The Food Safety Modernization Act

For example, the Rules establish specific new design and functionality requirements for vehicles and transportation equipment operations that mandate automatic real-time monitoring, extensive record keeping, environmental controls and the education and training of employees. See FSMA for Food Transportation: A Simplified Guide to FSMA, ORBCOMM 2017.

The enactment of FSMA underscores the need for food processors to purchase and use equipment, machinery and facilities that have been certified as conforming to hygienic design and engineering principles. Several internationally recognized standards-writing organizations offer guidelines and certifying programs to the food and feed industry. Under FSMA, the goal of hygienic design and fabrication of equipment and machinery is to permit easy disassembly for cleaning and maintenance, increase inspectability and accessibility, eliminate or substantially reduce the possibilities of contamination, increase durability and permit enhanced monitoring and controls.

Impact on Lessors and Lenders

From the equipment leasing and finance perspective, FSMA requires a fundamental rethinking by lenders and lessors of their traditional due diligence and underwriting for credit facilities for lessees and borrowers in the food industry. Such obligors must be in compliance with the Rules or incur significant business risk for themselves and their lenders. That risk includes product-safety recalls, deregistration of facilities, plant and operations shut-downs, the inability to use equipment or vehicles or to purchase food supplies and produce, or to otherwise conduct business as usual.

For large-ticket and middle-market leasing and lending, the representations and warranties required from obligors should focus on their compliance with FSMA and its Rules. The events of default and the obligors covenants in the lease and loan documents should require that lessors and lenders are immediately notified of any defaults or breaches by the obligors under FSMA. The availability, production and review of the various reports, plans, audits, analyses and verifications required under FSMA is critical to a lender's due diligence process and the ongoing obligations of borrowers. So too is the availability of satisfactory general liability insurance together with product recall and business interruption insurance coverage to protect lessors and lenders.

Downstream indemnities and guaranties from suppliers regarding their compliance with FSMA and the Rules are important from a risk-sharing perspective. The level of vulnerability of a lessee or other obligor to a mandatory FSMA shut down or product recall is critical information for any lender-lessor. Pending or threatened tort or product liability litigation or a possible product recall or plant closing would be a financial disaster for most borrowers and lessees, and their lenders and lessors.

The conditions for closing any financing for a business in the food-process industry should require the receipt by lenders of adequate documentary assurance and ongoing undertakings of FSMA compliance. While lease documents used in the small-ticket sector are unlikely to change in any material way as a direct result of FSMA, the customized and more comprehensive documentation required for middle-market and large-ticket transactions will certainly be modified to ensure that the lessee/borrower is in compliance with its FSMA obligations at closing and during the term of the credit.

Conclusion

Possessed with sufficient high-level knowledge about the impact of FSMA and the related Rules, lawyers serving the equipment leasing and finance industry can be aware of the potential issues facing lessors and lenders who provide financing to companies in the U.S. food process industry, regardless of whether those companies are producers, growers, manufacturers, processors, distributors, importers, rail or truck transporters, operators of storage facilities or equipment and machinery manufacturers.

Maintaining product safety, sanitary and contamination-free environments and avoiding the enterprise risks of product recall, deregistration and plant closure, and civil or criminal lawsuits under FSMA are paramount considerations for such lessees and obligors. Careful due diligence and an underwriting and documentation process that recognizes the impact of FSMA on the lessee's business and the equipment being financed is an essential and important consideration for these financings.

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Michael A. Leichtling is counsel at Sills Cummis & Gross P.C. in New York. Mr. Leichtling concentrates his practice on equipment leasing and finance, secured lending and asset-based finance. He is a past member of the Legal Committee of the Equipment Leasing and Finance Association, and can be reached at [email protected].