September 12, 2018

PACA Trust Rights and Bankruptcy: Defeating a Preference Claim

We are pleased to provide a guest article from Mr. Jason Read.  R. Jason Read is a partner with the law firm of Rynn & Janowsky, LLP, devoting the majority of his practice to PACA and other aspects of agriculture law. You can access Mr. Read’s bio at

You sell a load of produce.  You receive full payment.  (On time, even!)  Life is good.

Months later, you receive an official looking envelope from a Bankruptcy Court Trustee appointed to liquidate the assets of that buyer, who recently filed bankruptcy.  You received full payment for that load and the buyer owes you nothing, so you are not too concerned about the bankruptcy filing.  Until you open the envelope and see that it contains a lawsuit filed by the Trustee demanding that you return that payment to the Bankrupt Estate.  It’s called a “Preference Claim.”

Under the U.S. Bankruptcy Code, the 90 day period prior to the bankruptcy filing is referred to as the “Preference Period.”  Any payments made by a bankrupt debtor to its creditors within that 90 day period are presumed to be preferential transfers and thus subject to recapture by the Trustee.  In the simplest of terms, because you received payment during that 90 day period, the Trustee can require that the funds you received be returned to the Bankrupt Estate to be distributed to all of the Debtor’s creditors. 

Most of you already know that PACA trust rights provide you with a super-priority claim against a bankrupt buyer who has not paid you, the PACA trust creditor, for purchased produce.  What you may not know, however, is that those same PACA trust rights will provide you with a very strong defense against a Preference Claim for payments you did receive during that 90 day Preference Period.  This is because in order to prevail on the Preference Claim, the Trustee must first prove that the funds you received as payment for the load of produce actually belonged to the Debtor in the first place. But, assuming you validly perfected your PACA trust rights for that sale, the funds you received most likely did not belong to the Debtor but instead were PACA trust assets rightfully belonging to you as an unpaid PACA beneficiary. This is because both the produce and all of the Debtor’s sales proceeds and accounts receivable became part of the PACA trust, which the Debtor must hold in trust for you as the beneficiary.  According to the leading cases on this issue, where the Debtor uses PACA trust assets to pay a valid PACA trust debt during that Preference Period, the Trustee cannot assert a Preference Claim against a PACA trust beneficiary. 

This underscores the importance of making certain that you properly perfect your PACA trust rights for all sales.  Assuming you do, if you ever receive a Preference Claim you should be able to resolve that claim relatively quickly. 

We appreciate Jason Read’s providing his timely perspective, as several Western Growers members have recently been subject of a preferential claim demand. Please consider allowing WG’s Trade Practices Department to provide you as a regular member a no cost review of your invoice to make certain the precise trust language is accurate and that your credit terms are also compliant with the PACA regulations. The following trust language should be included on your invoice:

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.

Please contact any of the Western Growers Trade Practices team members, Matt McInerney, Bryan Nickerson, or Ken Gilliland.