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Paca Trusts and Personal Liability

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By Scott E. Blakeley, Esq.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

The Vendor Finds Another Pocket For Payment

Can a seller of perishable goods, such as fruits and vegetables, get a priming lien on the goods sold, senior in priority to the financing of the customerís bank, until such seller is paid in full? Can an officer of a company or other person in charge of the disposition of purchased p erishable goods be held personally liable when the seller of such goods is not paid? In other words, does the seller have a second pocket for payment, even without a personal guarantee?

Suppliers of perishable fruits and vegetables as well as vendors providing other products and services should be aware of the provisions of the Perishable Agricultural Commodities Act (ìPACAî). As discussed below, PACA addresses these issues and (a) what sellers have to do to preserve PACA protections, (b) when payments must be tendered, what (c) conduct of the seller that causes a waiver of PACA protections, and (d) what buyers are covered by PACA.

Purpose of PACA

In 1930, Congress originally enacted PACA to provide protections to sellers of perishable agricultural commodities (produce sellers) in cases where a buyer failed to make payment as provided by contract. Congress believed that ordinary state court collection lawsuits, such as suits for recovery of damages, did not adequately protect sellers of perishable goods. Congress found that certain financing arrangements between dealers and brokers deprived suppliers of payment and disserved the public interest. The PACA amendments were designed to provide sellers with a self-help tool that would enable them to protect themselves against abnormal risk of losses resulting from the ìslow-pay and no-pay practices by buyers or receivers of fruits and vegetables.

Statutory Trust Over Goods, Accounts Receivable and Proceeds

To protect produce sellers, Congress amended PACA to provide for the creation of a statutory trust in favor of sellers. Under PACA, a trust is created in favor of the seller by automatic operation of law from the moment a seller delivers perishable agricultural goods to a buyer. The trust is created in the purchased goods, the accounts receivable from the sale of such goods, or the cash proceeds from the sale. PACA requires that the goods, accounts receivable, and proceeds be held in trust by the buyer for the benefit of all unpaid sellers until the sellers have been paid in full.

Priority Over Secured Creditors

Because the trust is automatically created the moment the goods are conveyed, title to unpaid goods is not transferred to the buyer until the seller is paid in full. One Bankruptcy Court has held that when the buyer files for bankruptcy, the unpaid goods do not become part of the buyerís bankruptcy estate.

This trust in favor of the seller of unpaid goods is, in effect, superior to the interest of the buyerís secured lender. Thus, if the buyerís bank has a lien on the buyerís inventory (of commodities) to secure the bankís loan, the PACA trust over the unpaid goods will, nonetheless, be superior to, i.e. prime, the bankís lien. This means that in the event the bank ever forecloses on the Debtorís inventory, the foreclosure sale should not include that portion of the inventory that is subject to the sellerís PACA trust. If the inventory that is subject to the PACA trust is sold, the proceeds must be paid to the seller, not the bank.

Preserving A PACA Trust

A supplier must (a) deliver written notice of the supplierís intent to preserve trust benefits to the ìDebtorî (the buyer), and (b) to the United States Secretary of Agriculture. The notice must be given within thirty (30) calendar days of three events:

(i) expiration of the time prescribed in the contract by which payment must be made, or

(ii) expiration of such other time by which payment must be made, as the parties expressly agreed in writing before entering into the transaction; or

(iii) the seller has received notice that the check tendered in prompt payment has been dishonored.

Deadline to Pay Suppliers

In the absence of a written agreement, under PACA a supplier is required to be paid within ten (10) days. However, the parties may extend the time period for payment by written agreement up to thirty (30) days without impairing the supplierís PACA protections.

Waiver of PACA Protections If Payment Extends Beyond 30 Days

Any agreement extending the payment period beyond thirty days generally constitutes a waiver of rights under the PACA trust.

Personal Liability Under PACA

Courts have held that PACA imposes fiduciary duties on any individual who is in the position to control the perishable goods that are the subject of a PACA trust. These Courts hold that individuals who do not preserve these assets for the beneficiaries of the PACA trust (the sellers), have breached their fiduciary duties. Courts have found such individuals personally liable for these tortuous acts.

For example, an officer or controller of a company in charge of the proceeds from the sale of perishable goods could be found to be personally liable to pay a seller if the proceeds are not turned over to the seller.

A bankruptcy court recently considered whether owners of a business should be personally liable to a PACA claimant, and whether the PACA claimantís debt should not be discharged in the bankruptcy.

In In re Steinberg, the debtor and his wife owned and operated a distributor of perishable products. The distributor was given notice by PACA claimants that it was out of trust to these claimants. The PACA claimants were not paid. The owner of the distributorship filed personal bankruptcy.

A PACA claimant sued the owner of company in the bankruptcy court for failing to account for the sale of their perishable product.

The court considered whether the owner was personally liable to the PACA claimant, adopting a two part test:

  1. Whether the individual's involvement with the corporation was sufficient to establish legal responsibility; and

  2. Whether the individual in failing to exercise any appreciable oversight of the corporations' management, breached a fiduciary duty owed to PACA creditors.

The supplier failed to show that the debtor's involvement with the distributor was sufficient to establish legal responsibility. The court found that others involved in the business remained responsible for customers, sales, purchasing and day-to-day operations. The court noted that the debtorís goal was to keep the distributor operating long enough for it to repay the PACA claimants. The distributor was not successful. Because of the lack of evidence of the debtorís direct participation in the day-to-day management and control of the distributorís operations, the court determined that the debtor should not be held individually liable for the debts of the corporation.

PACA and Personal Liability

While the PACA trust gives the producer a superpriority claim, there may be instances where the corporate debtor does not have sufficient assets to pay the supplierís claims in full. The court=s analysis in In re Steinberg is helpful for suppliers looking for a second pocket for payment in such a situation. Where an officer or owner of the business has direct participation in he day-to-day management and control of a business and the PACA claimant goes unpaid, consider whether the individual may be able to make the supplier whole.

Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP Fall 04

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