Perishable Agricultural Commodities Act

The Perishable Agricultural Commodities Act, 1930 (PACA), 7 U.S.C. §499a, et seq., is a federally created statutory trust. The PACA trust is created for the benefit of persons who sell perishable agricultural commodities that are not paid. The statutory trust arises when the following occur:

1. The Commodities Sold Are “Perishable Agricultural Commodities.” 7 U.S.C. §499a(B)(4). A “Perishable Agricultural Commodity” Is Defined As Fresh Fruits Or Vegetables Of Every Kind And Character (Whether Frozen Or Packed In Ice) And Cherries In Brine. Id.
2. The Purchaser Of Perishable Agricultural Commodities Is One Of The Following:
   1. A Commission Merchant (7 U.S.C. §499a(B)(5));
   2. A Dealer (7 U.S.C. §499a(B)(6)); Or
   3. A Broker (7 U.S.C. §499a(B)(7)).
3. The Transaction Occurs In Interstate Or Foreign Commerce. 7 U.S.C. §499a(B)(8).
4. The Suppliers, Sellers, Or Agents Have Not Received Full Payment On The Transaction. 7 U.S.C. §499e(C).
5. The Suppliers, Sellers, Or Agents Preserve Their Trust Rights By Giving Written Notice To The Commission Merchant, Broker, Or Dealer Within The Time Provided By Law. Id.

The PACA “Floating Trust” treatment for proceeds

Under the PACA, the purchaser holds all perishable agricultural commodities, all products derived therefrom, and all receivables or proceeds from the sale of such perishables “in a floating trust” for the benefit of the unpaid suppliers, sellers, or agents. See, e.g., G&G Peppers, LLC v. Ebro Foods, Inc. (In re Ebro Foods, Inc.), 449 B.R. 759, 762 (N.D.Ill. 2011).

An understanding of the application of the PACA is important in any agricultural lending. If the borrower is one of the suppliers, sellers, or agents whom the PACA benefits, the lender must know whether the borrower remains unpaid by the purchaser of perishable agricultural commodities. The lender also needs to ensure that its collateral description is broad enough to cover the right to payment of funds held in trust.

If the borrower is the purchaser, however, the lender is at greater risk. The rights of suppliers, sellers, or agents as trust beneficiaries in all inventory, receivables, or proceeds from the perishable agricultural commodities are statutorily superior to the rights of any other creditor, including a creditor of the purchaser who holds a perfected security interest in those inventories, receivables, or proceeds. A & J Produce Corp. v. Bronx Overall Economic Development Corp., 542 F.3d 54 (2d Cir. 2008). Consequently, lenders need to ensure that a purchaser-borrower has paid all of its suppliers.

Finally, there is a parallel statutory scheme known as the Packers and Stockyards Act, 1921, 7 U.S.C. §181, et seq., that provides the same protection for livestock producers. See, e.g., Weichman Pig Co. v. Jack-Rich, Inc. (In re Jack-Rich, Inc.), 176 B.R. 476 (Bankr. C.D.Ill.1994).