There is a plethora of comments from the industry about the PACA Trust Post-Default. Most follow the same line of thinking as this comment from Michael Aerts of the Florida Fruit and Vegetable Association. The question now is whether USDA lawyers will agree with the industry . .

This is comment on PROPOSED RULE: Perishable Agricultural Commodities Act: Impact of Post-Default Agreements on Trust Protection

September 13, 2010
PACA Trust Post-Default Comments
Agricultural Marketing Service, Fruit and Vegetable Programs
PACA Branch

1400 Independence Avenue, SW
Room 2095-S, Stop 0242
Washington, DC 20250-0242
RE: Response on the USDA’s Request for Comments on the Proposed PACA Post-Default Agreements on Trust Protection Eligibility.
Docket Control Number AMS-FV-09-0047

To Whom It May Concern:

This communiqué is being provided in response to the USDA’s announcement on the proposed modification of the regulations under the Perishable Agricultural Commodities Act (PACA) in response to the potential loss of seller’s status as trust creditors after default on payment, to accept payments over time from financially challenged buyers.

The Florida Fruit and Vegetable Association (FFVA) is a private, non-profit agricultural cooperative whose  mission is to enhance the business and competitive environment for producing fruits, vegetables, and other crops by managing issues and providing collective services for our members.

FFVA is submitting these comments on behalf of our producer industry members. We appreciate and welcome the opportunity to once again supply the Department with input on this important topic. The purpose of PACA’s trust provisions is to provide protections for suppliers of perishable agricultural commodities in cases where a buyer fails to make payment as provided by contract.

PACA was designed to provide suppliers with a self-help tool that enables them to protect themselves against abnormal risk of losses resulting from the slow-pay and no-pay practices by buyers or  receivers of fruit and vegetable commodities.

The terms of the PACA trust are set forth in the PACA statute, which says proceeds from the sale of produce must be held in trust. The statute also says that beneficiaries are the unpaid suppliers until full payment is made. In order for suppliers to remain trust beneficiaries currently, they must give written notice to the buyer of their intent to preserve the trust within 30 days after payment is due.

USDA regulations say that “such other time by which payment must be made, as the parties have expressly agreed to in writing greater than 30 days, then the supplier loses their trust rights.” When buyers fail to pay, suppliers might attempt to work out payment schedules rather than immediately filing a lawsuit or a PACA complaint.

These are commonly called post-default agreements, meaning that they occur after the buyer has the produce and the payment term has been breached. No further credit is extended to the buyer; the supplier is simply trying to collect a bad debt. However, some courts interpreted post-default agreements as extensions of terms. These court rulings concluded that because post-default agreements extend payment terms beyond 30 days, then they are outside the terms of the PACA trust and any supplier with a post-default agreement therefore waives their trust rights.

According to the aforementioned proposal outlined in the June 8th Notice, a seller now would forfeit their trust rights if they enter into a post-default payment agreement unless the post-default agreement is in writing and it is less than 180 days from the original date payment was due. USDA has always said that the PACA law states that a supplier who meets the PACA trust requirements remains a beneficiary until the dept is paid in full.

In this proposal, USDA now seems to be saying that if a supplier enters into an oral payment agreement (and phone calls are often the common mechanism for such transactions to occur), or agrees to a payment of more than 180 days from the original payment due date, then the supplier is forfeiting the trust rights that is has preserved. So the proposed rule in fact formally establishes what the previous incorrect court decisions held, that being that post-default agreements to collect  trust assets can result in a waiver of trust rights.

Therefore, we believe that the notion stating that all agreements must be in writing, and that these agreements must be less than 180 days from the original date payment was due, should be removed from the proposal. Questions also remain as to how exactly this 180 threshold became established in the proposal. Does this number have basis, or is there some reason AMS thought to incorporate this number into the Notice?

What must be remembered throughout this process is that only full payment should end a supplier’s trust rights, and this proposed rule seems to be contrary to that precedent which has already been established. The parameters of this proposal read that post-default agreements can in fact be responsible for waiving trust rights. This is completely contradictory to the original intended regulation. Post-default agreements should not be looked at as extensions of credit but simply as an attempt to collect a debt.

Similarly, a supplier has no way of knowing at the time of an original agreement that a subsequent 180 day (or longer) type agreement might be necessary, so how would one get a subsequent agreement in place and in writing then at the time of the original contract? The courts appear to have misinterpreted the portion of the regulations that says that payment terms can only be extended before the transaction is completed.

There is no way to be assured that a subsequent agreement might be necessary, but if a supplier doesn’t draft such an agreement in advance of completion of the transaction, apparently they will still lose their PACA trust protection rights under this proposal? Further clarification on this situation should be provided, as standard logic does not apply.

We have no doubt that concerns and uncertainties have been raised subsequent to the recent court decisions, and the silence of the PACA regulation about the issue results in risk, cost and unnecessary litigation are concerning as well. The PACA rule must protect the rights of the sellers and not take away the occasional need for extended terms to pay for produce. FFVA appreciated the opportunity to comment on this important topic, and if additional information is needed or questions arise, please do not hesitate to contact us. Thank you in advance for your support with this situation.

Michael J. Aerts
Marketing and Membership Division

TK: On a related note, there may be a question whether the USDA's fruit and vegetable  industry advisory committee made a formal recommendation on the PACA rulemaking.  Here is what a USDA AMS official said about the committee's action relative to the PACA rulemaking, relating to a presentation by Stephen McCarron that suggested changes similar to the FFVA comment above: From the USDA AMS:

The PACA Trust is currently in the public comment period of the rulemaking process (ex parte which legally forbids any USDA official or staff to discuss the content, etc. and permits the statement of process only). What the Committee did after Mr. McCarron’s presentation (during the initial comments from observers period) was to vote on having the Committee on record during the rulemaking comment period in support of his proposed revision – the document he provided.

Basically, they wished for their support to be considered in the rulemaking record.

This was not a formal Recommendation to the USDA Secretary nor part of the Working Group/recommendation research and study activities that occurred as part of the Advisory Committee charter.

So there you have it. Again, it will be interesting to see if the USDA lawyers are comfortable with the changes suggested by industry.