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.
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.
“All assets are assumed to be part of the trust; the buyer must prove otherwise,” explains Larry Meuers of Meuers Law Firm PL in Naples, FL. “If [the buyer] takes cash from the sale of produce and buys a truck or inventory, it becomes part of the PACA trust. The whole account is tainted with produce.”
Claims Administration
Under a signed order, the court appoints a special PACA counsel to act as trustee. This can be the seller’s counsel, buyer’s counsel, or independent counsel. The company is ordered to turn over financial information to identify all assets and liabilities. The trustee then marshals and liquidates company assets. Several people may be assigned (and in some cases compensated) to handle various legal and collection tasks. These include sending demand letters to collect accounts receivable, selling inventory, and notifying creditors.
Potential PACA trust creditors are then mailed a notice of all dates and deadlines relevant to the claims procedure. “These creditors [with valid claims under the trust] all have the same beneficial rights to a single pool of limited assets,” states Amendola, and will share in the recovery.
Amendola stresses that companies owed money must join the lawsuit to secure their share. To do so, they must file a ‘complaint in intervention’ and a PACA proof of claim along with supporting documents by the PACA claims bar date or deadline. Generally, the court sets this deadline 60 days from the date the initial claims procedure order was established. A PACA supplier that fails to meet the filing deadline is forever barred from asserting any PACA claim against the buyer.
Anyone with an objection to the validity or amount of trust claims must file an objection by a specific deadline, usually 30 days after the bar date.
The deadline for responding to objections is often set within the following 20 days. Afterwards, counsel prepares a PACA Trust Distribution Chart, listing all claims filed in the case, amounts deemed valid (or invalid, due to claimants not filing a timely objection), any amount subject to a pending objection, and the amount of any objection already resolved by settlement.
The chart also lists the funds available for distribution, including the share held back pending dispute resolution. If funds are insufficient to cover all claims, PACA trust beneficiaries share the proceeds on a pro-rata basis.
Parties have a period of time to object to the distribution, after which undisputed claims are paid and the parties work to resolve the disputes. Those who settle receive their pro-rata share. If a disputed claim has been disallowed, the pro-rata share is distributed to the other claimants. When no agreement is reached, a motion to determine the validity of the claim is filed by either party with the court.
BENEFITS
The PACA trust claims procedure has several benefits. “The biggest benefit is efficiency, not only in administering all the claims but also what we call judicial economy, or efficiency in the courts,” Amendola observes. All suits are pooled together into one, rather than each creditor filing a lawsuit to collect money. He also points to control of assets—the order not only provides a freeze on the company’s assets but also assets in a third party’s hands, like a bank.
While many companies do not have significant assets, two exceptions are grocery stores and restaurants. Regarding the former, Meuers comments, “When they go out of business, there’s a great probability of recovering money.” This is because produce is generally a small percentage of the business. “You can claim most of the assets as PACA trust assets even if only 20 percent may be from selling produce. If produce money is green, then everything purchased with the money turns green. So if [grocery retailers] buy Cheerios with money received from selling produce, the Cheerios become part of the PACA trust account.”
As powerful and effective as the PACA trust can be, however, Michael Erdman of Chicago-based Teeple, Leonard, and Erdman explains, “When multiple PACA trust beneficiaries are pursuing a buyer for payment, the norm in our experience is pro-rata distributions; unpaid sellers participating in a claims procedure process should not expect dollar-for-dollar recoveries.”
Amendola agrees and notes that, on average, the PACA trust claims procedure will take about six months from beginning to end, depending on the complexity of the case.
A NOTE ON PERSONAL LIABILITY
In many instances, a bankrupt company does not have sufficient assets to cover its trust claims. The law allows PACA creditors to pursue the buyer’s individual officers, directors, and shareholders in these cases.
Even if these individuals file for personal bankruptcy protection to avoid the debt owed to produce suppliers, the debt subject to the PACA trust can be exempted. Courts have held that individuals in a position to control trust assets are personally liable if they fail to perform their fiduciary responsibilities.
In some cases, a buyer strapped for money will pay obligations from trust assets to a non-PACA party, such as a bank. Here, too, produce sellers can sue for recovery by tracing the assets to the third party. A ‘disgorgement action’ is sometimes required to force repayment of money received through illegal or unethical business transactions.
CONCLUSION
“The sooner you bring the claim and enforce your rights, the better chance you have to recover money,” confirms Meuers. But the PACA trust claim procedure order, he notes, liquidates the business. “Many buyers are undercapitalized; are you going to recover more money by shutting them down? Or is it better to have them continue to operate and have a plan to pay you back? This is one of the first analyses that must be made.”
