What Do Produce Suppliers Give Up When They Waive Their PACA Trust Rights?
Updated: Nov 11, 2020
By Nicole Cook
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The Perishable Agricultural Commodities Act Trust, or “PACA Trust,” recently sprouted up in the produce news after a large produce buyer caused a panic in the produce industry with a letter to all of its suppliers, including its produce suppliers, announcing a new 90-day payment policy. The purchaser has since notified its produce suppliers that the new policy will not apply to them, but if you’re wondering why produce suppliers were worried, keep reading.
What Is the PACA?
The Perishable Agricultural Commodities Act (PACA) sets rules of fair dealing for produce companies. These go beyond the normal rules for other businesses because, unlike most commodities, produce is extremely perishable. PACA ensures produce merchants follow these rules through a system of licensing. We previously covered PACA and its licensing requirements in this post.
Basically, nearly every company which buys, sells, or handles large quantities of fresh and frozen produce must be licensed. There are gray areas, but for all practical purposes, if a company buys or sells wholesale quantities of produce, it must be licensed. Wholesale quantities are defined as the sale of one ton or more of produce in any one day. The business must also be involved in “interstate commerce,” which is defined broadly and basically means the produce, at some point in its commercial life, crosses a state line. So, nearly everyone who handles or distributes produce must be licensed. Companies not required to be licensed are: growers; retailers who buy less than $230,000 per year of produce; frozen food brokers who are independent agents and sell less than $230,000 per year of produce; processors (other than potato processors) who buy produce for processing solely within the state where the produce is grown; and restaurants (unless a restaurant group has a separate entity which buys produce and resells it to the individual restaurants).
What Is the PACA Trust?
A trust is an obligation imposed by agreement or law where one person holds and controls assets for the benefit of another. Congress created the PACA Trust in 1984 to ensure that produce suppliers who are owed an undisputed amount for produce sales are paid from the proceeds of their produce before any other creditor. Because a federal statute (PACA) set up the PACA Trust, it is called a statutory trust. The “trustee” is the produce buyer, and the “trust assets” are the buyer’s produce inventory, products made from produce and proceeds from their sale. The “trust beneficiaries” are all unpaid produce sellers who properly preserved their rights as PACA Trust beneficiaries.
What Protection Does the PACA Trust Provide?
Before the PACA Trust, if a produce buyer became insolvent, produce sellers had to stand in line behind secured creditors such as banks for payments and they often then received no money for their produce. Congress wanted to fix this problem because this non-payment to produce suppliers was threatening the financial stability of the produce industry. With the PACA legislation, Congress wanted to ensure that produce buyers used the proceeds of produce to pay the sellers of that produce. Congress also sought to prevent produce buyers from using the produce proceeds, for which the produce sellers had not received payment, to pay their non-produce related expenses.
The PACA Trust gives produce sellers the most powerful collection tool afforded any industry, a trust. This puts sellers of fresh and frozen fruits and vegetables in a priority status in the event their buyers become insolvent or file for bankruptcy protection. Under PACA, produce creditors, as PACA Trust beneficiaries, have priority over all other creditors, including banks with security interests on produce-related assets.
The law does not require that the produce-related assets be held in a separate account by the buyer. Rather, the trust floats over all the buyer’s produce-related assets until all qualified produce suppliers have been paid in full. Because of this, suppliers filing for trust protection have a far greater chance of recovering money owed them if a buyer goes out of business. The law also allows a produce supplier to file suit immediately in federal court to freeze the assets of a buyer who has not paid the seller.
Why Were Producer Suppliers Panicked?
Produce sellers must preserve their PACA Trust rights to become PACA Trust beneficiaries. This is done by sending a document entitled “Notice of Intent to Preserve Trust Benefits” to the buyer within 30 days from the date payment was due. Alternatively, a produce seller licensed under PACA may preserve its trust rights by including PACA-required language on the face of its invoice notifying the buyer that the produce is sold subject to the trust. Regardless of how the supplier notifies the buyer that the seller is preserving its PACA Trust rights, however, terms for payment cannot be extended beyond 30 days from the date of acceptance of the product. Any supplier agreeing to any extension for payment beyond 30 days for perishable produce permanently waives rights to PACA Trust protection. The reasoning is that a supplier extending terms beyond customary practice could be considered complicit if a bankruptcy subsequently occurs.
The concern, then, when the large purchaser recently unilaterally changed its terms of payment to extend to 90 days was that if suppliers simply went ahead and provided produce after receiving notice of the new 90-day terms, they might be giving up their PACA Trust rights regardless of whether they agreed to the new terms in writing.
Because the buyer has since rescinded the 90-day terms for produce suppliers, the question of whether simply continuing to supply produce after receiving notice of the extension beyond 30 days for payment necessarily waives a supplier’s PACA Trust rights regardless of the PACA language on its invoices was not tested. We don’t know how a court might rule if a PACA Trust beneficiary continued to provide produce to the buyer after notice of the new 90-day payment term.
How Can Produce Sellers Preserve Their PACA Protections?
The PACA Trust protections automatically apply in a wide variety of circumstances. It is possible, however, for a seller to inadvertently waive rights to PACA protections. The following are some of the ways in which a seller may inadvertently waive its rights to the PACA protections:
1. Agreeing to Payment Terms Exceeding 30 Days:
If a shipper agrees to any payment terms in writing which are more than 30 days after the receiver accepts the load, the shipper has automatically lost the special protections of the PACA trust. The legend at the bottom of the invoice will not protect the shipper if the shipper agrees in writing to payment terms of more than 30 days. This is the law under PACA even if the sales contract states it is “subject to PACA.” If you agree in writing to payment more than 30 days after the buyer receives the produce, you lose PACA Trust protections.
2. Allowing Different Payment Periods in the Order Confirmation and the Invoice:
If you have a written contract with a produce receiver or even an order confirmation with a receiver, not only must the pay period be no more than 30 days after acceptance of the load, but the pay period on your invoice must match the pay period in the contract or order confirmation. Some receivers have been successful in swindling shippers into losing their PACA Trust rights by sending order confirmations with unusual pay periods in the hope that the shipper will place a different pay period on the invoice issued to the receiver. Then when the receiver becomes insolvent, the receiver claims that because the invoice has one pay period and the order confirmation or written contract has a different pay period, the shipper has waived its PACA Trust rights. The best practice to ensure that PACA Trust protections are not waived is to always place the words “PACA Terms” as the payment period on invoices and use the same term in any produce contract.