PACA or The Perishable Agricultural Commodities Act was enacted by Congress in the year 1930 to establish honest trading and business practices in the vegetable and food industry. PACA’s main objective is to protect the different suppliers and vendors of agricultural goods from third parties who do not pay for produce. The PACA act has numerous consequences for secure lenders who provide finance to borrowers owning goods within their reach especially in bankruptcy.
PACA provides unpaid vendors and suppliers of perishable agricultural products with superior rights over other creditors by establishing trust. However, secure lenders should never depend on the standard language of the bankruptcy orders as they often cleanse lien assets. Secured lenders should become familiar with the laws and should create approaches to mitigate the threat of PACA’s involuntary claims and demands owed by the borrowers. It is necessary to understand the function and objective of PACA to understand its effect in Bankruptcy.
In 1984 Congress revised the PACA to create a statutory trust for the benefits of all unpaid vendors or salespersons of perishable agricultural goods to further reinforce its safety objective. A vendor authorized under PACA must have the following wordings on their invoices, accounting records and billing documents in order to safeguard their trust rights. There is no trust protection without it:
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.
Produce vendors who do not wish to incorporate this wording into their invoices shall inform the purchaser through a written notice about their desires to maintain PACA trust benefits within 30 days of payment due date. The PACA law provides USDA to use statutory teeth against enterprises and companies that do not pay for produce. USDA can suspend license of a company in case a PACA licensed firm fails to pay for produce. It can also prohibit it from any kind of operation in the produce industry until full payment is done.