What is a PACA Agreement?
As an overview, PACA agreements are a contract between a produce seller and a produce buyer. The most important aspect for both parties in a produce transaction – but especially the seller, is to ensure that the terms of the agreement do not violate the Agricultural Marketing Agreement Act ("Act"). 7 U.S.C. § 499a et seq. (2006). Of particular importance under the Act are the trust provisions for produce sellers. 7 U.S.C. § 499e(c) (2006). The Act provides that "perishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all sums belonging to the producer which are held by the commission merchant , dealer, or broker in connection with such transactions, shall be held in trust" for the benefit of the seller. 7 U.S.C. § 499e(c)(2) (2006).
The U.S. Supreme Court has remarked that "Congress clearly intended to include within the [Act’s] definition of the trust res not only the commodities themselves but also the ‘float’ . . . and ‘return’ from the sale of those commodities." Wischnowsky v. Citizens & S. Nat’l Bank, 507 F.2d 1207, 1210 (5th Cir. 1975). Thus, any funds related to the receipt, sale, and payment of goods are subject to the PACA trust. USDA has published a suggested PACA agreement for sellers and buyers of produce.
The Components of a PACA Agreement
Numerous factors help determine whether a PACA trust is applicable in a particular sale. One important factor is the application of the PACA trust to a sale governed by a PACA agreement. As such, it is critical that produce sellers and buyers understand the essential components of a PACA agreement prior to drafting or entering into a sale.
Terms of Sale
A PACA agreement should clearly define the relationship between the seller and buyer. Are they trading partners? Family members? Do they have a long-standing relationship? Or are they new business associates? Distinguishing the nature of the relationship informs how other covenant requirements are carried out.
Payment Terms
Several factors determine the timing and completeness of payment on the purchased goods. These include: Many PACA agreements fail to include payment terms, which typically means the buyer will be obligated to pay for the goods upon delivery.
Quality Standards
Federal and state guidelines dictate when food becomes unfit for consumption. A PACA agreement should specify the grading standard used for the goods sold. It should also identify how to determine defects in the goods shipped. It is also helpful to include pictures of the various grades in the agreement for quick reference.
Identifying Parties
Each party shall be identified by their respective names, physical addresses, and phone numbers.
PACA Agreements: Seller and Buyer Benefits
As discussed previously on this blog, PACA agreements are an essential part of many produce transactions. Such agreements benefit sellers and buyers alike in the marketplace. A PACA agreement first protects the seller of produce. As soon as the seller and the buyer enter into an oral or written agreement for the sale of produce, the seller is usually placing a priority interest in the proceeds into the PACA trust. This priority interest, as spelled out in a PACA agreement, should be enough to shield the proceeds from the claims of creditors of the buyer. So long as the seller can prove that the sale occurred, the contract was "true" and not a sham, and the seller has a right of replevin (the right to take back the goods), the seller should be on solid ground in claiming priority to the proceeds. By entering into a PACA agreement, the buyer usually transforms itself into a fiduciary. It is obligated to maintain the funds it receives from the sale of produce in trust for the benefit of his sellers. These funds are treated as assets of the buyer (the fiduciary) for insolvency purposes. If it is later determined that the buyer has mishandled the proceeds of the sale by putting the funds into the corporation’s general operating account and using them for corporate purposes, the assets may be deemed property of the PACA trust for the benefit of the sellers. Such trust property may not then be available to the creditors of the buyer. PACA offers another level of protection for sellers. PACA provides for an administrative procedure to enforce PACA trust claims. Failure to make payment of purchase price from cash or deferred payment transactions within the required time period creates a presumption of non-payment to the seller’s or suppliers’ benefit. When this default occurs, the PACA claims are handled much like unsecured claims in bankruptcy and can likewise be awarded interest on the is past due amounts. If the secured creditor with prior security interests in the corporation’s assets has perfected its security interest on the collateral by filing financing statements, it is the buyer’s right to grant and the seller’s right to receive. The secured creditor will likely withhold its credit facility from the buyer until the buyer agrees to waive any and all defenses against the PACA trust claim. If the buyer denies the seller’s PACA trust claim, the secured lender will likely deny credit. It is increasingly common in the produce industry for sellers to demand an individual guarantee from the buyers’ owners as a further condition to selling to these buyers. This additional step of security is simply an additional layer of protection that may be necessary to collect the full amount owed by the buyer or its other affiliates. Many brokers prefer to be paid by check rather than wire transfer, and insist upon this form of payment be imposed on the parties to the transaction as a condition of purchase.
PACA: Enforcement and Litigation
The PACA creates a statutory trust in favor of suppliers of fruits and vegetables. PACA authority enforces the provisions of the statute and trust and may take enforcement action through the USDA. The first step in the process begins with filing an informal complaint with the USDA, which will investigate and, on finding reasonable cause, issue a formal complaint to be heard by an Administrative law judge. Due to the sometimes lengthy nature of proceedings before the PACA Branch, with hearings often taking place many months after the initiation of the case, the USDA may agree to act on behalf of a complainant in the form of a simple default judgement in cases where the debtor has failed to respond to repeated demands for payment (whether by formal or informal complaint). Alternatively, should it choose to pursue its own investigation, the USDA can refer a matter to an Administrative law judge as it would in any other. Should it pursue such a matter, the USDA may seek a number of remedies that includes an award of damages together with interest, loss of the right to receive PACA trust protection in bankruptcy or foreclosure, and an order directing the defendant to cease and desist from engaging in business subject to PACA and from failing to make timely payment of produce debts. A decision under PACA is appealable to a panel of the Judicial Council of the USDA and final decisions thereunder are reviewable under the Administrative Procedures Act (the APA) as well as the general federal appellate procedure. PACA actions are heard by Administrative law judges who are appointed by the Secretary of Agriculture and are governed by the APA. The USDA may petition the federal courts for enforcement of decisions made by the PACA Branch, which decisions include an award of damages, costs, and interest. Under the APA, a decision of the Secretary may be reversed or set aside only if it is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. The District Court is limited in its ability to modify or alter the decision of the Secretary. Even where disputes are resolved without formal administrative action, the cost of litigation or the potential for adverse decision that may have the effect of precluding future extension of credit and business relationships are often sufficient to bring about resolution without regard to the merits.
PACA Agreements: Common Problems
Disagreements on the timing, quantity, or quality of produce deliveries are common when it comes to PACA agreements. Typically, sellers of produce demand payment quicker than buyers wish to pay. Buyers in turn may withhold payment for any number of reasons. Removing produce delayed payment by buyers is a common dispute. In some cases, buyers may simply ignore the most precise terms and conditions in a PACA agreement. Such disagreements can itself be a violation of the PACA statute, which can lead to disciplinary action being taken against the party that failed to carry out the PACA regulations. To mitigate these challenges , goodwill negotiations should always be conducted with the knowledge that an opportunity to revisit the agreement may lie ahead. If the timing or quantity of a PACA agreement is especially tight, the parties should make certain that there are provisions for the flexibility of timing or quantity. Should disagreements lead to the initiation of a UCC action in court, PACA creditors should include in their pleadings evidence of goodwill negotiations in order to bolster their claim and further justify the enforceability of their PACA contracts.
Draft a PACA-Compliant Agreement
A produce seller may have a verbal agreement with the buyer for the sale of produce, but if the produce seller intends to preserve its PACA trust rights in the event of buyer’s default on payment for the produce, such agreement must be in writing. U.C.C. § 2-201. The agreement must not be subject to a contract containing a waiver of PACA trust rights. 7 C.F.R. § 46.46(c)(2). Moreover, the agreement must contain certain statutory language that is prescribed by the PACA rules and regulations.
The PACA regulations provide a model agreement at 7 C.F.R. § 46.41(d). The model agreement includes the following language:
The seller has not previously given the Buyer written notice of a present debt or an outstanding performance obligation owing to the Seller, specified in § 46.46(d)(2) of the regulations or otherwise required to be disclosed. At the time of the signing of this agreement the Seller shall be satisfied that any produce delivered hereunder is purchased in good faith and the Buyer shall have the intention to make payment "in due course," meaning within the number of days specified…. The Seller does not waive its right to file a complaint with the United States Department of Agriculture or proceed against the Buyer directly to enforce its PACA trust rights, notwithstanding the execution of this contract. If the Buyer defaults on any payment due under this agreement, the Seller must give prompt written notice to the Buyer demanding that the Buyer pay for the particular shipments covered by this contract as it becomes due, and the Buyer must make payment for such shipments within the time specified in this contract.
The model agreement is not required, and a PACA trust compliant contract does not need to be termed a "PACA agreement" or "PACA trust agreement." The most important thing to remember in drafting the contract is that the produce seller cannot allow a subsequent PACA trust creditor to obtain greater PACA trust benefits than the contract provides to an earlier PACA trust creditor. In addition, the PACA trust can only be waived in signing a release or other general settlement instrument besides the contract. 7 C.F.R. § 46.46(c)(2).
Recent PACA Trends and Developments
In recent years, the agricultural industry has seen a surge in the use of PACA agreements as a means of ensuring timely payment to produce sellers. The US Department of Agriculture (USDA) has encouraged the use of payment assurances and has made some changes to the way Paced agreements are enforced. On August 1, 2019, the USDA issued rules that clarified how the Packers and Stockyards Act (PACA) would apply to such agreements.
Prior to the latest rule promulgation, USDA inspectors did not have clear guidance on whether an agreement requiring prompt payment to a seller complied with PACA. Under the new regulations, agreements are no longer subject to PACA if they require a seller to waive prompt payment rights or if they shift the risk of nonpayment to the buyer.
While the clarification provided in the August 1 rule is welcome news for many who use PACA agreements, it is important to remember that some key elements remain unchanged. For example, unscrupulous parties may misclassify a PACA trust as a PACA agreement to avoid penalties. It remains critically important to ensure that PACA agreements, PACA trust notices and other PACA-related documents are drafted by an experienced attorney. Additionally, the obligation to provide prompt payment cannot be waived or shifted from the buyer to the seller, even if that obligation is defined as a "PACA agreement," unless the PACA rights are not being waived pursuant to the agreement and the seller is provided with adequate notice of its statutory rights.
Learn More About PACA with These Resources
There are plenty of resources available to get more information on PACA. The Agricultural Marketing Service (AMS), which is a branch of the USDA, publishes a number of guides and rulebooks for both buyers and sellers. PACA also has its own phone and email helplines to answer questions about contracts or compliance with the PACA . PACA’s own website houses the entire PACA Administrative Manual, a comprehensive 1100-page document that contains the full set of rules and regulations which govern PACA agreements. There are also state-level resources, such as wholesalers’ licenses and produce dealer laws, that can provide direction and backup as contracts and payments for those contracts go through an audit.