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FREQUENLY ASKED QUESTIONS
: Agricultural Law


What is PACA?
PACA stands for a federal statute called the Perishable Agricultural Commodities Act of 1930, as amended 7 U.S.C. §499a-t.  It is the law under which a produce seller, who has properly preserved its trust rights under PACA, can enforce these rights against a produce buyer who fails to pay for produce it purchased in a federal district court.  The term PACA also refers to the administrative branch of the United States Department of Agriculture, which deals with licenses, rules and regulations of the produce industry.  The PACA branch of the USDA handles reparation proceedings between parties in payment disputes and disciplinary actions against individuals who are responsibly connected to a company that fails to promptly account and to promptly pay its produce suppliers.


Do I need a PACA license?

If you buy or sell perishable agricultural commodities totaling one ton (2,000 pounds) on any given day in interstate or foreign commerce, you must obtain a PACA license from the USDA.  Growers are not required to have a PACA license as long as they only sell produce they have grown. Retailers are subject to PACA if they purchase and negotiate sales of $230,000 or more worth of fruits and vegetables in a calendar year, and the aggregate total on any given day is 2,000 pounds. Brokers who negotiate sales and purchases of produce for or on behalf of a vendor or purchaser are subject to PACA if the invoices for these sales transactions exceed $230,000 in any calendar year.  Courts have found that restaurants that purchase $230,000 or more worth of fruits and vegetables in a calendar year and receive 2,000 pounds of produce on any given day are subject to the PACA statute.


What does PACA cover?

PACA covers fresh and frozen fruits and vegetables, whether or not packed in ice or held in common or cold storage (“Produce”).  It also includes cherries in brine.  Courts have found that raw nuts, mushrooms, herbs and French fries are also covered under PACA.  However, items such as dried fruit (prunes & apricots), sugar cane and juice are not covered.


PACA Trust Protection

Is it true that only USDA licensed brokers, dealers, and commission merchants may protect their PACA trust rights by printing special language on their invoices?
Yes.  The Perishable Agricultural Commodities Act and the USDA-PACA regulations provide that "[A] licensee may use ordinary and usual billing or invoice statements to provide notice of the licensee's intent to preserve the trust. The bill or invoice statement must include the information required by the last sentence of paragraph (3) [payment terms] and contain on the face of the statement the following:

"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 commodities 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."

In addition to including the statutorily mandated language on the face of each invoice or billing statement, your payment terms with the buyer, if they differ from PACA’s prompt payment terms, must also be included on your invoices, billing statements, accountings and other documents related to the transaction.


I am not a USDA licensee. How do I protect my PACA trust rights in the apples that I grew and sold to a receiver in New York, who is now past due on his payment?
As a grower selling your own produce, you are not required to have a valid PACA license.  However, without a PACA license, you cannot use your invoice to preserve your PACA trust rights.  Therefore, you must protect your rights the old fashioned way -- by giving a written notice of intent to preserve the benefits of the trust to the purchaser of your apples. This must be completed within 30 calendar days
(1) after expiration of the time prescribed by which payment must be made, as set forth in the USDA's regulations,
(2) after expiration of such other time by which payment must be made, as the parties have expressly agreed in writing before entering into the transaction, or
(3) after the time you have received notice that the promptly presented payment instrument has been dishonored.   
The Notice of Intent must
(1) be in writing,
(2) include the statement that it is a notice of intent to preserve trust benefits, and
(3) include the following information for each shipment:
(a) the names and addresses of the trust beneficiary [you] and the debtor [your receiver];
(b) the date of the transaction,
(c) the commodity sold,
(d) the invoice price,
(e) the terms of payment, and
(f) the amount past due and unpaid.
If the promptly presented payment instrument was dishonored, i.e. returned for non-sufficient funds or closed account, it must state the date that you received notice the payment was dishonored. 
Click here for a sample “Notice of Intent to Preserve Trust Rights.”


My payment terms are 35 days.  I have been told that these terms make me ineligible for PACA trust protection. Is this true?
Yes. The times for prompt accounting and prompt payment are stated in the USDA regulations. If the parties to a transaction elect to use different times for payment, it cannot exceed 30 days after receipt and acceptance of the produce and still qualify for coverage under the trust.  There are no exceptions to this rule.


I received a check for partial payment of an overdue and outstanding invoice.  If I accept this check, have I voided my PACA trust rights?
Not necessarily.  We recommend that you say thank you for the payment and then demand immediate payment of the balance due and owing.  Be cautious with comments that appear to extend payment terms.  For example, innocent comments like “send me a check when you can” or “don’t worry about it – next week is fine” could be viewed as your agreement to extend payment terms beyond PACA’s maximum of 30 days, which would void your PACA trust rights. 

Invoices
Do you recommend that we include any particular language on invoices?
Yes.  The statutory PACA trust language stated above is essential, along with your payment terms if they differ from PACA’s prompt payment terms set forth in the regulations. (Remember these altered payment terms cannot exceed 30 days after receipt and acceptance, and must also appear on all your statements, accountings and other documents related to this transaction).  In addition, you may want to consider the following:
"A FINANCE CHARGE calculated at the rate of 1½% PER MONTH (18% ANNUALLY), or at the highest rate permitted by law, will be applied to all PAST DUE ACCOUNTS."

"Should any action be commenced between the parties to this contract concerning the sums due hereunder or the rights and duties of any party hereto or the interpretation of this contract, the prevailing party in such action shall be entitled to, in addition to such other relief as may be granted, an award as and for the actual attorney's fees and costs in bringing such action and/or enforcing any judgment granted therein."
"ALL SALES FOB, NO GRADE CONTRACT. All claims must be reported by WRITTEN NOTICE received by seller within 24 HOURS of arrival and supported by acceptable USDA INSPECTION certificates. NO DEDUCTIONS ALLOWED without prior written authorization from seller.

Obviously, the last paragraph should be tailored to your company's sales terms; if you sell by grade, then you should delete the "All sales no grade contract" or if you sell on other than FOB terms, then you should delete that as well. The capitals and bold print should stay in, since these items should be very prominent. In addition, although the attorneys' fees provision is standard and usually very helpful, you should be aware that many states -- including California -- interpret this language as allowing attorneys fees to the "prevailing party" -- which could be either party – including your opponent. Therefore, it is possible that should a judge make a poor decision, you may be stuck with the other side's attorneys' fees. Consequently, you may or may not want to include the attorneys' fees provision.  However, without a contractual provision for the recovery of attorneys’ fees and costs in the event legal action becomes necessary, it is not possible for a court to include your attorneys’ fees and costs in a judgment.


Payment Terms
What payment terms should we use for produce transactions?
If your payment terms are more or less than 10 days, we strongly advise you to change them. Otherwise, you have to go through significant additional gyrations to protect your PACA trust rights. No one is entirely sure how a seller should phrase the 10 day terms, because what you are trying to tell the world is that you are complying with the "full payment promptly" PACA regulations, which have numerous different definitions of "full payment promptly."

The most common payment terms are:
(1) 10 days from date of acceptance of the goods for purchases;
(2)  20 days after acceptance for open sales or price after sale;
(3) 10 days after final sale or 20 days after acceptance for consignment sales, whichever comes first.
Consequently, some companies simply state "10 days" under payment terms. Others use "PACA prompt."  We recommend "PACA prompt," but only if you consistently use this term on all of your documentation and correspondence with the buyer. In other words, don't say "PACA prompt" on your invoices, but in a collection letter, use a different phrase.  If you do not use "PACA prompt," "10 days" is the next best verbage. However, NEVER use the phrase "10 days from invoice date" because this may take you out of the "full payment promptly" definition.
NOTE:  If you and the buyer have expressly agreed in writing to alter PACA’s payment terms, the altered terms must also be included on your invoices, billing statements, accountings and other documents related to the transaction.  Under no circumstances can these terms exceed 30 days from date of receipt and acceptance.



Federal Food Security Act
What is the Federal Food Security Act?
Section 1324 of the Federal Food Security Act of 1985 provides that buyers of farm products can purchase produce free and clear of any security interest of a bank or lender. Prior to the Act’s enactment, a secured lender having a secured interest in the borrower’s farm products could enforce a lien against a purchaser of those products even if the purchaser did not know that the sale of the products violated the lender’s security interest in the product. The result left the purchaser of farm product liable to the seller and to the secured lender when the seller failed to repay the lender.

However, an exception exists which allows states to create a ‘central filing system,’ to provide a practical method for purchasers to discover whether any security interest exists in the farm products. The current Act protects purchasers of farm product by allowing a purchaser to register within the central filing system to avoid the exposure to double payments to a lender and seller. By registering, the secured lender is deemed to have been placed on notice that the farm products have been sold to the buyer and, in turn, the buyer eliminates the risk of having to pay the grower as well as the secured lender.



Which states maintain a central filing system under the Federal Food Security Act?
Currently, 19 states maintain a central filing system through that state’s Secretary of State office. These 19 states require a purchaser of certain farm products to register in the system in order to avoid being liable to a lender and seller. Furthermore, some states require registration with Secretary of State and the local county clerk recorder. For more information on each state’s requirements and how to find out if a seller’s farm product is subject to a security interest, please visit the Uniform Commercial Code section of each Secretary of State web site:
Alabama    http://www.sos.state.al.us/business/ucc.cfm
Colorado    http://www.sos.state.co.us/pubs/business/main.htm
Idaho    http://www.idsos.state.id.us
Louisiana    http://www.sec.state.la.us/comm/ucc/ucc-index.htm
Maine    http://www.maine.gov/sos/cec/ucc/index.html
Minnesota    http://www.sos.state.mn.us/uccd/index.html
Mississippi    http://www.sos.state.ms.us/busserv/ucc/ucc.asp
Montana    http://sos.state.mt.us/css/index.asp
Nebraska    http://www.sos.state.ne.us/business/ucc/
New Hampshire    http://www.sos.nh.gov/ucc/index.html
New Mexico    http://www.sos.state.nm.us/agriculturalliens.htm
North Dakota    http://www.state.nd.us/sec/businessserv/centralindex/index.html
Oklahoma    http://www.sos.state.ok.us/cfs/aglien2.htm
Oregon    http://www.filinginoregon.com
South Dakota    http://www.sdsos.gov/ucc/
Utah    http://www.commerce.utah.gov/cor/cfs.htm
Vermont    http://www.sec.state.vt.us/tutor/dobiz/ucc/fpn.htm
West Virginia    http://www.wvsos.com/main.htm
Wyoming    http://soswy.state.wy.us/uniform/uniform.htm


What farm products are covered under each state's central filing system through the Federal Food Security Act?
Even if you are a buyer of farm product in any of the 19 states with an approved central filing system, not all produce and farm products are covered in these states. For a listing of covered farm products, please visit that state’s Secretary of State web site or visit the U.S.D.A. web site at http://www.gipsa.usda.gov/GIPSA/webapp?area=home&subject=lr&topic=cts

How does the Federal Food Security Act effect secured parties?
If you are a secured party having a security interest in a grower’s crops, and you discover the existence of a buyer, the Act provides a mechanism for you to provide notice of your secured interest to the buyer. In fact, any security agreement should include a provision where the borrower must disclose its current buyers, so that those buyers can be properly noticed.

 

 

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