On December 21, 2020, the Consolidated Appropriations Act (“CAA”) passed both houses of Congress and was later signed into law on December 27. The CAA is a $2.3 trillion spending bill, $900 billion of which is being used for stimulus relief due to the COVID-19 pandemic. Of the $900 billion in stimulus relief, $13 billion is allocated to the agricultural sector. This legislation is the first stimulus relief package since the CARES Actwas enacted in April, 2020.
Most of the agricultural provisions contained in the stimulus legislation offers financial assistance to producers through various USDA-led programs. However, the CAA also contains measures designed to protect and benefit certain individuals within the agricultural industry. One of these agricultural measures contained in the CAA creates a federal livestock dealer trust. Congress established this statutory trust to benefit unpaid sellers of livestock.
Before the enactment of the livestock dealer trust, two statutory trusts have been enacted in the agricultural industry. One trust is found under the Packers and Stockyards Act (“PSA”), which applies to meat packers and poultry dealers respectively. A statutory trust applicable to produce buyers operates under the Perishable Agricultural Commodities Act (“PACA”), which is modeled after the PSA trust. In general, each of these trusts Congress created were in response to an economic downfall in the industry, and were developed to protect sellers of commodities from losing money when they go unpaid.
For years, livestock sellers have lost large amounts of money due to livestock dealers defaulting on their payments, but no trust was set in place to protect these sellers. In 2018, the Securing All Livestock Equitably Act (“SALE Act”) was introduced in Congress. This bill was designed to create a livestock dealer trust, but it went no further in the legislative process. However, the 2018 Farm Bill instructed the United States Department of Agriculture (“USDA”) to conduct a study to determine whether a livestock dealer trust would be feasible. On February 4, 2020, USDA published its report from the study, finding that a statutory trust covering dealers’ livestock purchases is feasible, and “could be established in much the same manner as the statutory trusts covering meat packers, live poultry dealers, and produce buyers.”
One month after the report was published, the Securing All Livestock Equitably Act of 2020 was introduced in Congress. Similar to the 2018 SALE Act, the bill creates a statutory livestock dealer trust that is modeled after the PSA trust. But unlike the 2018 Act, the 2020 bill was enacted because it was included in the CAA stimulus legislation. Accordingly, the statutory livestock dealer trust is now in effect, and livestock sellers are currently receiving payment protection under the trust.
Why Create a Livestock Dealer Trust?
The main goal of enacting the livestock dealer trust is to ensure livestock sellers are repaid for the livestock they sold to a dealer. In the livestock industry, dealers regularly buy and resell livestock, so dealers are typically allowed to possess the livestock and pay for it at a later date. However, before enacting the livestock dealer trust, there was no guarantee a livestock seller would receive payment from the dealer. Therefore, enacting the livestock dealer trust accomplishes the main goal by requiring a livestock dealer to retain certain assets in trust for the benefit of unpaid livestock sellers. In other words, if the dealer fails to pay the seller for livestock, the seller will be able to receive payment through the trust assets.
What Parties are Subject to the Trust?
Congress established the livestock dealer trust to benefit unpaid cash sellers of livestock. The statutory trust provision under the CAA defines cash sales as “a sale in which the seller does not expressly extend credit to the buyer.” Also, in terms of the statutory trust, livestock includes “cattle, sheep, swine, horses, mules, or goats—whether live or dead.” 7 U.S.C.A. § 182(4). Overall, the trust applies to sellers who do not finance a dealer’s purchase of the seller’s livestock, and have not yet been paid for the sale. Examples of “unpaid cash sellers” that may receive protection from the statutory trust include livestock producers, auction markets, and livestock dealers selling to another livestock dealer.
Also, this trust specifically applies to livestock dealers. The PSA says a dealer is “any person, not a market agency, engaged in the business of buying or selling in commerce livestock, either on his own account or as the employee or agent of the vendor or purchaser.” 7 U.S.C.A. § 201(d). This means a person buying and selling livestock with their own funds, or the funds of their employer, is a dealer subject to the statutory livestock dealer trust. However, as provided in the CAA, livestock dealers whose average annual purchases of livestock do not exceed $100,000 are excluded from the statutory trust.
How Does the Trust Function?
A dealer’s trust is created when they take delivery of livestock without paying the seller, or when the dealer pays with a check that is later dishonored. In other words, if the dealer does not pay for livestock they “purchase” from a seller, the dealer must maintain a trust with certain assets until they satisfy the unpaid purchase of livestock. Generally, the trust assets include the dealer’s livestock, all inventories of, or account receivables or proceeds from, the livestock purchased by the dealer. Therefore, the dealer’s livestock and earnings from reselling livestock are assets held in trust for the seller.
Importantly, the statutory trust does not require dealers to keep trust assets separate for each individual seller because the trust is an integrated “floating trust.” This means all of the dealer’s livestock-related assets are commingled together to make up the trust. For example, if the dealer purchases livestock from multiple sellers, all livestock and proceeds are combined together to make up the trust assets. Thus, all of the trust assets are subject to claims from every unpaid seller, up to the amount they are owed.
The statutory trust serves as an important tool for unpaid livestock sellers because it secures repayment through the trust assets held by the dealer. The trust guarantees repayment by providing unpaid sellers first priority to the trust assets. In other words, the statutory trust gives unpaid sellers a superior claim to the trust assets over the dealer’s secured creditors who hold an interest in the assets. Accordingly, sellers who deliver livestock to a dealer without payment automatically become beneficiaries of the trust, and will have a greater claim to the trust assets until their claim is paid in full.
Generally, priority to the trust assets sometimes becomes an issue in cases where the livestock dealer files for bankruptcy. Conflicts between unpaid sellers and the dealer’s creditors occur because they each have an interest in the dealer’s property, which includes the trust assets. However, if an unpaid seller files a bankruptcy petition, the trust assets do not become part of the bankruptcy estate. Therefore, unpaid sellers will receive payment from the trust assets before any creditors who claim an interest in the same assets.
Preserving Seller’s Trust Claim
Although the livestock dealer trust is triggered when the dealer takes delivery of livestock without paying the seller, the statutory language of the trust contains two requirements a seller must satisfy to establish a right under the trust. First, the seller must sell livestock to a dealer who averages over $100,000 in livestock purchases annually. Dealers who average less than $100,000 annually are not subject to the statutory trust, and have no obligation to hold assets in trust.
Second, the unpaid seller must provide the dealer with a written claim on the trust, and the seller must file this claim with the Secretary of Agriculture (“Secretary”). The unpaid seller must send this notice to the dealer and Secretary within 30 days after payment was due. In general, a dealer’s payment is due before the close of the next business day following the purchase and delivery of the livestock. 7 U.S.C.A. § 228b.
If the dealer did provide payment to the seller, but the dealer’s payment instrument (usually a check) is dishonored, the seller is still an “unpaid seller.” In this situation, the seller must send their claim on the trust to the dealer and Secretary within 15 days after receiving notice that the dealer’s check was returned for insufficient funds.
After the dealer receives a written trust claim from the unpaid seller, the dealer is required to provide a notice to all of their creditors who have recorded a security interest in the dealer’s livestock held in trust. The dealer must provide this notice within 15 days of receiving the seller’s claim.
In general, the enactment of the statutory livestock dealer trust does not change the day-to-day business, and livestock sales will continue as before. However, with the statutory trust in place, livestock sellers are much more protected, and are now more likely to receive repayment for livestock they sale and deliver to dealers. Most likely, if a dealer takes delivery of livestock without paying the seller, the unpaid seller will be able to invoke the dealer trust provision to pursue payment through the trust assets if the seller makes a proper claim on the trust.
To view the full text of the Consolidated Appropriations Act (CAA), click here.
For a general overview of the agricultural provisions of the CAA, click here.
For more National Agricultural Law Center resources on the Packers and Stockyards Act (PSA), click here.
For more National Agricultural Law Center resources on the Perishable Agricultural Commodities Act (PACA), click here.