The Mighty Sword of PACA in Bankruptcy

This special creditor protection is not located in title 11 of the United States Code; instead, one needs to refer to 7 U.S.C. ” 499a through 499t in order to discover the special protections set forth for “claims” arising under the Perishable Agricultural Commodities Act (“PACA”). (Apart from PACA, similar protections are provided to vendors of livestock and poultry products under the Packers and Stockyards Act (“PASA”), 7 U.S.C. ' 181 et seq.). Although PACA issues are nonexistent in many bankruptcies, PACA can play a major role in certain types of bankruptcies, particularly those involving grocery and restaurant chains, among others (see, e.g., the recent PACA filings in In re Friendly Ice Cream Corp., Case No. 11-13167 (Bankr. D. Del. Oct. 6, 2011)).

About PACA

PACA was enacted in 1930 to regulate the marketing and sale of perishable agricultural commodities. PACA is designed to prevent unfair business practices and promote financial responsibility in the fresh fruit and produce industry. Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 282 (9th Cir. 1997). The law was enacted to provide protections to suppliers of perishable agricultural goods who were seen as vulnerable to geographically removed buyers of their product and at the mercy of their customers' business scruples. Magic American Cafe, Inc. v. Staiano (In re Magic Restaurants, Inc.), 205 F.3d 108, 110 (3d Cir. 2000). Buyers of fresh fruits and vegetables who do not timely pay in full for produce product are in violation of the statute.

Even with the protection of PACA, prior to 1984, unpaid produce suppliers remained vulnerable to lenders holding security interests in inventory and accounts receivable. Idahoan Fresh v. Advantage Produce, Inc., 157 F.3d 197, 199 (3d Cir. 1998). But that all changed in the 1980s, when the PACA statute was updated to provide an additional, powerful remedy for produce sellers. Under the amendment, proceeds from the sale of perishable commodities are held in trust by the buyer for the benefit of the unpaid seller until full payment is made. 7 U.S.C. ' 499e(b); Sunkist Growers, Inc., 104 F.3d at 282. This statutory PACA trust comes into existence immediately upon the sale of produce on credit to a produce debtor. Basciani Foods, Inc. v. Andrew Williamson Sales Co., Inc., 2011 U.S. Dist. LEXIS 368 at *7 (E.D.N.Y. Jan. 3, 2011). Once established, the PACA trust continues in existence until all beneficiaries are paid in full. A&J Produce Corp. v. Bronx Overall Economic Development Corp., 542 F.3d 54, 58 (2d Cir. 2008).

The statutory revision was designed to strengthen the statutory protections provided to produce suppliers and to alleviate the hardships caused by a produce buyer's bankruptcy. Importantly, under PACA, as it was amended in 1984, these trust assets are excluded from the bankruptcy estate. This means that PACA trust beneficiaries are entitled to payment ahead of all other creditors, including secured creditors. See Basciani Foods, Inc., 2011 U.S. Dist. LEXIS 368 at *7; and Sunkist Growers, Inc., 104 F.3d at 282.

PACA Claims in Bankruptcy

There is no precise formula for asserting a PACA claim in bankruptcy. As mentioned, PACA claims are not even really “claims” in the strict sense of the word. Some claimants will send a demand letter setting forth their PACA rights; others will file a precautionary proof of PACA claim with the court, or they might file a notice of PACA claim with the court to put parties on notice of their PACA rights.

The PACA trust exists for the benefit of a debtor's unpaid produce suppliers. 7 U.S.C. ' 499e(c)(2); William Consalo & Sons Farms, Inc. v. Drobnick Distributing, Inc., 2011 U.S. Dist. LEXIS 35205 at *14 (D. Ariz. Mar. 29, 2011). The trust is created upon receipt of produce by a commission merchant, dealer, or broker. 7 U.S.C. ' 499e(c)(2); William Consalo & Sons Farms, Inc., 2011 U.S. Dist. LEXIS 35205 at *14. General trust principles apply to PACA claims, except when those principles conflict with PACA. Because PACA is remedial legislation enacted with the purpose of protecting unpaid sellers of produce and
alleviating the burden on commerce of nonpayment, courts have construed PACA broadly to effectuate its purpose. Idahoan Fresh, 157 F.3d at 202. PACA creates a level of superpriority under which a seller's interest in the PACA trust takes precedence over the interests of all other creditors. Agri-Sales, Inc. v. United Potato Co., Inc., 436 F. Supp. 2d 967, 972 (N.D. Ill. 2006). But PACA has its limits.

PACA protects sellers of perishable agricultural commodities ' i.e., fruits and vegetables. Under PACA and its accompanying regulations, the PACA trust extends to fresh fruits and vegetables of every kind and character, whether or not frozen or packed in ice. A&J Produce Corp. v. CIT Group/Factoring, Inc., 829 F. Supp. 651, 657 (S.D.N.Y. 1993). As set forth in the USDA regulations that accompany PACA, PACA applies to:

Fresh fruits and fresh vegetables ' [but not] those perishable fruits and vegetables which have been manufactured into articles of food of a different kind or character. The effects of the following operations shall not be considered as changing a commodity into a food of a different kind or character: Water, steam, or oil blanching, battering, coating, chopping, color adding, curing, cutting, dicing, drying for the removal of surface moisture; fumigating, gassing, heating for insect control, ripening and coloring; removal of seed, pits, stems, calyx, husk, pods rind, skin, peel, et cetera; polishing, precooling, refrigerating, shredding, slicing, trimming, washing with or without chemicals; waxing, adding of sugar or other sweetening agents; adding ascorbic acid or other agents to retard oxidation; mixing of several kinds of sliced, chopped, or diced fruit or vegetables for packaging in any type of containers; or comparable methods of preparation.

7 C.F.R. ' 46.2(u).

Naturally, what is or isn't a perishable agricultural commodity becomes a matter for adjudication. For example, some products simply do not qualify as fresh fruits or vegetables ' such as pastas, meats, juice, cheeses, crackers and the like.

Moreover, PACA protections are limited to those fruits and vegetables that are unprocessed or only minimally processed. A&J Produce Corp., 829 F. Supp. at 657. Minor processing that does not change the produce's essential nature, such as slicing or freezing, does not alter the statutory PACA protection. On the other hand, the PACA chain is broken once the product is transformed into an essentially different product. When a transformation occurs, the vendor's claim is treated as a general creditor claim without the protections otherwise afforded by PACA. Id.

Permissible processing that does not fundamentally alter the nature of the product might include blanching and slicing potatoes, but it has been held not to include treating potato products with oil, because the addition of the oil was not meant to preserve the product but to prepare it for a certain type of cooking. Id. Other changes that go too far include the dehydration process used for dried apricots and prunes and the canning process for fruits and vegetables, each of which have been held to alter the essential nature of the formerly fresh fruits or produce. Cavendish Farms v. Fleming Companies, Inc. (In re Fleming Companies, Inc.), 316 B.R. 809, 814 (D. Del. 2004). Processed foods such as hash browns and breaded cauliflower have been held to have undergone a “fundamental change from the fresh state of the vegetables,” with the consequence of losing PACA protection. See A&J Produce Corp., 829 F. Supp. at 659 (but note that in 2004, the USDA expanded the permissible changes to include coating of the product). See Cavendish Farms, 316 B.R. at 814; and 7 C.F.R. ' 46.2(u). Similarly, vegetables that are mixed into potato salads and cream cheese and onion combinations have been processed to a point beyond PACA coverage.

All Types of Claims

Then there are the fundamental considerations that apply to all types of claims, such as whether in fact the PACA claimant's invoices are for the correct amounts and whether in fact the invoices remain unpaid, as well as whether some or all of the product was not used or sold due to spoilage or some other defect. For obvious reasons, debtors, lenders, and creditors' committees will be incentivized to knock out or knock down PACA claims to the extent possible. Needless to say, they will be on the lookout for these types of mitigating issues.

Apart from PACA coverage issues, PACA claimants must adhere to certain statutory procedures, including providing notice of their intent to preserve the benefits of the PACA trust. 7 U.S.C. ' 499e(c)(4); 7 C.F.R. ' 46.46(f)(3). Perhaps the most straightforward method of providing such notice is to include the notice on the invoice or billing statement. Idahoan Fresh, 157 F.3d at 205. The notice must contain the following magic language, preferably displayed in prominent fashion:

The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. 499e(c)). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.

7 U.S.C. ' 499e(c)(4). See also William Consalo & Sons Farms, Inc., 2011 U.S. Dist. LEXIS 35205 at *3-*4.

Failure to Comply

Failure to comply with PACA's notice requirements could result in a PACA claim losing its trust protections and being treated as a general unsecured claim. See Pupillo Brokerage Co. v. Lombardo Fruit and Produce Co. (In re Lombardo Fruit and Produce Co.), 12 F.3d 806, 811 (8th Cir. 1993). PACA creditors and debtors alike must also be mindful of miscellaneous considerations that exist separate and apart from statutory PACA mandates. In addition to the PACA statute, extensive regulations are promulgated by the United States Department of Agriculture. See 7 C.F.R. ” 46.1-46.49. And while PACA itself does not provide for recovery of interest or attorneys' fees, such additional claim components may be available when provided for under the applicable contract or other relevant state law. See Di Mare Homestead, Inc. v. Dixie Produce & Packaging, LLC (In re Dixie Produce & Packaging, LLC), 368 B.R. 533, 538-39 (Bankr. E.D. La. 2007).

Many bankruptcy cases are not implicated by PACA, but in some, these issues do loom large, such as in cases involving grocery and restaurant chains and vacation resorts. Debtors such as these typically file a motion early in their Chapter 11 proceedings requesting the establishment of procedures for the assertion, resolution, and payment of PACA claims. Debtors in a number of large cases have filed motions for approval of procedures designed to establish efficient and uniform procedures for resolution and disposition of PACA claims. See, among others, the following: In re Friendly Ice Cream Corp., Case No. 11-13167 (Bankr. D. Del. Oct. 6, 2011); In re Perkins & Marie Callender's Inc., Case No. 11-11795 (Bankr. D. Del. June 13, 2011); In re Contessa Premium Foods, Inc., Case No. 11-13454 (Bankr. C.D. Cal. Feb. 18, 2011); and In re BI-LO, LLC, Case No. 09-02140 (Bankr. D.S.C. Mar. 23, 2009). Establishing such procedures at the outset is often a good idea ' particularly in cases involving a debtor in the business of purchasing large volumes of perishable agricultural commodities from a number of suppliers. An early court order establishing PACA claim procedures provides the advantage of imposing an orderly, fair and transparent process for PACA claim allowance, as opposed to the ad hoc, unruly process that might emerge in the absence of uniform procedures.

It is also noteworthy that PACA may impose liability on individuals acting on behalf of corporate PACA buyers. Those individuals who exercise the requisite degree of control over a corporate defendant may find themselves personally and secondarily liable for breaching the PACA trust by using trust funds for purposes other than repayment of the produce supplier. Sunkist Growers, Inc., 104 F.3d at 282-83. The potential for secondary liability emphasizes the need for Chapter 11 candidates with PACA issues to address these issues at the outset with a first day motion to establish an orderly process for the resolution of PACA claims.

Conclusion

Non-bankruptcy PACA law provides a statutory exception to the normal priority scheme in bankruptcy. PACA gives an unpaid vendor an interest in trust assets superior to that of any secured creditor. Magic American Cafe, Inc. v. Staiano (In re Magic Restaurants, Inc.), 205 F.3d 108, 112 (3d Cir. 2000). Under PACA, amounts that are due and owing to suppliers of perishable agricultural commodities (fruits and vegetables) are subject to trust doctrine; therefore, they are not part of a debtor's bankruptcy estate. PACA law effectively vitiates a secured lender's interest in trust assets held by produce purchasers for their unpaid produce suppliers. Consumers Produce Co. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1379 (3d Cir. 1994). Under the law, unpaid produce suppliers are entitled to payment in full on their bankruptcy claims before all other creditors pursuant to trust doctrine.

PACA claimants should act promptly upon a buyer's bankruptcy filing to protect these potent rights. Similarly, companies who regularly purchase perishable agricultural commodities ' and their secured lenders ' should be mindful of the powerful protections for PACA claimants when assessing their reorganization alternatives.

Andrew L. Turscak, Jr. is a partner in the Restructuring, Creditors' Rights & Bankruptcy Group at Thompson Hine LLP in Cleveland. He can be reached at [email protected].

Over their years of doing business, most suppliers of goods encounter situations involving distressed customers who have slid into bankruptcy. While savvy vendors have developed what are often quite effective strategies to minimize the harm resulting from these encounters, it is inevitable that even the most sophisticated supplier will get burned from time to time. Among the unhappy consequences often associated with a customer's bankruptcy are, among others, preference liability, large general unsecured claims, and being left to cope with the uncertainty of a customer's ongoing viability during and after its bankruptcy.

Of course, Congress has seen fit to alleviate some of these consequences over time. One prominent example was the creation of the 20-day administrative expense claim for sellers of goods received by a debtor during the 20 days prior to its bankruptcy filing. 11 U.S.C. ' 503(b)(9). Another notable example is the Bankruptcy Code's grant of administrative priority to so-called “gap period” claims. See 11 U.S.C. ” 502(f), 507(a)(3). Still another is the Code's recognition and preservation of a creditor's setoff rights under applicable state law.

Another lesser known, but highly advantageous, statutory protection is found nowhere in the Bankruptcy Code. Indeed, its origins predate the Code and it dramatically alters the Code's normal priority scheme for sellers of certain types of goods, elevating such sellers to the top of the claim hierarchy ' above the claims of all other general unsecured creditors, not to mention administrative claimants and secured creditors.

This special creditor protection is not located in title 11 of the United States Code; instead, one needs to refer to 7 U.S.C. ” 499a through 499t in order to discover the special protections set forth for “claims” arising under the Perishable Agricultural Commodities Act (“PACA”). (Apart from PACA, similar protections are provided to vendors of livestock and poultry products under the Packers and Stockyards Act (“PASA”), 7 U.S.C. ' 181 et seq.). Although PACA issues are nonexistent in many bankruptcies, PACA can play a major role in certain types of bankruptcies, particularly those involving grocery and restaurant chains, among others (see, e.g., the recent PACA filings in In re Friendly Ice Cream Corp., Case No. 11-13167 (Bankr. D. Del. Oct. 6, 2011)).

About PACA

PACA was enacted in 1930 to regulate the marketing and sale of perishable agricultural commodities. PACA is designed to prevent unfair business practices and promote financial responsibility in the fresh fruit and produce industry. Sunkist Growers, Inc. v. Fisher , 104 F.3d 280, 282 (9th Cir. 1997). The law was enacted to provide protections to suppliers of perishable agricultural goods who were seen as vulnerable to geographically removed buyers of their product and at the mercy of their customers' business scruples. Magic American Cafe, Inc. v. Staiano (In re Magic Restaurants, Inc.), 205 F.3d 108, 110 (3d Cir. 2000). Buyers of fresh fruits and vegetables who do not timely pay in full for produce product are in violation of the statute.

Even with the protection of PACA, prior to 1984, unpaid produce suppliers remained vulnerable to lenders holding security interests in inventory and accounts receivable. Idahoan Fresh v. Advantage Produce, Inc. , 157 F.3d 197, 199 (3d Cir. 1998). But that all changed in the 1980s, when the PACA statute was updated to provide an additional, powerful remedy for produce sellers. Under the amendment, proceeds from the sale of perishable commodities are held in trust by the buyer for the benefit of the unpaid seller until full payment is made. 7 U.S.C. ' 499e(b); Sunkist Growers, Inc., 104 F.3d at 282. This statutory PACA trust comes into existence immediately upon the sale of produce on credit to a produce debtor. Basciani Foods, Inc. v. Andrew Williamson Sales Co., Inc., 2011 U.S. Dist. LEXIS 368 at *7 (E.D.N.Y. Jan. 3, 2011). Once established, the PACA trust continues in existence until all beneficiaries are paid in full. A&J Produce Corp. v. Bronx Overall Economic Development Corp. , 542 F.3d 54, 58 (2d Cir. 2008).

The statutory revision was designed to strengthen the statutory protections provided to produce suppliers and to alleviate the hardships caused by a produce buyer's bankruptcy. Importantly, under PACA, as it was amended in 1984, these trust assets are excluded from the bankruptcy estate. This means that PACA trust beneficiaries are entitled to payment ahead of all other creditors, including secured creditors. See Basciani Foods, Inc., 2011 U.S. Dist. LEXIS 368 at *7; and Sunkist Growers, Inc., 104 F.3d at 282.

PACA Claims in Bankruptcy

There is no precise formula for asserting a PACA claim in bankruptcy. As mentioned, PACA claims are not even really “claims” in the strict sense of the word. Some claimants will send a demand letter setting forth their PACA rights; others will file a precautionary proof of PACA claim with the court, or they might file a notice of PACA claim with the court to put parties on notice of their PACA rights.

The PACA trust exists for the benefit of a debtor's unpaid produce suppliers. 7 U.S.C. ' 499e(c)(2); William Consalo & Sons Farms, Inc. v. Drobnick Distributing, Inc., 2011 U.S. Dist. LEXIS 35205 at *14 (D. Ariz. Mar. 29, 2011). The trust is created upon receipt of produce by a commission merchant, dealer, or broker. 7 U.S.C. ' 499e(c)(2); William Consalo & Sons Farms, Inc., 2011 U.S. Dist. LEXIS 35205 at *14. General trust principles apply to PACA claims, except when those principles conflict with PACA. Because PACA is remedial legislation enacted with the purpose of protecting unpaid sellers of produce and
alleviating the burden on commerce of nonpayment, courts have construed PACA broadly to effectuate its purpose. Idahoan Fresh, 157 F.3d at 202. PACA creates a level of superpriority under which a seller's interest in the PACA trust takes precedence over the interests of all other creditors. Agri-Sales, Inc. v. United Potato Co., Inc. , 436 F. Supp. 2d 967, 972 (N.D. Ill. 2006). But PACA has its limits.

PACA protects sellers of perishable agricultural commodities ' i.e., fruits and vegetables. Under PACA and its accompanying regulations, the PACA trust extends to fresh fruits and vegetables of every kind and character, whether or not frozen or packed in ice. A&J Produce Corp. v. CIT Group/Factoring, Inc. , 829 F. Supp. 651, 657 (S.D.N.Y. 1993). As set forth in the USDA regulations that accompany PACA, PACA applies to:

Fresh fruits and fresh vegetables ' [but not] those perishable fruits and vegetables which have been manufactured into articles of food of a different kind or character. The effects of the following operations shall not be considered as changing a commodity into a food of a different kind or character: Water, steam, or oil blanching, battering, coating, chopping, color adding, curing, cutting, dicing, drying for the removal of surface moisture; fumigating, gassing, heating for insect control, ripening and coloring; removal of seed, pits, stems, calyx, husk, pods rind, skin, peel, et cetera; polishing, precooling, refrigerating, shredding, slicing, trimming, washing with or without chemicals; waxing, adding of sugar or other sweetening agents; adding ascorbic acid or other agents to retard oxidation; mixing of several kinds of sliced, chopped, or diced fruit or vegetables for packaging in any type of containers; or comparable methods of preparation.

7 C.F.R. ' 46.2(u).

Naturally, what is or isn't a perishable agricultural commodity becomes a matter for adjudication. For example, some products simply do not qualify as fresh fruits or vegetables ' such as pastas, meats, juice, cheeses, crackers and the like.

Moreover, PACA protections are limited to those fruits and vegetables that are unprocessed or only minimally processed. A&J Produce Corp., 829 F. Supp. at 657. Minor processing that does not change the produce's essential nature, such as slicing or freezing, does not alter the statutory PACA protection. On the other hand, the PACA chain is broken once the product is transformed into an essentially different product. When a transformation occurs, the vendor's claim is treated as a general creditor claim without the protections otherwise afforded by PACA. Id.

Permissible processing that does not fundamentally alter the nature of the product might include blanching and slicing potatoes, but it has been held not to include treating potato products with oil, because the addition of the oil was not meant to preserve the product but to prepare it for a certain type of cooking. Id. Other changes that go too far include the dehydration process used for dried apricots and prunes and the canning process for fruits and vegetables, each of which have been held to alter the essential nature of the formerly fresh fruits or produce. Cavendish Farms v. Fleming Companies, Inc. (In re Fleming Companies, Inc.), 316 B.R. 809, 814 (D. Del. 2004). Processed foods such as hash browns and breaded cauliflower have been held to have undergone a “fundamental change from the fresh state of the vegetables,” with the consequence of losing PACA protection. See A&J Produce Corp., 829 F. Supp. at 659 (but note that in 2004, the USDA expanded the permissible changes to include coating of the product). See Cavendish Farms, 316 B.R. at 814; and 7 C.F.R. ' 46.2(u). Similarly, vegetables that are mixed into potato salads and cream cheese and onion combinations have been processed to a point beyond PACA coverage.

All Types of Claims

Then there are the fundamental considerations that apply to all types of claims, such as whether in fact the PACA claimant's invoices are for the correct amounts and whether in fact the invoices remain unpaid, as well as whether some or all of the product was not used or sold due to spoilage or some other defect. For obvious reasons, debtors, lenders, and creditors' committees will be incentivized to knock out or knock down PACA claims to the extent possible. Needless to say, they will be on the lookout for these types of mitigating issues.

Apart from PACA coverage issues, PACA claimants must adhere to certain statutory procedures, including providing notice of their intent to preserve the benefits of the PACA trust. 7 U.S.C. ' 499e(c)(4); 7 C.F.R. ' 46.46(f)(3). Perhaps the most straightforward method of providing such notice is to include the notice on the invoice or billing statement. Idahoan Fresh, 157 F.3d at 205. The notice must contain the following magic language, preferably displayed in prominent fashion:

The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. 499e(c)). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.

7 U.S.C. ' 499e(c)(4). See also William Consalo & Sons Farms, Inc., 2011 U.S. Dist. LEXIS 35205 at *3-*4.

Failure to Comply

Failure to comply with PACA's notice requirements could result in a PACA claim losing its trust protections and being treated as a general unsecured claim. See Pupillo Brokerage Co. v. Lombardo Fruit and Produce Co. (In re Lombardo Fruit and Produce Co.), 12 F.3d 806, 811 (8th Cir. 1993). PACA creditors and debtors alike must also be mindful of miscellaneous considerations that exist separate and apart from statutory PACA mandates. In addition to the PACA statute, extensive regulations are promulgated by the United States Department of Agriculture. See 7 C.F.R. ” 46.1-46.49. And while PACA itself does not provide for recovery of interest or attorneys' fees, such additional claim components may be available when provided for under the applicable contract or other relevant state law. See Di Mare Homestead, Inc. v. Dixie Produce & Packaging, LLC (In re Dixie Produce & Packaging, LLC), 368 B.R. 533, 538-39 (Bankr. E.D. La. 2007).

Many bankruptcy cases are not implicated by PACA, but in some, these issues do loom large, such as in cases involving grocery and restaurant chains and vacation resorts. Debtors such as these typically file a motion early in their Chapter 11 proceedings requesting the establishment of procedures for the assertion, resolution, and payment of PACA claims. Debtors in a number of large cases have filed motions for approval of procedures designed to establish efficient and uniform procedures for resolution and disposition of PACA claims. See, among others, the following: In re Friendly Ice Cream Corp., Case No. 11-13167 (Bankr. D. Del. Oct. 6, 2011); In re Perkins & Marie Callender's Inc., Case No. 11-11795 (Bankr. D. Del. June 13, 2011); In re Contessa Premium Foods, Inc., Case No. 11-13454 (Bankr. C.D. Cal. Feb. 18, 2011); and In re BI-LO, LLC, Case No. 09-02140 (Bankr. D.S.C. Mar. 23, 2009). Establishing such procedures at the outset is often a good idea ' particularly in cases involving a debtor in the business of purchasing large volumes of perishable agricultural commodities from a number of suppliers. An early court order establishing PACA claim procedures provides the advantage of imposing an orderly, fair and transparent process for PACA claim allowance, as opposed to the ad hoc, unruly process that might emerge in the absence of uniform procedures.

It is also noteworthy that PACA may impose liability on individuals acting on behalf of corporate PACA buyers. Those individuals who exercise the requisite degree of control over a corporate defendant may find themselves personally and secondarily liable for breaching the PACA trust by using trust funds for purposes other than repayment of the produce supplier. Sunkist Growers, Inc., 104 F.3d at 282-83. The potential for secondary liability emphasizes the need for Chapter 11 candidates with PACA issues to address these issues at the outset with a first day motion to establish an orderly process for the resolution of PACA claims.

Conclusion

Non-bankruptcy PACA law provides a statutory exception to the normal priority scheme in bankruptcy. PACA gives an unpaid vendor an interest in trust assets superior to that of any secured creditor. Magic American Cafe, Inc. v. Staiano (In re Magic Restaurants, Inc.), 205 F.3d 108, 112 (3d Cir. 2000). Under PACA, amounts that are due and owing to suppliers of perishable agricultural commodities (fruits and vegetables) are subject to trust doctrine; therefore, they are not part of a debtor's bankruptcy estate. PACA law effectively vitiates a secured lender's interest in trust assets held by produce purchasers for their unpaid produce suppliers. Consumers Produce Co. v. Volante Wholesale Produce, Inc. , 16 F.3d 1374, 1379 (3d Cir. 1994). Under the law, unpaid produce suppliers are entitled to payment in full on their bankruptcy claims before all other creditors pursuant to trust doctrine.

PACA claimants should act promptly upon a buyer's bankruptcy filing to protect these potent rights. Similarly, companies who regularly purchase perishable agricultural commodities ' and their secured lenders ' should be mindful of the powerful protections for PACA claimants when assessing their reorganization alternatives.

Andrew L. Turscak, Jr. is a partner in the Restructuring, Creditors' Rights & Bankruptcy Group at Thompson Hine LLP in Cleveland. He can be reached at [email protected].