Your farm had a great harvest and you sold more than three-quarters of your produce to 82Z Mart. It will be the biggest payday in your farm’s history, but you haven’t received payment yet. Then you hear 82Z Mart filed for bankruptcy and will soon be out of business. Now your big payday looks like it may never happen. What can you do?
One of the most significant actions a supplier can take is to preserve and pursue trust rights through the U.S. Department of Agriculture (USDA) Perishable Agricultural Commodities Act (PACA) Trust. Although it does not guarantee you will receive your money in every circumstance, it is an essential tool to help produce sellers receive the money they are owed.
How can USDA’s Agricultural Marketing Service (AMS) help?
The PACA Division of the Fair Trade Practices Program regulates fair trading practices for produce businesses subject to PACA, including buyers, sellers, commission merchants, dealers, and brokers within the fruit and vegetable industry.
What is the PACA Trust?
The Trust provides priority status to sellers of fresh and frozen fruits and vegetables if a produce buyer’s business fails. In the event that a buyer becomes insolvent or files for bankruptcy protection, other creditors cannot be paid from the indebted buyer’s trust assets until all valid Trust claims have been satisfied.
How does it work?
When a supplier sells produce to a buyer operating subject to PACA, the supplier becomes eligible to participate in the Trust, whether licensed or not. The Trust requires that buyers maintain a statutory trust on fruits and vegetables received but not paid for.
In other words, buyers must ensure they have the money available to cover the cost of their debt—what is owed for the produce they have received from the seller.
In the case of a business failure or bankruptcy, a buyer’s trust assets will not be available for general distribution to other creditors until all valid PACA Trust claims have been satisfied. Sellers, however, must properly preserve their PACA Trust rights for each transaction to pursue those rights later.
Preserving Trust Rights
Recently, AMS amended PACA regulations to provide greater direction on how to preserve PACA trust rights for growers and other principals who employ a selling agent. The final rule amending these regulations was published in the Federal Register on February 6, 2018 and went into effect March 8, 2018.
Your farm had a great harvest and you sold more than three-quarters of your produce to 82Z Mart. It will be the biggest payday in your farm’s history, but you haven’t received payment yet. Then you hear 82Z Mart filed for bankruptcy and will soon be out of business. Now your big payday looks like it may never happen. What can you do?
One of the most significant actions a supplier can take is to preserve and pursue trust rights through the U.S. Department of Agriculture (USDA) Perishable Agricultural Commodities Act (PACA) Trust. Although it does not guarantee you will receive your money in every circumstance, it is an essential tool to help produce sellers receive the money they are owed.
How can USDA’s Agricultural Marketing Service (AMS) help?
The PACA Division of the Fair Trade Practices Program regulates fair trading practices for produce businesses subject to PACA, including buyers, sellers, commission merchants, dealers, and brokers within the fruit and vegetable industry.
What is the PACA Trust?
The Trust provides priority status to sellers of fresh and frozen fruits and vegetables if a produce buyer’s business fails. In the event that a buyer becomes insolvent or files for bankruptcy protection, other creditors cannot be paid from the indebted buyer’s trust assets until all valid Trust claims have been satisfied.
How does it work?
When a supplier sells produce to a buyer operating subject to PACA, the supplier becomes eligible to participate in the Trust, whether licensed or not. The Trust requires that buyers maintain a statutory trust on fruits and vegetables received but not paid for.
In other words, buyers must ensure they have the money available to cover the cost of their debt—what is owed for the produce they have received from the seller.
In the case of a business failure or bankruptcy, a buyer’s trust assets will not be available for general distribution to other creditors until all valid PACA Trust claims have been satisfied. Sellers, however, must properly preserve their PACA Trust rights for each transaction to pursue those rights later.
Preserving Trust Rights
Recently, AMS amended PACA regulations to provide greater direction on how to preserve PACA trust rights for growers and other principals who employ a selling agent. The final rule amending these regulations was published in the Federal Register on February 6, 2018 and went into effect March 8, 2018.
The rule provides greater direction to the industry as to how growers and other principals that use selling agents may preserve their PACA trust rights. Recent court decisions have invalidated the trust claims of unpaid growers against their selling agent because the growers did not file a trust notice directly with the agent. This new rule clarifies that it is the grower’s responsibility to preserve its trust benefits with its selling agent.
Licensees may preserve their PACA trust rights by giving written notification to buyers on an invoice. A licensee using this method must have the following wording, exactly as shown, on the face of the invoice: “The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. 499e(c)). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.”
Sellers not licensed under PACA or licensees that do not want to include the statutory wording on their invoices may use another method, providing a written notice to the buyer. The written notice must include the following: (a) a statement that it is a “notice of intent to preserve trust benefits”; (b) the names and addresses of the seller, commission merchant, or agent, and the debtor; (c) the date of the transaction; (d) the commodity; (e) the invoice price; (f) payment terms; and (g) the amount past due and unpaid.
Next, ensure the notification is given within 30 days from the day payment was due, or from receiving notification that a timely submitted payment was dishonored. To qualify for trust protection, the terms for payment cannot exceed 30 days from the date of acceptance of the product.
Payment terms other than PACA prompt payment terms (usually 10 days) must be agreed upon by the parties to the transaction in writing before entering into the transaction.
Preserving Trust Rights & Getting Paid
There are two primary ways a seller can pursue payment after properly preserving its trust rights: by filing an action in a U.S. district court or by asserting trust rights within a bankruptcy.
A seller can file a trust action in a U.S. district court seeking to enforce payment under the PACA trust. It is common for a trust enforcement action to seek a temporary restraining order, freezing the bank accounts of a buyer until the trust creditor is paid. Many produce sellers have found this to be a very effective tool for recovering payment for produce.
If a customer has filed bankruptcy, the seller should notify the bankruptcy court it is a priority creditor under PACA trust provisions (7 U.S.C.499e(c)). Priority creditor status should be indicated on the “Proof of Claim” submitted to the clerk of the bankruptcy court. Under bankruptcy law, trust creditors have priority and should be paid first from trust assets.
About PACA Licensing & the Trust
In general, any person who buys or sells more than 2,000 pounds of fresh or frozen fruits and vegetables in any given day is required to be licensed under PACA. Additionally, any entity selling at retail is subject to a PACA license once the invoice costs of fresh and frozen fruit and vegetable purchases exceed $230,000 in a calendar year.
Although growers who only sell fruits and vegetables they grow themselves are not required to be licensed under PACA, they may choose to get a license for the convenience it provides in preserving trust rights. Only sellers with a PACA license can use the official trust language on their invoices to preserve their trust rights on every transaction.
For futher information about the PACA Trust, contact Investigative Enforcement Branch chief Travis Hubbs at PACAInvestigations@ams.usda.gov or call (202) 720-6873.
