PACA In Bankruptcy: Enforcing Trust Rights in Insolvency
Written by: Jocelyne A. Macelloni, Esq., Partner, Barakat + Bossa PLLC and Mel C. Esposito, J.D. Candidate at University of Florida
Part 3 of the PACA & Factoring Series
In Parts 1 and 2 of this series, we explored how the Perishable Agricultural Commodities Act of 1930 (PACA) reshapes the receivables landscape for factoring companies and outlined tools for mitigating risk through due diligence, contract design, and ongoing monitoring.
In this final installment, we address one of the most critical and complex scenarios in PACA enforcement: bankruptcy. For most creditors, a bankruptcy filing marks the beginning of a constrained, court-controlled recovery process. But PACA trust beneficiaries operate on a parallel track. The statutory trust gives unpaid produce suppliers unique legal standing, one that can override traditional creditor hierarchies.
This article explains how PACA functions in insolvency, what pitfalls factoring companies must navigate, and how to assert and protect your interests when your client’s financial picture collapses.
THE CORE PRINCIPLE: PACA TRUST ASSETS ARE NOT PART OF THE ESTATE
A Parallel Enforcement Track
At the heart of PACA enforcement in bankruptcy is a simple but powerful rule: Courts construing § 499e(c)(2) have consistently held that PACA trust assets are not “property of the estate” under § 541 of the bankruptcy code, and that unpaid suppliers can assert trust claims in parallel to the bankruptcy process. In other words, when a PACA trust exists, covering receivables and proceeds from produce-related transactions, those assets are carved out from the general pool available to secured and unsecured creditors.[i]
This means unpaid suppliers may pursue recovery directly, even after the debtor has filed for bankruptcy protection. The automatic stay does not necessarily apply to trust enforcement actions, and the debtor’s use of trust funds may be restricted or conditioned by the court.
For factoring companies, this creates a disruptive and sometimes opaque landscape. Receivables that appear to be part of the collateral pool may, in fact, be held in trust for produce sellers and thus entirely outside your reach.[ii]
CHALLENGES FOR FACTORS IN BANKRUPTCY
Clawback Risk: Exposure from Prior Collections
One of the greatest dangers in PACA-affected bankruptcies is the risk of clawback. If a factor collects payments from receivables later deemed PACA trust assets, particularly while produce suppliers remain unpaid, those funds may be subject to recovery actions.[iii] This applies even if the factor had a perfected lien or was paid in the ordinary course. Courts have allowed trust beneficiaries to pursue repayment from factors and other third parties.[iv]
Competing Claims from Trust Beneficiaries
PACA gives suppliers the right to assert claims not just against the debtor, but also against third parties who receive trust property. This includes factoring companies. Suppliers may file post-petition trust notices and seek enforcement against funds the factor has already collected, or expects to collect, if they believe the proceeds were diverted in violation of the trust.
Collateral Uncertainty
Even receivables that were considered clean pre-petition may become legally problematic once bankruptcy proceedings begin.[v] If they are tied to unpaid produce transactions, their status may change overnight. This uncertainty complicates recovery planning, debtor-in-possession (DIP) financing negotiations, and asset sales during liquidation.
DEFENSIVE TACTICS FOR FACTORING COMPANIES
The moment a produce-sector client files for bankruptcy, the rules change but the risks do not disappear. In fact, they intensify. While PACA trust beneficiaries enjoy legal advantages in insolvency, factoring companies are not entirely powerless. A focused, proactive response can reduce exposure, protect collateral rights, and even create opportunities for negotiated resolution.
Act Immediately Upon Filings
Bankruptcy proceedings move quickly, and early inaction can translate into lost positioning later. As soon as your client files, initiate a PACA-specific exposure review. Begin by confirming whether the debtor holds a PACA license, and cross-reference that with public USDA records. Then, identify their active produce suppliers and determine if trust notices have been filed—either pre- or post-petition. A review of the claims docket may reveal whether unpaid sellers are asserting PACA rights that overlap with your collateral.
Simultaneously, your legal team should evaluate whether any of your factored receivables could be subject to the trust. If red flags emerge, do not wait for notice, act. Engage with the debtor’s counsel, move to preserve relevant documentation, and prepare to assert your position before the bankruptcy court if needed. Prompt intervention can mean the difference between priority preservation and full subordination.
Assert Non-Trust Status Where Appropriate
While PACA trust rights are powerful, they are not automatic. Suppliers must comply with several requirements to gain and maintain trust protection, including selling PACA-covered commodities, preserving their trust rights through timely written notices or invoice trust language, and adhering to the statutory and regulatory timing rules. While many trust beneficiaries are licensed under PACA, a license is not strictly required for trust eligibility; it primarily affects the method they may use to preserve their rights.[vi]
Factoring companies should carefully examine the underlying transactions behind each contested receivable. For example:
· Was the product truly a PACA commodity?
· Did the supplier include proper trust language or provide notice within the statutory window?
· Did the transaction occur with a non-licensed or out-of-scope counterparty?
Where these criteria are not met, the receivable may fall outside the PACA trust.[vii] By challenging the applicability of the trust on a transaction-by-transaction basis, factors can preserve recovery rights in portions of the receivables pool that might otherwise be swept into trust enforcement.
Negotiate Protective Agreements in DIP Financing
If the debtor seeks DIP financing, factoring companies may gain unexpected leverage. This is often the point where all stakeholders, including PACA claimants, secured lenders, and the debtor, must negotiate access to receivables and cash flow.
Use this moment to insist on carve-outs that shield your interest in receivables that are not subject to trust claims. This can include:
· First-position rights on non-produce receivables
· Allocation agreements that set recovery percentages across trust and non-trust proceeds
· Indemnification by the debtor for any trust-related clawback or litigation exposure
Where tensions between trust and non-trust claims create deadlock, the factor’s cooperation may become a bargaining chip. Strategic, PACA-savvy counsel can turn that moment into a negotiated path toward partial recovery.
Demand Segregation and Reporting
Although PACA does not legally require debtors to segregate trust and non-trust funds, bankruptcy courts often exercise equitable oversight. Factors should actively request that the debtor maintain trust accounting protocols during the case.[viii] This includes:
· Separating produce-related receivables in financial reports
· Identifying collections attributable to PACA-regulated transactions
· Disclosing payment status to produce vendors
If the debtor resists, a formal motion to compel reporting may be warranted. The goal is twofold: to ensure transparency regarding potentially encumbered assets, and to position the factor to challenge any misuse or mischaracterization of trust funds. Regular reporting also supports negotiations and, if needed, litigation strategy.
File Protective Claims and Objections
When trust status is unclear, or if PACA and non-PACA receivables are commingled, filing protective claims is essential. These filings provide a formal mechanism for contesting distributions or reorganization plans that impair your rights.
A protective claim does not concede liability or waive lien status.[ix] Instead, it ensures the court and trustee recognize your potential entitlement to recover from non-trust assets or clean receivables. It also enables you to:
Object to payments from trust proceeds to parties without valid claims
Oppose confirmation of plans that ignore trust priorities or distort asset classification
Participate meaningfully in negotiations over distributions, settlements, and plan structure
Even if your priority is ultimately subordinated, your presence and preparedness may shift the negotiation dynamic in your favor.
OPPORTUNITIES FOR STRATEGIC LEVERAGE
Negotiate from a Position of Strength
Factors who move quickly and demonstrate diligence often gain leverage in early settlement discussions. For instance, if you can show that your collateral relates to non-produce transactions, trust claimants may agree to carve-outs or indemnifications. In some cases, the debtor may propose structured resolutions that allow partial recovery without prolonged litigation.
Collaborate with Other Creditors
In heavily PACA-encumbered bankruptcies, consider forming coalitions with other non-trust creditors. While PACA beneficiaries have a priority track, coordinated creditor action can shape the reorganization process, influence trustee decisions, and preserve some measure of equitable treatment. A unified front can also reduce legal costs and streamline objection strategy.
CONCLUSION: PACA ENFORCEMENT DOESN’T END AT INSOLVENCY
Factoring companies accustomed to controlling their collateral through secured lending must recalibrate when PACA is in play. A client’s bankruptcy doesn’t nullify PACA obligations, it amplifies them. Trust rights survive the filing, and trust beneficiaries may leapfrog even perfected lienholders in the race for recovery.
However, PACA also creates alternative enforcement paths—ones that can be navigated effectively with timely action and strategic contract terms. Factoring companies that build these defenses early, and maintain vigilance through the bankruptcy process, can operate and recover successfully even in the most complex PACA-driven insolvencies.
FINALE NOTE: STRATEGIC READINESS ACROSS THE LIFECYCLE
This PACA & Factoring Series has outlined a lifecycle approach to managing risk in produce-related transactions:
Part 1 explained what PACA is and why it matters to factoring companies
Part 2 explained how to structure deals, draft contracts, and monitor compliance to mitigate PACA-related exposure.
Part 3 addressed how to enforce and defend your rights in the context of bankruptcy and insolvency.
The takeaway is clear: success in PACA-covered industries doesn’t come from avoiding complexity, it comes from mastering it. Factoring companies who invest in understanding PACA, and who develop the tools to navigate its challenges, are uniquely positioned to serve an essential and resilient corner of the economy.
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 Coast-To-Coast Produce, LLC v. Lakeside Produce USA, Inc., 709 F. Supp. 3d 413 (E.D. Mich. 2003); Sanszone-Palmiasano Co. v. M. Seaman Enterprises, Inc., 986 F.2d 1010 (6th Cir. 1993); Magic Restaurants, Inc. v. Bowie Produce Co. (In re Magic Restaurants, Inc.), 205 F.3d 108 (3d Cir. 2000).
[ii] Id.
[iii] See generally Life is Not a Bowl of Cherries for PACA Claimant Objectving to Cash Collateral Use: In re Cherry Growers, Inc., Chapman (Nov. 27, 2017) https://www.chapman.com/publication-PACA-Claim-Collateral-Agriculture; Reaves Brokerage Co. V. Sunbelt Fruit & Vegetable Co., 336 F.3d 410 (5th Cir. 2003) (”where a lender has purchased the acounts recievable, the borrower’s debt is extinguished and lender’s risk is direct.”).
[iv] Id.
[v] 7 U.S.C. § 499e; Sanzone-Palmisano Co. V. M. Seaman Enters., Inc., 986 F.2d 1010, 1012 (6th Cir. 1993) (holding that PACA trust applies to all of a debtor’s Produce-related inventory and proceeds thereof, regardless of whether the trust beneficiary or another Produce supplier was the source of such inventory; see also In re W.L. Bradley Co., 75 Bankr. 505, 509 (Bankr. E.D. Pa. 1987).
[vi] See In re San Joaquin Food Service, Inc., 958 F.2d 938 (9th Cir. 1992) (affirming “the denial of benefits of a PACA trust to a seller of produce who had failed to give the required notice of intent to preserve the trust benefits directly to the buyers.”); 7 U.S.C. § 499e(c) and 7 C.F.R. § 46.46.
[vii] Id.
[viii] A Chapter 11 Debtor’s Right to Use Cash Collateral Trumps PACA Trust Rights, Bruce Nathan, Esq. And Eric Chafetz, Esq. (2018) https://www.lowenstein.com/media/4205/bc-feb18-nathan.pdf.
[ix] See Ellis v. Westinghouse Elec. Co., LLC, 11 F.4th 221 (3d Cir. 2021) (emphasizing that creditors with post-confirmation administrative claims could file a protective claim to notify the debtor of their potential claim without conceding its amount or validity); see also DPWN Holdings (USA), Inc. v. United Airlines, Inc., 246 F. Supp. 3d 680, 691 (E.D.N.Y. 2017).