptcy, an automatic stay bars creditors from taking any action against the debtor or the debtor’s property. So even though funds that are part of the PACA trust are not part of a debtor’s bankruptcy estate—because under the trust, money realized from the sale of produce belongs to the unpaid produce supplier, not the buyer—and a bankruptcy court has no jurisdiction over these assets, the seller (creditor) still must file its claim in federal bankruptcy court. The ‘proof of claim’ submitted to the bankruptcy court’s clerk, however, should indicate the seller’s priority creditor status, to help ensure PACA claims are set apart from claims against the estate.
Similarly, when the buyer has not filed for bankruptcy, produce suppliers may pursue an injunction to freeze PACA trust assets under the trust in a U.S. federal district court. In this scenario, as in a bankruptcy proceeding, the court asserts control over the buyer’s accounts for the protection of unpaid creditors.
Whether in bankruptcy court or U.S. federal district court, the PACA claims ‘procedure order’ may be initiated. “The claims procedure order is almost always prenegotiated between the parties and submitted to the court for approval,” explains Mark Amendola, attorney for Martyn & Associates in Cleveland, Ohio.
Establishment of PACA Trust Account
An initial step is the creation of a court-supervised escrow account (PACA trust account) to hold all liquidated corporate assets for the benefit of qualified trust beneficiaries. The PACA trust account can hold assets from multiple suppliers commingled with funds from the sale of goods that do not qualify for PACA protection. Trust assets include inventory of produce, inventory of products made from produce, any proceeds from their sale, as well as any assets acquired with the money from the sale of produce. The latter can also include nonproduce inventory and equipment.
