Magazine article Business Credit

A Chapter 11 Debtor's Right to Use Cash Collateral Trumps PACA Trust Rights

Magazine article Business Credit

A Chapter 11 Debtor's Right to Use Cash Collateral Trumps PACA Trust Rights

Article excerpt

Trade creditors oftentimes have great difficulty collecting their general unsecured claims against financially distressed customers. Creditors should, therefore, take advantage of any rights that can enhance their recoveries.

Fresh produce sellers enjoy very valuable rights under the Perishable Agricultural Commodities Act ("PACA"). The PACA statute grants eligible suppliers of perishable agricultural commodities a statutory trust in all of a buyer's/debtors perishable agricultural commodity inventory, and all related products and proceeds, that is entitled to a higher priority than even the rights of the buyer's secured lender with a floating lien on all of the buyer's inventory. As a result, PACA trust claimants have a much greater chance of obtaining full payment of their claims than if they relied on their lower priority general unsecured claims and even their higher priority administrative priority claims under Bankruptcy Code section 503(b)(9) for goods sold to and received by a debtor within 20 days of a bankruptcy filing.

However, there are limits on ? PACA seller's trust rights. The United States Bankruptcy Court for the Western District of Michigan (the "Bankruptcy Court") recently addressed these limits in the context of a contested cash collateral motion in In re Cherry Growers, Inc. The Bankruptcy Court held that a creditor could not invoke its PACA trust rights to stop a debtor from using cash that is part of ? PACA trust until full payment of the creditor's PACA claim. The court allowed the debtor to use PACA trust assets, including cash, as long as the debtor adequately protected the PACA claimant's interest in the trust assets from any diminution in value resulting from the debtor's use of these assets during the Chapter 11 case.

The PACA Statute

Congress adopted PACA in 1930 to regulate the interstate sale and marketing of produce and remedy the practice of dishonest brokers taking advantage of small farmers and growers by refusing to accept produce in a weak market. Congress was concerned that a produce seller would be especially vulnerable due to the distances between the seller and a produce buyer, the perishability of the seller's goods, and the expense and impracticality of a seller seeking to recover its goods and otherwise enforce its claim in the event the buyer failed to pay for the goods.

Congress amended PACA in 1984 in response to a sharp increase in defaults by produce buyers. The amendment added a statutory trust for the benefit of produce suppliers, sellers and their agents that comply with all of PACA's requirements. This was designed to protect produce sellers from distressed buyers whose creditworthiness the seller frequently could not verify prior to any produce sale.

A PACA trust grants eligible produce suppliers an enhanced super priority right of payment of the purchase price of their goods over the claims of all other creditors, including secured creditors. PACA trust assets cannot be subject to the security interest of the buyers secured creditor until the seller is paid in full because a produce buyer lacks a sufficient interest in PACA trust assets for any security interest to attach to these assets. As a result, PACA creditors can compel the buyers secured creditor to disgorge collateral proceeds derived from PACA trust funds.

How PACA Works

Only the sale of perishable agricultural commodities gives rise to a PACA trust. Perishable agricultural commodities include unprocessed or minimally processed fruits and vegetables, irrespective of whether the produce is frozen or packed in ice. A sellers eligibility for PACA protection for fruits and vegetables subject to any processing depends on whether the processing converted the produce to a different kind or character of food.

PACA only applies to sales of perishable agricultural commodities to licensed commission merchants, brokers and dealers. Commission merchants and brokers buy and sell produce on behalf of third parties. …

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