Collecting Trust Assets
Each seller or grower is responsible for collecting payment under the trust. PACA is not involved in preserving or collecting trust assets.
First, a seller or grower decides if it can obtain payment without filing a lawsuit. Sometimes, this involves a payment arrangement. If that does not work, or there are significant cash flow problems with the buyer or agent, quick legal action to freeze the assets is usually the only alternative. If a seller or grower waits too long to act, the trust assets can be dissipated with little chance of recovery. In other words, the trust does not guarantee a recovery. But it does allow a seller’s or grower’s attorney to obtain an order from a federal court to preserve the trust assets.
Assets in the Trust
The trust includes all produce, receivables from produce, and proceeds paid or owed to the buyer or agent for produce. The trust also includes any assets acquired with produce proceeds, such as non-produce inventory, equipment or warehouses. A seller or grower is not limited to the produce or proceeds from the produce that it sold or provided to the buyer or agent.
The trust also extends to processed products made from fresh or frozen produce. For example, breaded cauliflower, zucchini sticks, hash browns, and salad concoctions, like potato salad or cream cheese with scallions. So, a seller of cauliflower does not lose its trust interest in the cauliflower if the buyer uses the cauliflower to make a processed product.
On the other hand, the processor, who converts the cauliflower into processed product, does not have a trust claim against its buyer because the processor is not supplying fresh or frozen produce covered under PACA.
Persons in a partnership or corporation, who are in control of trust assets, can be individually liable for PACA trust claims. Even though individuals in corporations are not normally liable for the debts of the corporation, the PACA trust is an exception to this rule.
If an individual is liable for a PACA trust debt, this kind of debt is not dischargeable in bankruptcy because there is a special exception to a discharge of trust debts in bankruptcy.
This individual liability reinforces the importance of exercising proper oversight of trust property.
Bank and Factor Liability
Trust creditors have priority over a bank’s security interest in trust assets. So, if a bank forecloses on trust assets under a security interest to repay its loan to the buyer, the bank will be required to return those assets to the PACA trust creditors.
A bank can also receive PACA trust money from buyers in the normal course of repayment of its loan from the bank. To obtain disgorgement of these loan repayments, an attorney for a seller or grower must show that the bank knew the buyer or agent was not paying its produce creditors when the bank received the payments.
A factor purchases trust assets in the form of the accounts receivable of the buyer. If the purchase is at a reasonable discount, the factor can retain the trust receivables. Sometimes, factors become secured lenders, rather than purchasers of trust assets, because they take no risk on the payment of the receivables they have purchased. In other words, the produce company guarantees payment of the receivables to the factor. As a result, there is not really a purchase of the receivables, and the factor holds the receivables as security. In those cases, a seller’s lawyer can file to obtain disgorgement of the trust assets from the factor, like other secured lenders who foreclose on trust assets.