Farming is a tough business. Weather, market volatility, tight lending requirements, reliable equipment and government regulations are just a few of the many issues that a farmer faces annually. Even when all the breaks go the farmer’s way and the crop has been harvested, the farmer still faces uncertainty. He must find a buyer for the harvest. One that can be trusted. A buyer that will hopefully pay and pay on time. He relies on the buyer for prompt payment because the farmer has lenders that must be paid. Unfortunately, buyers sometimes do not pay promptly, or even worse, the buyer does not pay after delivery of the harvest and files for bankruptcy. Will the farmer be paid, or will he be forced to stand in line with other unsecured creditors and pray for some scraps? The answer to the question all depends on whether the farmer has armed himself with the ultimate protection called PACA.
What is PACA?
PACA refers to the Perishable Agricultural Commodities Act of 1930. Congress enacted 7 U.S.C. § 499 (PACA) amid the Great Depression. The purpose of PACA was to protect farmers from delayed payments or no payment. The nature of the product being sold and marketed is perishable. These items have a short shelf-life and farmers had no way of ensuring payment once the product was delivered. The enactment of PACA provided farmers some protections in the event of non-payment or bankruptcy.
What Products does PACA Protect?
PACA only applies to perishable agricultural commodities. The statute defines a perishable agricultural commodity as “fresh fruits and vegetables of every kind and character, whether or not frozen or packed in ice…as defined by the secretary (of the USDA) in accordance with trade usage.” 7 U.S.C. § 499a(b)(4). The definition is limited in scope and does not protect processed products, such as frozen battered onion rings.
How does PACA Work?
To create a trust, (a) there must be property to transfer; (b) a definite purpose and disposition of the property; (c) a person to execute the disposition and purpose; and (d) a beneficiary. Every transaction that is PACA qualified creates a trust. The farmer grows and owns the property to transfer. The distributor takes delivery to process and sell the perishable crop for the benefit of the farmer. The farmer receives the money within a definite time after delivery.
How does a Farmer Create a PACA Transaction?
A farmer can receive the protections rather easily. A farmer must place the distributor on notice that the transaction was subject to PACA within 30 days after the expiration of the time prescribed for payment as set in the regulations by the USDA, or as the parties may agree otherwise in writing before the transaction. For best practices, farmer should invoke the protections of PACA each time a perishable crop is delivered.
What Happens to a PACA Transaction in Bankruptcy?
A farmer with a PACA claim has several protections in bankruptcy. First, the bankruptcy automatic stay does not prevent him form perfecting his PACA claim after the bankruptcy is filed. Second, PACA claim funds are generally not property of the bankruptcy estate. The funds are the property of the PACA trust beneficiary, the farmer. Third, because the funds are not property of the bankruptcy estate, the funds are not subject to the liens of secured creditors. Typically, a PACA claimant will jump ahead of banks in the priority scheme. Fourth, most courts have ruled that PACA proceeds are not subject to avoidance actions that may be brought by a bankruptcy trustee against other creditors. In a nutshell, a PACA claimant holds a superior claim to all creditors in a bankruptcy.
Conclusion
During times of uncertainty and even in times of certainty, a farmer should always be sure that his perishable crop transactions are afforded the protections of PACA. The statute is the ultimate weapon for a farmer and should be used.
If you have any questions about PACA or wish to make sure that you are properly using PACA, call C. Scott Kirk, Attorney at Law, PLLC at 252-689-6249 or email at scott@csklawoffice.clarencewebdesign.com. You may visit the website at csklawoffice.com. C. Scott Kirk is an attorney in Greenville, North Carolina serving Eastern North Carolina in bankruptcy and other financial matters.