Developing Loopholes in the Rights
of Produce Sellers under PACA
By Ralph Wood (1)
A trio of Federal Appeals Court cases coming out of New York in 2004 and 2005 (2) have begun to create a new uncertainty about rights of Produce Sellers under the Perishable Agricultural Commodities Act ("PACA") (3) which had, previously, been regarded as settled. This article is intended to explain these new trends and steps which Sellers can take to protect their rights.
Although Department of Agriculture regulations require that payment terms in excess of 10 days be agreed to in writing before the sale (and placed on invoices and other documents) in order to for the seller to be entitled to the special protections of the PACA (4), courts quickly recognized that a loophole would develop if slow paying buyers could avoid PACA merely by claiming that their seller verbally agreed to longer credit terms. A series of cases grew up, known as the "course of dealing" cases (5), to prevent this loophole. These cases generally allow enforcement of special PACA rights unless there is a written agreement entered into before or after the sale which extends payment terms beyond 30 days. (6)
However, one of the new New York cases, the American Banana case, for the first time, suggests that a verbal agreement to extend payment terms beyond 30 days, entered into after the sale as part of an effort to deal with a delinquent buyer, would be enough to waive a seller's PACA claim. Having opened this pandora's box, not surprisingly, a ripple of buyer's trying to wiggle out of their PACA obligations has developed (7).
The most effective way for sellers to avoid losing their PACA rights is to enter intowritten agreements with all produce customers setting forth credit terms, not to exceed thirty days (there are other provisions I find helpful to add as well, like agreement on where to sue and provision for attorneys fees and late charges). Make sure the correct credit terms are on invoices (along with the required PACA notice). The agreement should state that it is the entire agreement and can not be changed except by a written agreement signed by an authorized representative of seller. Always object in writing and by a provable means, like fax, to any writing proposing credit terms in excess of thirty days. Bring default situations promptly to counsel and do not negotiate workout deals without counsel. They may invalidate seller's PACA rights unless properly worded and entered into as part of a court case.
PRINCIPAL AND THIRD PARTY CREDITOR LIABILITY
Courts have long been loath to examine the merits of particular payments made by buyers to third parties but have, instead, tended to hold the principals of the Buyer liable for the full amount of PACA debts to suppliers based upon any payments made to third parties while produce suppliers were unpaid (8). Third parties have been unable to collect even for services that obviously helped the buyer to pay its PACA suppliers (9).
Now, two of the new New York cases, the E. Armata and the D.M. Rothman cases, have refused automatic liability to third party banks for receipt of bank fees and interest and the Court holds, instead, that certain payments that are "commercially reasonable" do not violate PACA and, therefore, are not a basis for liability. This holding may, also, be opening a pandora's box (10).
PACA sellers can avoid issues as to the liability of buyers' principals under PACA by obtaining personal guaranties. This approach, also, reduces the incentive of principals of buyers to try to carve administrative costs out of the liability of the buyer.
1. The Law Office of Ralph Wood, White Plains, NY, has broad experience in handling PACA related matters. Mr. Wood tried the D.M. Rothman case discussed in this article.
2. American Banana Co., Inc. et. al. v. Republic National Bank of New York, N.A., 362 F.3d 33 (2nd Cir. 2004), E. Armata, Inc. et. al. v. Korea Commercial Bank of New York et. al., 367 F.3d 123 (2nd Cir. 2004) and D.M. Rothman & Co., Inc. et. al. v. Korea Commercial Bank of New York , 411 F.3d 90 (2nd Cir. 2005).
3. 7 U.S.C. § 499a, et seq. These protections normally trump the rights of other creditors and put suppliers in first position to collect from the general assets of the buyer.
4. 7 C.F.R. § 46.46(e)(1&2).
5. e.g. Idahoan Fresh v. Advantage Produce, Inc., 157 F.3d 197 (3rd Cir. 1998) and the cases cited therein. The term "course of dealing" is a reference to U.C.C. and related doctrines which allow less than formal written contracts to still be enforceable, despite the requirements of a writing contained in Statutes of Frauds.
6. See Greg Orchards & Produce, Inc. v. Roncone, 180 F.3d 888 (7th Cir. 1999).
7. e.g. Bocchi Americas Associates, Inc. v. Commerce Fresh Marketing Inc. et. al., 2005 WL 3164240 (S.D. TX 2005) in which the Court found that an issue of fact as to whether seller waived its PACA rights, by allowing credit beyond 30 days, was created by the seller allegedly having orally "acquiesced" to buyer's delays in paying invoices, taken together with alleged admissions of such extended credit in a draft settlement agreement prepared after the litigation commenced.
8. e.g. Morris Okun, Inc. v. Zimmerman, Inc., 814 F. Supp. 346 (S.D.N.Y. 1993).
9. e.g. C.H. Robinson Co. v. Alanco Corp., 239 F.3d 483 (2nd Cir. 2001).
10. e.g. Top Banana, L.L.C. et. al. v. Dom's Wholesale & Retail Center, Inc. et. al., 2005 WL 1529736 (S.D.N.Y. 2005) in which the court had to apply the "commercially reasonable" test before holding buyer's principals liable and In re Hale-Halsell Company , case no. 04-11677-r in Bankruptcy Court for the Northern District of Oklahoma in which the PACA suppliers, after initially objecting, consented to the Stipulation and Order entered June 18, 2004 allowing buyer to hold back 6% of PACA claims as a reserve to pay for the costs of preserving buyer's assets for the PACA claimants.