Depending on the nature of its business, a debtor may encounter issues associated with the Perishable Agricultural Commodities Act (“PACA”), a statue designed to protect sellers of perishable produce. Recently, in Kingdom Fresh Produce, Inc. v. Stokes Law Office, L.L.P (In re Delta Produce, L.P.), the Fifth Circuit determined that the issue whether an attorney appointed to collect assets on behalf of PACA creditors could be paid from such proceeds was “ripe” for decision.

“Lettuce Ketchup” on PACA

Congress enacted PACA in 1930 to promote fair dealing in the sale of fruits and vegetables. Under the statute, buyers of perishable commodities violate federal law if they fail to make full, prompt payment to the seller of those goods. In 1984, Congress strengthened these protections by requiring the buyers of perishable commodities to hold either the produce or all proceeds thereof in trust for the benefit of the sellers until those sellers have been paid in full.

Typically, a vendor, such as a seller of goods, will be an unsecured creditor if its purchaser should file for bankruptcy. PACA prevents this outcome for sellers of perishable commodities. Because a debtor/buyer of perishable commodities holds only a legal interest in such commodities and the seller retains an equitable interest in the PACA trust assets, therefore, the assets are insulated from becoming property of the estate. Thus, PACA creditors have a superior right to payment from any proceeds of those assets that will trump the rights of a debtor’s other secured or unsecured creditors.

Facts and “FIG”ures

The Debtors, two “repackers” who bought produce from farmers to resell to grocers, filed for bankruptcy protection after being sued by various unpaid PACA creditors. After the filing, the debtors and certain of the PACA Claimants moved to appoint a member of the broccoli bar as “Special PACA Counsel” to preserve, collect, and administer the PACA assets for the benefit of all PACA claimants. The bankruptcy court approved this retention under section 327 of the Bankruptcy Code and the retention order provided that the attorney would be paid from the PACA trust fund.

When the attorney began to file fee applications in connection with his retention, the majority of PACA claimants consented to his payment from their portion of the PACA trust fund. One PACA claimant objected, arguing that the bankruptcy court lacked jurisdiction to disburse PACA trust assets that are not part of the bankruptcy estate and that the attorney could not be paid from the PACA trust until all PACA claimants were paid in full. Both the bankruptcy court and the district court, on appeal, held that the bankruptcy court had proper jurisdiction over the PACA trust. However, the district court vacated the bankruptcy court’s prior interim fee awards, reasoning that, in accordance with PACA, the attorney was essentially a trustee for the PACA trust and was not entitled to be paid from those assets until the trust beneficiaries were fully paid.

PACA Creditors “Beet” Attorneys’ Fees

The Fifth Circuit agreed that the attorney was not entitled to be paid from PACA trust assets until the objecting PACA creditor received full payment because PACA’s trust provision contains no exceptions. In its ruling, the court cited to precedent from the Second Circuit where the court ruled that a PACA trustee could not use lawsuit settlement funds to pay the attorney who had represented the produce purchaser in the lawsuit until the PACA beneficiaries were paid in full.

The court did note that there are cases that have come out the other way, holding that when a bankruptcy trustee has rendered substantial services in collecting PACA receivables for the benefit of PACA beneficiaries, the trustee is entitled to payment from the trust funds because the non-PACA creditors of the estate should not bear the burden for those services. The Fifth Circuit drew the admittedly blurred distinction between individuals who are PACA trustees (or their functional equivalent) and those whose primary role is outside the PACA trustee framework. The Fifth Circuit noted that a PACA trustee, as a fiduciary of the PACA trust, has a duty to repay the full amount to PACA creditors and, therefore, is not entitled to be paid from trust funds until the beneficiaries have been paid in full.

In this case, the “Special PACA Counsel,” although not denoted a “trustee,” was the functional equivalent of a PACA trustee and, therefore, could not be paid from trust assets until full payment was made to the objecting PACA claimant.

“Orange” You Glad You Are a PACA Creditor?

It looks like this attempt to squeeze the juice out of the objecting PACA creditor was unsuccessful. By enacting PACA, Congress intended to protect sellers of perishable goods, even at the expense of other secured and unsecured creditors, and this decision is no exception. Although the court recognized the unfortunate outcome for the attorney here, it did note that he was left with several alternate payment options, including payment under section 327 from general assets of the bankruptcy estate. Let’s hope his fees don’t get a-peel-ed again!