How to Avoid a PACA Trouble

There is a little known federal statute called the Perishable Agricultural Commodities Act or “PACA” for short. Most banks have only a passing awareness of PACA and the dangers that lie within. PACA is intended is to protect produce suppliers by seeing that they are promptly paid by produce wholesalers. PACA requires a wholesaler to pay for produce within ten days of receipt of perishable produce. If the wholesaler fails to pay, all of the wholesaler’s assets are subject to a super-priority PACA lien in favor of the vendor which can supersede a bank’s prior perfected security interest.

Consider this not so hypothetical situation. A produce wholesale company applies for and receives a loan for working capital from an unsuspecting bank. The bank’s loan is secured by all the assets of the wholesaler, including the wholesaler’s receivables. The security agreement and UCC-1 financing statement are properly executed and correctly filed. This gives the unsuspecting bank a first priority lien on all the wholesaler’s business assets. Right?

No.

If the bank customer’s aging receivables report shows that the time of payment to produce supplier increases from 10 days to 60 days and the amount unpaid in dollars increases by $100,000, PACA allows a produce supplier to recover $100,000 first, before the Bank recovers anything from its perfected UCC lien.

Unfortunately for the bank, the PACA statute creates a super-priority in favor of produce suppliers. This super priority commences the moment the bank should have known that the supplier was not being paid according to the statute (i.e, within 10 days). The fact that the bank has a properly perfected UCC first lien on the accounts receivables and other personal property of its customer will not protect the Bank from having those assets turned over to a PACA creditor instead.

The key concern issue for any Bank intending to do business with a produce wholesale company is to be aware that any decline in the profitability of a bank’s customer may trigger a loss of lien priority. A bank cannot rely upon a defense that it had no knowledge that its customer was not complying with the statute, if it appears that the bank should have known of a PACA breach.

The best way to avoid PACA trouble is not to make a loan to a produce wholesaler. If such loan is made, one must be ever vigilant in getting current and accurate financial statements demonstrating that a customer paying its PACA vendors in accordance with the PACA statutory timeframe.