The Trust Created Under the Perishable Agricultural Commodities Act Trumps a Perfected UCC Security Interest
 
February 15, 2007
 
Michael Weissman - Chicago

In J. A. Besteman Company v. Carter’s, Inc., 439 F.Supp. 2d 774 (W.D. Mich. 2006) the court expounded upon the trust created for unpaid sellers of perishable agricultural commodities under the Perishable Agricultural Commodities Act, U.S.C. § 499a et seq. (PACA). Although the case did not involve a lending institution, it is nonetheless instructive for those who lend to purchasers of agricultural commodities.

J. A. Besteman Company, a dealer in perishable agricultural commodities, had sold them to Carter’s, Inc., the operator of a chain of retail grocery stores, for more than 22 years. During that entire period Carter’s had always had an unpaid account due Besteman. In fact, 95 percent of the products Besteman sold to Carter’s were perishable agricultural commodities.

When Carter’s unpaid account amounted to $940,916.7,3 and it had ceased all operations, a lawsuit was instituted by Besteman. An order impressing a PACA trust on all of Carter’s assets was requested. The court granted the request and further ordered Carter’s to pay into the treasury of the court all proceeds from the sale of its inventory and other assets.

In the course of rendering its judgment the court noted that the PACA trust protects sellers of perishable agricultural commodities against financing arrangements made by purchasers who encumber the commodities or the proceeds therefrom. Unpaid sellers have priority over the claims of secured creditors of the purchasers.

Continuing its discussion, the court said the PACA trust is a “floating” trust that applies to all of the purchaser’s produce and proceeds from the sale of the produce. Therefore, said the court, the trust beneficiary, the seller, is not obligated to trace assets. When trust and non-trust assets are commingled, the burden is on the purchaser to show that disputed assets were not acquired from the sale of produce or produce-related assets.

Although recognizing that the PACA trust treats secured creditors harshly, the court said the statute reflects a Congressional determination that the sellers of perishable agricultural commodities were particularly vulnerable and, as a result, should have priority over secured and unsecured creditors.

 

What’s the Point?

The PACA is a secret lien in that no public filing is necessary for it to arise. Therefore, those who lend to the purchasers of such perishable agricultural commodities run the risk of having their apparent secured position trumped by a lien of which they have no notice. This kind of lending requires continuing due diligence.

 

For more information, e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.