Category Archives: Credit Management Tips

PACA Trust Perfection Formula for Grower/Grower Agent Relationships

One of the most misunderstood, or misused, sections of the Regulations governing the Perishable Agricultural Commodities Act (“PACA”) concern the appropriate time for Growers to receive the proper accountings and prompt payment under PACA.  In my experience, few do it correctly and even fewer do it the same way twice.  This is a dangerous practice for the Grower because the Grower is the one who bears the risk of waiving its PACA trust rights.

Time and time again, I see cases where a Grower will sit back and wait for its Grower’s Agent to provide an accounting of all the Produce delivered under the parties’ agreement.  Once the Grower sees the accounting the Grower begins to look for payment and to calculate the reasonableness of the returns.  The problem with this approach is that the Grower’s time to properly perfect its PACA trust rights begins to tick away without regard to whether the Grower’s Agent timely complies with the Regulations.  To many Growers operate under the misconception that they are not able to invoice or otherwise perfect their trust rights in their Produce until they receive an accounting from the Grower’s Agent.  This is WRONG!  Let me show you why…

Important Definitions:

Grower means any person who raises produce for marketing.  7 C.F.R. § 46.2(p).

Growers’ agent means any person operating at shipping point who sells or distributes produce in commerce for or on behalf of growers or others and whose operations may include the planting, harvesting, grading, packing, and furnishing containers, supplies, or other services.  7 C.F.R. § 46.2(q).

Account promptly, except when otherwise specifically agreed upon by the parties, means rendering to the principal a true and correct accounting:

(2)        In connection with consignment or joint account transactions, within 10 days after the date of final sale with respect to each shipment, or within 20 days from the date the goods are accepted at destination, whichever comes first: Provided, That whenever a grower’s agent or shipper distributes individual lots of produce for or on behalf of others, accounting to the principal shall be made within 30 days after receipt of the shipment from the principal for sale or within 5 days after the date the agent receives payment for the goods, whichever comes first. Whenever a grower’s agent or shipper harvests, packs, or distributes entire crops or multiple lots therefrom for or on behalf of others, an accounting on the initial shipment shall be rendered within 30 days after receipt of the goods for sale. Accountings for subsequent shipments shall be made at 10-day intervals from the date of the accounting for the initial shipment and a final accounting for the season shall be made to each principal within 30 days from the date the agent receives the last shipment for the season from that principal: Provided further, That whenever the marketing agreement between a principal and agent includes a provision for storage of goods prior to sale, the agent shall render accountings of inventory and expenses incurred to date at 30-day intervals from the date the goods are received by the agent until sales from storage begin, and Provided further, That nothing in the regulations in this part shall prohibit cooperative associations from accounting to their members on the basis of seasonal pools or other arrangements provided by their regulations or bylaws; and

7 C.F.R. § 46.2(z)(2).

Full payment promptly is the term used in the Act in specifying the period of time for making payment without committing a violation of the Act. “Full payment promptly,” for the purpose of determining violations of the Act, means:

(9)        Whenever a grower’s agent or shipper harvests, packs, or distributes entire crops or multiple lots therefrom for or on behalf of others, payment for the initial shipment shall be made within 30 days after receipt of the goods for sale or within 5 days after the date the agent receives payment for the goods, whichever comes first. Payment for subsequent shipments shall be made at 10-day intervals from the date of the accounting for the initial shipment or within 5 days after the date the agent receives payment for the goods, whichever comes first, and final payment for the seasons shall be made to each principal within 30 days from the date the agent receives the last shipment for the season from that principal.

7 C.F.R. § 46.2(aa)(9).

Time to Perfect PACA Trust Rights:

Timely filing of a notice of intent to preserve benefits under the trust will be considered to have been made if written notice is given to the debtor within 30 calendar days:

(i)         After expiration of the time prescribed by which payment must be made pursuant to regulation,

7 C.F.R. §46.46 (f)(2)(i).

Trust Perfection Formula for Grower/Grower Agent Relationship

The Regulations require a Grower’s Agent to “account promptly” to the Grower in compliance with 7 C.F.R. § 46.2(q)(2).  The  Regulations further required the Grower’s Agent to make “full payment promptly” to the Grower in compliance with  7 C.F.R. § 46.2(zz)(9).

Simply put, the Grower’s Agent must both account to and pay the Grower for the initial shipment of Produce within 30 days of the Grower’s Agent’s receipt of said Produce.  The Regulations further require the Grower’s Agent to make additional prompt accountings on and payments for all subsequent shipments of Produce in 10-day intervals from the date of the Grower’s Agent’s accounting to the Grower for its receipt of the initial shipment of Produce.  The Grower’s Agent shall make the final accounting and payment for the season to the Grower within 30 days from the date the Grower’s Agent receives the last shipment of Produce for the season from the Grower.  7 C.F.R. § 46.2(aa)(9).

  • Company’s Receipt of Initial Shipment + 30 Days = First Accounting & Payment Due
  • Date of First Account & Pay + 10 Days = First Interim Account & Pay
  • Date of First Interim Account & Pay + 10 Days = Second Interim Account & Pay….
  • Company’s Receipt of Last Shipment  + 30 Days = Final Account & Pay

In light of the foregoing payment scheme, the Grower’s last day to timely perfect its PACA trust rights occur thirty (30) days after the expiration of the Grower’s Agent’s time to make full payment promptly under 7 C.F.R. § 46.2(aa)(9). 

Key Initiating Dates:

The Grower’s Agent’s statutory obligations to both “account promptly” and to make “full payment promptly” begin on the date the Grower’s Agent first receives Produce from the Grower during a given season.

The Grower’s obligation to perfect its PACA Trust rights – or risk waiver – arises on the date the Grower receives the Grower’s Agent’s accountings under 7 C.F.R. § 46.2(q)(2) and ends thirty (30) days after the expiration of the Grower’s Agent’s last day to make a “full payment promptly” on a given accounting under 7 C.F.R. § 46.2(aa)(9).

Important Take Away:

The Grower’s deadline to timely perfect its PACA trust rights is capable of calculation without any action on the part of the Grower’s Agent.  The Grower knows when it shipped Produce to the Grower’s Agent.  These dates can be found on either the field pick tickets or the relevant bill of lading.  Simply put, the Grower can calculate this date on its own and is responsible for doing so. 

Because of this fact, a Grower cannot successfully recover money damages for unpaid Produce invoices under the PACA if it fails to timely perfect its trust rights.  Equally important, Courts will not accept the fact that a Grower failed to timely perfect its PACA trust rights because the Grower’s Agent failed to provide the Grower with a timely accounting. 

Restrictive Endorsements: What you need to know about accord and satisfaction

Savvy credit managers need to understand how to use restrictive endorsements to their advantage and how to deal with any restricted check they may receive.

As a matter of policy, a company should make it a practice not to deposit any check containing a restrictive endorsement until they have discussed the issue with their legal counsel. 

With that said, here is an overview of what credit managers should know about accord and satisfaction: 

To constitute a valid accord and satisfaction it is essential that what is given shall be offered in full satisfaction and extinction of the original debt.  That the debtor shall intend it as a full satisfaction of the original debt and that such intention shall be made known to the creditor in some unmistakable manner. 

It is equally important that the creditor shall have accepted it with the intention that it should operate as a full satisfaction of the original debt.

Generally, an accord and satisfaction requires:

  1. a bona fide dispute, plus
  2. tender which is clearly made as payment in full. 

1 Am. Jur. Accord & Satisfaction, Section 22 et. seq.  See also Louis Caric & Sons v. Ben Gatz Co., 38 Agric. Dec. 1486 (1979); Mendelson-Zeller Co. v. Michael J. Navilio, Inc., 34 Agric. Dec. 903 (1975); Kelman Farms v. Bushman Brokerage, 34 Agric. Dec. 1146 (1975); Mendelson-Zeller Co. v. The Season Produce Co., 31 Agric. Dec. 1288 (1972). 

“To constitute an accord and satisfaction it is necessary that the money be offered in full satisfaction of the demand, and be accompanied by such acts and declarations as amount to a condition that the money, if accepted, is accepted in satisfaction; and it must be such that the party to whom it is offered is bound to understand therefrom that, if he takes it, he takes it subject to such conditions. The mere fact that the creditor receives less than the amount of his claim, with knowledge that the debtor claims to be indebted to him only to the extent of the payment made, does not necessarily establish an accord and satisfaction.” 

Spada Distributors Co. v. Frank KenworthyCo., 17 Agric. Dec. 347 (1958). (emphasis added).  Quoted in Mendelson-Zeller Co. v. The Season Produce Co., 31 Agric. Dec. 1288 (1972).

Clear and CONSPICUOUS terms required

Words: “This check is in settlement of the following invoices: . . .” and words: “This check is in settlement of the following. If incorrect please return.” did NOT constitute clearly conditional tender.  Half Moon Fruit & Produce Co. v. North American Produce, 40 Agric. Dec. 1610 (1981) (emphasis added); Harvitz Brothers v. David Goldsamt, 20 Agric. Dec. 391 (1961).

Words: “Payment in Full” or “similar words” held effective. Kelman Farms v. Bushman Brokerage, 34 Agric. Dec. 1146 (1975) (emphasis added); Southmost Vegetable Co-Op v. M. & G. Tomato, 28 Agric. Dec. 966 (1969); Johnson & Allen v. Fernandez Bros., 27 Agric. Dec. 1127 (1968); Zinno v. Marvin, 24 Agric. Dec. 396 (1965); National Produce Distributors, Inc. v. Stewart Produce, 21 Agric. Dec. 955 (1962) [Transaction lacked bona fide dispute, and check was not offered in good faith where accord language was pre-printed on the check].

Where a partial payment check was tendered on the condition that it be accepted as payment in full, but debtor did not specify to what debt it was to be applied, and there were several open accounts at the time of tender, creditor was within its rights when it applied the payment to an open freight bill, and no accord and satisfaction of the produce debt was accomplished. Jody DeSomma d/b/a Impact Brokerage v. All World Farms, Inc., 61 Agric. Dec. 821 (2002).

Bona Fide Dispute Required!

One of the biggest misuses of restrictive endorsements arise from the mistaken belief that placing a restrictive endorsement on all checks as a matter of company policy provides some benefit if a unknowing recipient deposits a partial payment.  NOT TRUE!  There must be a bona fide or good faith dispute that the partial payment is intended to resolve.  A “gotcha” move will not carry the day and will be resolved in the payee’s favor.

Although respondent’s partial payment checks stated that the checks were tendered as payment in full, it was found that no accord and satisfaction existed as to several transactions because respondent had not proven that a dispute existed between the parties as to such transactions.   Eustis Fruit Company, Inc. v. The Auster Company, Inc., 51 Agric. Dec. 865 (1992).  Where a Respondent presented evidence of a breach by the Complainant this was not enough to show that there had been a dispute.  Richard Ruiz v. Pacific Sun Produce Co., 48 Agric. Dec. 1105 (1989).

Good Faith Tender As Full Payment Necessary

Debtor tendered payment in one check for six produce transactions. Four of the transactions were undisputed, and the check covered these transactions in their full amount. The remaining two transactions were disputed, and as to these the check tendered only partial payment. The creditor negotiated the check, and then sought to recover the balance alleged due on the disputed transactions. The debtor pled accord and satisfaction. It was held that the good faith tender requirement of UCC 3-311 would not be met by such a check, especially in view of the “full payment promptly” requirement of the Act and Regulations. Lindemann Produce, Inc. v. ABC Fresh Mktg., Inc., et al., 57 Agric. Dec. 7389 (1998).

In C. H. Robinson Company v.TrademarkProduce, Inc., 53 Agric. Dec. 1861 (1994) the words “Full and Final Payment” were pre-printed on all of respondent’s checks in very small type.  Referencing Official Comment 4 to UCC Section 3-311 it was held that the requirement of “good faith tender” had not been met, and there was no accord and satisfaction.

Although respondent’s partial payment checks stated that the checks were tendered as payment in full, it was found that no accord and satisfaction existed as to one transaction because there was no manifested intent that the payment should apply to all the items on the invoice where respondent paid in full for one of the types of fruit.  Eustis Fruit Company, Inc. v. The Auster Company, Inc., 51 Agric. Dec. 865 (1992).

Return the Check!

Under UCC  Section 3-311 the return within 90 days of an amount paid in full satisfaction of a claim disputed in good faith precludes the discharge of the claim.  Pacific Tomato Growers, LTD v. American Banana Co., Inc., 60 Agric. Dec. 352 (2001).  Simply put, you must return the check containing a restrictive endorsement to the sender within 90 days of your receipt.  If you keep it as a partial payment you will be deemed to have accepted full payment.

BEST PRACTICES

  • If you use a lock box service to receive payments, consider notifying your bank in writing not to deposit any checks containing a restrictive endorsement.  Instead, these checks should be forwarded directly to the company for assessment.
  • If you place a restrictive endorsement on a check, use the correct terminology and make it CONSPICUOUS. 
  • Do not bundle or combine payment for both disputed and undisputed invoices.  You may lose the benefit of the restrictive endorsement if there is not a bona fide dispute. 
  • Always reference the disputed invoice the check is intended to resolve.
  • Be prepared to return the partial payment if you are not willing to accept it as full payment.
  • Return the check in a timely manner and include a cover letter articulating your position.
  • Don’t deposit checks containing a restrictive endorsement until you have assessed the situation.