Each seller is responsible for collecting under the trust. PACA is not involved in preserving or collecting trust assets.
First, a seller decides if it can obtain payment without filing a lawsuit. Usually, this involves a payment arrangement. If that does not work, or there are significant problems with the business, legal action is the only alternative. If a seller waits too long to take action, the trust assets can be dissipated with little chance of recovery. In other words, the trust does not guarantee a recovery. But it does allow a seller’s lawyer to obtain a restraining order from a federal court to preserve the trust assets.
Assets in the Trust
The trust includes all produce, receivables from produce, and proceeds paid or owed to the buyer for produce. The trust also includes any assets acquired with produce proceeds, such as non-produce inventory, equipment or warehouses. A seller is not limited to the particular produce that it sold or to the proceeds from that produce.
The trust reaches back to property of the buyer acquired before a sale of produce. A buyer cannot acquire property using trust funds from earlier suppliers, and then roll the debt onto later suppliers to shield the asset from the trust. For example, suppose a buyer purchases a new Jaguar with the proceeds from the produce of Seller 1. He then pays Seller 1 from the proceeds of the produce of Seller 2. He then pays Seller 2 from the proceeds of the produce of Seller 3, and so on, until, owing Seller 20, he goes out of business, and drives away in the Jaguar. If Seller 20 is a trust creditor, Seller 20 is entitled to the Jaguar, because the buyer used trust assets to buy the Jaguar and merely rolled the trust debt from Seller 1 to Seller 20.
The trust also extends to processed products made from fresh or frozen produce. For example, breaded cauliflower, zucchini sticks, hash browns, and salad concoctions, like potato salad or cream cheese with scallions. So a seller of cauliflower does not lose its trust interest in the cauliflower if the buyer uses the cauliflower to make a processed product.
On the other hand, the processor, who converts the cauliflower into processed product, does not have a trust claim against its buyer because the processor is not supplying fresh or frozen produce covered under PACA.
Persons in a partnership or corporation, who are in control of trust assets, can be individually liable for PACA trust claims. Even though individuals in corporations are not normally liable for the debts of the corporation, the PACA trust is an exception to this rule.
If an individual is liable for a PACA trust debt, this kind of debt is not dischargeable in bankruptcy because there is a special exception to a discharge of trust debts in bankruptcy.
This individual liability reinforces the importance of exercising proper oversight of trust property.
Bank and Factor Liability
Trust creditors have priority over a bank’s security interest in trust assets. So, if a bank forecloses on trust assets under its security interest to repay its loan to the buyer, the bank will be required to return those assets to the PACA trust creditors.
A bank can also receive PACA trust money from buyers in the normal course of repayment of its loan from the bank. To obtain disgorgement of these loan repayments, a seller’s lawyer must show the bank knew the buyer was not paying its produce creditors when the bank received the payments.
A factor purchases trust assets in the form of the accounts receivable of the buyer. If the purchase is at a reasonable discount, the factor is allowed to retain the trust receivables. Sometimes, factors become secured lenders, rather than purchasers of trust assets, because they take no risk on the payment of the receivables they have purchased. In other words, the produce company guarantees payment of the receivables to the factor. As a result, there is not really a purchase of the receivables, and the factor holds the receivables as security. In those cases, a seller’s lawyer can file to obtain disgorgement of the trust assets from the factor, like other secured lenders who foreclose on trust assets.
Restaurants do not have to be licensed under PACA. However, restaurants which buy wholesale quantities of produce are subject to the PACA trust. So if a restaurant is not paying or goes bankrupt, produce suppliers are entitled to payment from the trust assets before anyone else, provided the seller preserved its trust rights as explained above. (The trust also extends to cruise lines.)
The problem with enforcing trust rights against restaurants is proving they buy wholesale quantities of produce, which is at least one (1) ton in any one day. Sometimes, a single restaurant does not qualify. But a restaurant with three (3) or more locations almost always qualifies.