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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. 

PACA Trust Litigation Alert

PACA Trust Litigation Alert

PACA Trust Litigation Alert

On May 29, 2012, a civil action was filed in Chicago against CP No. 3, Inc. d/b/a Cermak Produce, DMM Produce, Inc. d/b/a Harvey Fresh Market, Mayfair Market Place, Inc. d/b/a Mayfair Market, Jenor LLC – Michael’s Fresh Market, Michael’s Market, Inc. and North Avenue Fresh Market LLC in an effort to collect approximately $1,9322,270.00 in an alleged PACA trust debt.

On May 29, 2012, a civil action was filed in Maryland against Tamburo, Inc. in an effort to collect approximately $23,500.00 in alleged PACA debt.  

On May 31, 2012, a new civil action was filed in Washington against Seven Stars Fruit Company LLC in an effort to collect approximately $2,018,400.00 in alleged PACA debt.  

On June 1, 2012, a civil action was filed in Chicago against A-1 Foodservice, Inc. and Forever Green Food Group, Inc. d/b/a Forever Green Foodservice in an effort to collect approximately $27,700.00 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.

Food Borne Illness Liability Forces Jensen Farms to File for Ch. 11 Bankruptcy Protection

On May 25, 2012, Jensen Farms, which is a general partnership, filed for Ch. 11 bankruptcy protection in Colorado.  With a list of the 20 largest creditors dominated by contingent, unliquidated and disputed estate claims, it is clear that wrongful death claims and other food safety related liabilities played a major role in the demise  of Jensen Farms.

The Produce News reported that Jensen Farms filed bankruptcy with $4.8 million in revenues in 2011, $2.1 million in current assets, $2.5 million in liabilities and an outstanding A/R from Frontera Produce in excess of $1.6 million.  The article went on to report that the bankruptcy should free up millions of dollars in insurance money to help fund settlements in numerous Listeria related wrongful death actions.  The Produce News – Jensen Farms Files for Bankruptcy Protection

This case will be closely watched as it is a glaring example of how important food safety issues are to the very sustainability and viability of a food company’s operations! 

PACA Trust Litigation Alert

PACA Trust Litigation Alert

PACA Trust Litigation Alert

On May 22, 2012, a civil action was filed in Hawaii against Paradise Corner LLC in an effort to collect approximately $164,950.00 in an alleged PACA trust debt.  

On May 23, 2012, a civil action was filed in California against Santanas Grill, Inc. d/b/a Fresh MXN Food in an effort to collect approximately $64,000.00 in alleged PACA trust debt.  

On May 24, 2012, a civil action was filed in Alabama against Atlanta Tomato LLC in an effort to collect approximately $492,890.00 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.

Judge Rejects Deal from Adams Produce, PNC Bank and Pro*Act

On May 21, 2012, Judge Mitchell of the U.S. Bankruptcy Court for the Northern District of Alabama rejected a proposed settlement in the Adams Produce Bankruptcy, which the Court identified as a case of “national interest.”

On May 22, 2012, The Packer published an article outlining Judge Mitchell’s reasons for rejecting the proposed settlement, which can be found here:

Judge Rejects Deal from Adams Produce, PNC Bank and Pro*Act

Echoing Jason Klinowski and Brian Jackiw of Freeborn & Peters’ objections to the proposed settlement, the Court cited the “lack of financial statements,” the lack of “schedules, statement of affairs and a full creditors’ matrix.”  As key reasons the Court would not approve the proposed settlement.  The Court went further to say that “we know very little about this company” and we are only “three weeks and three days into this case.”  Simply put, settlement was both premature and overreaching given the timing and all of the conditions contained in the proposal.

Judge Mitchell, agreeing with counsel from Freeborn & Peters, also took issue with the liability releases contained in the proposed settlement agreement.  Specifically, the Court noted that the “deal would have benefitted PNC Bank because it would get other creditors off the books, clearing the way for it to receive payment on a $5 million lien it claims to have against Adams Produce.”    Jason Klinowski and Brian Jackiw of Freeborn & Peters were not willing to allow their clients to sign away their future rights and the Court clearly agreed!

Jason Klinowski Quoted in The Packer’s Updated Article on Adams Produce

The Packer quoted Jason Klinowski in its 5/18/2012 updated article discussing the battle over a proposed settlement in the Adams Produce bankruptcy case, which involves the Debtor, PNC Bank and certain PACA creditors.

See:  Future Recovery Rights at Heart of PACA Case

Jason Klinowski and Brian Jackiw of Freeborn & Peters LLP are leading the opposition to the proposed settlement on behalf of several other PACA trust creditors.  Steve Leara and Jay Clark of Wallace, Jordan, Ratliff & Brandt LLC are an important part of the PACA creditors’ opposition to the proposed settlement and have filed their client’s opposition jointly with Klinowski and Jackiw.   Similarly, Jason Read of Rynn & Janowsky LLP and Howard Spector of Spector & Johnson PLLC have each filed pleadings in opposition to the proposed settlement.

Oral arguments in this highly publicized case will be held on Monday, May 21, 2012 at 10:30 a.m. in the U.S. Bankruptcy Court for the Northern District of Alabama, which is located in Birmingham, Alabama. 

Jason Klinowski Quoted in The Packer’s Recent Article on Adams Produce

 

The Packer quoted Jason Klinowski in its 5/17/2012 article discussing the rapidly unfolding battle over a proposed settlement in the Adams Produce bankruptcy case.

See:  Adams Produce: Bankruptcy Deal Could Hamper PACA Creditors

Jason Klinowski and Brian Jackiw of Freeborn & Peters LLP are leading the opposition to the proposed settlement on behalf of several PACA trust creditors.

Jason Klinowski Cited in The Produce News’ Recent Article on Adams Produce

The Produce News quoted Jason Klinowski in its 5/17/2012 article discussing the rapidly unfolding battle over a proposed settlement in the Adams Produce bankruptcy case.

See:  Creditors Battling Over Potential Adams Produce Settlement

Jason Klinowski and Brian Jackiw of Freeborn & Peters LLP are leading the opposition to the proposed settlement on behalf of several PACA trust creditors.

PACA Trust Litigation Alert

PACA Trust Litigation Alert

PACA Trust Litigation Alert

On May 10, 2012, a civil action was filed in New York against Sun East Trading Corp. in an effort to collect approximately $198,650.00 in an alleged PACA trust debt.  Importantly, the Court recently entered a Temporary Restraining Order in this case.

On May 10, 2012, a civil action was filed in Washington against Seven Stars Fruit Company LLC in an effort to collect approximately $1,467,950.00 in alleged PACA debt.  

On May 15, 2012, a civil action was filed in Maryland against Blue Ocean Enterprises LLC t/a The Family Market in an effort to collect approximately $236,000.00 in an alleged PACA trust debt.  Importantly, the Court recently entered a Temporary Restraining Order in this case. 

On May 15, 2012, a civil action was filed in New York against J. NY Produce, Inc. in an effort to collect approximately $48,000.00 in an alleged PACA trust debt.  Importantly, the Court recently entered a Temporary Restraining Order in this case.

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

Should a Company’s Failure to Comply with Food Safety Programs or Laws be Deemed an Unfair Trade Practice?

The Packer recently reported that the “CaliforniaCantaloupe Advisory Board is establishing the state’s first mandatory food safety program implemented by a commodity board.”  Although the actual details are still in the works, Steve Patricio, chairman of the California Cantaloupe Advisory Board, stated that “we have existing assessments and revenue we can convert to food safety” and “there will be an additional assessment, probably as high as two cents a carton.”   California Cantaloupe Food Safety Program Article – The Packer 

According to the article, the proposed Cantaloupe safety program utilizes USDA inspectors under the supervision of the California Department of Food and Agriculture (“CDFA”).  This is important because the CDFA stated that:

“noncompliance with the coming food safety metrics would amount to an unfair trade practice.”    

Under California law, 

“a marketing order may contain provisions which relate to the prohibition of unfair trade practices. In addition to the unfair trade practices now prohibited by law, applicable to the processing, distribution, or handling of any commodity within this state, the director may include in any marketing order which is issued provisions that are designed to correct any trade practice which affects the processing, distributing, or handling of any commodity within this state which the director finds, after a hearing upon the marketing order in which all interested persons are given an opportunity to be heard, is unfair and detrimental to the effectuation of the declared purposes of this chapter.” 

California Food and Agricultural Code Section 58890.  The foregoing means that the parties to a marketing agreement or other similar arrangement can agree that certain conduct shall be deemed a violation of California law.

Taken as a whole, the members of the California Cantaloupe industry, who make up approximately 70% of the domestic Cantaloupe supply, are working together to accomplish two significant goals.  See Leafy Green Marketing Agreement Article  The first is to promote and ensure food safety, which is great!  The second is to ensure that no one Cantaloupe grower is able to obtain a competitive price advantage over the other by electing not to incur the costs associated with a mandatory food safety program, which was reported to be approximately two cents per carton.  This is a good idea!

The PACA prohibits certain types of conduct by fruit and vegetable buyers and sellers as unfair trade practices.  Some examples of unfair trade practices include failing to make full payment promptly for produce purchases, misbranding or mislabeling of produce, making false and/or misleading statements in connection with produce transactions, and employing individuals under employment restrictions that were responsibly connected with a PACA violator firm.  What you don’t see addressed here is the subject of food safety and the unfair advantages associated with non-compliance with food safety laws.   Maybe it should… 70% of the Cantaloupe industry seems to think so! 

But, what the PACA does give the suppliers of perishable agricultural commodities (“Produce”) is the right to obtain trust protection on the sums “owing in connection” with their transactions in produce.   7 U.S.C. 499e(c)(2).  The cost of food safety (i.e. the two-cent per carton assessment discussed above) is a sum owning in connection with a company’s transactions in produce.  The cost of compliance with food safety programs and laws help ensure the safety of the produce itself and that serves the public interest. 

As such, the cost of food safety compliance should be considered an inseparable part of a company’s transactions in produce and it should be invoiced as such.  Any company that has ever been on the wrong side of a foodborne illness issue or incurred the costs associated with a major recall can attest to the fact that the cost of prevention is far less than the alternative, which often includes brand identity damage, loss of goodwill in the marketplace and litigation costs.   Moreover, as we see from the premiums placed on most organic products, consumers will seek out and pay for safer products.