Regulations Under the Perishable Agricultural Commodities Act (PACA): Growers' Trust Protection Eligibility and Clarification of “Written Notification”, 90255-90258 [2016-29983]

Agencies

• Agricultural Marketing Service
• DEPARTMENT OF AGRICULTURE

[Federal Register Volume 81, Number 240 (Wednesday, December 14, 2016)]
[Proposed Rules]
[Pages 90255-90258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29983]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 81, No. 240 / Wednesday, December 14, 2016 / 
Proposed Rules

[[Page 90255]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 46

[Document Number AMS-FV-15-0045]
RIN 0581-AD50


Regulations Under the Perishable Agricultural Commodities Act 
(PACA): Growers' Trust Protection Eligibility and Clarification of 
``Written Notification''

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: The U. S. Department of Agriculture (USDA), Agricultural 
Marketing Service (AMS), is proposing to amend the regulations under 
the Perishable Agricultural Commodities Act (PACA or Act) to enhance 
clarity and improve the administration and enforcement of the PACA. The 
proposed revisions to the regulations would provide greater direction 
to the industry of how growers and other principals that employ selling 
agents may preserve their PACA trust rights. The proposed revisions 
would further provide greater direction to the industry on the 
definition of ``written notification'' and the jurisdiction of USDA to 
investigate alleged PACA violations.

DATES: Written or electronic comments received by February 13, 2017 
will be considered prior to issuance of a final rule.

ADDRESSES: You may submit written or electronic comments to ``PACA 
Regulatory Enhancements,'' AMS, Specialty Crops Program, PACA Division, 
1400 Independence Avenue SW., Room 1510-S, Stop 0242, Washington, DC 
20250-0242; Internet: https://www.regulations.gov; or fax: 202-690-4413.

FOR FURTHER INFORMATION CONTACT: Josephine E. Jenkins, Chief, 
Investigative Enforcement Branch, 202-720-6873; or 
PACAinvestigations@ams.usda.gov.

SUPPLEMENTARY INFORMATION: The Perishable Agricultural Commodities Act 
(PACA) was enacted in 1930 to promote fair-trading in the marketing of 
fresh and frozen fruits and vegetables in interstate and foreign 
commerce. It protects growers, shippers, distributors, and retailers 
dealing in those commodities by prohibiting unfair and fraudulent trade 
practices. The PACA also provides a forum to adjudicate or mediate 
commercial disputes. Licensees who violate the PACA may have their 
license suspended or revoked, and individuals determined to be 
responsibly connected to such licensees are restricted from being 
employed or operating in the produce industry for a period.

Growers' Trust Protection Eligibility

    Growing, harvesting, packing, and shipping perishables involve 
risk: Costs are high; capital is tied up in farmland and machinery; and 
returns are delayed until the crop is sold. Because of the highly 
perishable nature of the commodities and distance from selling markets, 
produce trading is fast moving and often informal. Transactions are 
often consummated in a matter of minutes, frequently while the 
commodities are in route to their destination. Under such conditions, 
it is often difficult to check the credit rating of the buyer.
    Congress examined the sufficiency of the PACA fifty years after its 
inception and determined that prevalent financing practices in the 
perishable agricultural commodities industry were placing the industry 
in jeopardy. Particularly, Congress focused on the increase in the 
number of buyers who failed to pay, or were slow in paying their 
suppliers, and the impact of such payment practices on small suppliers 
who could not withstand a significant loss or delay in receipt of 
monies owed. Congress was also troubled by the common practice of 
produce buyers granting liens on their inventories to their lenders, 
which covered all proceeds and receivables from the sales of perishable 
agricultural commodities, while produce suppliers remained unpaid. This 
practice elevated the lenders to a secured creditor position in the 
case of the buyer's insolvency, while the sellers of perishable 
agricultural commodities remained unsecured creditors with little or no 
legal protection or means of recovery in a suit for damages.
    Deeming this situation a ``burden on commerce,'' Congress amended 
the PACA in 1984 to include a statutory trust provision, which provides 
increased credit security in the absence of prompt payment for 
perishable agricultural commodities. The 1984 amendment to the PACA 
states in relevant part:

    It is hereby found that a burden on commerce in perishable 
agricultural commodities is caused by financing arrangements under 
which commission merchants, dealers, or brokers, who have not made 
payment for perishable agricultural commodities purchased, 
contracted to be purchased, or otherwise handled by them on behalf 
of another person, encumber or give lenders a security interest in 
such commodities, or on inventories of food or other products 
derived from such commodities, and any receivables or proceeds from 
the sale of such commodities or products, and that such arrangements 
are contrary to the public interest. This subsection is intended to 
remedy such burden on commerce in perishable agricultural 
commodities and to protect the public interest.

(7 U.S.C. 499e(c)(1))

    Under the 1984 amendment, perishable agricultural commodities, 
inventories of food or other derivative products, and any receivables 
or proceeds from the sale of such commodities or products are to be 
held in a non-segregated floating trust for the benefit of unpaid 
sellers. This trust is created by operation of law upon the purchase of 
such goods, and the produce buyer is the statutory trustee for the 
benefit of the produce seller. To preserve its trust benefits, the 
unpaid supplier, seller, or agent must give the buyer written notice of 
intent to preserve its rights under the trust within 30 calendar days 
after payment was due. Alternatively, as provided in the 1995 
amendments to the PACA (Pub. L. 104-48), a PACA licensee may provide 
notice of intent to preserve its trust rights by including specific 
language as part of its ordinary and usual billing or invoice 
statements.
    The trust is a non-segregated ``floating trust'' made up of all of 
a buyer's commodity-related assets, under which there may be a 
commingling of trust assets. There is no need to identify specific 
trust assets through each step of

[[Page 90256]]

the accrual and disposal process. Since commingling is contemplated, 
all trust assets would be subject to the claims of unpaid sellers, 
suppliers and agents to the extent of the amount owed them. As each 
supplier gives ownership, possession, or control of perishable 
agricultural commodities to a buyer, and preserves its trust rights, 
that supplier becomes a participant in the trust. Section 5(c)(2) of 
the PACA states in relevant part:

    Perishable agricultural commodities received by a commission 
merchant, dealer, or broker in all transactions, and all inventories 
of food or other products derived from perishable agricultural 
commodities, and any receivables or proceeds from the sale of such 
commodities or products, shall be held by such commission merchant, 
dealer, or broker in trust for the benefit of all unpaid suppliers 
or sellers of such commodities or agents involved in the 
transaction, until full payment of the sums owing in connection with 
such transactions has been received by such unpaid suppliers, 
sellers, or agents.

(7 U.S.C. 499e(c)(2))

    Thus, trust participants remain trust beneficiaries until they have 
been paid in full.
    Under the statute, the District Courts of the United States are 
vested with jurisdiction to entertain actions by trust beneficiaries to 
enforce payment from the trust. (7 U.S.C. 499e(c)(5)).
    Thus, in the event of a business failure, produce creditors may 
enforce their trust rights by suing the buyer in federal district 
court. It is common in this type of trust enforcement action for unpaid 
sellers to seek a temporary restraining order (TRO) that freezes the 
bank accounts of a buyer until the trust creditors are paid. Many 
unpaid sellers have found this to be a very effective tool to recover 
payment for produce. Often, a trust enforcement action with a TRO will 
be the defining moment for the future of a buyer-debtor firm. Since the 
TRO freezes the bank accounts of the buyer, the buyer must either pay 
the trust creditors or attempt to operate a business without access to 
its bank accounts. This aggressive course of action by unpaid sellers 
is generally pursued when the sellers are concerned that trust assets 
are being dissipated.
    In the event of a bankruptcy by a produce buyer, that is, the 
produce ``debtor,'' the debtor's trust assets are not property of the 
bankruptcy estate and are not available for distribution to secured 
lenders and other creditors until all valid PACA trust claims have been 
satisfied. The trust creditors can petition the court for the turnover 
of the debtor's trust-related assets or alternatively request that the 
court oversee the liquidation of the inventory and collection of the 
receivables and disburse the trust proceeds to qualified PACA trust 
creditors.
    Because of the statutory trust provision, produce creditors, 
including sellers outside the United States, have a far greater chance 
of recovering money owed them when a buyer goes out of business. 
However, because attorney's fees are incurred in trust enforcement 
cases, it is not always practical to pursue small claims that remain 
unpaid. Nonetheless, because of the PACA trust provisions, unpaid 
sellers, including those outside the United States, have recovered 
hundreds of millions of dollars that most likely would not otherwise 
have been collected.
    The PACA trust provisions protect not only growers, but also other 
firms trading in fruits and vegetables since each buyer in the 
marketing chain becomes a seller in its own turn and can preserve its 
own trust eligibility accordingly. Because each creditor that buys 
produce can preserve trust rights for the benefit of its own suppliers, 
any money recovered from a buyer that goes out of business is passed 
back through preceding sellers until ultimately the grower also 
realizes the financial benefits of the trust provisions. This is 
particularly important in the produce industry due to the highly 
perishable nature of the commodities as well as the many hands such 
commodities customarily pass through to the end customer.
    In 1995, Congress amended the PACA (Pub. L. 104-48), changing 
several requirements of the PACA trust. Changes include no longer 
requiring sellers or suppliers to file notices of intent to preserve 
trust benefits with USDA, and allowing PACA licensees to have their 
invoices or other billing documents serve as the trust notice. The 
primary reason for removing the notice filing requirement was to reduce 
the paperwork burden on sellers and suppliers and eliminate USDA's 
expense in processing trust notices and administrating the provision.
    To preserve trust protection under the PACA, the law offers two 
approaches to unpaid sellers, suppliers, and agents. One option allows 
PACA licensees to declare at the time of sale that the produce is sold 
subject to the PACA trust, providing protection in the event that 
payment is late or the payment instrument is not honored. This option 
allows PACA licensees to protect their trust rights by including the 
following language on invoices or other billing statements:

The perishable agricultural commodities listed on this invoice are 
sold subject to the statutory trust authorized by section 5(c) of 
the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. 
499e(c)). The seller of these commodities retains a trust claim over 
these commodities, all inventories of food or other products derived 
from these commodities, and any receivables or proceeds from the 
sale of these commodities until full payment is received.

(7 U.S.C. 499(c)(4))

    The second option for a PACA licensee to preserve its trust rights, 
and the sole method for all non-licensed sellers requires the seller to 
provide a separate, independent notice to the buyer of its intent to 
preserve its trust benefits. The notice must include sufficient details 
to identify each transaction and be received by the buyer within 30 
days after payment becomes due.
    Under current 7 CFR 46.46(e)(2), only transactions with payment 
terms of 30 days from receipt and acceptance, or less, are eligible for 
trust protection. Section 46.46(e)(1) of the regulations (7 CFR 
46.46(e)(1)) requires that any payment terms beyond ``prompt'' payment 
as defined by the regulations, usually 10 days after receipt and 
acceptance in a customary purchase and sale transaction, must be 
expressly agreed to in writing before entering into the transaction. A 
copy of the agreement must be retained in the files of each party and 
the payment due date must be disclosed on the invoice or billing 
statement.
    Since 1984, the district courts have had jurisdiction to entertain 
actions by trust beneficiaries to enforce payment from the trust. 
Recent court decisions have invalidated the trust claims of unpaid 
growers against their growers' agent because the growers did not file a 
trust notice directly with the growers' agent. Growers' agents sell and 
distribute produce for or on behalf of growers and may provide such 
services as financing, planting, harvesting, grading, packing, labor, 
seed, and containers. The growers have argued that it is not necessary 
to file a trust notice with their growers' agent because growers' 
agents are required to preserve the growers' rights as a trust 
beneficiary against the buyer (7 CFR 46.46(d)(2)). Some courts have 
ruled that while the growers' agent is required to preserve the 
growers' trust benefits with the buyer of the produce, the grower has 
the responsibility to preserve its trust benefits with the growers' 
agent.
    AMS proposes that section 46.46 of the regulations be amended by 
revising paragraphs (d)(1) and (d)(2), redesignating paragraph (d)(2) 
as (d)(3), adding a new paragraph (d)(2) and revising (f)(1)(iv). These 
amendments

[[Page 90257]]

would clarify that growers, or other types of principals, who employ 
agents to sell perishable agricultural commodities on their behalf are 
among the class of ``suppliers or sellers'' referenced in section 5(c) 
of the PACA (7 U.S.C. 499e) and as such must preserve their trust 
benefits against their agents. The revision of (f)(1)(iv) would 
identify additional types of documents that can be used in a notice of 
intent to preserve trust benefits.
    If licensed under the PACA, the grower may choose to preserve its 
trust rights by invoicing the growers' agent based on shipping and/or 
billing documents. The shipping and/or billing documents must include 
the requisite trust language provided in section 5(c)4 of the PACA. 
Non-licensed growers may choose to preserve their trust rights by 
issuing a notice of intent to preserve trust benefits as outlined under 
section 46.46 of the PACA regulations.

Clarification of ``Written Notification''

    The PACA was amended in 1995 to require written notification as a 
precursor to investigations of alleged violations of the PACA. Within 
recent years, produce entities have challenged the USDA's jurisdiction 
to conduct investigations based their narrow reading of the definition 
of ``written notification'' stated in section 46.49 of the Regulations 
(7 CFR 46.49). The proposed amendment of section 46.49 is needed to 
make clear that public filings such as bankruptcy petitions, civil 
trust actions, and judgments constitute written notification. Moreover, 
AMS proposes to clarify that the filing of a written notification with 
USDA may be accomplished by myriad means, including, but not limited 
to, delivery by: Regular or commercial mail service, hand delivery, or 
electronic means such as email, text, or facsimile message. 
Furthermore, a written notification published in any public forum, 
including, but not limited to, a newspaper or internet Web site, will 
be considered filed with USDA upon its visual inspection by any office 
or official of USDA responsible for administering the Act. 
Clarification of the meaning of ``written notification'' would ensure 
that PACA licensees and entities operating subject to the PACA 
understand the breadth of documentation that could trigger USDA's 
authority to initiate an investigation of alleged PACA violations.
    Section 46.49 would be amended by revising paragraphs (a), (b), (c) 
and (d) to clarify the meaning of ``written notification'' as the term 
is used in section 6(b) of the PACA. Further, to reflect current 
industry practices and advancements in electronic communication, 
section 46.49(d) would be amended to allow the Secretary to serve a 
notice or response, as it relates to paragraph (d), by any electronic 
means such as registered email that provides proof of receipt to the 
electronic mail address or phone number of the subject of the 
investigation.

Executive Orders 12866 and 13563

    The proposed rule has been reviewed under Executive Order 12866 
supplemented by Executive Order 13563 and it has been determined that 
this proposed rule is not considered a significant regulatory action 
under section 3(f) of Executive Order 12866 and, therefore, it was not 
reviewed by the Office of Management and Budget.

Executive Order 12988

    This proposed rule has been reviewed under Executive Order 12988, 
Civil Justice Reform, and is not intended to have retroactive effect. 
This proposed rule will not preempt any State or local laws, 
regulations, or policies, unless they present an irreconcilable 
conflict with this rule. There are no administrative procedures that 
must be exhausted prior to any judicial challenge to the provisions of 
this proposed rule.

Effects on Small Businesses

    Pursuant to requirements set forth in the Regulatory Flexibility 
Act (RFA) (5 U.S.C. 601 et seq.), USDA has considered the economic 
impact of this proposed rule on small entities. The purpose of the RFA 
is to fit regulatory actions to the scale of businesses subject to such 
actions in order that small businesses will not be unduly or 
disproportionately burdened. Small agricultural service firms are 
defined by the Small Business Administration (SBA) as those having 
annual receipts of less than $7,500,000, and small agricultural 
producers are defined as those having annual receipts of less than 
$750,000 (13 CFR 121.201). There are approximately 14,500 firms 
licensed under the PACA, a majority of which could be classified as 
small entities. Historically, the produce industry has been an entry-
level job market. There is a constant turnover involving the closing 
and opening of businesses. Produce firms generally start as small 
business entities.
    The Agricultural Marketing Service (AMS) believes that the proposed 
amendments to the PACA regulations would help growers and other sellers 
and suppliers of produce protect their rights under the PACA trust, and 
the potential recovery of millions of dollars in unpaid produce debt. 
Moreover, AMS believes that the proposed amendments more accurately 
reflect the intent of Congress when it amended the PACA to require 
written notification as a precursor to investigations by the Secretary 
of Agriculture. The proposed revisions include language that clarifies 
a grower's responsibility to preserve its benefits under the PACA 
trust, as well as language that clarifies what constitutes ``written 
notification'' for purposes of investigating alleged violations of the 
PACA.
    AMS believes the proposed revisions would increase the clarity of 
the PACA regulations and improve AMS's enforcement of the PACA. AMS 
believes that this proposed rule would not have a significant economic 
impact on a substantial number of small entities.

Executive Order 13175

    This proposed rule has been reviewed in accordance with the 
requirements of Executive Order 13175, consultation and Coordination 
with Indian Tribal governments. The review reveals that this proposed 
regulation will not have substantial and direct effects on Tribal 
governments and will not have significant Tribal implications.

Paperwork Reduction Act

    In accordance with OMB regulations (5 CFR part 1320) that implement 
the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), the 
information collection and recordkeeping requirements that are covered 
by this proposed rule are currently approved under OMB number 0581-
0031.

E-Government Act Compliance

    USDA is committed to complying with the E-Government Act, which 
requires Government agencies in general to provide the public the 
option of submitting information or transacting business electronically 
to the maximum extent possible. Forms are available on our PACA Web 
site at https://www.ams.usda.gov/rules-regulations/paca and can be 
printed, completed, and faxed. Currently, forms are transmitted by fax 
machine, postal delivery and can be accepted by email.

List of Subjects in 7 CFR Part 46

    Agricultural commodities, Brokers, Penalties, Reporting and 
recordkeeping requirements.

    For the reasons set forth in the preamble, AMS proposes to amend 7 
CFR part 46 as follows:

[[Page 90258]]

PART 46--REGULATIONS (OTHER THAN RULES OF PRACTICE) UNDER THE 
PERISHABLE AGRICULTURAL COMMODITIES ACT, 1930

0
 1. The authority citation for part 46 continues to read as follows:

    Authority:  7 U.S.C. 499a-499t.
0
2. Amend Sec.  46.46 by revising paragraphs (d) and (f)(1)(iv) to read 
as follows:


Sec.  46.46  Statutory trust.

* * * * *
    (d) Trust maintenance. (1) Licensees and persons subject to license 
are required to maintain trust assets in a manner so that the trust 
assets are freely available to satisfy outstanding obligations to 
sellers of perishable agricultural commodities. Any act or omission 
which is inconsistent with this responsibility, including dissipation 
of trust assets, is unlawful and in violation of section 2 of the Act 
(7 U.S.C. 499b). Growers, licensees, and persons subject to license may 
file trust actions against licensees and persons operating subject to 
license. Licensees and persons subject to license are bound by the 
trust provisions of the Act (7 U.S.C. 499(e)).
    (2) Principals, including growers, who employ agents to sell 
perishable agricultural commodities on their behalf are ``suppliers'' 
and/or ``sellers'' as those words are used in section 5(c)(2) and (3) 
of the Act (7 U.S.C. 499e(c)(2) and (3)) and therefore must preserve 
their trust rights against their agents by filing a notice of intent to 
preserve trust rights with their agents as set forth in paragraph (f) 
of this section.
    (3) Agents who sell perishable agricultural commodities on behalf 
of their principals must preserve their principals' trust benefits 
against the buyers by filing a notice of intent to preserve trust 
rights with the buyers. Any act or omission which is inconsistent with 
this responsibility, including failure to give timely notice of intent 
to preserve trust benefits, is unlawful and in violation of section 2 
of the Act (7 U.S.C. 499b).
* * * * *
    (f) * * *
    (1) * * *
    (iv) The amount past due and unpaid; except that if a supplier, 
seller or agent engages a commission merchant or growers' agent to sell 
or market their produce, the supplier, seller or agent that has not 
received a final accounting from the commission merchant or growers' 
agent shall only be required to provide information in sufficient 
detail to identify the transaction subject to the trust.
* * * * *
0
 3. Revise Sec.  46.49 to read as follows:


Sec.  46.49  Written notifications and complaints.

    (a) Written notification, as used in section 6(b) of the Act (7 
U.S.C. 499f (b)), means:
    (1) Any written statement reporting or complaining of a violation 
of the Act made by any officer or agency of any State or Territory 
having jurisdiction over licensees or persons subject to license, or a 
person filing a complaint under section 6(a), or any other interested 
person who has knowledge of or information regarding a possible 
violation of the Act, other than an employee of an agency of USDA 
administering the Act;
    (2) Any written notice of intent to preserve the benefits of, or 
any claim for payment from, the trust established under section 5 of 
the Act (7 U.S.C. 499e);
    (3) Any official certificate(s) of the United States Government or 
States or Territories of the United States; or
    (4) Any public legal filing or other published document describing 
or alleging a violation of the Act.
    (b) Any written notification may be filed by delivering the written 
notification to any office of USDA or any official of USDA responsible 
for administering the Act. Any written notification published in any 
public forum, including, but not limited to, a newspaper or an internet 
Web site shall be deemed filed upon visual inspection by any office of 
USDA or any official of USDA responsible for administering the Act. A 
written notification which is so filed, or any expansion of an 
investigation resulting from any indication of additional violations of 
the Act found as a consequence of an investigation based on written 
notification or complaint, also shall be deemed to constitute a 
complaint under section 13(a) of the Act (7 U.S.C. 499m(a)).
    (c) Upon becoming aware of a complaint under section 6(a) or 
written notification under 6(b) of the Act (7 U.S.C. 499f (a) or (b)) 
by means described in paragraph (a) and (b) of this section, the 
Secretary will determine if reasonable grounds exist to conduct an 
investigation of such complaint or written notification for 
disciplinary action. If the investigation substantiates the existence 
of violations of the Act, a formal disciplinary complaint may be issued 
by the Secretary as described in section 6(c)(2) of the Act (7 U.S.C. 
499f(c)(2)).
    (d) Whenever an investigation, initiated as described in section 
6(c) of the Act (7 U.S.C. 499f(c)(2)), is commenced, or expanded to 
include new violations of the Act, notice shall be given by the 
Secretary to the subject of the investigation within thirty (30) days 
of the commencement or expansion of the investigation. Within one 
hundred and eighty (180) days after giving initial notice, the 
Secretary shall provide the subject of the investigation with notice of 
the status of the investigation, including whether the Secretary 
intends to issue a complaint under section 6(c)(2) of the Act (7 U.S.C. 
499f(e)(2)), terminate the investigation, or continue or expand the 
investigation. Thereafter, the subject of the investigation may request 
in writing, no more frequently than every ninety (90) days, a status 
report from the Director of the PACA Division who shall respond to the 
written request within fourteen (14) days of receiving the request. 
When an investigation is terminated, the Secretary shall, within 
fourteen (14) days, notify the subject of the termination of the 
investigation. In every case in which notice or response is required 
under this paragraph, such notice or response shall be accomplished by 
personal service; or by posting the notice or response by certified or 
registered mail, or commercial or private delivery service to the last 
known address of the subject of the investigation; or by sending the 
notice or response by any electronic means such as registered email, 
that provides proof of receipt to the electronic mail address or phone 
number of the subject of the investigation.

    Dated: December 8, 2016.
Elanor Starmer,
Administrator, Agricultural Marketing Service.
[FR Doc. 2016-29983 Filed 12-13-16; 8:45 am]
 BILLING CODE 3410-02-P