The Perishable Agricultural Commodities Act: Suggestions for a Grade A Loan

by Anthony Cianciotti and Mark Duedall
Anthony Cianciotti
Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Mark Duedall
Baker, Donelson, Bearman, Caldwell & Berkowitz, PC

For secured lenders that provide financing to distributors, restaurants, grocery stores and other businesses that purchase fresh fruits and vegetables, understanding the intricacies of the Perishable Agricultural Commodities Act is critical to maintaining senior priority.

Asset-based lenders typically require properly secured and perfected liens, and the requisite priority over other secured parties. The Uniform Commercial Code’s priority rules provide assurance on that front, but the protection of those rules can vanish when a borrower is a distributor, grocery store, restaurant, or other purchaser of large quantities of fresh fruits and vegetables, as the Perishable Agricultural Commodities Act (PACA) can dramatically alter a lender’s recovery, both prior to and after a borrower enters bankruptcy.


PACA was enacted in 1930 to regulate the trade of fresh fruit and vegetables and encourage fair trading practices. As part of its protections, PACA requires produce buyers to make full payment “promptly” and creates civil liability in favor of unpaid sellers against buyers who fail to comply. Congress amended PACA in 1984 to address the fact that secured lenders had payment priority over unsecured PACA claims of unpaid sellers due to lenders having security interests in the buyer’s inventory and accounts receivable.  The amendment created a “floating,” non-segregated trust for the benefit of unpaid sellers of agricultural commodities.  This PACA trust includes purchased agricultural commodities, their products and any proceeds (including receivables) derived from their sale.

PACA requires buyers to “maintain trust assets in a manner so that the trust assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities.”1  The unpaid seller’s right in the PACA trust assets will trump those of a prior-perfected secured creditor against its borrower (as buyer), its borrower’s assets, and also, in some instances, as to prior debt repayments received from its borrower. This priority claim includes attorneys’ fees and interest if the agreement or invoices between the PACA seller and the borrower provides for such items.2

Scope of Coverage

Generally speaking, PACA defines perishable agricultural commodities as “fresh fruits and vegetables of every kind and character, whether frozen, not frozen or packed in ice.”3 Although broad, the PACA regulations exclude fruits and vegetables “manufactured into articles of food of a different kind or character.”4

Due to the benefits afforded the PACA seller, PACA’s reach remains a litigated point.  Courts are often required to decide if the “essential nature” of the commodity has been changed. For example, operations like steaming, blanching, shredding, etc., are not considered to lead to this alteration in character.5 However, coleslaw  is not entitled to protection because it has ingredients other than cabbage that are beyond the scope of PACA.6    The analysis of a product’s “essential nature” can become highly esoteric depending on the product.  However, the potential adverse consequences that a PACA buyer (and its lender) may face can be severe.

Therefore, a lender may need to review its borrower’s inventory and sales, interview the borrower, and perhaps even hire an expert to determine whether the processing of a given fruit or vegetable impacts the rights which might otherwise be senior to a secured lender.  Otherwise, a lender could find some of its borrower’s inventory and resulting proceeds subject to senior PACA claims if the seller is unpaid.

Purchasers Subject to PACA

The PACA trust applies to covered commodities received by a commission merchant, dealer or broker. A commission merchant is a person “engaged in the business of receiving in interstate or foreign commerce any perishable agricultural commodity for sale, on commission, or for or on behalf of another.”9  Similar to a commission merchant, a broker is a person “engaged in the business of negotiating sales and purchases of any perishable agricultural commodity in interstate or foreign commerce for or on behalf of the vendor or the purchaser,” although PACA does exclude buyers which purchase less than “$230,000 of PACA goods in any calendar year.”10 Lastly, while there are some more nuanced intricacies around the definition of a dealer, generally speaking, dealers are those engaged in buying or selling any perishable agricultural commodity in interstate or foreign commerce “in wholesale or jobbing quantities,” which are “aggregate quantities of all types of produce totaling one ton (2,000 pounds) or more in weight in any day shipped, received, or contract to be shipped or received.”11 

Notably, the United States Courts of Appeal for the Third, Eighth, and Ninth Circuits have concluded that a “dealer” includes restaurants if the purchase threshold amount of $230,000 is satisfied.[1]  Each of these courts base their holdings on the “unambiguous” language of the statute which makes no exception for the type of institution that can constitute a dealer.  Interestingly, this conclusion runs contrary to both the legislative history and long-standing agency interpretation.

Thus, in light of existing case law on what is a “dealer”, PACA’s reach could extend to any institution or business purchasing agricultural commodities annually over $230,000.  Lenders who extend credit facilities to operators of restaurants, universities, hospitals, nursing homes, assisted living facilities or other larger producers of meals, should be aware of such an outcome.

Claiming Protection Under the Trust

Although the PACA trust arises automatically, the seller must act to preserve the benefits afforded to it. First, the selling terms must be no more than 30 days, with the statutory default for “prompt payment” being 10 days after acceptance or final sale.12 However, if the terms exceed 30 days, whether at the time of purchase or due to an agreed extension as part of a workout or forbearance, then the protections of PACA are waived.13 

Assuming the selling terms are no more than 30 days, then the seller must satisfy the statute’s notice requirements to preserve the PACA trust.  The original — and now more cumbersome and rarely used — method to preserve the trust is to deliver notice to the purchaser within 30 days after the required payment date or after the seller receives notice that the payment has been dishonored.  The notice must include (1) the name and address of the “trust beneficiary”, (2) the date of the sale, (3) the date of notice of dishonor (if applicable) and (4) the amount past due and unpaid.14

A second — and simpler — method is available to sellers with PACA licenses from the U.S. Department of Agriculture.  Licenses can preserve a seller’s PACA trust rights by including specific statutory language on each invoice or other billing statement involving the sale of covered commodities.  Also, if the parties have agreed to payment terms other than 10 (but no more than 30) days, then those terms must also be included on the invoice or billing statement.

Scope of Assets Included in the PACA Trust

The PACA trust includes perishable agricultural commodities received by a covered buyer and “all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products.”15 Assuming the borrower is a covered buyer, then a statutory trust is created upon the purchase of the covered commodity and continues until payment in full for the commodity.

The PACA trust is a “floating trust,” which covers any assets of the borrower that may have been acquired with the direct or indirect proceeds of the commodity. The unpaid supplier is not required to specifically identify all of the PACA trust assets.  Thus, the scope of the assets are broad, and can include, among other items, inventory, equipment and even real estate.

There are, however, limited circumstances in which assets are beyond the reach of the PACA trust, such as when the asset was not purchased with PACA trust assets, when no PACA trust existed when the asset in question was purchased, or when subsequent to purchasing the asset, the buyer paid in full all suppliers, thereby terminating the trust.16 The first exception offers some protection where a lender provides purchase money financing for the acquisition of equipment or other specific asset.17  Even so, lenders should be aware that no per se exception exists for equipment from the broad reach of what could be trust assets.18  In addition, this defense may be difficult for a revolving lender to establish because it is advancing loans to fund generally the working capital requirements of its borrower.

Disgorgement and the ‘Bona Fide Purchaser’ Defense

It is important to note that, under PACA, ordinary course payments of a borrower — even for regular business expenses — are “unlawful” if such payments deplete the trust assets available to pay the PACA seller.  Repaying loans to a lender who has extended financing are not automatically exempt.  As such, these payments may be at risk of disgorgement if the borrower falters and the amounts owing to the PACA seller are not paid in full.

Fortunately, not all payments are at risk due to the “bona fide purchaser” defense. Under this theory, a lender would have no obligation to turn over the payments received from a borrower if the lender received the funds for value and without notice of the breach of the trust.19

Traditionally, a payment made on account of an antecedent debt is not considered “for value.” However, trust law contains an exception for money and negotiable instruments (i.e., checks) received and “value” will exist “[i]f money is paid or other property is transferred or services are rendered as consideration for the transfer of trust property.”20  The rationale for this exception is that ordinary financial transactions could not take place if each recipient bore the burden of establishing that the payor-borrower has the right to transfer the “trust assets.”21  However, the “value” requirement can only be satisfied if the payment is made in the ordinary course of business of the purchaser.  “Value” is not given when a lender seizes PACA trust assets by enforcing its security interest because the lender is forcing the transfer of trust assets for repayment of an antecedent debt.22 As a result, the bona fide purchaser defense is only available for pre-enforcement payments and collections.

The “without notice” requirement poses an additional issue for lenders. Actual notice of the breach is not necessary, and ignorance is not a defense. Most cases hinge on constructive notice.  Simply put, if the facts create a duty to inquire, the lender must establish it discharged its duty and could not reasonably be expected to have learned of the breach of the PACA trust by its borrower as a result of such inquiry.

This high threshold may be difficult for some lenders to satisfy.  Most asset-based credit facilities include robust reporting requirements.  This information may afford the lender insight into the borrower’s business and impending distress.  A lender could have an uphill battle to show that payments received during financial distress were received without knowledge of the stretching of payables or failure to make timely payments to sellers of PACA goods. In some limited circumstances, a lender who is the victim of fraud by a borrower may be protected when the financial reporting it receives is false, but even in those circumstances, a lender cannot overlook circumstances which may alert it to apparent irregularities.23

Protecting the Lender Against the PACA Claim

When documenting a transaction, a lender should enhance the representations and warranties in its loan documentation to address the nature of its borrower’s business. For example, at the time of borrowings and loan repayments, a borrower should be required to represent and warrant that no PACA debt is outstanding and unpaid beyond the agreed payment date.  In addition, periodic reporting should include an accounts payable aging report, and any unexpected increase in payables or their aging should trigger a discussion between lender and borrower.  Beyond this, there are several things a lender can do when dealing with a potentially defaulting PACA buyer.

  1. Institute reserves. The most common method to protect against the reach of the PACA trust and potential disgorgement by a lender of receipts of PACA trust assets, is to reserve against the borrowing base an amount equal to the payables owing to the PACA seller. These are appropriate from the date the transaction closes, and should be increased as the borrower’s business (and PACA-covered purchases) grows.  Of course, increasing reserves as a borrower is experiencing difficulty will often only exacerbate the difficulty.  In addition, food distributors and other purchasers of large quantities of PACA goods may at any time have outstanding payables that would severely limit availability under the line if a dollar-for-dollar reserve is implemented.  Even with reserves, a lender must be aware of the risk of disgorgement and monitor closely when there is an unusual increase in payables, repeated overdrawn checking accounts, and other indications that its borrower may not be meeting its obligations to its suppliers.
  2. Exercise caution when locations are closing. In the case of restaurants or operators with multiple locations, the PACA situation can quickly become more severe if the borrower is closing underperforming locations. As locations are closed, the revenue from such locations will fall to zero, but the trailing payables will still have to be paid. In short, the amount a location owes to its PACA creditors may increase as a distressed borrower attempts to execute a turnaround plan by closing underperforming locations. At the first sign of distress, a lender should evaluate the borrower’s PACA liability and then forecast the liability growing in a downsizing environment.
  3. Conduct detailed invoice sampling. A lender should conduct periodic sampling of invoices as part of its periodic field examinations, as a great deal of purchased commodities may already be mixed or adulterated, which may place them outside the scope of PACA. The analysis may be tedious, but to understand the true scope of potential liability, the lender will need to identify and determine product by product whether the borrower’s purchase of those products creates a PACA trust in favor of the seller.
  4. Don’t consolidate affiliated borrower entities. A lender should recognize that its borrower group may be made up of separate but affiliated borrowers.  As noted earlier, a party that purchases PACA goods must purchase at least $230,000 annually to be subject to PACA. Multi-unit operators often operate under a single trade name but organize each location as a separate legal entity. This structure can benefit the lender.  Under PACA, each separate legal entity would need to exceed the threshold to be subject to PACA.
  5. Review communications. A lender should review the invoices, emails and other communications between its borrower and the PACA seller. There could be correspondence in which the seller agreed to extend payment beyond 30 days notwithstanding the statutory language pre-printed on its invoices, either as part of the initial purchase or as an accommodation to the borrower.  Any such extension eliminates the PACA priority.

These suggestions are a starting point and not “magic bullets” when dealing with potential PACA trust beneficiaries.  But the case law involving PACA indicates a willingness on the part of courts to dive deep into the minutiae of these matters, and diligent lenders will be rewarded if they accurately access the risks by approaching its borrower and the administration of its credit facility accordingly.

Anthony Cianciotti is a shareholder in the Atlanta office of Baker, Donelson, Bearman, Caldwell & Berkowitz and focuses his practice on representing lenders and borrowers in debt financings, including asset-based and cash flow lending transactions.

Mark Duedall is a shareholder in the Atlanta office of Baker, Donelson, Bearman, Caldwell & Berkowitz and concentrates his practice in bankruptcy and insolvency issues, with a particular emphasis on advising clients with consumer and household products, retail, food and beverage, mass tort, manufacturing, health care, and energy matters.

End Notes

1 7 CFR § 46.46(d)(1).

2 In re Delta Produce, L.P., 845 F.3d 609, 622 (5th Cir. 2016) (attorney’s fees); In re Fleming Cos., Inc., 316 B.R. 815-16 (Bankr. D. Del. 2004) (interest).

3 7 U.S.C. §499a(b)(4).

4 7 C.F.R. § 46.2(u).

5 7 C.F.R. § 46.2(u).

6 Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1069-70 (2d Cir. 1995).

7 See, e.g., In re Fleming Cos., Inc., 316 B.R. 809 (Bankr. D. Del. 2004).

8 7 C.F.R.§ 46.2(u) (emphasis added).

9 7 U.S.C. § 499a(b)(5).

10 7 U.S.C. §499a(b)(7); 7 C.F.R. § 46.2(n).

11 7 U.S.C. §499a(b)(6); 7 C.F.R. § 46.2(x).

12 7 C.F.R. § 46.2(aa).

13 Greg Orchards & Produce, Inc. v. Roncone, 180 F.3d 888 (7th Cir. 1999). (forbearance agreement); Phillips Mushroom Farms, L.P. v. Gold Star Mushroom Co., Inc., 2004 WL 620166 (E.D. Pa. 2004) (note for past due amounts); In re Cafeteria Operators, L.P., No. 02-30179 HDH-11, 2005 Bankr. LEXIS 2483 (Bankr. N.D. Tex. Aug. 29, 2005) (email exchange extending payment terms).


14 7 C.F.R. § 46.46(f)(2); 7 U.S.C. § 499e(c)(3).

15 7 U.S.C. § 499e(c)(2).

16 In re Kornblum & Co., Inc., 81 F.3d 280, 287 (2d Cir. 1996).

17 In re United Fruit & Produce Co., Inc., 242 B.R. 295 (Bankr. W.D. Pa. 1999).

18 In re Bear Kodiak Produce, 283 B.R. at 583-584.

19 Restatement (Second) of Trusts § 284.

20 Id. § 298.

21 Albee Tomato, 155 F.3d at 616.  See also Consumers Produce Co., Inc.  v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1380 (3d Cir. 1994).  

22 Consumers Produce, 16 F.3d at 1380 n.3 (3d Cir. 1994).

23 Compare Consumers Produce Co., 16 F.3d 1374 (3d Cir. 1994) (asset-based lender discharged its duty when it received typical reporting, but borrower had falsified borrowing base reports and information provided to lender and public accountants) and Albee Tomato, 155 F.3d 612  (2d Cir. 1998) (lender required to disgorge where financial information may have been inaccurate because frequent and extended overdrafts were ignored).