The Effects of Paca's Perfection Mechanisms on Colorado Agricultural Law

• Publication year: 2000
• Pages: 63
• Citation: Vol. 29 No. 7 Pg. 63

29 Colo.Law. 63 Colorado Lawyer 2000.

2000, August, Pg. 63. The Effects of PACA's Perfection Mechanisms on Colorado Agricultural Law

---

63

Vol. 29, No. 7, Pg. 63

The Colorado Lawyer
August 2000
Vol. 29, No. 8 [Page 63]

Specialty Law Columns
Business Law Newsletter
The Effects of PACA's Perfection Mechanisms on Colorado Agricultural Law
by Scott T. Rodgers

Colorado has a substantial financial interest in perishable agricultural commodities. Therefore, lawyers need to recognize the protections afforded to these commodities when advising secured parties, merchants, dealers, or brokers Sellers must move quickly to preserve and enforce their rights and should aggressively pursue those who ignore their obligation to preserve trust benefits. This article covers the perfection mechanisms under the Perishable Agricultural Commodities Act ("PACA"),1 as well as the rights of secured creditors and sellers and related bankruptcy concerns. Given the specific time limitations mandated by PACA, practitioners who represent these sellers need to become familiar with the requirements

Historical Background

In 1930, PACA was enacted to promote fair trading practices and suppress unfair and fraudulent business practices regarding the marketing of perishable commodities. In 1984 Congress significantly amended PACA by adding to 7 U.S.C. § 499(e) provisions that create a statutory trust for the benefit of agricultural producers when their inventory is transferred to produce dealers.2 Currently, many merchants, dealers, and brokers use bank loans secured by the inventories, proceeds, or assigned receivables they obtain from the sale of perishable agricultural commodities. This provides a secured position for lenders in case of insolvency. Under prior law, fresh fruit and vegetable sellers were considered unsecured creditors.

PACA was modified to impose a trust in favor of unpaid sellers and suppliers on inventories of commodities and products and proceeds of sale. This trust would work the same way as "Trust" amendments to the 1976 Packers and Stockyard Act.3 Congress passed the PACA amendment because it found that "a burden on commerce in perishable agricultural commodities is caused by financing arrangements under which dealers who have not made payment give lenders a security interest in such commodities and that such arrangements are contrary to the public interest."4

The term "perishable agricultural commodity" includes all fresh fruits and vegetables that are frozen or packed on ice, as well as cherries in brine, as defined by the Secretary of the U.S. Department of Agriculture ("Secretary") in accordance with trade usages.5 The relevant provision of the 1984 PACA amendment provides that perishable agricultural commodities will be held in trust for unpaid suppliers, agents, or sellers until full payment has been received from the debtor. In general, however, the unpaid suppliers will lose the benefits unless written notice of intent to preserve the benefits of the trust is filed with the Secretary within thirty calendar days after payment is due.6

These trust assets will be maintained in a non-segregated, floating trust, and may be commingled with non-trust assets.7 Those holding trusts must maintain the assets so they are "freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities."8

Priority and Perfection

A PACA beneficiary has priority over a secured creditor on a purchaser’s commodity-related assets to the extent of the amount of the claim.9 A produce buyer’s unpaid obligation "becomes a trust obligation . . . prior to and superior to any lien or secured interest in inventory held by the [buyer’s] secured lender."10 The PACA trust’s ability to affect distribution in bankruptcy is extremely potent. The trust effectively provides beneficiaries with a claim status that trumps that of all creditors, even secured creditors.11 A secured lender will be forced to return trust property unless it can establish bona fide purchaser status (that is, that it received the property for value and without notice of trust).12 Whether the producers in question gave a proper notice to create a PACA trust often is a litigated issue in cases involving PACA trusts.13

The beneficiary of a trust set up...