Statute requires sale proceeds kept in trust until suppliers paid
By MATEUSZ PERKOWSKI
The RainSweet farmers' cooperative isn't the type of company that's usually associated with the Perishable Agricultural Commodities Act.
PACA, a federal statute aimed at protecting the interests of produce sellers, is typically connected with the fresh produce industry.
As a seller of frozen fruits and vegetables, RainSweet can also use PACA as a tool for financial protection, although it has done so rarely.
"It gives a level of security in doing business in a high-risk marketplace," said Mark May, the company's CEO.
Experts say the produce industry is now particularly hazardous due to the limited availability of credit.
Lending curtailments have squeezed fruit and vegetable buyers financially, affecting their suppliers and sometimes creating a domino effect of cash shortages, according to several attorneys.
The prospect of nonpayments has led more produce sellers to assert their rights under PACA, attorneys say.
"There has been a rise in this type of litigation," said Jason Klinowski, an attorney specializing in PACA.
The number of lawsuits based on PACA increased 30 percent between 2006 and 2009 in U.S. district courts, according to Klinowski's research. Filings seem to have fallen in 2010 but resumed increasing in 2011.
So far in 2012, they have been trending upward, he said.
More disputes over PACA may also be ending up in bankruptcy courts, which would explain the decreased case filings in U.S. district courts, attorneys say.
Under PACA, buyers must keep the proceeds from the sale of fruits and vegetables in a "floating trust" until their suppliers are paid.
A produce trader may still try to operate at the same volume of sales even though there's less cash immediately available to the company, Klinowski said. "He no longer has that safety net."
Inadequately capitalized buyers may then delay payments to their suppliers, since they don't have enough cash on hand to pay them, he said. "They basically make their suppliers their banks."
When the juggling act fails and a produce buyer is unable to pay suppliers on time, that can trigger lawsuits demanding repayment of PACA trust assets, Klinowski said.
If the produce buyer files for bankruptcy protection first, the PACA claims are resolved through that process, said Brandy Sargent, an attorney specializing in reorganizations and agricultural contracting. "You wouldn't see a federal court filing in that case."
Sargent said she has seen growing interest among produce sellers in PACA rights as well as other options provided by state laws, such as using agricultural liens to secure collateral for crops.
"We're seeing an uptick in people protecting themselves under those statutes as well," she said.