Understanding the PACA Trust
July 1, 2017 | 6 min to read
Running a wholesale produce business is an exciting 24/7/365 endeavor that requires the ability to juggle multiple responsibilities. Depending on management’s expertise in areas such as human resources, administration, accounting and contract negotiations, a company may have to look externally for assistance.
It’s almost impossible to do everything internally; it’s rare that a small business has the capabilities to function effectively without outside help. In most situations, produce wholesalers can use professionals who are general business practitioners — attorneys, accountants and other professionals — who regularly work in the business world. However, there is one area that requires an expert — an attorney who is well-versed in the Perishable Agricultural Commodities Act (PACA) Trust.
The PACA was created by the U.S. Congress in 1930 to create the “rules of the road” for the growing interstate commerce in fresh fruits and vegetables. Primarily, it was designed to protect growers and shippers in transactions with buyers who may be thousands of miles away from the production area. Prior to 1930, unscrupulous operators could short-pay suppliers with little risk of consequences, as the cost of collection often exceeded the claim. The PACA enabled sellers to file complaints and claims without having to use the local or federal courts. Buyers of commercial quantities of these commodities were, and still are, required to be licensed under the Act. Failure to resolve violations under the PACA can result in the loss of one’s license to buy and sell in the produce industry.
In 1984, Congress amended the PACA to add a trust statute. The trust was added to protect produce sellers from buyers who became insolvent, and used assets from their produce purchases to pay other creditors. Under the 1984 PACA amendment, buyers are required to maintain a floating trust of assets obtained by the sale of perishable commodities. This trust is separate from other assets, and out of the reach of banks and other secured creditors. Since 1984, the Trust has protected hundreds of millions of produce industry dollars from non-produce creditors.
When a customer becomes insolvent, most companies will hire an attorney to represent them in a PACA Trust claim. However, by waiting until after a customer gets into trouble, it may be too late to correct mistakes made by the seller, thus resulting in a loss of protection under the Trust. A simple mistake in credit policy or even incorrect language on an invoice can disqualify a seller from protecting its rights under the Trust. Such an error could cost a seller tens or even hundreds of thousands of dollars.
There is one area that requires an expert — an attorney who is well-versed in the PACA Trust.
Disclaimer: I’m not an attorney and nothing in this column should be viewed as, or relied on as, legal advice. I’ve been involved in selling customers whose inability or unwillingness to pay resulted in my company going to court to invoke its rights under the Trust. In the late 1980s and early 1990s, I was involved in the governance of the organization now known as United Fresh. During that time, I was actively involved working with the USDA, congressional committees and other food industry organizations on modernizing the PACA.
So, with my above-average layperson expertise, here is what I view as two key things to check for when verifying you’re taking the proper steps to maintain your rights under the Trust:
1) You must preserve your company’s rights under the Trust. Failure to do this will result in your claim being thrown out. Although there are other methods, the easiest way to do so is to include the following wording on the face of the invoice:
“The Perishable Agricultural Commodities listed on this invoice are sold subject to the statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. 499e(c)). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities and any receivables or proceeds from the sale of these commodities until full payment is received.”
Verbiage can also be added regarding interest and collection fees. Once the invoice is sent with the Trust wording, trust rights are preserved until there is payment. If you use electronic billing with a customer, the electronic invoice must contain the above wording.
2) PACA terms are 10 days, though a company can extend terms up to 30 days and still be protected. Extending terms longer than 30 days will result in your claim being thrown out. If you do change terms from 10 days to 30 days or under, make sure every invoice, statement or any document pertaining to a transaction reflects the adjusted terms. No documentation of the adjusted terms could result in a disputed claim.
If you find yourself in federal court, you will quite likely be involved in a fight with banks, pension funds and government tax agencies. Such agencies will review your documents with a microscope, and look for anything that might void your claim. I strongly recommend investing a few dollars to have a PACA attorney review your documents and procedures.
Still want to do it yourself? Many PACA law firms have websites that can be helpful. The agricultural marketing service of the USDA also has a site dedicated to preserving Trust rights at pacawebguide.com/trust_preserving_trust_rights.html.
Alan Siger is chairman of Siger Group LLC, offering consulting services in
business strategy, logistics, and operations to the produce industry. Prior to selling Consumers Produce in 2014, Siger spent more than four decades growing Consumers into a major regional distributor. Active in issues affecting the produce industry throughout his career, Siger is a former president of the United Fresh Produce Association.
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