PACA & Bankruptcy
If a produce seller takes the steps necessary to preserve its rights under the PACA trust [the words PACA trust is linked to PACA trust legend and PACA trust notice pages], and either the produce receiver or one of its principals becomes bankrupt, there are special protections available in bankruptcy. These protections are:
PACA Trust Creditors Have Priority Over Other Creditor Claims
PACA trust creditors have first priority to all any asset that the bankrupt entity obtained from produce dealings [ CRAIG – is this true that they would have priority over items such as IRS tax liens?]. In other words, if a bankrupt PACA trust debtor purchased a warehouse through funds which were earned by produce sales and the debtor becomes bankrupt, those produce suppliers who have qualified as PACA trust creditors have a first priority claim to paid from the sale of that asset before other creditors can have their claims satisfied from sale of that asset. Similarly, if the bankrupt produce trader has accounts receivable from produce sales, the proceeds from payment of these receivables must be used first to pay PACA trust creditors.
[new section] Bank accounts of produce debtors into which produce sales funds are deposited must also be used first to pay qualified PACA trust creditors. Banks or other non-produce creditors that have liens against the accounts receivable or other assets that were generated from produce transactions will find themselves subordinated to the claims of PACA trust creditors of a bankrupt PACA trust debtor.
PACA trust creditors can ask a bankruptcy court to prevent use of PACA trust assets by a bankrupt receiver. Generally in bankruptcy, a bankrupt entity can seek bankruptcy court permission to use its assets to continue its operations while it attempts to organize. However, PACA trust creditors can ask a bankruptcy court to deny a debtor the right to use PACA trust assets or to require the bankrupt debtor with unpaid PACA trust creditors to set aside sufficient funds to quickly pay PACA trust claims.
PACA Debt May Not Be Dischargable Under US Bankruptcy Law
[Possible non-dischargability of PACA trust debt – take out – ]Under US bankruptcy law, persons who are bankrupt can seek a discharge of their debt, a court order that relieves them from having to continue to pay the holders of the discharged debt [Craig – it seems like the previous sentence doesn’t quite read correctly]. In some circumstances it is possible to obtain an order from a bankruptcy court that exempts PACA trust debt from being discharged in bankruptcy. If a PACA trust creditor can obtain such an order, the order would mean that the PACA trust debt will survive bankruptcy and the unpaid produce seller can continue to attempt to collect from the debtor after the bankruptcy concludes. [Can they also go after shareholders who own 10% or more of the company? If so, did you want to add this?]