Lenders, Vendors and Landlords of Food Service Businesses Beware - Your Rights Under Your Agreements May Be Subordinated or Eliminated Under Federal Law

Recent bankruptcy court cases throughout the country involving restaurants, supermarkets and meat and produce wholesalers have again pointed out the significance of the Federal Perishable Agricultural Commodities Act (PACA), and how this law's provisions can subordinate or even eliminate the rights and remedies of lenders, vendors and landlords of any of these businesses that seek bankruptcy protection or just fail.

PACA (which can be found at  7 USC 499a  et seq.) was enacted by Congress a number of years ago after heavy lobbying pressure was brought by those representing American farmers and those who sell and distribute perishable farm products. The protection afforded to the beneficiaries of the act, those who sell produce in similar commodities as well as unpackaged meats, are superior to the rights granted to creditors by agreement or other statutes in the event that the charges for the purchase of the perishable agricultural commodities have not been paid to the vendors/beneficiaries of the act.

PACA creates a trust in a debtor's inventory of perishable agricultural commodities and any proceeds therefrom, including accounts receivable, for the benefit of the unpaid vendors. In creating this trust, Congress intended that the rights and remedies of those who are left unpaid as vendors of the perishable agricultural commodities will have rights that are superior to any lien, security interest or other right granted by agreement or statute. This means that lenders, landlords  and vendors that may have a perfected security interest or other lien rights in inventory of perishable agricultural commodities and/or the proceeds and accounts receivable generated therefrom will have their security interest and lien rights subordinated to the rights of the beneficiaries of the PACA trust.  The rights and remedies of the beneficiaries of the trust extend to any business that purchases perishable agricultural commodities as part of their business activities, which can include restaurants, commercial caterers, food service purveyors, supermarkets, wholesale clubs, meat and produce wholesalers and the like.

Additionally, a majority of the bankruptcy courts now hold that the owners and principals of the perishable agricultural commodities businesses may not be discharged in bankruptcy based upon the concept of a breach of fiduciary duty. This has the effect of substantially curtailing or totally eliminating rights of those who hold a guarantee from those individuals.

All of this points out the need for heightened awareness, special care and proactive credit underwriting when dealing with those businesses that may be subject to the provisions of PACA.

The attorneys at Tripp Scott have substantial experience in dealing with the best ways to protect lenders, vendors and landlords of those dealing with the food service industry, and also how best to recover unpaid obligations in the event of a bankruptcy proceeding or business failure.