The debtors entered into agreements with two agricultural producers (collectively, the “creditors”). Under the terms of the agreements, the creditors would supply the debtors with agricultural products, including cherries, frozen fruit, and vegetables. The creditors, who were licensed produce dealers under the Perishable Agricultural Commodities Act (“PACA”), sent the debtors an invoice after delivering the commodities. The invoices stated that the commodities were “sold subject to the statutory trust” under Section 5(c) of PACA. The debtors failed to pay invoices from each of the creditors in a timely manner. The debtors also received a loan from the lenders in exchange for granting the lenders a security interest in all the debtors’ assets. The lenders perfected its security interest. Subsequently, the debtors filed for chapter 11 bankruptcy; the debtors’ assets were sold at auction for nearly $1 million; the bankruptcy case was converted to a chapter 7 case; and a trustee was appointed. The creditors initiated an adversary proceeding against the debtors, lenders, and the chapter 7 trustee, arguing that, under PACA, it was entitled to the funds held by the chapter 7 trustee. In response, the lenders argued that they were entitled to the funds held by the trustee because (1) the creditors’ course of dealings waived PACA protections, (2) no PACA trust existed when the creditors had shipped the commodities, (3) a percentage of the funds were not protected by the PACA trust (if one were to exist), (4) granting the funds to the creditors would violate the lenders’ constitutional rights under the Due Process and Takings Clause, and (5) the creditors were not entitled to prepetition and post-petition interest or attorneys’ fees.
In Peterson Farms, Inc. v. Something Sweet Acquisition (In re Something Sweet Acquisition), Case No. 21-10992 (CTG), Adv. Proc. No. 23-50752 (CTG), 2025 Bankr. LEXIS 2691 (Bankr. D. Del. Oct. 20, 2025) (opinion not yet released for publication), the bankruptcy court held that the creditors were entitled to the funds held by the chapter 7 trustee. As a preliminary matter, the court discussed PACA and the authorization of a statutory trust for producers of agricultural goods. The court cited a second circuit case that explained that “‘the seller [of produce] retains an equitable interest in the trust property pending payment’… [i]n the event of a buyer’s bankruptcy, the trust assets are excluded from the bankruptcy estate.” In re Kornblum & Co., Inc., 81 F.3d 280, 284 (2d Cir. 1996). Further, “a “PACA trust beneficiary is thereby entitled to claim trust property ahead of even creditors holding security interests in the property.’” Id. The bankruptcy court then adopted the Second Circuit’s burden-shifting analysis, stating that “[o]nce it is established that a PACA trust has come into existence, a party contending that particular assets are outside of that trust bears the burden of proving one of three things:” (1) at the time of purchase no trust existed, (2) trust assets were not used to purchase the commodities in question, or (3) the debtor paid all unpaid sellers in full. The court found that a PACA trust existed, which shifted the burden to the lenders. The court then addressed the lender’s five arguments in turn.
First, the court held that the creditors’ course of dealing had not waived the PACA protections. The lenders argued that because the creditors made shipments while the debtors had outstanding invoices, the creditors had “implicitly agreed” to payment terms longer than PACA’s requirement that suppliers require payment within 30 days of shipment. However, only pre-transaction agreements that extend the time for payment operate to waive the PACA trust. See 7 C.F.R. § 46.46. Here, the court found that making the shipments while outstanding invoices remained unpaid was a post-transaction agreement that would not waive the trust. Second, the court held that the lenders failed to meet their burden to show that the trust had terminated. The lenders had argued that one of the creditors had not had any unpaid invoices until after the lenders had a perfected security interest, and thus no trust was established for that creditor. However, the court noted that the lenders had the burden to show “that there was a point in time when all produce suppliers had been paid in full,” which the lenders were unable to do. Third, the court held that the proceeds of the sale of the debtor’s assets in the trustee’s possession were held in a PACA trust. The lenders argued that the proceeds were not held in trust because the “bulk of the value in the § 363 sale was attributable to the equipment” and was purchased before the PACA claims arose. The court found the lenders’ argument to be unpersuasive because it held that a trust had been created before the lenders obtained their security interest and the lenders failed to “[take] steps to ensure that the assets in which they took a security interest had been acquired by the debtors with funds that fell outside the ambit of any then-existing PACA trust.” Therefore, the court found that the lenders failed to meet its burden that the proceeds were not part of the trust. Fourth, the court held that the lenders’ Due Process and Takings clauses rights had not been violated. The court summarily dismissed the lenders’ argument because the Supreme Court requires that the challenging party establish that the law “interferes with the party’s ‘reasonable investment-backed expectations.’” E. Enters. v. Apfel, 524 U.S. 498, 523 (1998). Here, the law had been enacted in 1984 and was settled by the time of the lenders’ loan, and thus, the lenders could not have had a “reasonable investment-backed expectation” that the court would grant priority to their security interest over a PACA trust. Finally, the court held that the creditors were entitled to both prepetition and post-petition interest. The lenders argued that awarding post-petition interest would be inequitable, or, in the alternative, that the bankruptcy code does not grant the right of post-petition interest to unsecured creditors. The court dismissed both arguments, finding it had no authority to invoke its equitable powers to alter the terms of the agreements between the creditors and the debtors. Additionally, the court held that bankruptcy code section 506(b) entitled the creditors to post-petition fees and interest. In conclusion, the court held that a PACA trust existed, that the creditors, as opposed to the lenders, were the beneficiaries, and ordered the proceeds be distributed to the creditors.
By Hayden Mariott [email protected]
Edited By Landon Womack [email protected]
Edited By Kristin Meurer [email protected]