chevron-down Created with Sketch Beta.

Probate & Property

Archives 2016-2022

The Impact of PACA and PASA on Real Estate Loans

Raymond J Werner


  • Create a trust on the borrower’s assets, and even require disgorgement of payments.
  • Many loan documents, especially if the financing arrangement involves revolving credit, require the borrower to provide periodic financial reports to the lender.
  • Federal legislation enacted to protect farmers can have a significant effect on lenders.
The Impact of PACA and PASA on Real Estate Loans
konradlew via Getty Images

Jump to:

The Perishable Agricultural Commodities Act (PACA), 7 U.S.C. §§ 499a et seq., and the Packers and Stockyards Act (PASA), 7 U.S.C. §§ 181 et seq., apply to certain real estate borrowers with a nexus to the agricultural industry. These acts can have an adverse effect on the ability of such borrowers to repay their loans. In the worst case, these laws can create a trust as a priority encumbrance on the borrower's assets and even result in a disgorgement of payments that have been received by a lender and credited against the debt. This article summarizes the effect of these laws on lenders.


If the borrower is involved in the meatpacking, produce, grocery, or food business, PACA and PASA can apply. These statutory structures, among other things, create a trust on cash held by a business entity for the benefit of the farmers and growers who supply the business.

A hypothetical example follows:

Cattle Raiser sells cattle to Meat Processor. Happy Bank has a revolving line of credit with Meat Processor that is secured by a lien on all of Meat Processor's assets, including its real estate and accounts receivable. Meat Processor sells the product created from the cattle purchased from Cattle Raiser to Quick and Spiffy Burgers, which pays Meat Processor for its product. Meat Processor deposits the payment into its general operating account, which is used for many purposes, including the payment of Happy Bank's debt. Because the funds in the account are not sufficient to pay all of Meat Processor's accounts payable, however, Cattle Raiser is not paid for the cattle it sold to Meat Processor. As described below, Cattle Raiser could bring suit for a violation of PASA, forcing Happy Bank to disgorge the payments that had been made on Meat Processor's debt.

The Floating Trust

Both PACA and PASA are based on the legislative finding that a burden has been placed on commerce in perishable agricultural commodities, poultry, and livestock by financing arrangements under which meatpackers, live poultry dealers, commission merchants, dealers, or brokers who, not having paid the sellers of those commodities, encumber or give security interests to lenders in such commodities, or inventories of food or other products derived from such commodities, and any receivables or proceeds from the sale of such commodities or products. 7 U.S.C. §§ 196(a), 197(a), 499e(c)(1). These laws provide that any receivables or proceeds from the sale of such commodities or products shall be held by the meatpacker, live poultry dealer, 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. 7 U.S.C. §§ 196(b), 197(b), 499e(c)(2). Thus, the growers and sellers of perishable produce and farm products are given a priority interest in the assets of the intermediary. D. M. Rothman & Co., Inc. v. Korea Commercial Bank of New York, 411 F.3d 90, 94 (2d Cir. 2005). The poultry grower, meatpacker, or seller of agricultural commodities is not required to trace the trust assets back to the sale. Rather, if the proceeds of the PACA or PASA sale are found to be held in trust and commingled with other funds not subject to the trust, then a lien on the entire commingled fund exists for the benefit of the beneficiaries of the trust. Those who receive payment from the commingled fund with actual or constructive notice of the trust are subject to the enforcement of that lien. First State Bank v. Gotham Provision Co., 669 F.2d 1000, 1011 (5th Cir. 1982).

Although the seller of the agricultural commodities must comply with some procedural requirements, see, e.g., 7 U.S.C. §§ 196(b); 197(d); 499e (c)(3) & (4), for purposes of this article it is assumed the commodity seller has taken appropriate steps to preserve its PACA/PASA rights to the trust assets.

This somewhat unique trust is a "floating, non-segregated, statutory trust" that extends not only to agricultural commodities, but also to the inventories of food or other products derived from those commodities and receivables or proceeds from the sale of the commodities or products. Consumers Produce Co. v. Volante Wholesale Produce, Inc., 16 F.3d 1374, 1378 (3d Cir. 1994).

The Consumers Produce case involved just such a financing arrangement, a line of credit and a loan to finance capital needs secured by a first lien on the borrower's assets, including its real estate. Over the course of time, including when the borrower was in financial distress, the lender received loan repayments made in breach of the PACA/PASA trust. The court framed the test as being whether the lender was a bona fide purchaser for value with respect to the loan repayments and whether the lender received such payments without notice of the breach of the trust by the borrower.

General trust theory provides that a transfer of trust assets in satisfaction of a preexisting debt is normally not "for value," but an exception exists when the transferred trust property is a negotiable instrument or money. This result follows for practical business reasons, in that a payee of money in the due course of business should not be put upon inquiry at its peril as to the title of the payor. 4 Austin W. Scott & William F. Fratcher, The Law of Trusts § 304. The court held that because the lender received the repayment in the form of trust assets in the ordinary course of business as monetary loan repayments, the transfer was "for value." As a result, a lender receiving loan payments in the ordinary course should qualify as a transferee for value.

The second part of the test may be a bit more difficult for a lender to pass, especially if the lender is vigilant. The good news for lenders is that mere notice of the existence of the PACA/PASA trust does not expose the lender to liability or disgorgement of loan payments made by a borrower, even if those payments are made from trust assets in violation of the trust. The lender must know that the borrower is breaching the trust by making the payment. The bad news for lenders, however, is that under traditional trust law, the lender is deemed to have effective notice that the borrower is acting in breach of the PACA/PASA trust by making the loan payment if the lender knows or should know of the breach of the trust. The concept of inquiry notice is applicable in this context to the effect that a party has notice of a breach of trust if that party knows of facts that under the circumstances would lead a reasonably intelligent and diligent person to inquire whether the trustee is committing a breach of trust.

Many loan documents, especially if the financing arrangement involves revolving credit, require the borrower to provide periodic financial reports to the lender. Such was the case in the Consumers Produce case. As it developed, however, the financial information provided to the lender was not accurate and indeed, the trial court found that the borrower concealed its financial difficulties from the lender. The court found that under these facts, the information provided to the lender did not put the lender on notice that the payments were being made in breach of the PACA/PASA trust. But see Albee Tomato Co., Inc. v. Korea Commercial Bank of New York, 282 F. Supp. 2d 6, 16–20 (S.D.N.Y. 2003) (finding that lender had a duty to investigate whether merchant could satisfy its PACA suppliers when the lender had notice of the merchant's cash-flow problems).

What would the outcome have been if the borrower's financial statements and borrowing base certificates provided to the lender were accurate and portrayed a business that was experiencing financial difficulties? Could the lender have met its burden of proof? The implication of the holding of the Consumers Produce case is that the lender would have knowingly received the payments in breach of the trust and been subject to disgorgement. See Nickey Gregory Co., LLC v. Agricap, LLC, 597 F.3d 591, 605–06 (4th Cir. 2010) (lender had knowledge of the borrower's excessive aging of its PACA payables).

Applicability of Constructive Trust Laws

A fair question is to what businesses do these acts apply? Should lenders and their counsel be concerned only with businesses that are the "first stop" in the distribution system of agricultural commodities or should they look further down the line in integrated businesses? PASA applies in an appropriate case to retailers, 7 U.S.C. § 499a(b)(6), and restaurants, In reCountry Harvest Buffet Restaurants, Inc., 245 B.R. 650 (B.A.P. 9th Cir. 2000), that maintain integrated facilities. In the right case, a retailer who obtains meat products from a slaughterhouse and processes those products at a facility to make them ready for retail consumption is subject to the act. Safeway Stores, Inc. v. Freeman, 244 F. Supp. 779, 781 (D.D.C. 1965), aff'd, 369 F.2d 952 (D.C. Cir. 1966). While the Safeway case dealt with the issue of whether the business was subject to the PASA's regulatory provisions, it is likely that the other provisions of the act, including the constructive trust provisions, are also applicable.

Effect on Secured Lenders

Why should a lender who has a security interest in real estate care about the implications of these laws? Some lenders, as in the case of Happy Bank in the example given above, hold a mixture of collateral, with both real and personal property standing as security for their loan. In the typical example of a revolving credit and term loan facility made with a business in the meatpacking, poultry, or agricultural commodity business, the implications can be important. Thus, if the collateral securing the loan is real estate that is somehow involved in the storage, processing, or sale of the borrower's foodstuff items, a warning sign is provided to the lender that the loan payments could be subject to PACA/PASA trust implications.

The PACA/PASA laws impose an additional burden on such secured lenders because courts have held that the burden of proof is not on those seeking to disgorge the payments made to the lender in violation of the PACA/PASA trust. Instead, that burden lies on the lender to prove that it was a bona fide purchaser for value with respect to the loan payment. Consumers Produce, 16 F.3d at 1383. It may not be possible for a lender to carry that burden, especially if the lender knows of the borrower's financial difficulties or does not take action to obtain the financial reports the borrower is required to provide under the loan documents. Movsovitz & Sons of Florida, Inc. v. Scotiabank, 447 F. Supp. 2d 156, 165 (D.P.R. 2006).

Some sample provisions to be used in documenting loans made to borrowers in the food industries are set forth in the box on page 41 to this article. As can be seen, these provisions are promises by and agreements of the borrower and contain the protections afforded only to the extent to which the borrower complies with those provisions.


Federal legislation enacted to protect farmers can have a significant effect on lenders. PACA and PASA require special documentation and care when making loans to borrowers in meatpacking, produce, and grocery businesses.

Documentary Provisions Regarding PACA/PASA

Defined Terms:

"Agricultural Statute" means, collectively, PACA, PASA and any other federal, state or local law that creates trust fund rights or other liens against the assets of a purchaser of agricultural products and that provides that the trust fund rights or liens granted by or pursuant to such statute have priority over a security interest granted by Borrower, and the regulations promulgated under any of the above.

"Agricultural Statute Notice" means any notice pursuant to the applicable provisions of any Agricultural Statute from (i) any Farm Products Seller, (ii) any lender to any Farm Products Seller or any other person with a security interest in the assets of a Farm Products Seller, or (iii) the Secretary of State (or equivalent official) or other governmental authority of any state, commonwealth or political subdivision thereof in which any Farm Products purchased by the Borrower are produced, in any case advising or notifying the Borrower and the recipient of such notice of the intention of such Farm Products Seller or other person to preserve the benefits of any trust applicable to any assets of the Borrower established in favor of such Farm Products Seller or other person under the provisions of any law or claiming a trust, security interest in or lien upon or other claim or encumbrance with respect to any perishable agricultural commodity or any other Farm Products which may be or have been purchased by the Borrower or any related or other assets of the Borrower.

"Farm Products" shall mean crops, livestock, poultry, products and supplies used or produced in a farming or agricultural operation and the products thereof.

"Farm Products Sellers" shall mean, collectively, sellers or suppliers to Borrower of any Farm Product and including any perishable agricultural commodity (as defined in PACA) or livestock (as defined in the PASA), meat, meat food products or livestock products derived therefrom or any poultry or poultry products derived therefrom.

"PACA" means the Perishable Agricultural Commodities Act, as amended, 7 U.S.C. § 499a et seq. or any other statute of similar import.

"PASA" means the Packers and Stockyard Act, 1921, 7 U.S.C. § 181 et seq., as amended.

Substantive Provisions:

Agricultural Products. Borrower agrees that, so long as this Agreement shall remain in effect or the principal of or interest on the Note, any fee or any other expense or amount payable under the Note or this Agreement or any other Loan Document shall be unpaid, and notwithstanding anything contained in this Agreement or any other Loan Document to the contrary, Borrower shall:

  1. At all times comply with any existing and future Agricultural Statutes Notice during its period of effectiveness under any Agricultural Statute, including, without limitation, directions to make payments to the Farm Products Seller by issuing payment instruments directly to the secured party with respect to any assets of the Farm Products Seller or jointly payable to the Farm Products Seller and any secured party with respect to the assets of such Farm Products Seller, as specified in the Agricultural Statutes Notice, so as to terminate or release the trust, security interest or lien in any Farm Products or the proceeds thereof maintained by such Farm Products Seller or any secured party with respect to the assets of such Farm Products Seller under any Agricultural Statute.
  2. Take all other actions as may be reasonably required, if any, to ensure that any Farm Products are purchased free and clear of any security interest, lien or other claims in favor of any Farm Products Seller or any secured party with respect to the assets of any Farm Products Seller.
  3. Promptly notify Lender upon receipt by or on behalf of Borrower of any Agricultural Statutes Notice or amendment to a previous Agricultural Statutes Notice, including any notice from any Farm Products Seller of the intention of such Farm Products Seller to preserve the benefits of any trust applicable to any assets of Borrower under the provisions of any Agricultural Statute and promptly provide Lender with a true, correct and complete copy of such Agricultural Statutes Notice or amendment, as the case may be, and such other information delivered to or on behalf of such Farm Products Seller pursuant to any Agricultural Statute.
  4. In any event, comply with and observe all provisions of any Agricultural Statute applicable to it.