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PACA Claims Against Owners of Business

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

Suppliers must watch the clock in pursuing PACA claims
against owners of business.

Can a supplier of perishable goods, such as fruits and vegetables, get a priming lien on the goods sold, senior in priority to the financing of the customer’s bank, until such supplier is paid in full? Can a owner of the debtor’s corporation be personally liable when the supplier is not paid? In other words, does the supplier have a second pocket for payment, even without a personal guarantee? If the supplier indeed has a second pocket, when must the supplier pursue its claims against the owner?

Suppliers of perishable fruits and vegetables should be aware of the provisions of the Perishable Agricultural Commodities Act (“PACA”). As discussed below, PACA addresses these issues and what suppliers have to do to preserve PACA protections, when payments must be tendered and what conduct of the supplier that causes a waiver of PACA protections. In a recent Third Circuit Court of Appeals decision, Weis- Buy Sevices, Inc. v. Paglia (“Weis-Buy”) , the court considered whether an owner of a corporation should be personally liable to a PACA supplier where the corporation had insufficient assets to pay the PACA suppliers’ claims, and when a PACA supplier must bring such an action.

Purpose of PACA

In 1930, Congress enacted PACA to provide protections to suppliers of perishable agricultural commodities 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 suppliers 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 suppliers with a self-help tool that would enable them to protect themselves against abnormal risk of losses resulting from the slow-pay and no-pay practices by buyers or receivers of fruits and vegetables. L

egal Trust Over Goods, Accounts Receivable and Proceeds

Congress enacted PACA to deter unfair business practices and promote financial responsibility in the perishable agricultural goods market. One of the primary purposes of the act was to protect the suppliers of perishable agricultural products as they must entrust their products to a merchant miles away and depend on their good faith and fair dealing for their payment. In addition, the suppliers have more at stake due to the fact that they generally have capital tied up in land and machinery and the survival of their business depends on timely payment by the merchants whom they make deals with.

While many merchants operate on bank loans which are often secured by the merchant’s inventory and proceeds of sale of perishable commodities making the bank a secured creditor, suppliers of fresh fruit and vegetables on the other hand are unsecured creditors and receive little protection in any suit for recovery of damages where the merchant neglects to pay as required by contract. Thus, this legislation would provide a remedy by impressing a floating trust in favor of the unpaid supplier on the inventories of commodities and products resulting from those transactions and on the proceeds of sale of such commodities. On the one hand, the trust provision gives assurance that the raw products will be paid for promptly, while on the other hand, the monitoring system provided under the act will protect the interest of the borrower.

PACA in Action

In the Weis-Buy ruling, suppliers of fruit made several shipments on credit to a produce corporation. The corporate debtor failed to pay, and filed bankruptcy. The bankruptcy court found the suppliers’ claims were valid PACA claims, and, therefore, each supplier received a partial distribution from the corporate debtor’s assets. The suppliers filed suit in state court against the debtor’s owner seeking to recover the remainder of the money owed. The suppliers alleged that the debtor’s owner breached his fiduciary owned to the suppliers under PACA. The state court found the owner liable and ordered judgment in favor of the suppliers for the remainder of their outstanding balance, interest and attorney’s fees.

The owner appealed, contending the suppliers’ suit should have been dismissed as the collection action was timedbarred. The owner complained that the suppliers should have filed their collection suit against him long ago.

Individual Liability to Suppliers

On appeal, whether an individual corporate officer or owner of a corporation or LLC can be held personally liable to suppliers for breaching his fiduciary duty to protect PACA trust assets was a matter of first impression with the appellate court.

In considering sister circuit court decisions, the appellate court noted several courts had concluded that individual liability did exist in certain circumstances. The Ninth Circuit Court, for example, found that officers and shareholders who control PACA trust assets, and who breach their fiduciary duty to preserve those assets, may be personally liable.

The concept of individual liability, even though the buyer of the produce is a corporation, is derived from the common law breach of trust principle. Under common law, a trustee owes a fiduciary duty to the trust in administrating the trust to exercise such care as an ordinary prudent man would exercise in his own dealing. This type of liability is distinct from the liability arising when the corporate veil is pierced and the corporate form is disregarded because the individual uses the corporation as only a shell to advance their own personal, rather than corporate ends. Rather, under trust principles, breach of one’s fiduciary duty as an administrator is considered a tortious act, one that can lead to individual liability. Therefore, individual shareholders or officers of a corporation can be held individually liable in certain circumstances for breaching their fiduciary duty.

When the Supplier Must Pursue the Owner

The appellate court held that the suppliers’ claim against the owner was tolled until the date of the bankruptcy court’s decision authorizing partial payment to PACA claimants from the debtor’s assets. The court noted that under the PACA statute, a supplier had two years from the date the claim accrues.

Generally, the statue of limitation begins to accrue as soon as the trustee breaches his or her fiduciary duty. The owner here argued that the statute of limitation should have commenced as of the date the supplier’s invoices became due. The appellate court overruled that argument and found that debtor’s failure to pay invoices was a continuing violation. Under the continuing violation doctrine, the focus was on the wrongful acts of the owner. The appellate court affirmed the lower courts ruling, finding that the owner must pay the PACA claimants. The owner appealed to the circuit court of appeals.

The court of appeals reversed the lower courts’ rulings, finding that the suppliers were on notice of owner’s breach of fiduciary duty when the debtor first failed to pay its bills, and at the very least was on notice when the debtor filed for bankruptcy protection.

The court of appeals saw no justification for tolling the statute of limitations as they only applied to cases where the defendant had actively misled the plaintiff regarding their cause of action, or where the plaintiff was prevented in some extraordinary way from asserting his right or where the plaintiff had timely asserted their right in the wrong jurisdiction. The court of appeals did not find any of these situations were present here.

The court of appeals reasoned that when the suppliers were initially not timely paid, they were on notice that debtor, and the responsible parties of the debtor, had breached their trustee obligation. This alone should have given the Suppliers an incentive to find out why their payment was delayed or who the cause of the problem was, according to the court of appeals. However, as the suppliers did not take adequate action to discover the cause of the problem or to file a suit, the statute of limitations began as of the date of non-payment and was not tolled.

Here, the suppliers did not file suit until two years after any of their invoices became due and more than two years after the debtor filed bankruptcy. As such, the statute of limitation had run out and the suppliers were barred from pursuing their claims against the owner, the court of appeals ruled.

Reprinted by permission from The Trade Vendor Quarterly Blakeley & Blakeley LLP
Fall 05

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