Summary of a Recent
Judicial
Development in
Perishable Agricultural Commodities Act
Third Party Liability for PACA Trust Violations
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In Nickey Gregory Co., LLC v. AgriCap, LLC, 592 F. Supp. 2d 862, 2008 WL 5265742 (D.S.C. 2008), the United States District Court for the District of South Carolina, Greenville Division, held that a financial lending company was liable as a third party for violating the terms of a Perishable Agricultural Commodities Act (PACA) statutory trust because its lending agreement with the PACA trustee was a loan secured by accounts receivable that encumbered trust assets such that they were not "freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities."
Background
AgriCap entered into a financing agreement with now defunct Robison Farms that permitted Robison Farms to immediately receive money to satisfy its PACA "prompt payment" obligations to the wholesalers from which it purchased produce. Id. at *3. Robison Farms warranted and represented that it would use the funds for "general working capital purposes" only and that it would not make any loans to its shareholders without AgriCap's written consent. Id. At the time it ceased operations in July 2006, Robison Farms owed AgriCap just over $133,000 and had eligible accounts receivable of only $126,865 to be collected to satisfy those obligations. Id. AgriCap wrote off the remaining debt following Robison's bankruptcy filing, but it retained $88,690 of Robison Farms' trust assets pursuant to the lending agreement. Id. Because PACA trust assets are not part of the bankruptcy estate, the bankruptcy court lifted the automatic stay to allow the plaintiffs, wholesalers who made produce sales to Robison, to collect the PACA trust assets. Id. at *4. The PACA trust claims totaled $716,173, but only $83,606 was recovered and disbursed pro rata to the trust creditors, and the plaintiffs brought this action against AgriCap for PACA violations. Id. at *4-5.
Arguments
AgriCap argued that it had not breached the PACA trust because its lending agreement with Robison Farms was commercially reasonable, and alternatively it argued that it was a bona fide purchaser that acquired the accounts receivables for value and without any notice of an alleged breach of the PACA trust. Id. at *7.
Analysis and Holdings
The court examined the statutory PACA trust requirements, set forth in 7 U.S.C. § 499e(c), and explained that PACA trustees are directed to refrain from "dissipating" trust assets, meaning any act which could result in the diversion of trust assets or which could prejudice or impair the ability of unpaid sellers to recover money owed in connection with produce transactions. Id. at *6. Failure to maintain the trust and make "full payment promptly" to the trust beneficiary is unlawful, with "full payment promptly" defined as payment within ten days of acceptance of the produce. Id. However, if the period is extended beyond 30 days, then growers and sellers are no longer eligible for PACA trust protection. Id. The court noted that third parties are generally not guarantors of PACA trust assets and that a bona fide purchaser, who takes trust property for value and without notice of the breach of trust, may retain PACA trust assets without liability to trust beneficiaries. Id. at *7. Stated another way, the general rule is that if the third party had notice of the breach or did not take trust property for value, the third party must disgorge retained trust assets. Id.
The first issue to be determined was whether the agreement was a loan secured by Robison Farms' accounts receivable or a true purchase of receivables by AgriCap. Id. at *8. The court explained that if the agreement was a loan secured by the accounts receivable, then it would have to determine whether AgriCap qualified for the bona fide purchaser exception to liability; however, if it was a true purchase, then the court would consider whether it was commercially reasonable. Id. at *9. In making that determination, the court noted that the key was whether there was an actual transfer of the risk of loss from Robison Farms to AgriCap. Id. at *12. Examining the agreement, the court found that Robison Farms essentially bore the risk of loss on its accounts, and there had been no transfer of that risk to AgriCap. Id. at *12-13. The court further found that AgriCap was not a bona fide purchaser because the transfer of accounts receivable under a secured lending arrangement is not for value; therefore, it ordered AgriCap to disgorge its retained trust assets to the plaintiffs. Id. at *14-15.
The case was decided on December 19, 2008.