Understanding the Perishable Agricultural Commodities Act (PACA)
“PACA Trust” is one of the most used, yet least understood terms in the produce industry. Signed into law back in 1930, Congress amended the Perishable Agricultural Commodities Act (“PACA”) in 1984 to include the statutory trust provisions. These provisions resulted in the collection of millions of dollars in past due receivables with little or no understanding of what the trust is and how it actually works. The PACA Trust operates according to general trust law. Sellers who learn these general trust law principles, will better understand the trust and how it operates, thereby increasing the rate of success in the recovery of past due receivables.
The situation before PACA
Prior to the PACA trust, if a produce buyer became insolvent, produce sellers had to stand in line behind secured creditors such as banks for payments. As last in line, produce sellers often received no money for their produce. Congress wanted to fix this problem because it was concerned that non-payment to produce suppliers was threatening the financial stability of the produce industry. Their goal was simple – 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 proceeds of produce, for which the produce sellers had not received payment, to pay their non-produce related expenses.
Congress could have followed state imposed remedies and given the produce sellers a lien on the buyer’s inventory or requiring that buyers be bonded. Instead, Congress chose to impose a trust on the parties to a produce sales transaction. This unique choice creates a fiduciary relationship between produce sellers and produce buyers. It gives produce sellers the most potent collection tool afforded any industry – a trust, which provides them with superior creditor rights over other creditors.
What is a trust?
A trust is an obligation imposed by agreement or law, where one person holds and controls property for the benefit of another. A trust must have four elements: a trustee, trust assets, trust beneficiaries and a trust purpose. With the PACA Trust, its terms are set up by law. Since a federal statute (PACA) set up the trust, it is called a statutory trust. The “purpose” is to protect unpaid produce sellers. The “trustee” is the produce buyer. 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.
Preserving PACA Trust Rights
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 thirty (30) days after expiration of the parties’ payment terms. Alternatively, a produce seller, who is licensed under PACA, may preserve its trust rights by including language required by the PACA statute on the face of its invoice to notify the buyer that the produce is sold subject to the trust.
PACA law mandates that the produce buyer/trustee must maintain sufficient PACA trust assets to pay PACA trust claims as they become due. If non-PACA trust assets are commingled with PACA trust assets, under trust law, all of the assets are impressed with the PACA trust. The buyer/trustee has the burden of proving which assets are not subject to PACA.