seller or grower is responsible for collecting under the trust. PACA is
not involved in preserving or collecting trust assets.
a seller or grower 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 or grower 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 or grower's lawyer to obtain a restraining
order from a federal court to preserve the trust assets.
Assets in the Trust
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 or grower is not limited to the
particular produce that it sold or to the proceeds from that produce.
trust reaches back to property of the buyer or agent acquired before a
sale of produce. A buyer or agent 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
Buyer A 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 Buyer A 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
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.
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.
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
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 or agent, the bank will be
required to return those assets to the PACA trust creditors.
bank can also receive PACA trust money from buyers or agents in the
normal course of repayment of its loan from the bank. To obtain
disgorgement of these loan repayments, a seller’s or grower's lawyer
must show the bank knew the buyer was not paying its produce creditors
when the bank received the payments.
factor purchases trust assets in the form of the accounts receivable of
the buyer or agent. 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 or grower's lawyer can file to
obtain disgorgement of the trust assets from the factor, like other
secured lenders who foreclose on trust assets.
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.)
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.