Summary of a Recent
Judicial Development in
Perishable Agricultural Commodities
and Bankruptcy

Produce Seller Loses Rights to
PACA Statutory Trust

David B. Whitlow
National AgLaw Center Research Fellow

In In re Delyser, 295 B.R. 430 (Bankr. W.D.N.Y.), the United States Bankruptcy Court for the Western District of New York held that a produce seller lost its benefits in a statutory trust created by the Perishable Agricultural Commodities Act (PACA), 7 U.S.C. §§ 499a-499t, when it failed to disclose payment terms on its invoices that differed from the payment terms set forth in PACA.

Kenneth Delyser, Sr., purchased several shipments of seed potatoes from Maine Farmers Exchange (Maine Farmers). See id. at 433. Delyser executed a Sales Confirmation Order sent to him by Maine Farmers that stated that payment was due within 25 days of delivery and acceptance. See id. The invoices that Maine Farmers subsequently provided to Delyser did not contain the 25 day payment term that was set forth in the Sales Confirmation Order. See id. Delyser failed to make full payment to Maine Farmers and subsequently filed a bankruptcy petition. See id.

Delyser argued that the $12,575.82 debt it owed to Maine Farmers was dischargeable because Maine Farmers failed to properly preserve its rights in the PACA statutory trust. See id. Specifically, it argued that pursuant to PACA § 499e(c)(3),

where parties have agreed to a payment period different from that provided for by the Secretary . . ., as was the case with the . . . [Sales Confirmation Order], those agreed payment terms must be disclosed on all written documents used in connection with the purchase and sale transaction, including any invoices, or the PACA Trust beneficiary loses the benefit of the Trust when it, as Maine Farmers did, fails to properly disclose those different payment terms on all documents.

Id.

The court explained that under PACA an unpaid seller, such as Maine Farmers, loses the benefits of a PACA statutory trust if that seller does not provide written notice of its intent to preserve the benefits of the trust to the buyer within 30 days after expiration of the ten-day payment period prescribed by the Secretary. See id. (citing 7 U.S.C. § 499e(c)(3)). The court also explained that a seller may preserve its rights in a statutory trust by including, as Maine Farmers did, the following phrase on its invoices:

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.

Id. at 433-34 (quoting 7 U.S.C. § 499e(c)(4)).

The court further explained that if the parties expressly agree to a payment time period different from the ten-day payment period established by the Secretary, "the terms of payment shall be disclosed on invoices, accountings, and other documents relating to the transaction." Id.

The court held that

when Congress uses the words "shall" and "must" in statutory provisions that deal with preserving trust benefits and the circumstances under which a seller can lose them, those words must have consequences when they are not complied with, and the only reasonable consequence is the loss of trust benefits. Therefore, this Court believes that when a seller elects to use the invoice notice option provided for by Section 499e(c)(4) in order to notify the buyer of its intent to preserve the PACA Trust, that seller must fully comply with the provisions of that paragraph in order to preserve the benefits of the Trust. Should a seller fail to include the payment terms previously agreed to by the parties in writing on the very invoice that it elects to use to give notice of its intent to preserve the PACA Trust, it loses the benefits of the Trust. For these reasons the Court finds that Maine Farmers lost any PACA Trust benefits for unpaid indebtedness, including accrued interest, . . . when it failed to disclose the previously expressly agreed to 25-day payment terms on its invoice to the . . . [debtor].

Id.

The case was decided on July 11, 2003; this summary was posted Jan. 27, 2004.