PACA vs. Pandemic: Extending Payment Period Before Buyer Default May Terminate PACA Trust Protections

The federal Perishable Agricultural Commodities Act (“PACA”), 7 U.S.C. § 499a, et seq., provides a seller of fresh and frozen fruits and vegetables (“PACA Produce”) that complies with PACA’s provisions a floating trust for the amounts owed for the PACA Produce by certain produce dealers, brokers, and commission merchants. This trust functions like a super-priority lien that applies to the dealer’s produce inventory, and it continues until the seller is paid in full or the transaction ceases to qualify for PACA trust treatment. To qualify as PACA Produce, a frozen or fresh product must not be dry, canned, or cooked, and must be “generally considered” a fruit or vegetable. The U.S. Department of Agriculture (“USDA”), which administers PACA, provides a lengthy, but non-exhaustive, list of products that qualify as PACA Produce at Commodities Subject Under the Perishable Agricultural Commodities Act (PACA).

In light of the ongoing financial stress caused by COVID-19, sellers of PACA Produce must take care to preserve their PACA trust rights by not prematurely modifying the terms of their produce sale contracts. Deteriorating economic conditions will inevitably cause some PACA Produce buyers to struggle to timely meet their obligations to sellers. As those buyers start to struggle, it is critical that sellers wait for buyers to default before making alternative payment arrangements that go beyond the 30-day payment period required by PACA regulations. Failure to wait for buyer default can result in the loss of protected PACA trust rights.

PACA Provisions and Licensing Requirements Unchanged by COVID-19 Outbreak

The USDA has issued guidance that its PACA Division will continue to operate during the COVID-19 coronavirus outbreak, and that licensing requirements and deadlines set by PACA will not be extended or affected. See the USDA’s PACA Q&A website, available at FAQs: Related to COVID-19 impact on the Fruit and Vegetable industry. Accordingly, PACA’s trust preservation provisions remain in force, and sellers must take care to preserve their PACA trust rights when modifying purchase and sale agreements with distressed buyers.

PACA’s licensing requirements for brokers, dealers, and consignees of perishable fruits and vegetables in interstate commerce also remain in force, and PACA licensees should update and maintain their licenses during the COVID-19 outbreak. A supplier that is not a regulated entity can opt to be licensed and gain some advantage with respect to PACA’s noticing requirements, but being a licensee triggers the requirement to comply with and be subject to PACA.

Preservation of PACA Trust Rights Prior to Default

PACA trust rights are non-consensual and created solely by complying with PACA’s minimum requirements. These requirements are:

• that the buyer be subject to PACA (i.e., a dealer, broker, or commission merchant as defined in PACA);
• that the seller provide timely notice to buyer, either on the invoice in the statutory form (for PACA licensees) or separate written notice (for non-licensees and an option for PACA licensees); and
• payment terms of sale are 10 days or less after delivery and acceptance by buyer, or, if greater than 10 days, as provided by an agreement in writing, but not exceeding 30 days after receipt and acceptance by the buyer. Once properly invoked, the PACA trust continues in effect until the seller is paid in full or the transaction ceases to qualify for PACA trust treatment.

Any PACA seller, licensed or unlicensed, may satisfy the PACA notice requirement by sending the buyer a written notice of intent to preserve PACA trust benefits and must include information that establishes for each shipment:

• the names and addresses of the trust beneficiary, seller-supplier, commission merchant, or agent and the debtor, as applicable;
• the date of the transaction, commodity, invoice price, and terms of payment (if appropriate);
• the date of receipt of notice that a payment instrument has been dishonored (if appropriate); and
• the amount past due and unpaid.

Sellers who are PACA licensees may also use an alternative method of preserving trust benefits. PACA licensee sellers may use their invoice or other billing statement, whether in documentary or electronic form, to preserve trust benefits. The invoice or other billing statement given to the buyer must contain the following statement verbatim in a prominent place on the face of the billing statement or 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.”

The invoice or billing statement must also set out the terms of payment if they differ from the default PACA period of 10 days net and the parties expressly agreed to such terms in writing before the affected transactions occur, bearing in mind that such terms cannot include a payment period greater than 30 days. Only a seller who is also a PACA licensee may use this form of notice to perfect PACA trust rights. An unlicensed seller CANNOT preserve its rights simply by including this language in its invoice or billing statement.

Preservation of PACA Trust Rights in the Event of Default

As is always the case with PACA trust rights, sellers should NOT modify produce sale agreements to allow terms of payment for any period greater than 30 days after the buyer’s receipt and acceptance of the produce. Terms of payment that allow any period greater than 30 days, including any written agreement (including by email) extending an otherwise qualifying payment period beyond 30 days, disqualify the sale for protection by the PACA trust.

So, if a seller receives information during the 30-day period indicating that a buyer is not going to be able to make its payments on time, sellers should NOT modify such agreement (neither orally nor in writing). Instead, sellers must allow buyers to default on their obligations. After default, a seller may make new payment arrangements, including acceptance of partial payments or creation of an extended schedule for payments, and still preserve its PACA trust rights. Sellers and buyers alike should keep records of any such modified payment arrangements in the event they are called upon to provide documentation of modifications in the event of future proceedings regarding preservation of trust rights. More information is available at PACA’s website at PACA Trust. Remember, PACA is not a self-enforcing statute. The PACA seller must take action to preserve and enforce its trust rights in the face of non-payment. PACA claimants should be prepared to take prompt action to preserve and enforce those rights within the periods prescribed by PACA. If you have any questions about PACA, please do not hesitate to contact Dan Kubitz at (360) 430-4638 or J.B. Evans at (208) 387-4229 for more information.