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What Secured Lenders and Factors Need to Know About PACA and Other Hidden Liens

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What Secured Lenders and Factors Need to Know About PACA and Other Hidden Liens BROUGHT TO YOU BY An SFNet Industry Webinar Lien On Me: What Secured Lenders and Factors Need to Know About PACA and Other Hidden Liens JULY 22, 2020 12:00 PM - 1 : 0 0 P M E T Disclaimer Today’s webinar is for information purposes. It is open to SFNet members and outside participants, which may consist of media representatives, related authorities and other interested parties. Comments made by individuals participating in this meeting are not intended to represent the views of their respective companies. It is expected that information shared in this forum will be within the boundaries of best practices and based on publicly available information and in no way should be considered giving legal or business advice. This program is being recorded for the benefit of our members and will be available at SFNet.com along with copies of all materials presented. Chat comments will not be recorded or attributed to individuals. No participant may be quoted without express written consent by the individual. We invite participants to continue the conversation after the meeting by joining the SFNet Discussion Group at SFNet.com. © 2020 Secured Finance Network Brought to you by: 2 Presenters Howard Brod Brownstein (Moderator), The Brownstein Corporation (610) 828-1300 or [email protected] Howard is the President of The Brownstein Corporation near Philadelphia, a firm that provides investment banking, turnaround management and other services. He also regularly serves as an independent corporate board member for publicly-held and privately-owned companies, as well as large nonprofits. Howard is an NACD Board Leadership Fellow as well as a Fellow of the American Bar Foundation. He is the author of over 90 articles and textbook chapters, and regularly guest-teaches at leading business and law schools. Jonathan S. Bodner, Bodner Law PLLC (516) 444-3923 or [email protected] Jonathan Bodner is the Founder of Bodner Law PLLC in Great Neck, NY, and provides local, regional and national businesses, as well as individuals, with legal excellence, results and value in a wide array of transactions, litigation and bankruptcy matters throughout Long Island, the boroughs of New York City and New Jersey. Jeffrey A. Wurst, Armstrong Teasdale LLP (212) 209-4443 or [email protected] Jeffrey Wurst is a Partner at Armstrong Teasdale LLP in New York City, and has more than 30 years of experience and is well recognized for handling significant commercial finance and bankruptcy matters. He is an esteemed fellow of the American College of Commercial Finance Lawyers and is a panelist on the American Arbitration Association’s National Roster of Arbitrators. © 2020 Secured Finance Network Brought to you by: 3 Statutory / Hidden Liens ▪ A wide array of liens arise under federal and state law that may have the effect of priming a secured lender ▪ However, there are steps lenders can take to protect themselves from becoming subordinated to these types of liens ▪ Many of these liens may be found by diligent lender searches and other due diligence © 2020 Secured Finance Network Brought to you by: 4 Statutory / Hidden Liens ▪ IRS Tax Liens Arise under federal law Prime a bank, but a lender can run searches every ninety (90) days ▪ Real Estate Tax Liens Arise under state law Prime a mortgage, but can be monitored ▪ Warehouse Liens Arise under state law Inventory in the warehouse A lender can obtain a landlord’s waiver © 2020 Secured Finance Network Brought to you by: 5 Statutory / Hidden Liens ▪ Construction & Material Men’s Liens Arise under state law Can prime a lender “Notice of Lending” ▪ Liens on Meat and Poultry – Packers & Stockyards Act Arise under federal law (and some by state law) Bond requirement Letter of Credit ▪ Other liens © 2020 Secured Finance Network Brought to you by: 6 Statutory / Hidden Liens ▪ Notice of Lending © 2020 Secured Finance Network Brought to you by: 7 Statutory / Hidden Liens ▪ State law money transmitter statutes Floating trust on proceeds of sales of ‘store value cards’ © 2020 Secured Finance Network Brought to you by: 8 Statutory / Hidden Liens In addition to these liens, Lenders should be cognizant of a special lien that may arise when lending to any company that touches or will touch fruits and vegetables © 2020 Secured Finance Network Brought to you by: 9 PACA The Perishable Agricultural Commodities Act of 1930, as Amended © 2020 Secured Finance Network Brought to you by: 10 PACA: The History and Purpose ▪ Over eighty (80) years ago, Congress concluded that sellers of certain perishable farm products were suffering from severely unfair treatment at the hands of their buyers ▪ Fruits and vegetables were grown on farms and sold in large quantities to buyers, often hundreds or thousands of miles away ▪ Upon delivery by rail, buyers were able to reject the goods on the basis that they were non-conforming or deteriorated in the course of transit ▪ Sellers could even falsely claim deterioration if a market declined between the placement of the order and delivery of the goods ▪ Farmers had limited recourse – they could not simply take back their goods upon a buyer’s non-acceptance or a dispute ▪ In 1930, Congress, seeking to protect farmers, passed legislation to regulate commerce by passing PACA ▪ PACA initially regulated transactions by requiring licensing of buyers and permitting United States Department of Agriculture (“USDA”) intervention when buyers failed to meet payment obligations ▪ Initial remedies for unpaid sellers were to seek suspension or revocation of buyers’ licenses or reparation awards, which could inure to a judgment © 2020 Secured Finance Network Brought to you by: 11 PACA: The History and Purpose In the early 1980s,Congress expanded PACA’s protections as: (i) produce sellers often did not have time to verify the creditworthiness of buyers due to the need to market and sell produce speedily; -and- (ii) purchasers were using credit extended by secured lenders to purchase produce, which created security interests for the lenders in the produce and proceeds thereof; often this resulted in sellers being left unpaid upon buyers’ insolvencies or bankruptcies © 2020 Secured Finance Network Brought to you by: 12 PACA: The History and Purpose ▪ In 1984, Congress determined these types of financing arrangements were “against public policy” and a burden on commerce and amended PACA to increase the protections ▪ The 1984 PACA Amendments provide that perishable agricultural commodities, received by a commission merchant, dealer or broker, and all inventories or products derived therefrom, shall be held in trust for the benefit of all unpaid suppliers of such commodities until full payment has been received ▪ The 1984 Amendments provide that the mere shipment of qualifying produce creates a statutory trust on all of the buyer’s inventory of food or other products derived from the commodities, plus any proceeds of sales, as soon as the buyer accepts the goods ▪ It is a “floating” trust, which means that the trust extends to all of the buyer’s produce related inventory, and the proceeds thereof, regardless of whether the seller was the source of the inventory ▪ The seller becomes the beneficiary, and fiduciary duties are imposed upon the purchaser as well as certain individuals that control the trust property ▪ As the 1984 Amendments are an extremely powerful sword, Congress enacted rigid requirements for sellers to qualify for trust protection © 2020 Secured Finance Network Brought to you by: 13 PACA: Today ▪ PACA makes it illegal to engage in the produce-marketing industry without first obtaining and complying with USDA's licensing requirements ▪ PACA makes various types of unfair trading conduct illegal and provides administrative complaint procedures as an alternative method to enforce PACA laws ▪ PACA establishes the PACA Trust under the 1984 Amendments to maximize the likelihood that produce sellers will be repaid in full before other creditors © 2020 Secured Finance Network Brought to you by: 14 Who Can Assert PACA Trust Rights? ▪ Farmers ▪ Certain logistics providers ▪ Exporters ▪ Commission merchants ▪ Brokers and farmers’ agents ▪ Dealers / Wholesalers © 2020 Secured Finance Network Brought to you by: 15 How Are PACA Trust Rights Perfected & Preserved? ▪ The goods must qualify – fresh or frozen fruits and veggies – Processed or canned goods do not qualify – Example: Nuts don’t qualify, but what about Coconuts? – Example: Flowers don’t qualify, but what about edible flowers? – Fleming Case – Court held that batter-dipped frozen French Fries qualify as the process merely preserves crispiness and color while under a heating lamp, and they have the same taste and texture as potatoes after the process ▪ The buyer must be commission merchant, dealer or broker – a ‘dealer’ means “any person engaged in the business of buying or selling in wholesale ... quantities ... any perishable agricultural commodity in interstate ... commerce....” 7 C.F.R. § 46.2(m)(2) – dealer includes “retailers” who buy or sell produce “when the invoice cost of all purchases of produce exceeds $230,000 during a calendar year” AND purchases of at least one (1) ton of produce in any day of the year – Example: Wholesalers and distributors – What about: Restaurants, hotels, casinos, cruises or airlines? © 2020 Secured Finance Network Brought to you by: 16 How Are PACA Trust Rights Perfected & Preserved? ▪ Transaction occurring in interstate or foreign commerce − Example: Where the seller and purchaser are both in same state, the transaction can
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