In light of the ongoing financial stress caused by COVID-19, sellers of PACA Produce must take care to preserve their PACA trust rights by not prematurely modifying the terms of their produce sale contracts. Deteriorating economic conditions will inevitably cause some PACA Produce buyers to struggle to timely meet their obligations to sellers. As those buyers start to struggle, it is critical that sellers wait for buyers to default before making alternative payment arrangements that go beyond the 30-day payment period required by PACA regulations. Failure to wait for buyer default can result in the loss of protected PACA trust rights, Stoel Rives, LLP, writes.
PACA provisions and licensing requirements unchanged
The USDA has issued guidance that its PACA Division will continue to operate during the COVID-19 coronavirus outbreak, and that licensing requirements and deadlines set by PACA will not be extended or affected. See the USDA’s PACA Q&A website, available here. Accordingly, PACA’s trust preservation provisions remain in force, and sellers must take care to preserve their PACA trust rights when modifying purchase and sale agreements with distressed buyers.
Preservation of PACA trust rights prior to default
PACA trust rights are non-consensual and created solely by complying with PACA’s minimum requirements.
Sellers who are PACA licensees may also use an alternative method of preserving trust benefits. PACA licensee sellers may use their invoice or other billing statement, whether in documentary or electronic form, to preserve trust benefits. The invoice or other billing statement given to the buyer must contain the following statement verbatim in a prominent place on the face of the billing statement or invoice:
“The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. 499e(c)). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.”
The invoice or billing statement must also set out the terms of payment if they differ from the default PACA period of 10 days net and the parties expressly agreed to such terms in writing before the affected transactions occur, bearing in mind that such terms cannot include a payment period greater than 30 days. Only a seller who is also a PACA licensee may use this form of notice to perfect PACA trust rights. An unlicensed seller cannot preserve its rights simply by including this language in its invoice or billing statement.
Preservation of PACA trust rights in the event of default
As is always the case with PACA trust rights, sellers should NOT modify produce sale agreements to allow terms of payment for any period greater than 30 days after the buyer’s receipt and acceptance of the produce. Terms of payment that allow any period greater than 30 days, including any written agreement (including by email) extending an otherwise qualifying payment period beyond 30 days, disqualify the sale for protection by the PACA trust.
So, if a seller receives information during the 30-day period indicating that a buyer is not going to be able to make its payments on time, sellers should NOT modify such agreement (neither orally nor in writing). Instead, sellers must allow buyers to default on their obligations.
After default, a seller may make new payment arrangements, including acceptance of partial payments or creation of an extended schedule for payments, and still preserve its PACA trust rights. Sellers and buyers alike should keep records of any such modified payment arrangements in the event they are called upon to provide documentation of modifications in the event of future proceedings regarding preservation of trust rights.
Click here for an overview of companies who previously violated PACA.