PACA Liens: Farm Legislation’s Surprising Effects on Title Marketability

The Perishable Agricultural Commodities Act (PACA) has existed since 1930, initially passed by Congress for the protection of produce suppliers from commercial vendors who unscrupulously refuse to pay for the goods after receipt. While the Act may have its origins in agricultural policy, its overarching applications are far broader — and of interest to title professionals — than meets the eye. Here’s everything you need to know about PACA liens from the risk mitigation experts at All American Document Services.

Legislation Background

The legislation provides specific benefits to farmers and other produce creators, creating a statutory trust system where suppliers are the beneficiaries and vendors the trustees. The vendors (referred to as “dealers” in the Act) are compelled to hold the inventory — and any proceeds gained from them — until the suppliers receive full and complete payment. Specifically, these dealers must maintain the trust’s assets to make sure that they are “freely available to satisfy outstanding obligations.” Accordingly, if a vendor is in breach of this fiduciary duty, the supplier may file a PACA claim in order to make good on any improperly-diverted assets.

Title Applications

So what does an 85-year-old piece of agricultural legislation have to do with real estate title? As it turns out, quite a lot. Until recently, the Act was typically employed in bankruptcy claims, enabling suppliers to receive lien priority over other creditors. However, a 2013 New York summary judgment established that PACA claimants had legitimate and superior right to a piece of real property, even over the mortgage holder itself. This particular case involved a bank seeking to foreclose on the home of an individual whose commercial property (a grocery store) was in forbearance. However, several PACA suppliers joined the case to argue their claim’s priority over that of the mortgager’s.

Their intervention was a qualified success: the court found that while the complainants did not have right to the full amount of the unpaid PACA debt, their lien was superior to other creditors’ with regard to any mortgage payments made after incurring said debt. This position was strengthened in 2016 with an ensuing New York case that established PACA claims’ right to real property liens — as long as the payments were directly linkable to the trust assets.

Factors for Consideration

Title professionals examining issues of food-retail commercial property such as grocery stores, catering establishments, food stands or restaurants would be well advised to investigate any potential agricultural liabilities before sale. Savvy leaseholders can establish strong provisions to specifically indemnify themselves and the property owner against PACA liens (with the agreement of the tenant).

Finally, any property owner must produce an affidavit and indemnity agreement in favor of the title company upon any act of sale: incorporating specific PACA exemption language into this document is wise extra protection when it comes to real property with food-selling tenants.