The Perishable Agricultural Commodities Act (PACA) was passed by Congress in 1930 to protect agricultural produce suppliers from unscrupulous vendors who refused to pay the suppliers for their goods. PACA contains language creating a statutory trust, whose beneficiaries are the suppliers and whose trustees are the vendors, whom PACA calls “dealers.”1 The act imposes fiduciary duties on dealers to hold the agricultural commodities and any inventories, receivables and proceeds derived from them in trust until the suppliers are paid in full.2 If a dealer breaches its fiduciary duty to the trust by failing “to maintain trust assets in a manner that such assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities,”3 the supplier can file a PACA claim against it and seek to recover any assets improperly diverted from the trust.
Until recently, PACA claims primarily arose in bankruptcies, when PACA suppliers received priority over all other creditors, secured and unsecured, with regards to PACA trust assets. In 2013, however, a state court in Rockland County, New York issued a summary judgment holding that PACA claimants had a superior claim over a mortgage holder for a piece of real property.4 The plaintiff was a bank foreclosing on the house of a grocery store owner, but several PACA suppliers intervened to claim priority for their lien over the mortgage. The trial court held that the suppliers did not have a lien over the house in the full amount of the unpaid PACA debts, but the court did find that the PACA suppliers had a lien “over the subject property superior to all other creditors with respect to the mortgage payments” the defendant made after incurring the debts to the PACA suppliers. It is unclear from the opinion whether the court meant that there was a PACA lien directly on the property or on the PACA trust proceeds, which the court presumed the defendant used for the mortgage payments. In 1993 and 2016, federal district courts in the Eastern District of New York also held that PACA claims could cause liens on real property when mortgage payments could be traced to PACA trust assets.5
The New York state court case prompted a title insurance company to raise an exception on title for the sale of property, with a grocery store tenant, due to potential PACA liens on the property. The title company requested that the owner sign an affidavit and indemnity agreement, in case a PACA claimant tried to impose a lien on the property causing a cloud on title.
While it is not clear that every court would impose a lien on a piece of real property in a PACA claim, the title insurance company has indicated that PACA affidavit and indemnity agreements will be required going forward for the sale of any property owned or leased by a potential PACA dealers. Under the broad language of PACA, many tenants are or could be considered “dealers” under the terms of PACA. Common retail entities subject to PACA trust duties include grocery stores, “big box” stores, and any retailer purchasing produce in “wholesale or jobbing quantities.”6 It is possible that other operations, including table-service and fast-food restaurants, catering companies, mini-marts, convenience stores or even the local coffee or donut shop may be subject to PACA trust duties, if they are purchasing produce in “wholesale or jobbing quantities.”
In the future, if a landlord is planning to sell property which contains a grocery, restaurant or convenience store, the landlord should be prepared to indemnify the title company against any PACA liens that the tenant may incur. A landlord can protect itself by having strong lease provisions, including a “no liens” clause specifically identifying PACA liens and having the tenant indemnify the landlord against such PACA liens. Upon the sale of real property with a PACA tenant, the property owner should consider obtaining further indemnity from the PACA tenant relating to the affidavit and indemnity agreement the property owner must execute in favor of the title company.