The PACA Law Perspective
PACA TRUST COMPLIANCE - THE COMMISSION MERCHANT,
DEALER OR BROKER REQUIREMENT
by Steven M. De Falco
One of the requirements for preserving your PACA trust rights is that the customer qualifies as a commission merchant, dealer or broker as defined by PACA. Practically speaking, by holding a PACA license, your customer admits that it is a commission merchant, dealer, or broker and therefore, the transactions with that customer are subject to the PACA trust. But what happens when your customer operates within the produce industry without a PACA license? Alternatively, what happens if your customer has a PACA license, but denies that it qualifies as a produce dealer, commission merchant, or broker under PACA? Are your transactions with that customer still eligible for PACA trust protection? The answer depends upon whether your customer is a dealer, commission merchant, or broker that is subject to the PACA requirements.
Before we can answer these questions, we must analyze the PACA statute and regulations, which define produce dealers, commission merchants, and brokers as follows:
Dealer - any person or entity engaged in the business of buying or selling 2,000 pounds or more of perishable agricultural commodities (Produce) in interstate commerce on any given day and are them a dealer from that day forward. Retailers, persons who sell directly to the ultimate consumer, are not considered dealers until they purchase Produce in excess of $230,000 annually and are then a dealer from that day forward. Produce growers are exempt from licensing as long as they only sell products of their own production. Retailers and frozen food brokers representing sellers are exempt from licensing until they purchase or negotiate sales of Produce exceeding $230,000 in a calendar year. Restaurants that purchase $230,000 or more worth of Produce in a calendar year and 2,000 pounds or more on any given day are retailers subject to PACA. Retailers, produce growers, and frozen food brokers may nevertheless be considered a dealer by securing a PACA license.
Commission Merchant - any person or entity engaged in the business of receiving Produce for sale on a commission basis on behalf of another. A commission merchant is the agent of the seller, the seller retains title and the commission merchant sells the commodities on a consignment basis. A commission merchant is usually a receiver at destination that obtains possession of the commodities. However, a grower's agent or shipper that sells a grower's crop on a consignment basis at shipping point is also a commission merchant.
Broker - any person or entity engaged in the business of bringing a buyer and seller of Produce together to form a sales contract. A broker does not become part of the sales transaction and does not obtain title or possession of the commodities. A broker is paid a commission by either the buyer or seller.
Most of our clients' transactions are sales of Produce with a customer that holds a PACA license who does not dispute that it is a dealer. Those transactions are clearly subject to the PACA trust. But if your customer does not have a PACA license, you must then examine the dollar amount and weight of the Produce purchased by your customer. As discussed, your customer must have on at least one day in its existence purchased and sold 2,000 pounds of Produce. It is therefore imperative to monitor the weight of the Produce sold when selling to a customer without a PACA license, as it is often difficult to look back at the invoices and determine the weight of the produce sold.It should also be noted that depending on the jurisdiction and the customer, you may also be required to prove that your customer purchased more than $230,000.00 of Produce annually. This threshold includes purchases from all suppliers, not just your company.
If your customer does not hold a valid PACA license and fails to meet the definition of a produce dealer, broker, and commission merchant, be aware that transactions with that customer do not qualify for PACA trust protection. Therefore, your claim is characterized as unsecured. This means that secured creditors are entitled to priority payment ahead of your claim. Additionally, no claim can be pursued against the principals of the company, as they have no duty to you, to ensure that the company maintains sufficient assets to pay your claim in full.
In review, the PACA trust only applies to transactions of perishable agricultural commodities to produce dealers, brokers and commission merchants. Before selling any shipment of Produce to a customer, you should first learn whether that customer holds a PACA license. You can obtain that information at the following website:
If the customer is not listed as having a valid PACA license, you should inquire as to the weight and dollar amount of Produce purchased daily and annually by the customer. You can obtain this information by requiring your customers to complete a credit application prior to the first transaction.
Learning this information about your customer at the onset of your relationship can better equip you in deciding whether to sell or continue to sell to a customer. Should you have any questions regarding this Article, do not hesitate to contact us at (239) 513-9191.