The Perishable Agricultural Commodities
Act – An Overview
The Perishable Agricultural Commodities Act (“PACA”), 7 U.S.C. §§ 499a-499t, was enacted in 1930 to regulate the marketing of perishable agricultural commodities in interstate and foreign commerce. The primary purposes of the PACA are to prevent unfair and fraudulent conduct in the marketing and selling of perishable agricultural commodities and to facilitate the orderly flow of perishable agricultural commodities in interstate and foreign commerce. The PACA is administered and regulated by the Agricultural Marketing Service, an agency within the USDA.
A “perishable agricultural commodity” is any fresh fruit or vegetable, whether or not frozen or packed in ice, including cherries in brine, as defined by the USDA Secretary. 7 U.S.C. § 499a(b)(4). The PACA regulations include within the definition of fresh fruits and vegetables “all produce in fresh form generally considered as perishable fruits and vegetables, whether or not packed in ice or held in common or cold storage, . . . [except] those perishable fruits and vegetables which have been manufactured into articles of food of a different kind or character.” 7 C.F.R. § 46.2(u).
A “dealer” is “any person engaged in the business of buying or selling in wholesale or jobbing quantities . . . any perishable agricultural commodity” that has an invoice value in any calendar year in excess of $230,000.00, subject to several exceptions. 7 U.S.C. § 499a(b)(6). A “commission merchant” is “any person engaged in the business of receiving . . . . any perishable agricultural commodity for sale, on commission, or for or on behalf of another.” Id. at § 499a(b)(5). A “broker” is a person engaged in the business of negotiating sales and purchases of perishable agricultural commodities either for or on behalf of the seller or buyer. See id. at § 499a(b)(7). A person who is “an independent agent negotiating sales for or on behalf of the vendor” is not considered to be a broker, however, if “sales of such commodities negotiated by such person are sales of frozen fruits and vegetables having an invoice value not in excess of $230,000.00 in any calendar year.” Id.See also id. at § 499a(b)(3), (8) (defining “interstate or foreign commerce”).
Under the PACA, a “person” includes “individuals, partnerships, corporations, and associations.” Id. at § 499a(b)(1).
The PACA prohibits certain types of conduct on the part of commission merchants, dealers, and brokers. For example, it is unlawful for a commission merchant, dealer, or broker “to engage in or use any unfair, unreasonable, discriminatory, or deceptive practice in connection with the weighing, counting, or in any way determining the quantity of any perishable agricultural commodity received, bought, sold, shipped, or handled . . . .” Id. at § 499b(1). It is also unlawful for a commission merchant, dealer, or broker “to make, for a fraudulent purpose, any false or misleading statement in connection with any transaction involving any perishable agricultural commodity”; “to fail, without reasonable cause, to perform any specification or duty, express or implied, arising out of any undertaking in connection with any such transaction”; and “to fail or refuse truly and correctly to account and make full payment promptly” with respect to any transaction. Id. at 499b(4). A full listing of the conduct that a commission merchant, dealer, or broker is prohibited from engaging in is set forth at 7 U.S.C. § 499b.
A commission merchant, dealer, or broker that violates any of the unfair conduct provisions “shall be liable to the person or persons injured thereby for the full amount of damages . . . sustained in consequence of such violation.” Id. at § 499e(a). The injured person or persons may enforce such liability by bringing an action in federal district court or by filing a reparations proceeding against the commission merchant, dealer, or broker.
The PACA requires that all commission merchants, dealers, and brokers obtain a valid and effective license from the USDA Secretary. The PACA sets forth several requirements and conditions associated with the licensing requirement including, but not limited to, standards governing the application for a license and the required fees; grounds on which the Secretary may refuse to issue a license; and the authority of the Secretary to withhold the issuance of a license pending an investigation of the applicant. A commission merchant, dealer, or broker that fails to obtain a valid and effective license “shall be liable to a penalty of not more than $1,000 for each such offense and not more than $250 for each day it continues . . . .” Id. at § 499c(a). A commission merchant, dealer, or broker that can demonstrate to the Secretary that its failure to obtain a license “was not willful but was due to inadvertence” may be permitted by the Secretary to settle the matter “by the payment of fees due for the period covered by such violation and an additional sum, not in excess of $250 . . . .” Id. Moreover, If the Secretary determines that a commission merchant, dealer, or broker has violated any of the unfair conduct provisions, it may suspend the violator’s license “for a period not to exceed ninety days, except that, if the violation is flagrant or repeated, the Secretary may, by order, revoke the license of the offender.” Id. at § 499h(a).
In 1984, Congress amended the PACA to include a statutory trust for the benefit of unpaid sellers of perishable agricultural commodities. The PACA provides that
[p]erishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents.
Id. at § 499e(c)(2).
The PACA statutory trust is often referred to as a “floating trust.” Thus, a PACA trust beneficiary is not obligated to trace the assets to which the beneficiary’s trust applies. When a controversy arises as to which assets are part of the PACA trust, the buyer has the burden of establishing which assets, if any, are not subject to the PACA trust. The PACA beneficiary only has the burden of proving the amount of its claim and that a floating pool of assets exists into which the produce-related assets have been commingled.
If a buyer files for bankruptcy, the trust assets do not become “property of the estate” pursuant to Bankruptcy Code § 541 because the buyer-debtor does not have an equitable interest in the trust assets. Because the buyer holds those assets for the benefit of the seller. Thus, a beneficiary of the PACA trust has priority over all other creditors with respect to the assets of the PACA trust.
An unpaid produce seller loses the benefits of the statutory trust, however, if it fails to properly preserve the benefits of the trust pursuant to § 499e(c)(3). An unpaid seller may preserve the benefits of the trust by providing a written notice to the commission merchant, broker, or dealer of intent to preserve such benefits. See id. at § 499e(c)(3). See also 7 C.F.R. § 46.46(f). The written notice must be given to the commission merchant, broker, or dealer
within thirty calendar days (i) after expiration of the time prescribed by which payment must be made, as set forth in the regulations issued by the Secretary, (ii) after expiration of such other time by which payment must be made, as the parties have expressly agreed to in writing before entering into the transaction, or (iii) after the time the supplier, seller, or agent has received notice that the payment instrument promptly presented for payment has been dishonored.
7 U.S.C. § 499e(c)(3).
Section 499e(c)(3) also provides that if the parties to the transaction “expressly agree to a payment time period different from that established by the Secretary, a copy of any such agreement shall be filed in the records of each party to the transaction and the terms of payment must be disclosed” on the documents relating to the transaction. Id. If this agreement extends the time for payment for more than thirty days, however, the seller cannot qualify for coverage under the trust. See 7 C.F.R. § 46.46(e)(2).
Section 499e(c)(4) provides an alternative method of preserving the benefits of the statutory trust, in addition to the methods provided in § 499e(c)(3). Under this alternative method, a PACA licensee may provide notice of its intent to preserve the benefits of the trust on the “ordinary and usual billing or invoice statements,” subject to two conditions. 7 U.S.C. § 499e(c)(4). First, the bill or invoice statement must contain the terms of payment, and each party must maintain a copy of the agreement in its own records. See id. Second, the face of the billing or invoice statement must contain the following statement:
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 (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.
Any person complaining that a commission merchant, dealer, or broker has violated any of the PACA’s unfair conduct provisions may commence a reparations proceeding by filing an informal complaint with the Secretary. See 7 U.S.C. § 499f(a)(1). See also 7 C.F.R. § 47.2 (defining a “reparations proceeding”) and § 47.3 (setting forth requirements for filing informal complaints). Reparations proceedings provide a remedy in addition to remedies available under applicable state laws or common law and are governed by the PACA Rules of Practice for Reparation Proceedings, 7 C.F.R. §§ 47.1-47.49.
The informal complaint must provide a brief statement of the facts supporting the allegations against the commission merchant, dealer, or broker and must be filed within nine months from the date in which the violation occurred. See id. at 7 U.S.C. § 499f(a)(1). After receiving all information and supporting evidence provided by the person filing the informal complaint, the Secretary must conduct an investigation. See 7 C.F.R. § 47.3(b)(1). See also 7 U.S.C. § 499f(c). If the informal complaint and the investigation seem to warrant such action, subject to certain exceptions, the Secretary
in an effort to effect an amicable or informal adjustment of the matter, shall give written notice to the person complained against of the facts or conduct concerning which complaint is made, and shall afford such person an opportunity, within a reasonable time . . ., to demonstrate or achieve compliance with the applicable requirements of the Act and regulations promulgated thereunder.
Id. at § 47.3(b)(2).
If an amicable or informal settlement is not reached, the complaining party may file a formal complaint. See generally id. at § 47.6 (setting forth procedures for filing a formal complaint). The formal complaint must contain the information required for filing an informal complaint and a statement of the damages claimed. After the parties have properly responded to all claims and counterclaims, if any, the matter is assigned a docket number and scheduled for a hearing.
If a complaint claims less than $30,000.00 in damages, “a hearing need not be held and proof in support of the complaint and in support of the respondent’s answer may be supplied in the form of depositions or verified statements of facts.” 7 U.S.C. § 499f(c)(2). If a complaint claims damages in excess of $30,000.00, a hearing must be provided, unless waived by the parties. The Secretary must then determine whether the commission merchant, dealer, or broker has violated any of the PACA’s unfair conduct provisions. See id. at § 499f(d). If the Secretary determines that a violation has occurred, it must determine the amount of damages owed and enter an order stating the date by which the offender must pay those damages. See id. at § 499g(a).
Either party may appeal a reparation order to the district court in which the hearing was held within thirty days from the date the order was entered. See id. at § 499h(c). If, however, the matter was handled without a hearing because the claim for damages was less than $30,000.00 or because the parties agreed to waive the hearing, appeal must be made to the district court in which the commission merchant, dealer, or broker is located. See id. The trial before the district court “shall be a trial de novo and shall proceed in all respect like other civil suits for damages, except that the findings of fact and order or orders of the Secretary shall be prima-facie evidence of the facts stated therein.” Id.
A “disciplinary proceeding” is any proceeding, other than a reparations proceeding, arising out of any violation of the PACA. Disciplinary proceedings are governed by the USDA’s Uniform Rules of Practice for Disciplinary Proceedings, 7 C.F.R. §§ 1.130-1.151, that apply not only to certain PACA violations, but violations under a multitude of other statutes as well. See 7 C.F.R. § 1.131 (setting forth the various statutes and portions thereof governed by the Uniform Rules of Practice for Disciplinary Proceedings).
Disciplinary proceedings under the PACA differ from reparations proceedings in that private parties do not bring disciplinary proceedings. Rather, “[a]ny officer or agency of any State or Territory having jurisdiction over commission merchants, dealers, or brokers in such State or Territory and any other interested persons (other than an employee of an agency of the Department of Agriculture administering this Act) may file” an informal complaint with the Secretary concerning any alleged violation of the PACA by any commission merchant, dealer, or broker. 7 U.S.C. § 499f(b). Thus, it is possible for a reparations proceeding to be brought by a private party, have a reparations order issued against a commission merchant, dealer, or broker for a violation of any of the unfair conduct provisions as a result of that reparations proceeding, and to then have a disciplinary action filed by “any officer or agency . . . and any other interested person” as a result of the filing of a reparations proceeding.
Disciplinary proceedings are commenced, similar to reparations proceedings, by the filing of an informal complaint. See 7 C.F.R. § 47.3. With respect to disciplinary proceedings, however, the informal complaint may be brought any time within two years after the violation occurred, as long as the complaint does not allege “flagrant or repeated violations.” 7 C.F.R. § 47.3(a)(1).