Best Practices – Growers and Foreign Suppliers Preserving PACA Trust Protection
We often field questions from domestic growers, foreign growers and exporters as to whether they can obtain PACA trust protection for produce they have sold or supplied on consignment to companies in the United States. These domestic growers, foreign growers and exporters, who we will refer to collectively as suppliers, are unsure of whether or not they are entitled to this protection. They question whether they are entitled to PACA trust protection because they are not licensed under PACA by the U.S. Department of Agriculture and often supply their produce to sales agents on consignment. These suppliers are entitled to PACA trust protection. The PACA trust was enacted by Congress to ensure that all produce suppliers throughout the distribution chain are paid for their produce, whether they are licensed under PACA or located in the United States or a foreign country and whether the produce is sold or supplied on consignment.
All suppliers are entitled to participate in the PACA trust if they meet the following four requirements: (1) the transactions involve the supply of perishable agricultural commodities; (2) the produce is supplied to commission merchants, dealers, or brokers; (3) the transactions require payment of 30 days or less after receipt and acceptance of the produce; and (4) the suppliers provide the commission merchants, dealers, or brokers with written notice of their intent to preserve their PACA trust benefits within 30 days after payment became due.
Suppliers meet the first requirement by supplying perishable agricultural commodities, which are defined by PACA as fresh and frozen fruits and vegetables which have been minimally processed and are generally considered to be fresh fruits and vegetables.
Suppliers who contact our office are often unaware that they meet the second requirement. They are under the mistaken impression that the PACA trust only applies to traditional sales where the supplier sells the produce to a dealer and issues invoices. Instead, many suppliers either consign their produce to sales agents or supply their produce to processors. In consignment transactions, the sales agents frequently perform other services on the suppliers’ behalf including importing, packing, cooling, and storage. Although PACA does not list sales agents and growers agents in its definition of those subject to PACA, they are considered commission merchants and subject to PACA. In addition, processors are also subject to PACA if the produce is purchased from outside the state where the processor is located or if the produce remains a perishable agricultural commodity after processing. The best practice for domestic growers, foreign growers or exporters is to assume that all persons or entities that they supply produce to, or through, in the United States are subject to PACA.
The third requirement that the payment term be less than 30 days after acceptance of the produce, and the fourth requirement of providing written notice of intent to preserve PACA trust rights, are often problematic for suppliers. Determining the payment term is crucial because it not only determines eligibility for the PACA trust, it also begins the suppliers’ 30-day period to provide written notice of their intent to preserve their PACA trust benefits. Under PACA, the payment terms for the suppliers’ transactions are established either by written agreement entered into prior to the transactions or the applicable PACA regulation.
Any produce supplied after the suppliers have entered into written agreements with their sales agents, importers or buyers that require payment of more than 30 days after receipt and acceptance of the produce, is ineligible for PACA trust protection. The best practice for growers and foreign suppliers is to closely review all written agreements with sales agents, importers and buyers for the sale or consignment of produce to ensure that payment is less than 30 days after receipt and acceptance of the produce. When reviewing an agreement with a sales agent who will store the produce for any period of time, a supplier should take into consideration that produce is not received and accepted until the sales agent’s customer receives and accepts the produce. For this reason, the agreement does not need to require payment less than 30 days after the agent’s receipt of the produce; it can require payment 30 days after the agent’s customer has received and accepted the produce. This will alleviate the sales agent’s concern that it is required to pay before it has time to sell the produce and provide an account of sale to the supplier.
If the suppliers and their sales agents, importers or buyers do not enter into a written agreement with a payment term prior to the transactions, the PACA regulations establish the payment term. The PACA regulations contain eleven different payment options that may apply to the transactions. The payment term for a traditional sale is 10 days after the buyer’s receipt and acceptance of the produce. The payment term for a grower’s agent that sells an individual lot of produce for the supplier is the earlier of 30 days after the agent’s receipt of the produce or five days after the agent’s receipt of payment for the produce. The payment term for a grower’s agent that distributes a supplier’s entire crop, or multiple lots from the crop, is the earlier of five days after the agent’s receipt of payment for the produce or 30 days after the agent’s receipt of the produce for the initial shipment of the season and for subsequent shipments at 10-day intervals from the date of the accounting for the initial shipment. Final payment for the season is due within 30 days after the date the agent receives the last shipment for the season.
Once the payment term is determined, if it is not contained in a written agreement allowing for payment of more than 30 days after receipt and acceptance of the produce, suppliers can comply with the fourth, and final, requirement for PACA trust protection by providing the commission merchants, dealers, or brokers with written notice of their intent to preserve their PACA trust benefits within 30 days after payment becomes due. Since domestic growers, foreign growers and exporters generally do not have PACA licenses or invoice the commission merchants, dealers, or brokers, they cannot preserve their PACA trust rights by placing the required PACA language on invoices. Instead, they must send their the commission merchants, dealers, or brokers a separate written Notice of Intent to Preserve Trust Benefits (Trust Notice) within 30 days after expiration of their payment terms. The Trust Notice must include the statement that it is a notice of intent to preserve trust benefits and must include information which establishes for each shipment: (1) the name and address of the supplier and the commission merchant, dealer, or broker, (2) the date of the transaction, commodity, price, and terms of payment, (3) the date of receipt of notice that a payment instrument has been dishonored, if any, and (4) the amount past due and unpaid. Since many transactions between growers and their customers are on consignment, the invoice price may not be known. In this situation, an estimated price can be used or, for imported goods, the price used for customs purposes listed on a pro-forma invoice can be used.
The best practice is for domestic growers, foreign growers and exporters to establish a system of sending Trust Notices to all buyers or agents they supply produce to no later than 35 days after shipment for produce grown in the United States, or 35 days after arrival in the United States for imported transactions. Under this system, the suppliers will only need to send a Trust Notice to protect their trust rights on those transactions that are not timely paid and on those invoices at risk for non-payment. The Trust Notice will also serve as a past due reminder by placing a “PAST DUE” notice on it. This system could be programmed into a computer to ensure that no sales transactions are missed.