PACA Claims in Bankruptcy
By: Jamie L. Harris
The Perishable Agricultural Commodities Act of 1930 (“PACA”), as amended, 7 U.S.C. §§ 499(a)et seq. provides federal statutory protection to certain qualifying sellers of perishable agricultural products. Congress amended PACA in 1984 to establish a statutory trust for the benefit of all unpaid suppliers or sellers of perishable agricultural commodities or products. PACA defines perishable agricultural commodities as “fresh fruit and fresh vegetables of every kind and character,” whether or not frozen or packed in ice, and cherries in brine. 7 USC § 499(b). PACA trusts are floating, non-segregated trusts, created upon sellers sending certain proscribed statutory notices to buyers. Section 499e(c)(2) of the Perishable Agricultural Commodities Act establishes the trust and provides, in relevant part:
(2) Perishable agricultural commodities received by a commission
merchant, dealer, or broker in all transactions, 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, shall be held by such commission merchant, dealer, or broker in
trust for the benefit of all unpaid suppliers or sellers of such commodities
or agents involved in the transaction, until full payment of the sums owing
in connection with such transactions has been received by such unpaid
suppliers, sellers, or agents.
7 U.S.C. § 499e(c)(2).
Upon the imposition of a PACA trust, courts construing PACA have consistently held that PACA trust assets are not “property of the estate” pursuant to section 541 of the Bankruptcy Code. See In re CFP Liquidating Estate, 405 B.R. 694 (Bankr. D. Del. May 21, 2009); In re Long John Silver’s Restaurants, Inc., 230 B.R. 29, 32 (Bankr. D. Del. 1999). Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F. Supp. 346, 348 (S.D.N.Y. 1993). Therefore, the distribution of assets to beneficiaries of a PACA Trust falls outside of both (i) the priority scheme established by the Bankruptcy Code, and (ii) the plan process (i.e., trust beneficiaries may be paid outside of, and prior to, a confirmed plan of reorganization). Id.
While PACA trust property does not become property of the bankruptcy estate, the distribution of trust assets to PACA trust beneficiaries; however, remains under the jurisdiction of the bankruptcy court presiding over the relevant bankruptcy case. See e.g., Bear Mountain Orchards, Inc. v. Mich-Kim, Inc., 623 F. 3d at 167; Allied Growers Co-Op, Inc. v. United Fruit & Produce Co., Inc. (In re United Fruit & Produce Co., Inc.), 86 B.R. 14, 16 (Bankr. D. Conn. 1988). As a result, creditors holding PACA claims should assert assert their claims in bankruptcy proceedings in order to ensure that they are paid senior to the claims of secured and unsecured creditors. Furthermore, PACA imposes certain procedural steps that must be taken by a seller in order to preserve its rights as a trust beneficiary. A PACA creditors’ failure to comply with these procedural requirements renders the claim on account of PACA goods a general unsecured claim.