PACA and seller rights in Chapter 11 bankruptcy

What is a PACA trust and how do you perfect your PACA rights to ensure that you are paid during a Chapter 11 bankruptcy?

Produce sellers have a unique tool in federal law that allows them to secure payment even if they are not considered priority creditors in Chapter 11 bankruptcy. This tool lies in a 1984 amendment to the Perishable Agricultural Commodities Act (PACA). Congress, concerned about stability in the nation’s produce industry due to a significant increase in non-payment, decided to protect produce sellers’ right to payment through trusts.

The amendment created a legal / statutory trust that requires produce buyers / trustees to maintain enough assets in a PACA trust to pay PACA claims by sellers as those claims come due.

Protecting your PACA rights

In order to preserve their PACA rights, produce sellers must do one of two things:

  • If licensed under PACA, they may note on the invoice that the produce is subject to a PACA trust
  • They may send a “Notice of Intent to Preserve Trust Benefits” to the produce buyer within thirty days after the payment terms expire.

If a produce seller discovers that the produce buyer has broken the agreement, he or she has remedies under trust law, including asking the court for a temporary restraining order or bringing a lawsuit to collect from the individual officers, bankers, shareholders or third parties who have personal liability.

What if the buyer files bankruptcy?

The beauty of the PACA trust (for sellers) lies in its impact on Chapter 11 bankruptcy. If the seller attempts to file for bankruptcy, the debt will be non-dischargeable and the seller will still be able to collect on it. Furthermore, the seller will be paid ahead of everyone else in the Chapter 11.

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