Making PACA Work for You: How Factors Can Safely Navigate the Produce Industry
Written by: Jocelyne A. Macelloni, Esq., Partner, Barakat + Bossa PLLC and Mel C. Esposito, J.D. Candidate at University of Florida
Part 2 of the PACA & Factoring Series
In Part 1 of this series, we explored the foundational concepts of the Perishable Agricultural Commodities Act of 1930 (PACA), its creation of a statutory trust, and the priority-shifting implications for factoring companies. For many, PACA may appear to be a legal hazard; a federal framework that disrupts traditional security interests, overrides UCC protections, and exposes even perfected liens to clawbacks.[i] That concern is not misplaced.
However, PACA should not be viewed as a deterrent to funding the produce industry. PACA offers access to a dynamic market segment characterized by short payment terms, high transaction volumes, and relatively limited competition.
This article builds on the groundwork laid in Part 1, offering practical guidance on how to factor in a PACA-regulated environment. We’ll walk through identifying PACA exposure, designing due diligence protocols, building contract protections, monitoring compliance, and structuring deals to mitigate trust-related risks.
IDENTIFYING PACA EXPOSURE: THE FOUNDATION OF RISK MANAGEMENT
Look Beyond the Label
Many companies that handle PACA-regulated commodities don’t market themselves as “produce businesses.”[ii] They might operate as foodservice distributors, meal kit vendors, cold chain logistics providers, or retail aggregators.[iii] Yet, if they buy or sell fresh or frozen fruits and vegetables, even as a subset of their operations, they may fall squarely within PACA’s scope.[iv]
To evaluate exposure, factors must go beyond surface-level industry classifications and dig into the business model. Ask:
· Does the client buy, sell, or transport fresh or frozen produce?
· Are any goods minimally processed (e.g., washed, chopped, frozen)?
· What percentage of revenue is produce-derived?
· Who are their suppliers, and are they PACA beneficiaries?
If produce activity is even one pillar of the client’s receivables base, assume PACA applies and proceed accordingly.
Check for PACA Licensing
Under federal law, any entity handling more than $230,000 of covered produce annually at retail or more than 2,000 pounds of fresh or frozen fruits and vegetables on a single day must hold an active PACA license.[v] This license is issued by the USDA and serves as both a compliance requirement and a due diligence checkpoint.
Request the license number early and verify its status through the USDA PACA License Search Tool.[vi] A suspended or revoked license should raise serious concerns, as it may signal prior violations, unpaid trust claims, or systemic issues.
But even a clean license isn’t a guarantee. Trust compliance can erode quickly under cash flow stress, so license verification is a baseline, not a green light.
Understand the Receivables
Receivables composition is key. Request a revenue breakdown by product type and identify which invoice streams are tied to PACA-regulated commodities. If a large share of receivables is trust-encumbered, your client may not have full rights to those assets, and you may not be able to factor them without risk of clawback.
If possible, segregate receivables by category and fund only non-trust invoices. At a minimum, recognize that a mixed pool of receivables carries embedded legal risk.
Investigate Vendor Relationships
Because PACA trusts protect unpaid produce suppliers, your client’s accounts payable ledger may contain hidden landmines.[vii] Review current vendor lists, check for balances owed to PACA-qualified sellers, and determine whether any payments are overdue.
Unpaid vendors have the right to enforce the trust, even after receivables have been sold. Their claims can override your lien position and expose you to repayment demands.
Make Diligence an Ongoing Process
PACA exposure isn’t static. Product mixes evolve, new vendors are added, and payment practices fluctuate. Build regular PACA reviews into your compliance calendar. Recheck supplier rosters, revisit receivables breakdowns, and investigate new product lines that may quietly expand trust exposure.
DRAFTING PACA-CONSCIOUS AGREEMENTS
Factoring agreements built solely on UCC principles will not withstand PACA trust enforcement. Customized language is required to ensure that the factor has recourse, visibility, and a legal foundation to act when PACA obligations are breached.
Include Compliance Representations and Covenants
Require the client to affirm that:
· They are in full compliance with PACA requirements;
· No trust claims are pending;
· All produce suppliers have been paid in accordance with the statute.
These representations form the contractual basis for recourse if misstatements are uncovered later.
Mandate Notice of Trust Events
Your agreement should compel the client to notify you immediately of any:
· Supplier claims invoking PACA rights;
· Payment disputes over produce;
· Missed supplier payments that could trigger enforcement.
The earlier the factor is alerted to risk, the better equipped it will be to act.
Reinforce Payment and Indemnification Obligations
Require clients to pay produce vendors within PACA’s ten-day prompt payment window.[viii] Include indemnity provisions holding the client fully responsible for any losses you incur due to PACA noncompliance, whether through trust enforcement, litigation, or clawbacks.
Enforce Reporting and Certification Requirements
Structure your agreement to require:
· Periodic reporting on supplier relationships and payment statuses;
· Written certifications that all PACA vendors have been paid and no trust claims exist.
These mechanisms provide legal leverage and early warning indicators when trust risk starts to rise.
MONITORING COMPLIANCE: STAYING AHEAD OF TRUST TROUBLE
Contracts alone won’t protect you from PACA-related fallout. Active oversight is required throughout the factoring relationship.
Conduct Regular Supplier Audits
Review vendor lists and invoice trails regularly. Focus on high-volume suppliers and ensure that produce-related payments are current. In seasonal or fast-turnover businesses, delays can escalate quickly.
Track Signs of Financial Stress
Remain alert to behavioral cues that PACA obligations are slipping:
· Delayed supplier payments
· Frequent short-term borrowing
· Growing invoice disputes[ix]
These indicators often precede trust enforcement claims and should trigger immediate review.
Obtain Periodic Compliance Certifications
Have the client certify, in writing and on a recurring basis, that:
· All produce suppliers have been paid within the statutory window;
· No trust claims are active or pending.
These statements not only support legal defenses, they can prompt internal accountability.
STRUCTURING AROUND PACA RISKS
When PACA exposure is unavoidable, as it often is in produce-intensive businesses, transaction design becomes your most powerful line of defense. Structural safeguards help reduce the likelihood of entanglement in trust claims and improve your recoverability if the relationship deteriorates. Factoring companies that approach deal architecture with PACA in mind can maintain profitable engagements while minimizing legal friction.
Segregate Non-PACA Receivables
Where possible, limit funding to receivables arising from transactions unrelated to PACA commodities. Clients often have diversified operations that include; shelf-stable packaged goods, dry grocery or non-produce perishables, freight or third-party logistics services, and equipment leasing or warehousing.[x]
Receivables tied to these activities typically fall outside of the PACA trust and can be factored with significantly lower risk. To impellent this strategy:
· Request invoice-level detail during underwriting
· Tag or flag produce vs. non-produce receivables in reporting
· Build funding thresholds or carve-outs into the factoring agreement
This approach creates a cleaner, more defensible collateral pool and allows factors to tailor risk appetite to trust exposure.
Establish Dedicated Collection Accounts
While PACA does not mandate the segregation of trust funds, establishing a separate bank account for the collection of produce-related receivables enhances transparency and defensibility.[xi] Segregated accounts help in several ways:
· Clarify the flow of trust vs. non-trust funds
· Supports tracing of proceeds if a dispute arises
· Reduce the likelihood of mingling that could trigger broader trust liability.
Instruct the clients to direct produce customers to remit payment into a designated PACA collections account. Simultaneously, route non-PACA receivables into a separate general collections account. This operational bifurcation not only strengthens your legal posture but can also signal your seriousness about compliance during diligence or litigation.
Tailor the Flow of Funds
Go one step further by controlling or conditioning disbursements from collections accounts. For instance:
· Require that produce supplier invoices be paid directly from the PACA account before any funds are swept to the client.
· Hold a reserve or buffer in the PACA account to address late-arriving trust claims
· Include waterfall provisions in the agreement to prioritize trust compliance over client remittance
These measures may seem conservative, but they an be critical in preserving the factor’s standing and avoiding entanglement in downstream trust enforcement.
Structure Factoring by Invoice or Product Type
Rather than purchasing receivables in bulk, consider factoring selectively on a per-invoice basis. This strategy allows for real-time verification that the underlying transaction falls outside PACA’s reach. Implement a screening protocol that includes reviewing invoices for product type and customer as well as confirming that no produce items are included. A separate internal approval process for exceptions or mixed invoices may be a helpful addition.
Prepare for Bankruptcy Scenarios
Perhaps the most critical structural consideration for factoring companies is what happens when a PACA-regulated client files for bankruptcy, which we will discuss in more detail in Part 3. Unlike typical receivables, courts have held that PACA trust assets are excluded from the debtor’s bankruptcy estate. This means that unpaid produce suppliers retain a direct claim on the receivables and proceeds derived from PACA-covered transactions. These trust beneficiaries are entitled to payment ahead of secured creditors, even those with perfected liens, and courts have consistently upheld this super-priority status. As a result, bankruptcy protections such as the automatic stay may not shield trust-encumbered funds from recovery actions initiated by suppliers.
To mitigate these risks, factors must build structural safeguards into the relationship from the outset. One key practice is identifying and tracking trust-eligible receivables throughout the life of the deal. This allows for real-time monitoring of what portions of the collateral pool may be vulnerable in an insolvency event. Factors should also be cautious not to over-advance against receivables that are potentially encumbered by the PACA trust. Maintaining a conservative advance rate or excluding high-risk invoices altogether can help avoid exposure to clawbacks or priority disputes.
In PACA-involved bankruptcies, traditional creditor hierarchies are often upended. The better prepared a factor is to distinguish trust from non-trust property, the stronger their recovery position will be when
CONCLUSION: PACA REQUIRES READINESS, NOT RETREAT
Yes, PACA shifts the rules. It limits what your client can pledge, overrides your security interest, and empowers vendors to reclaim funds even after receivables have been collected. But it also creates a well-defined framework, one that, with the right preparation, can be navigated profitably.
By combining enhanced diligence, PACA-informed contracts, active monitoring, and legal experience, factoring companies can enter this space with confidence. The produce industry is fast-moving, underserved, and deeply reliant on short-term financing. It is not just a challenge; it is an opportunity.
Coming in Part 3: PACA in Bankruptcy
In the final article in this series, we’ll explore how the PACA trust operates in insolvency, how trust claims are prioritized, and what strategies factors can use to protect their position when clients default or files for bankruptcy.
About the Authors:
Jocelyne A. Macelloni, Esq. is a partner and director of education at Barakat + Bossa PLLC, located in Miami. Board-certified by the Florida Bar in business litigation, Macelloni has spent more than a decade representing businesses and business owners in courts and arbitrations around the U.S., including in cross-border transactions and disputes that involve enforcing factoring companies’ and secured creditors’ rights. Macelloni can be reached at jmacelloni@b2b.legal.
Mel C. Esposito is a J.D. candidate at the University of Florida with an expected graduation date of May 2026. She previously attended Emory & Henry College earning a B.A. in political science and history. Esposito can be reached at eesposito@b2b.legal.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.
[i] See generally Pac. Int’l Mktg., Inc. v. A.& B Produce, Inc., 462 F.3d 279 (Fla. 3d DCA 2006); Middle Mountain Land & Produce, Inc. v. Sound Commodities, Inc., 307 F. 3d 1220, 1223 (9th Cir. 2002); Fishgold v. OnBank & Trust Co., 43 F. Supp. 2d 346, 350 (W.D.N.Y. 1999); 7 U.S.C. § 499e(c)(2).
[ii] Tim Henkel, The PACA Primer – An Introduction and Overview of the Perishable Agricultural Commodities Act and PACA Law, Henkel Law (Aug. 14, 2022), https://miamibusinesslitigators.com/2022/08/14/the-paca-primer-an-introduction-and-overview-of-the-perishable-agricultural-commodities-act-and-paca-law/#:~:text=Almost%20all%20traders%20engaged%20in,courts%20under%20state%20contract%20law.
[iii] See In re Fresh Am. Corp., 66 Agric. Dec. 953, 959 (U.S.D.A. 2007); see also Taylor v. USDA, 636 F.3d 608 (D.C. Cir. 2011); Chris Koger, Meal Kit company Chef’d, others cited for PACA violations, (Nov. 15, 2022) https://www.thepacker.com/news/retail/meal-kit-company-chefd-others-cited-paca-violations?p=2#:~:text=(File%20photo)-,The%20U.S.%20Department%20of%20Agriculture%20is%20restricting%20California%20and%20New,sole%20proprietor%20of%20the%20company; See Magic Restaurants, Inc. V. Bowie Produce Co. (In re Magic Restaurants, Inc.), 205 F.3d 108 (3d Cir. 200) (discussing the broad application of “dealer” under PACA).
[iv] See Endico Potatoes v. CIT Group/Factoring, 67 F.3d 1063 (2d Cir. 1995) (“PACA covers only those commodities that are in their natural form or are subject to a change in form which does not change the essential nature of the item.”) (citing A & J Produce, 829 F. Supp. 651 (S.D.N.Y 1993).
[v] https://www.ams.usda.gov/rules-regulations/paca/licensing
[vi] Id.
[vii] Anthony Cianciotti, Mark Duedall, The Perishable Agricultural Commodities Act: Suggestions for a Grade A Loan, (June 27, 2024) https://www.abfjournal.com/the-perishable-agricultural-commodities-act-suggestions-for-a-grade-a-loan/#:~:text=Asset%2Dbased%20lenders%20typically%20require,after%20a%20borrower%20enters%20bankruptcy.
[viii] U.S. Dep’t of Agric., Agric. Mktg. Serv., PACA Licensing, https://www.ams.usda.gov/rules-regulations/paca/paca-trust (last visited Nov. 19, 2025). The parties can agree in writing to extend the prompt payment window but never longer than 30 days. See 7 C.F.R. § 46.2(aa).
[ix] U.S. Dep’t of Agric., Agric. Mktg. Serv., Top 10 Contracting issues, https://www.ams.usda.gov/rules-regulations/paca/top-10-contracting-issues; see also Consider The Consequences of Failing to Pay for Produce Under the Perishable Agricultural Commodities Act, Fox Rothschild LLP (July 13, 2020) https://www.jdsupra.com/legalnews/consider-the-consequences-of-failing-to-78409/
[x] See Endico Potatoes v. CIT Group/Factoring, 67 F.3d 1063 (2d Cir. 1995)
[xi] Robert J. Heinrich & Sara McNamara, PACA’s Priority: A Potential Problem for Secured Lenders, Reinhart Boerner Van Deuren S.C. (May 4, 2023), https://www.reinhartlaw.com/news-insights/pacas-priority-a-potential-problem-for-secured-lenders.