The Perishable Agricultural Commodities Act (“PACA”) is a federal statute regulating the purchase and sale of agricultural commodities, such as fruits and vegetables. 7 U.S.C. § 499(a)-(s). PACA provides protection to producers and growers of perishable goods who transfer such perishables to brokers, dealers, and merchants, who in turn sell the food to purchasers. Essentially, PACA provides that all inventory and proceeds held by a broker that are related to perishable commodities are held in trust by the broker. The PACA trust is for the benefit of all producers that have sold products to such broker. PACA trust funds can be commingled and producers are generally entitled to a pro rata distribution of trust funds without the need for tracing. Producers, as the beneficiaries of a PACA trust, are entitled to a priority position over secured creditors of the broker.
While PACA does not explicitly provide that a depository bank has any responsibility or liability with respect to a PACA trust, under general trust law principles there are circumstances where a bank could have potential liability. Theoretically, a bank could be liable to the producers, as trust beneficiaries, where either the bank’s receipt of trust funds into a depository account was in breach of trust or where the disbursement of trust funds from the depository account was in breach of trust.
With respect to the receipt of funds into a depository account, generally a bank will only be liable if the deposit itself constituted a breach. Further, a bank must have actual or constructive notice of the breach to be held liable. Similarly, with respect to funds withdrawn from the account, a bank will only be liable if the withdrawal was in breach of trust and the bank had actual or constructive notice of the breach. Ordinarily, the disbursement of funds to PACA claimants is not a violation of the trust. Likewise, courts have held that payment of fees to the bank itself, such as overdraft fees, are not a breach, provided that the payments are made as part of a commercially reasonable transaction, particularly where the transaction has assisted the broker in fulfilling obligations to the PACA beneficiaries. While banks generally have very low risk of liability prior to receiving notice of a breach, there is, unfortunately, the potential for liability in situations where they have received notice.
Such potential liability is alarming for several reasons. First, it is highly possible that a bank may have existing depository customers that hold PACA trust funds without the bank even having knowledge of the PACA trust and may be faced with PACA issues unexpectedly. Secondly, depository banks may be placed in a difficult position when a potential PACA issue arises because the bank must determine whether to place a hold on the account, to the ire of the depositor, or whether to risk potential liability to PACA claimants.
Further, it is unclear what constitutes notice, and after a bank receives any indication that a PACA trust might be violated, it is unclear how far the duty of inquiry may reach. Stretched to the extreme, a bank may be expected to screen each recipient of funds from the trust account to determine whether the recipient is a proper PACA claimant and whether the recipient is receiving more than its pro rata share of the trust funds. Such monitoring of an account is nearly impossible for most banks, yet it is at least conceivable that a court could hold a bank liability for failing to do so.
The question of liability may vary from state to state. Accordingly, banks must understand the potential for liability in such situations. We highly recommend that you ensure that your bank has policies and procedures in place to deal with PACA claimants and accounts that may contain PACA trust funds.