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Peter E. Fisch and Mitchell L. Berg

While the Perishable Agricultural Commodities Act, 1930 (PACA), which was enacted to protect the interests of suppliers and sellers of perishable agricultural commodities, would appear to have little relevance to real estate transactions, it has become a matter of some concern to title insurance companies and lenders in loan transactions involving borrowers that purchase significant amounts of produce. PACA applies to fresh or frozen produce sold on credit to dealers, commission merchants or brokers (defined by PACA to mean those who purchase or receive 2,000 pounds or more in weight of perishable agricultural commodities in any day or who purchase more than $230,000 of such commodities in any year) 7 U.S.C. §499a(b)(6); 7 C.F.R. §46.2(x). Once perishable commodities are delivered to dealers, the commodities are held in trust until the supplier or seller is paid in full. PACA trusts are floating, non-segregated trusts that are created “at the moment the produce is shipped” from any supplier or seller and continue until the dealer pays all suppliers and sellers in full. Chiquita Fresh N. Am.v. Long Island Banana Corp., 2016 U.S. Dist. LEXIS 14-982 (ADS) (AKT) (EDNY 2016) (quoting Ger-Nis Int’l I, 2007 U.S. Dist. LEXIS 18403, at *1). PACA trusts extend to the proceeds received by the dealer once the commodities are sold, including proceeds that are used by the dealer to pay other debts and obligations. 7 U.S.C. §499e(c)(1). Thus, a dealer who pays its debt to a lender in lieu of paying suppliers and sellers may be in breach of the trust and the lender may be required to disgorge such payments if the lender is not deemed a bona fide purchaser for value with no notice of the breach. See, e.g., Am. Fruit & Vegetable Co., Inc. v. Ithaca Produce, 848 F. Supp. 2d 375 (W.D.N.Y. 2011); Chiquita Fresh N. Am., LLC, 2016 U.S. Dist. LEXIS 14-982. This includes payments made to a lender of debt secured by a mortgage on real property, effectively making the lender’s security interest junior to that of unpaid PACA sellers and suppliers.

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