Get Your Burger, Fries and Fresh Fruit, Hold the Broccoli. Applying the PACA Trust to Restaurants and Other Food Establishments.(Perishable Agricultural Commodities Act of 1930)

Introduction

Until recently, a restaurant that filed for bankruptcy or was otherwise financially troubled was no different than other troubled companies. Secured creditors had a prior claim to the restaurant's cash and other assets, followed by the claims of all unsecured creditors.

Recently, however, a growing number of courts, including the United States Courts of Appeal for the Third and Eighth Circuits, have applied the Perishable Agricultural Commodities Act (PACA) to restaurants that do a significant volume of business. As a result, the claims of creditors that supply perishable agricultural commodities to restaurants have been granted trust fund status, which has entitled them to payment of their claims before any payment can be made to the restaurant's secured and unsecured creditors. This trust fund status creates a secret priming lien, in favor of produce suppliers, that lies in wait for the restaurant's other unsuspecting creditors and reverses the traditional bankruptcy priority rules.

The PACA Statute

Congress enacted the PACA statute in 1930 to regulate the interstate produce business. Congress was concerned that unscrupulous brokers would take advantage of small farmers and growers. A broker or other purchaser might wrongfully reject the goods in a declining market. The produce seller would be especially vulnerable due to the perishability of the goods and the great distances between the seller and purchaser. As a result, it would have been expensive and impractical for the produce seller to try to recover its goods or otherwise enforce its rights against the purchaser. It would have also damaged sellers who needed the sales proceeds to plant new crops.

In 1984, Congress amended the PACA statute to include a floating nonsegregated statutory trust for the benefit of produce suppliers, sellers and their agents who comply with the statute. Congress intended the trust to elevate the claims of the statute's beneficiaries over the claims of all other creditors. The trust is designed to protect unpaid PACA suppliers until the purchaser pays their claims in full. The PACA trust is even more potent than the traditional state law lien or security interest that requires a filing for perfection. The PACA trust entitles the unpaid PACA suppliers/beneficiaries to payment before payment is made to lien creditors, provided the PACA supplier complies with the statute.

How PACA Works