An Introduction to the Perishable Agricultural Commodities Act ("PACA")
Full Version in Printable Form (Requires Adobe Acrobat)
I. THE "PAPERLESS" TRUST SYSTEM
II. PAYMENT TERM AGREEMENTS
III. INVOICING PROCEDURES
IV. INTEREST AND ATTORNEYS' FEES
V. OTHER KEY CHANGES TO THE PACA
VI. COLLECTION STRATEGY & TRUST CLAIM ENFORCEMENT
VII. CONCLUSION
I. THE "PAPERLESS" TRUST SYSTEM
The 1995 Amendments changed several requirements under the
Perishable Agricultural Commodities Act ("PACA") but
left many others the same. The main difference is obviously
the creation of the so-called "paperless trust", or
the ability of those shippers who hold a USDA license to have
their invoices serve as the trust notice. If the supplier does
not have a PACA license, the foreign or domestic supplier must
preserve its trust rights the "old way" by sending
a trust notice in addition to the invoice and, thus, the non-licensee
cannot benefit from the Amendments in this regard. Essentially,
the Amendments reflect a Congressionally approved incentive
for produce companies to submit to the USDA's jurisdiction and,
of course, pay the license fee.
The primary reason for removing the notice filing requirement
was to save time and eliminate the USDA's expense in processing
trust notices and in administrating this provision. Therefore,
in cases of bankruptcy or insolvency, the USDA will no longer
acknowledge receipt of trust notices or provide an opinion
as to the amount qualified for trust protection, for any trust
notice received after November 15, 1995. In order to ensure
compliance with the regulations governing the PACA trust, each
invoice must contain the following language exactly as it appears
in the statute:
The perishable agricultural commodities
listed on this invoice are sold subject to the statutory trust
authorized by Section 5c 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.
No language other than this will be acceptable as complying
with the statutory requirements. While the issue of "substantial
compliance" (ie: paraphrasing this language) has yet to
be tested, the statute does quote the above language as the
"approved" statement and there are several cases requiring
strict compliance with the PACA for preservation of trust rights.
Accordingly, there is no need to risk non-compliance when the
preferred language is set forth in the statute for all to use.
Additionally, this language should be prominently displayed
on the front of the invoice, preferably in bold large letters.
In keeping with prior practice, each invoice should include
sufficient detail to identify the transaction subject to the
trust including:
- names and addresses of the seller and the debtor;
- date of the transaction;
- commodity sold;
- contract terms (i.e., F.O.B., consignment, etc.);
- invoice price;
- the date payment is due, and;
- the amount due.
Because each invoice now serves as your trust notice, be sure
to serve a copy of each invoice on the debtor within 30 days
of either the payment due date or the date of receipt
of notice of any check being dishonored. In the latter instance,
the new invoice/trust notice should be generated and sent to
the debtor within thirty (30) days of being notified of the
check being dishonored.
II. PAYMENT TERM AGREEMENTS
If the payment terms are different from those specified under
PACA's prompt pay regulations (i.e. ten days net for an F.O.B.
sale), the agreement must be in writing, entered into prior
to the transaction, and the terms must be reflected on the
invoice and all other billing documents. Merely including
the term on your invoice does not satisfy this requirement.
The agreed payment terms cannot exceed 30 days from the
date of acceptance of the transaction for an F.O.B. sale.
If at all practical from a business perspective, you should
consider revoking all prior "terms agreements" which
allow debtors to pay beyond ten (10) days. This way, you can
never be caught in one of two situations that can lead to a
loss of your PACA trust rights:
1) where an invoice reflects terms of more than 10 days and
you have no written agreement to go beyond 10 days; or,
2) where there is an inconsistency between your documents
(ie. the terms agreement says 30 days and your invoice is
either silent or states terms other than 30 days - both must
match exactly).
Under the USDA regulations, you can keep the "paper"
saying 10 days and have oral agreements not to consider any
invoice past due until the longer credit period has expired.
Under the current USDA regulations, these oral agreements are
unenforceable and the account debtor or, more often -
the debtor's Bank, cannot rely upon such oral agreements to
say the terms were anything other than the written ten (10)
days. This way, we can greatly reduce the chance of an inconsistency
in your documents that may destroy your trust rights. The bottom
line is credit terms of 10 days greatly reduces the amount of
paperwork necessary to preserve your trust rights and, thereby,
significantly improves your chances of a full recovery on any
outstanding account balance.
III. INVOICING PROCEDURES
Although we are pleased that obtaining trust protection may
be easier with the passage of the 1995 amendments, Congress
failed to address one key issue. Under the "old way",
the issue of whether the debtor actually received the
trust notice led to a great deal of litigation and expense.
This litigation occurred when a debtor alleged it did not receive
a copy of the trust notice by mail or other means and where
the creditor had no proof of delivery except the live testimony
of company personnel. Unfortunately, this same scenario has
been occurring under the new system wherein a debtor will claim
it did not receive the invoice/trust notice, and where the only
proof of delivery will be live testimony regarding the business's
ordinary billing practices. Although this has proven to be effective,
please carefully evaluate the receivables nearing the thirty
(30) day filing deadline. For these receivables, you should
consider re-serving your invoice on the debtor using a method
that you can prove the debtor received it. This will allow you
to prove receipt through documents (ie: copy of fax confirmation
or FedEx receipt) rather than through expensive live testimony
about how you mailed it.
In a perfect world, from a trust claim enforcement perspective,
each and every invoice would be sent to the debtor in a way
that we have a document which serves as the "proof of delivery."
We can greatly reduce your legal fees in any trust enforcement
action by having more unambiguous documentation to support the
claim and less live testimony about who sent what and when.
When the documents "speak for themselves", the debtor's
counsel either gives in right away or we obtain a summary judgment
at a fraction of the cost of a contested court battle or a full-blown
trial. The trick in this regard is to not nullify the 1995 Amendments
by replacing one paperwork-intensive administrative burden with
another.
If, in the opinion of your credit personnel, the buyer's credit
standing is questionable, or if they have misgivings about receiving
payment, they should re-send each invoice to the debtor via
fax, and keep a copy of the transmission record and the cover
sheet as a proof of service on the debtor. The fax cover should
clearly indicate the contents of the transmission by including
language like: "Attached are copies of unpaid invoices
approaching 30 days past due for which we hereby preserve our
rights under the PACA trust". While it would be nice
to have written proof of delivery and receipt on each late invoice,
you need to decide how much follow-up can be done without needlessly
increasing the office work load. In particular, we strongly
advise a fax follow-up on questionable accounts (ie: customers
who have recently changed ownership, those currently experiencing
downward fluctuations in their credit ratings, those who have
factored or assigned their accounts receivable, etc.).
IV. INTEREST AND ATTORNEYS'
FEES
While the primary concern is to make sure your trust claims
are properly preserved, another issue to consider is the amount
which can be claimed under the trust and any reparation actions.
The USDA and many courts are allowing interest and collection
costs, including attorneys' fees, to be recovered from the Debtor
as part of your trust claim - but only if this provision is
made a part of the transaction itself. Also, it will help to
reduce the chances of a damage dispute arising if you limit
the time for such claims. Along these lines, please consider
including the following provisions on the face of your new invoices:
-
Interest shall accrue on any past-due account balance at
the rate of 1.5% per month (18% per annum).
-
Buyer agrees to pay all costs of collection, including
attorneys' fees.
-
No claims for credits or adjustments can be considered
unless the problem is reported in writing to Seller within
eight (8) hours of receipt of the product along with the
written USDA inspection results.
** The first two (2) provisions recently allowed Keaton &
Associates, P.C. to win a favorable decision for our grower/shipper
client, thereby allowing it to recover its attorneys' fees
and interest from the debtor in addition to
the invoice costs of the produce. This landmark ruling
from the 9th Circuit Court of Appeals in California is entitled
Middle Mountain Land & Produce, Inc. v. Sound Commodities,
307 F.3d 1220 (9th Cir. 2002). In that ruling (a copy is enclosed),
the Appeals Court stated "Congress wrote the statute
broadly to include not only the value of commodities sold
but also the expenses in connection with the sale of [Produce]
when it drafted the statute. It did not limit the claim to
[Produce] alone... A fair reading of the statute brings contractually
due attorneys' fees and interest within the scope of the statute's
protection of 'full payment owing in connection with the [produce]
transaction." As you might expect, this was a huge
win for the supply side of this industry and confirmed
a position this firm has taken in every case, without exception.
Many PACA lawyers will advise you to put these provisions
on your invoices, then not ask for these "extras"
in Court. In fact, some of these other lawyers actually spend
their clients' money fighting against
PACA coverage of interest and collection costs. If you put
this language on your invoices, our firm will always fight
to get your entire claim paid, not just a portion of it.
V. OTHER KEY CHANGES
TO THE PACA
-
In order to proceed under the Shortened Rules of Procedure,
a USDA reparation complaint may now seek up to $30,000.00
rather than the previous $15,000.00 limit. Thus, all complaints
for $30,000.00 or less will be decided without an oral hearing.
-
The filing fees of $60.00 and $300.00 for informal and
formal complaints, respectively, are now permanent requirements.
-
In a reparation action, the complainant will automatically
be awarded the $300.00 filing fee as damages if it prevails.
-
The new amendments include a change in the unfair practices
section to allow payment of collateral fees and expenses
including promotional allowances, rebates, etc. However,
the payments must be disclosed on invoices, etc. in order
to comply with the PACA full disclosure requirements.
VI. COLLECTION STRATEGY
& TRUST CLAIM ENFORCEMENT
In selecting the best way to proceed against a past due account,
ask yourself one question - why is this account not paying?
The answer to this question will determine whether you should
go with a USDA complaint or act to privately enforce your PACA
trust rights. The challenge here is to know when to use each
method so you don't end up having to pay for both to get your
money out of the Debtor.
A) USDA COMPLAINT
If the Debtor is not paying because he has plenty of money
but believes none of it is yours, then by all means, your
regional USDA office is the place to go. An informal or formal
complaint is cheap and is usually a very effective way of
getting a delinquent buyer to pay you, if that buyer is still
concerned with its credit rating or license standing. However,
the only satisfaction this procedure has to offer is the entry
of a reparation award in your favor. This piece of paper tells
the Debtor - "pay this amount within 30 days or your
license will be suspended." If the Debtor does not pay,
the USDA has no other way to force him to pay you. Accordingly,
this is a relatively passive action which only works if two
essential factors are present - (1) the Debtor actually has
all of the money he owes you in readily-available cash, and
(2) he really cares if his license is suspended. By the time
most Debtors are past due to a valued supplier, there is not
enough cash to go around to pay all suppliers and some unpaid
creditors (like you) need to be shorted or flat-out ignored
for the Debtor to make ends meet.
In such circumstances, the Debtor views the potential loss
of his license as secondary to keeping food on the table and
a roof over his head. The delays inherent in this process
also provide the unscrupulous or truly desperate Debtors with
ample time to hide the company's assets from what he knows
will be the next step - a large creditor or his Bank deciding
enough is enough and pulling the plug for good. From there,
the Debtor's choices are to run and hide or file a bankruptcy
petition. Once this happens, PACA will tell you there is nothing
more they can do and that you are free to enforce your reparation
award in federal court to recover the amounts to which they
determined you are properly entitled. The problem is, by the
time you get this far, the Debtor has likely burned through
whatever cash he had, and sold or hidden whatever other assets
he had, back on the date you first started the PACA action.
Now you are faced with an uphill battle to recover these dissipated
trust assets, if you can even find them.
B) PRIVATE ENFORCEMENT OF PACA TRUST RIGHTS
On the other hand, if the debtor is not paying timely because
there is simply not enough money to go around at the end of
the month, the earlier you move against him the better. The
other way of saying this is - why close the barn door after
the horses have left? In most instances, the lack of payment
is due to the Debtor's insolvency and he begins to throw money
(your money) at the wheel that squeaks the loudest. When the
reason for the non-payment is insolvency, a PACA reparation
order simply becomes another piece of paper telling the Debtor
he owes you X amount of money. Your invoice already does that,
but the Debtor is still not paying you.
In cases of non-payment because of insolvency, the Debtor
generally has some money - just not enough to go around.
He will continue to pay the landlord, because he can lock
him out. He will continue to pay his labor, because they will
not work for long without a check. He will continue to pay
the Bank on any loans because they can foreclose on all his
assets and, invariably, he will continue to pay himself and
his other "insiders" a full salary. The only way
to stop this leakage or "dissipation" of the PACA
trust assets to non-trust creditors, which the law requires
to wait in line behind you, is to enforce your trust
rights in court. While initially more expensive than going
to the USDA and filing a PACA complaint, the results are much
more satisfying. You have the right to obtain a Court Order
freezing the Debtor's accounts and all other assets until
he pays you - ahead of all other creditors - including
his landlord, the utility company and even his secured creditors
or Bank.
By moving quickly, you can close the barn doors before the
horses are gone. Upon entry of this Court Order, called a
Temporary Restraining Order or "TRO", the Debtor's
bank accounts are all frozen and every check the Debtor has
on the way to someone other than you will bounce because the
money in that account is frozen. By striking while the Debtor
still has some cash and uncollected receivables, this action
has the uncanny ability to capture the Debtor's immediate
and undivided attention. He suddenly becomes very
interested in taking your telephone calls and in reaching
a prompt resolution of your unpaid balance so he can get his
accounts unfrozen. In addition, with some slight modifications
to your invoices, the costs of this private enforcement action
can be added to your PACA trust claim so the Debtor is forced
to reimburse you for all the legal expenses. See Section IV
above.
VII. CONCLUSION
This information should assist you in determining how best
to implement the new procedures allowed under the 1995 Amendments
to the PACA and better protect your hard-fought produce receivables.
To further assist you, we have enclosed a copy of both a sample
payment term agreement and a sample revocation of existing agreements.
In the event you decide terms of more than 10 days are a business
necessity, be sure you have a written payment term agreement
in the file for every customer. For obvious reasons, a counter-signed
agreement is the best, but the key is to stay consistent.
Having some signed and others not signed will only invite some
cagey debtor's lawyer or shifty bank's lawyer to argue there
was no "meeting of the minds" and thus, no agreement
as to the 10+ day terms, thereby possibly disqualifying your
trust claim..
At a minimum, these fact disputes will give a judge reason
to pause and likely direct the parties to fully research and
brief the issues on both sides. While the Debtor's attorneys
and even other firms that handle a little bit of many types
of cases may require extensive research to "get up to speed",
we are always ready to go. Because our firm spends 100% of its
time enforcing PACA trust claims for creditors only,
we are always up to date on the most recent case law the Judge
may need to decide an issue and have most likely already briefed
and argued those issues in numerous other cases. In many situations,
we are also able to identify a potential problem with sales
documentation before it becomes a litigation problem, like when
the Debtor or the competing creditors are seeking to disqualify
your PACA trust claim.
Should you have any questions regarding these recommendations,
or if you have any specific questions on an issue relating to
credit or collections, please do not hesitate to call. We would
be happy to help at no charge for an initial consultation. Please
free to call us at 800/535-9949, fax us a note at 847/934-6508
or simply send me an e-mail at
keaton@pacatrust.com. We will
be happy to lay out your options at no cost. We look forward
to be being able to help you.
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