THE PERISHABLE AGRICULTURAL COMMODITIES ACT -- SUPERPRIORITY LIEN

The Perishable Agricultural Commodities Act, U.S.C. '499(c) (“PACA”) was passed to encourage fair trading practices in the marketing of perishable commodities. PACA requires any commission merchant, dealer, distributor or broker (the “Commodity Seller”) of perishable agricultural commodities (i.e., fresh fruits and vegetables “of every kind & character”) (“Produce”) placed in interstate commerce to promptly pay in full for any perishable commodities they purchase. In 1984, Congress amended PACA to impose a statutory trust in favor of any unpaid supplier of Produce (the “Produce Supplier”) held by a Commodity Seller.

Under PACA, a Commodity Seller must hold the Produce and anything derived from the sale of the Produce, including food products, receivables and other proceeds, in trust (the “Trust Assets”) for the benefit of the Produce Supplier. This is a non-segregated floating trust on the Produce which permits commingling of Trust Assets. This statutorily imposed trust also provides the unpaid Produce Supplier with a first priority security interest in the Trust Assets that prevails over other creditors, including those holding a pre-existing, perfected security interest in any personal property that are also included in the Trust Assets. This superpriority security interest is an extraordinary security mechanism because it contravenes the first to perfect, first to prevail rule that typically governs the priority of creditors’ interests in personal property.

To preserve the benefit of the PACA trust, a Produce Supplier is only required to file a written notice of intention to preserve trust benefits (the “Trust Notice”) with the Secretary of Agriculture and the Commodity Seller who holds the Trust Assets. Once the notice is filed, the trust mechanism is in place. Unlike the Uniform Commercial Code, which conditions the enforcement of a security interest upon timely and public notice of that interest, PACA does not require the Secretary of Agriculture or the Commodity Seller to make the Trust Notice available to the public. Moreover, the Trust Notice can be filed by the Produce Supplier within 30 calendar days after payment is due. Thus, the PACA trust can be created after the Commodity Seller has defaulted on its payment obligation.

A Lender making a secured loan to a Commodity Seller cannot search for prior filings because the filings are most likely to occur at a time when the borrower is experiencing financial difficulty. The existence of the lien obviously adds to the risks assumed by those who provide secured financing to the Commodity Seller, since they can never be sure of the priority of their liens. Moreover, if the Lender is repaid from Trust Assets, it can be held liable to the Produce Supplier for any payments received from Trust Assets unless it is found to be a bona fide purchaser (“BFP”) for value. Under general principles of trust law the transfer of trust assets is satisfaction of an antecedent debt is normally not considered a transfer for value. However, an exception exists if the transferred property is a negotiable instrument or money. Therefore, a secured Lender who receives loan repayments in the ordinary course of its business will be deemed to have received the transfer for value if it meets the other party of the BFP test--i.e. it did not know or have reason to know that it was receiving Trust Assets.

However, lenders who foreclose on collateral that includes Trust Assets do not receive the benefit of the money or negotiable instrument exception. Accordingly, in this situation a Lender who obtains Trust Assets in its foreclosure of collateral will not be deemed to have received the Trust Assets for value and therefore cannot qualify as a bona fide purchaser even if it had no reason to believe that it was seizing Trust Assets. The result is that a secured Lender enforcing its contractual rights in good faith and without notice of a PACA trust lien may find itself liable to pay Produce Suppliers for the value of the Trust Assets.

A Lender who finances a Commodity Seller is thus advised to monitor accounts payable to insure that Produce Suppliers have been paid or to develop a reserve for accounts payable to Produce Suppliers. Otherwise, there is a risk of a prior lien on receivables due to a Commodity Seller.