On August 23rd 2018, Andrew Branan, Extension Assistant Professor (of law), briefed grower and packer members of the North Carolina Sweet Potato Commission on the accounts receivable protections available to farmers under the Perishable Agricultural Commodities Act (7 U.S.C. §499). Also joining the discussion were attorneys Catherine Clodfelter and Brian Darer of Parker Poe, a regional law firm representing several sweet potato grower-claimants in two current packer bankruptcies in eastern North Carolina. The program was held August 23 at the Maxwell Regional Agricultural Center in Goldsboro.
The Perishable Agricultural Commodities Act, commonly called PACA, is a Depression-era federal statute enacted to safeguard producers of fruits and vegetables against potential unfair trade practices by purchasers of their produce. Because such commodities are perishable, producers can find themselves at a disadvantage when a buyer does not make prompt payment on a produce load the farmer cannot otherwise reclaim and resell due to its perishable nature. Under PACA, all buyers of perishable commodities must be licensed with the USDA (restaurants and other small buyers excluded) to ensure compliance with the Act.
The key feature of PACA highlighted at the Goldsboro meeting is known as the “PACA Trust.” The effect of the PACA Trust is to place the producer’s invoiced amount (for a product load sold) at the front of the buyer’s accounts payable line before all other payables and creditors, both secured and unsecured. Such placement is particularly critical should the buyer declare bankruptcy in an attempt to discharge its financial obligations to all creditors, including farmers. The challenge for producers is to preserve the full amount of their claim, for which there are two statutory methods under PACA which notify the buyer of the amount.
The first method, known as the invoice method, is available to those producer-sellers who choose to purchase an annual PACA license, which is optional for producers. With the license, producers can print language on each invoice to notify the buyer that he or she now holds the seller-producer’s invoice payable in trust. While the invoice notice must be the exact language prescribed in the statute, presenting it on an invoice relieves the seller of providing further information on the transaction. The other method, called the notice method, requires the seller to send notice in writing within 30 days of the due date on each invoice, sometimes times prescribed by contract, but often not. Such notice – one for each invoice – must contain detailed information, including the amount due on the invoice, date of transaction, description of commodity, and payment terms after which payment is delinquent.
“Because the notice method requires more detailed information, this method creates a fact-based inquiry whereby the producer-seller – in order to preserve their trust amount and secure their place at the front of the creditor line – must prove each item in the notice, including timing and delivery of notice, acceptance of product, price, etc.” said Branan, who worked on several PACA cases while in private law practice. “Fact-based inquiries increase risk that trust preservation will fail” he said. Branan suggested that, given the large quantities of sweet potatoes sold by some producers, securing an annual PACA license and using the invoice method could serve as a form of cost-effective insurance against losing one’s receivables should a buyer declare bankruptcy.
Darer and Clodfelter, both experienced bankruptcy attorneys, agreed. “If you are unable to prove and secure the amount of your PACA trust, your claim falls behind others to a place where there is usually not much money left, and most if not all of your claim is otherwise discharged,” said Clodfelter. The Parker Poe attorneys further suggested some best practices for sweet potato growers to consider, given that many growers often ship harvested sweet potatoes to packers before knowing the price for the shipment, which is determined sometime later at packout, making the notice method more problematic. “If you choose to use the notice method, please remember that it is the duty of the lawyers for the buyer-debtor to challenge every detail of every claim, so getting the license and using the invoice method makes their job harder” added Darer.
The group also discussed the significant challenge farmers face when a large volume buyer dictates contract terms that otherwise eliminate PACA protection, such as a “payment due” date in excess of 30 days past delivery and acceptance. Branan promised to continue his cooperative extension legal research on various sweet potato business and contract practices to provide growers with better information on how they can navigate PACA and protect their receivables. “You may have a great personal relationship with your buyer, but once their company declares bankruptcy, decisions on who and how much to pay are completely out of their hands,” said Branan.