Food growers and other sellers of certain perishable goods, like fresh fruit and vegetables, have a little known law in their toolbox that protects against business failure of a buyer. The Perishable Agricultural Commodities Act (PACA) 7 U.S.C. 499a was enacted in 1930 at the request of the fruit and vegetable industry to promote fair trade in the industry. PACA protects businesses dealing in fresh and frozen fruits and vegetables by establishing and enforcing a code of fair business practices and by helping companies resolve their business disputes.
This post will look at main points of the PACA, to which businesses it applies, and its impact on the industry.
The PACA has three main purposes:
- To regulate traders of fresh fruit and vegetables
- To provide fair trade practices in the marketing practices of perishable commodities
- Provides a mechanism for collecting damages from any buyer or seller who violates the PACA or breaches the contract.
Section 499e(c) creates a statutory trust in favor of the sellers on the inventories of commodities, the products derived thereform, and the proceeds of the sale of such commodities and products. Essentially, the law creates a situation where a produce buyer, as trustee, holds its produce-related assets in trust as a fiduciary until full payment is made to the unpaid seller or trust beneficiary.
It comes into play when the buyer has a business failure, bankruptcy, or just fails to pay. By issuing a Notice of Intent to Preserve Trust Assets or providing certain Statutory Language on their invoices, growers and sellers can protect themselves against a buyer’s bankruptcy and get in line as a protected creditor.
Through the PACA trust, the sellers of perishable commodities maintain a right to recover against the purchasers that is superior to all other creditors, including secured creditors.
The PACA imposes liability on a trustee, whether a corporation or controlling person of that corporation, who uses the trust assets (i.e. the food, products derived from fresh and frozen fruits, and all receivables or proceeds from the sales) for any purpose other than repayment of the supplies. This includes using the proceeds from the sale of the perishables for legitimate business expenditures, such as payment of rent, payroll or utilities.
The most lucrative part of PACA is that it provides for damages to be paid by those not meeting their contractual obligations in buying and selling fresh and frozen fruits and vegetables. Interstate produce traders operating as commission merchants, dealers or brokers, and conducting a sufficient volume of business must be USDA-licensed. USDA is required to suspend the license of a business that fails to pay PACA reparations awarded against it.
If you would like more information about the PACA and if your company has rights under it, contact Dalton & Tomich PLC to evaluate your eligibility under the Act.