Tag Archives: PACA attorney

Objecting to a Debtor’s Use of Cash Collateral in Bankruptcy

Personal BankruptcyWhen a produce company files a chapter 11 bankruptcy case, one of the first questions my PACA trust creditor clients ask is whether the debtor will be able to keep any cash it may have in the bank or any cash it receives from collecting its accounts receivable.

The answer is that the debtor almost always has a bank or other secured creditor which holds a lien on substantially all of its assets.  Property like inventory, machinery and equipment and the like is called hard collateral.  Such items can be used and sold in the ordinary course of business in a chapter 11 case.

Liquid assets, like cash, bank accounts, and accounts receivable, however, are a different matter.  These are called “cash collateral.”  And cash collateral may not be used over the objection of a secured party without a court order.  This order is called the “cash collateral order.”   Simply put, the purpose of a cash collateral order is to allow the debtor to utilize its cash collateral even though the cash collateral is subject to the liens of a secured party.  To do this, the debtor must provide its secured lenders with adequate protection (e.g. replacement liens in post-petition assets, super-priority administrative claims, etc.) necessary to facilitate the use of the cash collateral.  Because the debtor’s ability to use its cash collateral is critical to its ability to successfully emerge from a chapter 11 filing, debtor’s counsel often seek court approval of a cash collateral order on the very first day of the bankruptcy filing.

If you are a PACA trust creditor, you must be mindful of the cash collateral order process because there are almost never any provisions included in a cash collateral order that protect the rights of the PACA trust creditors.  As a result, a savvy PACA trust creditor will immediately object to the debtor’s use of cash collateral and create a seat at the negotiating table for the PACA trust creditors.  A well advised PACA trust creditor understands the debtor’s obligations under PACA and will generally make the following objections to debtor’s use of cash collateral:

  1. The scope of the PACA trust covers the debtor’s cash collateral as a matter of law
  2. PACA trust assets are not property of the debtor’s estate
  3. The debtor cannot use non-estate property as cash collateral
  4. The debtor cannot use PACA trust assets as collateral for post-petition financing

A timely filed objection to a debtor’s attempt to obtain a cash collateral order will often result in the full and immediate payment of the PACA trust claim.  When that is not possible, the objecting PACA trust creditor will have the ability to either seek adequate protection (just like a secured party) from both the debtor and its secured creditors or force the case to convert to a chapter 7 liquidation case.  Remember, a chapter 11 case will not stand if there are no estate assets to administer.

Key Point: If the PACA trust creditors do not act quickly when they are notified of a produce buyer’s insolvency, the debtor will obtain a cash collateral order that does not include any protections for PACA trust creditors.  If that happens, the cash collateral order will allow the debtor to use trust assets (the Court won’t know unless someone speaks up) to administer its estate, obtain DIP financing, and otherwise place trust assets out of the PACA trust creditors reach (e.g. paying pre-petition wages, etc.)

What you Need to Know About Administrative Detention of Foods – New FSMA Guidence

FDA LogoThe FDA recently issued a revised industry guidance document titled: What You Need To Know About Administrative Detention of Foods; Small Entity Compliance Guide  Utilizing a question and answer format, this industry guidance document contains some valuable information.  Here are some of the highlights you need to know:

Why is administrative detention needed?

Administrative detention provides a means through which FDA can hold adulterated or misbranded food and prevent it from reaching the marketplace, thus further enhancing FDA’s ability to ensure the safety of food for U.S. consumers.

What food is subject to administrative detention?

The term food refers to (1) articles used for food or drink for man or other animals, (2) chewing gum, and (3) articles used for components of any such article (section 201(f) of the FD&C Act [21 U.S.C. § 321(f)]).  The term food also refers to dietary supplements, which are to be treated as food under the FD&C Act (section 201(ff) [21 U.S.C. § 321(ff)]).

How long may FDA administratively detain an article of food?

FDA may detain an article of food for a reasonable period, not to exceed 20 calendar days, after the detention order is issued. However, an article of food may be detained for 10 additional calendar days if a greater period of time is required to institute a seizure or injunction action. The entire detention period may not exceed 30 calendar days (21 CFR 1.379).

What criteria does FDA use to order an administrative detention?

An officer or qualified employee of FDA may order the administrative detention of any article of food that is found during an inspection, examination, or investigation under the FD&C Act if the officer or qualified employee has reason to believe that the article of food is adulterated or misbranded (21 CFR 1.378).

May an administratively detained article of food be delivered to another entity or transferred to another location?

It is a prohibited act under section 301(bb) of the FD&C Act [21 U.S.C. 331(bb)] to transfer an article of food subject to an administrative detention order and/or to alter or remove any mark or label that identifies an article of food as administratively detained.

Can an administrative detention order be modified?

FDA may approve a request for modification of an administrative detention order to allow for the destruction of the article of food or movement of the detained article of food to a secure facility, to maintain or preserve the integrity or quality of the article of food, or for any other purpose that the authorized FDA representative believes is appropriate in the case (21 CFR 1.381(c)).

What’s the difference between an import detention and administrative detention?

FDA’s authority to administratively detain food under section 304(h) of the FD&C Act [21 U.S.C. 334(h)] is separate and distinct from detention that may occur during FDA’s import admissibility review. Under section 801(a) of the FD&C Act [21 U.S.C. 334(h)], when food is imported or offered for import into the United States, FDA conducts an admissibility review to determined whether to admit the product into United States or detain the product.

On the other hand for administrative detentions under section 304(h) of the FD&C Act, FDA will issue an order to the owner of the suspect food notifying him that FDA is administratively detaining the food and that he has an opportunity to appeal the detention with or without a hearing (see 21 CFR Part 1 Subpart K).

When does an administrative detention order terminate?

If FDA terminates an administrative detention order or the detention period expires, an authorized FDA representative will issue an administrative detention termination notice to any person who received the detention order (or that person’s representative), releasing the article of food, as quickly as possible. If FDA fails to issue an administrative detention termination notice and the detention period expires, the administrative detention is deemed to be terminated (21 CFR 1.384).

Who pays the costs associated with the detention order, such as storage, moving, disposal or reconditioning?

As stated in the preamble to the 2004 final rule (69 Federal Register 31659 at 31690), the party or parties responsible for paying the storage costs of food that FDA orders administratively detained is a matter between the private parties involved with the food. FDA is not liable for those costs. An owner, operator, or agent in charge of the place where the food is located can always request modification of a detention order to destroy the food if they do not want to store it.

Please take the time to read the entire guidance document.  It contains information about your rights and other deadlines that become very important if your product is administratively detained.

PACA Trust Litigation Alert

PACA Trust Litigation Alert

PACA Trust Litigation Alert

On September 26, 2012, a civil action was filed in Washington against YLM, Inc. in an effort to collect approximately $64,600.00 in an alleged PACA trust debt.

On October 2, 2012, a civil action was filed in Puerto Rico against P.R. Rexville Produce Distributors, Inc. in an effort to collect approximately $236,300.00 in alleged PACA trust debt.

Please check your A/R to see if these cases affect you.  If they do, please do not wait to assert your rights.

Jason Klinowski – Panelist at Turnaround Management Association Event

On Friday, September 21, 2012, Jason Klinowski served as one of five panel speakers at the Turnaround Management Association’s “Trying to Stay Healthy in a Distasteful Economy” Breakfast Forum Event, which was held at The Standard Club.  During this event, Jason discussed the Perishable Agricultural Commodities Act and the Food Safety Modernization Act in order to illustrate some of the challenges they present to the food & agribusiness industries.

Tyler Mayoras of O’Keefe & Associates moderated the panel, which consisted of: Wayne Carpenter (Managing Director of Lake Pacific Partners), Ed Cooper (Senior Vice President of Wells Fargo’s Food & Agribusiness Office), Justin Segel (CEO of American Pasteurization Company), Jason Klinowski (Agricultural & Food Law attorney at Freeborn & Peters) and Troy Terwilliger (CFO of Graceland Fruit).

PACA Trust Litigation Alert

PACA Trust Litigation Alert

PACA Trust Litigation Alert

On September 7, 2012, a civil action was filed in New York against Maxsun Produce Corporation in an effort to collect approximately $291,390.00 in an alleged PACA trust debt.

On September 19, 2012, a civil action was filed in Arizona against Arizona Marketing Produce Distributors, Inc. in an effort to collect approximately $111,740.00 in alleged PACA trust debt.

On September 20, 2012, a civil action was filed in Florida against Florida European Export-Import Co., Inc. in an effort to collect approximately $36,660.00 in alleged PACA trust debt. 

On September 20, 2012, another civil action was filed in New York against Maxsun Produce Corporation in an effort to collect approximately $71,200.00 in an alleged PACA trust debt.

On September 20, 2012, a civil action was filed in New York against Illinois Trading Co. in an effort to collect approximately $319,760.00 in an alleged PACA trust debt.

Please check your A/R to see if these cases affect you.  If they do, please do not wait to assert your rights.

PACA Trust Litigation Alert

PACA Trust Litigation Alert

PACA Trust Litigation Alert

On August 28, 2012, a civil action was filed in California against Koshan, Inc. d/b/a Payless Foods and d/b/a Bargain Foods in an effort to collect approximately $421,500.00 in an alleged PACA trust debt.

On August 24, 2012, a civil action was filed in New Jersey against Amazon Produce Network LLC in an effort to collect approximately $437,800.00 in alleged PACA trust debt.

On August 21, 2012, a civil action was filed in Maryland against Tree House Produce, Inc. in an effort to collect approximately $140,000.00 in alleged PACA trust debt.  A temporary restraining order was recently entered in this case.

On August 9, 2012, a civil action was filed in California against Inglewood Unified School District in an effort to collect approximately $36,300.00 in an alleged PACA trust debt.

On August 6, 2012, a civil action was filed in Massachusetts against Vetsource Solutions LLC in an effort to collect approximately $26,900.00 in an alleged PACA trust debt.

Please check your A/R to see if these cases affect you.  If they do, please do not wait to assert your rights.

FSMA Update: Food Facility Registration and Updates to Food Categories

The FDA recently issued a DRAFT guidance for the food industry discussing the agency’s current thinking regarding the necessity of food categories in food facility registrations.

See Draft Guidance for Industry: Necessity of the Use of Food Categories in Food Facility Registrations and Updates to Food Categories

DISCLAIMER: The forthcoming discussion relates to draft guidance that is still open for comment, modification and retraction.  As such, it is not intended for immediate implementation in its current form and it does not create a legally enforceable responsibility.

 

Step One: Relevant Rule (FD&C Act & Bioterrorism Act)

Section 305 of the Bioterrorism Act, generally required domestic and foreign facilities that manufacture, process, pack, or hold food for human or animal consumption in the United States to register with FDA by December 12, 2003 (See 68 FR 58894). This section also required facilities to submit registrations to FDA containing information regarding applicable food product categories as identified in 21 CFR 170.3.

Step Two: Necessity to be Determined by the FDA Through Guidance

Section 415(a)(2) of the FD&C Act, as added by section 305 of the Bioterrorism Act, provided in relevant part that, when determined necessary by FDA “through guidance,” a registrant must submit a registration to FDA containing information necessary to notify FDA of the general food category (as identified in 21 CFR 170.3) of food manufactured, processed, packed, or held at such facility.

Step Three: FDA Issued the Requisite Guidance and Finding of Necessity

On July 17, 2003, FDA issued a guidance stating that the agency had determined that the inclusion of food product categories in food facility registrations was necessary for a quick, accurate, and focused response to an actual or potential bioterrorist incident or other food-related emergency (see 68 FR 42415).

Step Four: Net Result…

Section 305 of the Bioterrorism Act, in relevant part, requires a food facility registrant to submit a registration to FDA containing information necessary to notify FDA of the general food category (as identified in 21 CFR 170.3) of food manufactured, processed, packed, or held at such facility.

What’s New Under FSMA?

Step One: The New Relevant Rule

FSMA, enacted on January 4, 2011, amended section 415 of the FD&C Act. Section 415(a)(2) of the FD&C Act, as amended by section 102 of FSMA, now provides in relevant part that, when determined necessary by FDA “through guidance,” a registrant must submit a registration to FDA containing information necessary to notify FDA of the general food category (as identified in 21 CFR 170.3 or any other food categories, as determined appropriate by FDA, including by guidance)  of any food manufactured, processed, packed, or held at such facility.

Step Two: Necessity to be Determined by FDA Through Guidance

FDA believes that it is necessary for a food facility to submit to FDA a registration containing the general food category as identified in 21 CFR 170.3 and any other food categories as identified below, if applicable, for a quick, accurate, and focused response to a food-safety related issue or an actual or potential bioterrorist incident, other food-related emergency, or food safety incident.

FDA believes that information about a facility’s food categories is a key element to allow for rapid communications between FDA and facilities directly impacted by actual or potential bioterrorist attacks, other food-related emergencies, or food safety incidents. Information about the categories of food a facility handles currently assists FDA in conducting investigations and surveillance operations in response to food-related emergencies. These categories also enable FDA to quickly alert facilities potentially affected by such an incident if FDA receives information indicating the type of food affected.

Section 102 of FSMA, also provides in relevant part that FDA may, through guidance, determine that additional food categories, other than those listed in 21 CFR 170.3, are appropriate for the purposes of food facility registration under section 415 of the FD&C Act.

Step Three: FDA Issued a DRAFT Version of the Requisite Guidance and Finding of Necessity

This draft guidance document also addressed the FDA’s finding of necessity needed to include additional food categories into the food facility registration process.  To this end, the “FDA believes that the following additional food categories are appropriate for food facility registration and will include such categories as mandatory fields in the food facility registration form when FDA finalizes this guidance”:

Additional Food Categories for Foods for Human Consumption:

  • Acidified Food (see 21 CFR 114.3(b));
  • Cheese and Cheese Product Categories: Soft, Ripened Cheese; Semi-Soft Cheese; Hard Cheese; Other Cheeses and Cheese Products;
  • Dietary Supplement Categories: Proteins, Amino Acids, Fats and Lipid Substances; Animal By-Products and Extracts; Herbals and Botanicals;
  • Fisher/Seafood Product Categories: Fin Fish, Whole or Filet; Shellfish; Ready to Eat (RTE) Fishery Products; Processed and Other Fishery Products;
  • Fruit and Fruit Products: Fresh Cut Produce; Raw Agricultural Commodities; Other Fruit and Fruit Products;
  • Fruit or Vegetable Juice, Pulp or Concentrate Products;
  • Low Acid Canned Food (LACF) Products (see 21 CFR 113.3(n));
  • Nuts and Edible Seed Product Categories: Nut and Nut Products; Edible Seed and Edible Seed Products;
  • Shell Egg and Egg Product Categories: Chicken Egg and Egg Products; Other Egg and Egg Products;
  • Vegetable and Vegetable Product Categories: Fresh Cut Products; Raw Agricultural Commodities; Other Vegetable and Vegetable Products; and
  • Baby (Infant and Junior) Food Products Including Infant Formula.

Additional Food Categories for Foods for Animal Consumption:

  • Grain or Grain Products (i.e., barley, grain sorghums, maize, oat, rice, rye, wheat, other grains or grain products);
  • Oilseed or Oilseed Products (i.e., cottonseed, soybeans, other oilseeds or oilseed products);
  • Alfalfa Products or Lespedeza Products;
  • Amino Acids or Related Products;
  • Animal-Derived Products;
  • Brewer Products;
  • Chemical Preservatives;
  • Citrus Products;
  • Distillery Products;
  • Enzymes;
  • Fats or Oils;
  • Fermentation Products;
  • Marine Products;
  • Milk Products;
  • Minerals or Mineral Products;
  • Miscellaneous or Special Purpose Products;
  • Molasses or Molasses Products;
  • Non-protein Nitrogen Products;
  • Peanut Products;
  • Recycled Animal Waste Products;
  • Screenings;
  • Vitamins or Vitamin Products;
  • Yeast Products;
  • Mixed Feed (e.g., poultry, livestock, equine);
  • Pet Food;
  • Pet Treats or Pet Chews;
  • Pet Supplements (e.g., vitamins, minerals); and
  • If none of the above food categories apply, print the applicable food category or categories (that does not or do not appear above).

Step Four: Net Result…  (coming some in final form)

Once FDA issues the final version of the aforementioned guidance document, the foregoing rules about registrations and additional food category disclosures will become a mandatory requirement for food facilities and a legally enforceable obligation under FSMA.

Important New Bankruptcy Filings!

Please take note of the following two new food industry bankruptcies:

Cascade Ag. Services, Inc. d/b/a Pleasant Valley Farms, which filed a voluntary petition for chapter 11 bankruptcy protection in the Western District of Washington on August 13, 2012.  A review of the bankruptcy petition shows estimated assets between $10 MM and $50M with estimated liabilities within the same range.  By way of example, the claims of the top 20 largest creditors range from $2 MM to $119k.

California Organics LLC, which filed a voluntary petition for chapter 11 bankruptcy protection in the Northern District of California on  August 13, 2012.  A review of the bankruptcy petition shows estimated assets between $1 MM and $10M with estimated liabilities within the same range.  By way of example, the claims of the top 20 largest creditors range from $325K to $13k.

Please check your A/R to see if theses cases affect you.  If they do, please do not wait to assert your rights!

Burch Farms – Melons Recalled After FDA Discovers Listeria

In a recent online article The Packer reported that:

“Listeria contamination is confirmed at the Burch Farms melon packing facility in Faison, N.C., according to the Food and Drug Administration.”

FDA officials also said the Listeria finding spurred Burch to expand its recall to include all cantaloupe and honeydew melons shipped this season. No illnesses have been reported in relation to the recalled melons.

“This recall expansion is based on the FDA’s finding of Listeria monocytogenes (L. mono) on a honeydew melon grown and packed by Burch Farms. The recall expansion is also a result of the agency’s finding of L. mono in the environment of the firm’s packing facility,” according to the notice.

FDA finds Listeria at Burch Farms

Food Safety News also picked up on this breaking news and reported as follows:

According to FDA, the recalled whole cantaloupes are identified by a red label reading Burch Farms referencing PLU # 4319. All cantaloupes involved in the recall were grown by Burch Farms, however some of the cantaloupes may have been identified with a “Cottle Strawberry, Inc.” sticker referencing the same PLU, but Cottle Strawberry, Inc. did not grow or process the recalled cantaloupe.

FDA said that honeydew melons involved in the recall expansion “do not bear any identifying stickers and were packed in cartons labeled melons.”

The melons were shipped to distributors in 18 states — Florida, Georgia, Illinois, Kentucky, Massachusetts, Maryland, Maine, Michigan, North Carolina, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, South Carolina, Virginia, Vermont and West Virginia — but distributors in those states may have further distributed them to other states.

FDA Issues Update on Burch Farms Melons Recall

Midwest Produce Conference + Expo

I wanted to personally thank everyone who came out to Michael Jordan’s Steak House and joined Freeborn & Peters LLP’s Food Industry Team for a cocktail reception following the Midwest Produce Conference + Expo.  For those of you who could not join us, please look for us at the upcoming PMA Fresh Summit Convention this October!