Three recent cases give insight into how judges interpret the Perishable Agricultural Commodities Act (PACA), a law that is supposed to protect sellers of produce from unfair trade practices and ensure they get paid. They are only protected, however, if they meet certain criteria, as noted in the court decisions.
In Carter v. Michael Cutler Co., carrot farmer Richard H. Carter, Jr. grew carrots in North Carolina for a processing company which owns carrots from the time of planting until delivery to the end user. Carter started growing carrots for the company in 2009 on his 400 acres, and in January 2010 he agreed to try to establish a year-round crop despite the summer heat by using several varieties of carrots. It was considered an experimental crop, since carrots are not usually grown there in the summer, so the plan was for the processing company to pay him his costs plus 10 percent, rather than an amount based on carrots produced. That way, he did not bear the risks of the carrots not growing in the summer.
Shortly after Carter began growing the experimental crop, the processing company began to advertise and market the "Carolina Carrots." However, they did not wait for harvest to sell them. Instead they took carrots from Mexico and Canada and rebagged and mislabeled them, with the barcode tracing the carrots back to Carter's farm, according to the lawsuit. The processing plant paid the farmer for a while for his growing services, but eventually stopped, and did not bother to harvest the carrots when they were ready in the fall. The carrots wasted in the field, preventing Carter from using the land to grow other crops the next spring. Carter claimed damages of nearly $1 million, alleging breach of contract, PACA violations, and other charges.
The U.S. District Court for the Middle District of North Carolina dismissed the PACA claim, finding that the carrots always belonged to the processing company; the farmer didn’t own them expecting to sell to the company.
The farmer also failed to show how he was damaged by the company mislabeling carrots as coming from North Carolina. The Court said Carter should pursue his breach of contract claim against the carrot processor instead of a PACA claim.
In another case called In re Quality Sales, LLC, the U.S. Bankruptcy Court District of Connecticut considered the validity of a PACA claim. Basically, if a seller has a valid PACA claim against a buyer who goes into bankruptcy, the seller is given priority over other creditors to collect his debts. The value of the produce is considered held in trust by the buyer until he pays the farmer, so the farmer’s PACA claim essentially goes to the front of the line ahead of other creditors.
In spring 2011, Cupola Hollow Farm and Clark Farm both entered into agreements to grow specified varieties of tomatoes and squash to sell to Quality Sales. When the vegetables were harvested, Quality Sales picked up the produce and agreed to pay within 30 days.
The company made partial payments, but declared Chapter 7 bankruptcy before paying for all the produce. The farms wrote to the USDA and stated they wished to file a PACA complaint.
Months later when the bankruptcy court called for PACA claims, the farms filed their claim for more than $40,000. As proof, they attached records of produce picked, a statement of income and expenses, an invoice, and correspondence with Quality Sales.
However, the judge rejected their PACA claim because they had not given Quality Sales the notice that is required under the law to receive the benefits of PACA. The farms could have provided Quality Sales written notice within 30 days of when payment was due that they were preserving their trust rights under PACA, or they could have placed a special notice on their invoice.
If a farm chooses to provide notice on its invoice, the farm must be licensed through PACA, and the notice must be worded as follows: "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 commodites 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 farms did not provide either notice, so they lost their chance to have PACA. The bankruptcy judge determined that the farms would have to get in line with all the other creditors and wouldn’t get the priority treatment of a PACA claim.
In Onions Etc. Inc. v. Z & S Fresh, Inc., the U.S. District Court Eastern District of California looked at a claim against a buyer who squandered the goods and proceeds held in trust before paying the farmers.
Martin Zaninovich, the sole shareholder of Z&S Fresh, Inc., was in charge of PACA trust assets – the purchased produce and money from reselling it – but spent the money as his own for personal expenses, gifts and entertainment. In 2008 and 2009, Z&S transferred $4.3 million in trust assets to a separate company in which Zaninovich was 50 percent shareholder and president or to other companies on its behalf. As a result, Z&S became insolvent.
The court ruled against Z&S in 2011, and a Trustee paid money to the farmers, with the final payment being made in April 2013. However, Frank A. Logoluso Farms had not been paid yet, and a month later filed a motion for judgment.
The court sided with Logoluso Farms and awarded more than $360,000, saying that Zaninovich and Z&S Fresh were both liable.
As is clear from the above three cases, PACA can offer a lot of protection to produce sellers, but they must comply with the requirements of the law to get that protection. For more information, visit www.ams.usda.gov/paca. There you can view the PACA statute, explanations, contract tips, and training materials.
Dayna J. Sondervan is an attorney based in Atlanta, Georgia and can be reached at dayna.sondervan@gmail.com. As an attorney since 1994 and a former Vice President & General Counsel of a company, she has experience in a wide range of legal issues that confront businesses. She also has served on a Georgia Senate Lien Law Study Committee helping to draft new lien legislation, and she has been admitted to practice before the Supreme Court of the United States. Ms. Sondervan's articles are for general information only and subject to editing, and readers should consult an attorney for legal advice about current laws and options that apply to their situation.