Pennsylvania Litigation Blog : Pennsylvania Litigation Lawyer & Attorney : Barley Snyder Law Firm : Serving Lancaster, York, Reading, Hanover, Malvern

PACA stands for the Perishable Agricultural Commodities Act, a Depression-era federal statute that protects growers and suppliers of unprocessed fruits and vegetables.  PACA creates a floating, non-segregated trust on buyer’s accounts receivable and inventory.  This provides PACA suppliers with a right to payment before all other creditors, including secured lenders with blanket liens. This super-priority status means that when a buyer purchases produce from a PACA supplier, it must account to the supplier before all other creditors.  Until the buyer does, the trust operates by placing a lien on not only the inventory derived from the produce , but also on accounts receivable and proceeds from the sale of the produce.  7 U.S.C. § 499e(c)(2); In re Magic Restaurants, Inc., 205 F.3d 108, 111-12 (3d Cir. 2000).  Since PACA can have harsh consequences for businesses and lenders that deal with PACA suppliers, it is important to be aware of its provisions.  Front-end lenders also need to be mindful of ways in which they can protect their banks and guard against some of PACA’s unforgiving provisions.  

To establish a PACA trust, the goods in question must be fruits and vegetables which have not been altered from their original state (i.e., cucumbers but not pickles, cranberries but not cranberry sauce, onions but not onion rings).  The supplier must also provide the buyer with written notice that the goods are sold subject to PACA, which usually is found on the invoice.  Unless the parties agree otherwise, PACA requires prompt payment (usually within thirty days).  Buyers who breach a PACA trust may be subject to interest and attorneys fees for collection costs and their principals may be personally liable if they knowingly played a role in dissipating the trust assets (i.e., spending it elsewhere).  That is one of the many reasons why it is important to be mindful of accounts involving PACA suppliers. 

Perhaps most importantly to lenders, courts have held creditors liable for breach of the trust when they “knew or should have known” that they were being paid with receivables that rightly belonged to the PACA supplier.   Consumers Produce Co., Inc. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1382 (3d Cir. 1994).  In Volante, the court stated that lenders must return the receivables from the PACA trust unless they could prove that they were a bona fide purchaser for value who did not know the receivables came from trust assets.  Id; see also Albee Tomato, Inc. v. A.B. Shalom Produce Corp., 155 F.3d 612 (2d Cir. 1998). 

In bankruptcy, PACA’s impact can be even greater.  PACA supplier’s claims in bankruptcy enjoy the same super-priority status as they do outside bankruptcy, but they also are not subject to avoidance in a preference action.  Courts have held that, since the debtor is holding the funds in question for the benefit of PACA claimants, the funds are not part of the bankruptcy estate.  Hence, when the suppliers are paid in full from available trust funds, they are excluded from any new value defense to a preference claim.  See In re Arizona Fast Foods, 299 B.R. 589 (Bankr. D. Ariz. 2003).  Both the potential lender liability as well as the effects of PACA on a debtor’s bankruptcy estate should make creditors mindful of a the PACA trust. 

The good news, at least in Pennsylvania’s federal courts, is that there is a limit to how far the PACA trust can extend.  The trust corpus does not include vehicles and equipment purchased using PACA funds.  United Fruit & Produce, 242 B.R. 295, 301.  Moreover, real property similarly lies outside the trust since, like equipment, it is not inventory or proceeds from the sale of PACA products.  Chiquita Brands Co. N. Am., Inc. v. J & J Foods, Inc., 2004 U.S. Dist. LEXIS 22847, *31-34 (E.D. Pa. 2004).  Thus, simply because assets held or purchased by a produce buyer can be traced to PACA trust receivables, it does not follow that those assets are part of the PACA trust.  Outside of Pennsylvania, however, courts have found that real property, equipment and even the insurance proceeds of a PACA debtor are subject to the PACA trust.  See In re Kornblum, 81 F.3d 280 (2d Cir. 1996); J.A. Besterman Co. v. Carter’s Inc., 439 F. Supp. 2d 774 (W.D. Mich. 2006); In re Atlantic Tropical Market Corp., 118 B.R. 139 (Bankr. S.D. Fla. 1990); Sam Wang Produce, Inc. v. EE Mart FC, LLC, 2010 U.S. Dist. LEXIS 13608 (E.D. Va. 2010).  It may not be long until the Third Circuit addresses this discrepancy. 

So how can a lender wary of PACA protect itself on the front end?  The best way is by including a loan provision requiring the debtor to keep a minimum amount, either in reserve or in the form of inventory, to cover eligible PACA claims.  That way, the debtor will have funds on hand to cover PACA claimants and the lender will be able to recover from non-PACA assets.   

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The EHB recently issued a decision in TRRAAC v. DEP, et al, EHB Docket No 2008-315-L, addressing the EHB's de novo review of DEP actions. DEP approved a remedial investigation and cleanup plan for a site in Lancaster County. TRRAAC appealed the approval. TRRAAC noted in its pre-hearing memorandum that it intended to call a DEP inspector as a witness at the hearing. The DEP employee was not involved in the review of the action under appeal. Clean up at the site commenced and materials from the site were disposed of at a landfill. The DEP employee he was involved in inspections at the landfill. 

DEP filed a motion in limine seeking to prohibit TRRAAC from calling the DEP landfill inspector. DEP argued that the inspector had no part in review of the remedial investigation and clean up plan, rather his involvement related to implementation of the clean up plan. Issues relating to the implementation of the clean up plan have no bearing on an appeal of DEP's review and approval of that plan.

The EHB held that all evidence up to the time of the hearing is potentially relevant. The EHB cited 35 P.S. Section 7514(c) for the proposition that a DEP action is not final as to the person taking the appeal, until the EHB decides that the action is final. DEP focused on the action under appeal itself, the clean up plan, as the issue and viewed the issues TRRAAC wanted to address as separate compliance issues. The EHB took the position that issues related to the approval might be borne out by subsequent evidence, not before the Department at the time it took action.

The EHB determined that its focus should properly be on the appealed action itself, rather that DEP conduct in completing its review. Details regarding the nature of DEP's review are not as important as whether the decision itself was correct, as such pointing out harmless errors in the review process, is unproductive. The EHB does not conduct a record review, rather it creates its own record. 

The EHB distinguished its decision in this case from CRY v. DER, 639 A.2D 1265 (Pa. Cmwth. 1994). In CRY, the appellant appealed the issuance of a permit for a landfill. The appellant in CRY sought to introduce evidence relative to the fact that the liner was torn during its installation, in an effort to argue the permit should not have been issued. The EHB excluded the evidence. The Court determined that evidence relative to the tear in the liner was irrelevant, it had no bearing on whether the permit should have been issued. 

The EHB provided an example of when evidence obtained after DEP acts, may be relevant to an appeal of that action. If DEP were to approve a dam permit, which approval gets appealed, the dam is later constructed and subsequently fails. Evidence relative to the cause of the failure may be relevant to the appeal of the permit for the dam. The later evidence may go to the propriety of the decision to issue the permit, rather than an unrelated compliance issue as was the case in CRY. Blanket prohibitions of evidence, based on the time the evidence came into existence, are improper. 

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 In Geryville Materials, Inc. v. DEP, Docket No. 152 MD 2009 DEP issued a letter to Geryville Materials indicating that it was going to suspend review of Geryville Material's permit application for a quarry. DEP suspended its review of the permit application based on a letter from the Lehigh Valley Planning Commission ("LVPC") that the proposed quarry was not consistent with the comprehensive plan. Quarry use is a permitted use as a special exception. Geryville Materials is pursuing a special exception. Geryville Materials filed an equity actions in the Commonwealth Court's original jurisdiction seeking an order that required DEP to continue to review its application. The Court in an unreported decision authored by Judge Pellegrini, denied DEP's preliminary objections. The Judge pointed out to DEP that the comprehensive plan is simply a planning document, it was not consistent with the zoning ordinance regarding the proposed use and that DEP misapplied its obligations under Act 67 and Act 68 by suspending its review of the permit application.

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Tilden Township and Frank Perano v. DEP et al EHB Docket No. 2009-066-L, DEP issued a letter to Perano, a mobile home park operator, that the NPDES permit for its waste water treatment plant would not be reissued. The Department then issued an Order directing the Township to revise its Official 537 Plan to provide sewer service to the Perano's mobile home park. Perano filed appeals of the letter he received and the Order issued to the Township. DEP argued in a motion to dismiss, that Perano had no standing to appeal the Order issued to the Township. The EHB found that Perano had standing to appeal and denied DEP's motion. 

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In the recent case Carroll Township v. DEP, EHB Docket No. 2008-173-L (issued July 16, 2009) the Environmental Hearing Board (“EHB”) sustained a DEP Order to the Township relative to DEP’s grant of a private request. The property owner owned an approved lot in Carroll Township. The lot was not suitable for on-lot disposal, which was what the Township’s 537 Plan called for. The lot did not have suitable soils and had steep slopes.

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In the case Wampum Hardware Co v. DEP (March 2009), the Environmental Hearing Board sustained an appeal of a DEP order which was issued to Wampum relative to a blast at Wampum's quarry. The blast in question ejected rock into the air, which rock was expelled several hundred feet from the site of the blast. The blaster established a 950 foot safety zone which was nearly twice the size required by DEP regulations. No rock was expelled from the safety zone. The closest that any rock landed to any person on the site was 250 feet. Rock from the blast traveled up to 700 feet from the blast, which clearly was beyond what would have been the required safety zone under the regulations. The regulation that DEP relied on to issue the Order provided: “blasting…may not be done or performed in a manner…constituting a hazard or danger or do harm or damage to persons or property in the area of the blasting.” The Board found that there was no evidence that any harm or hazard to persons or property in the area of the blasting, due to the size of the safety zone. As part of DEP's order, Wampum was direct to revise its blasting plan and as a result, agreed to change the material used for stemming shots, to lower the depth of stemming and to increase the delay in shots, each of which were designed to decrease the potential for flyrock. It appears that the Board missed the point that the blast at issue was not properly designed and fired, as rock traveled well beyond what would have been anticipated within the typical safety zone, the fact that no one was hurt was not due to design, but rather good luck. 

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The Environmental Hearing Board ("EHB") in the case of Douglass Township v. DEP and Synagro (April 2009), determined that the Department did not abuse its discretion in rejecting the Township's request to revise its approval for the land application of biosolids by limiting such land application only to exceptional quality sludge, requiring the applicator to provide advance notice to the Township prior to any land application, providing copies to the Township of any reports to be submitted to the Department and to provide the Township access to the site during any application activity.  The Board determined that the DEP was limited in its ability to impose only such conditions as "are necessary to protect public health and the environment from the adverse effects of pollutants in sewage sludge".  The Board determined that DEP engaged in sufficient consultation and cooperation with the Township prior to issuing its approval of the biosolids application to Synagro. 

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