Your farm client has sold apples to a wholesaler operating as an LLC and has not been paid. Now the LLC has closed, and the owner of the LLC has filed bankruptcy.
What can you do to get your farmer paid?
Wisconsin has far fewer farms now than it did 40 years ago, but we are still an agricultural state. It therefore makes sense for lawyers, particularly those in rural Wisconsin, to have some understanding of the Perishable Agricultural Commodities Act (PACA).1
The Perishable Agricultural Commodities Act
PACA was enacted in 1930 at the request of fruit and vegetable growers to regulate marketing of perishable agricultural commodities. Its purpose is to prevent unfair and fraudulent conduct and to facilitate agricultural commerce.
PACA is administered and regulated by the Agricultural Marketing Service, under the USDA.
The law applies to all produce in fresh form generally considered perishable fruits and vegetables.2 It applies to dealers, which is any person engaged in buying or selling perishable commodities in wholesale or jobbing quantities. Invoice value in any calendar year must exceed $230,000 with a few exceptions.3
PACA prohibits certain types of conduct including unfair, unreasonable, discriminatory, or deceptive practices in determining the quantity of a commodity. It also makes it unlawful for a commission merchant, dealer, or broker to make any false or misleading statement for a fraudulent purpose in connection with the transaction. It includes a failure to unreasonably failed to perform.
For our purposes, it is unlawful “to fail or refuse truly and correctly to account and make full payment promptly” for our farmer’s apples.4
The PACA Trust
In 1984 Congress amended PACA to create a statutory trust for the benefit of unpaid sellers like our farmer.
The perishable agricultural commodities received and inventories of food or other products derived from them, as well as any receivables or proceeds from their sale, are to be held by the commission merchant, dealer, or broker in trust. The beneficiary of that trust is the unpaid supplier or seller, like our farmer.
A PACA trust is a “floating trust,” which means that the beneficiary is not required to trace the assets in order for the trust to apply. The beneficiary need only prove the amount owed and that assets exist into which the sold commodities were commingled. The buyer will have the burden of establishing which assets, if any, are not subject to the trust.
Preserving the Benefits of the Trust
The unpaid seller must preserve the benefits of the trust. It can do so by giving written notice of intent to preserve such benefits to the merchant, broker, dealer, or the sellers.
Notice can be provided on normal invoice statements, provided the invoice or statement contains the terms of payment and the following statement:
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 (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.
This written notice must be given within 30 calendar days after the time by which payment must be made or after the time the seller received notice that a payment instrument was dishonored.5
Be wary of agreeing to extend time for payment, as extensions for more than 30 days could result in a loss of the trust protection.6
Remedies include disciplinary proceedings against the PACA licensee as well as reparation proceedings, which may be brought by filing a complaint with the Secretary of Agriculture.
When Bankruptcy is Involved: A Practice Tip
Our concern, though, is with the bankruptcy filing by the owner.
Courts are divided on this issue. In In re Yerges,7 the bankruptcy court found that the owner of an LLC was subject to PACA as a commission merchant, dealer, and/or retailer. The owner was found to be the sole person in control of the LLC, and as such was personally liable for the amounts owed from the PACA assets due to the failure to preserve or pay the obligation.
The Yerges court found that these actions constituted a violation of fiduciary duties, making the debt nondischargeable under 11 U.S.C. 523(a)(4). This is the majority view across the country.
The U.S. Court of Appeals for the Seventh Circuit has not yet ruled on this issue, and bankruptcy courts in the Seventh Circuit are well divided.
So, what does this mean for our farmer?
Probably that an adversary proceeding should be filed in the bankruptcy case, objecting to the dischargeability of this obligation. Because one bankruptcy court is not bound by the decisions of another, the outcome is unknown – but not proceeding to object will result in certain loss.
This article was originally published on the State Bar of Wisconsin’s Solo/Small Firm & General Practice Blog of the Solo/Small Firm & General Practice Section. Visit the State Bar sections or the Solo/Small Firm & General Practice Section webpages to learn more about the benefits of section membership.
1 7 U.S.C. 499a-499t.
2 7 C.F.R. 46.2(u).
3 7 U.S.C. 499a(b)(6).
4 7 U.S.C. 499b.
5 7 U.S.C. 499e(c)(3).
6 7 C.F.R. 46.46(e)(2).
7 In re Yerges, 512 B.R. 916 (Bankr.W.D.Wis. 2014)