What is PACA and Why Should Factoring Companies Care?
Written by: Jocelyne A. Macelloni, Esq., Partner, Barakat + Bossa PLLC and Mel C. Esposito, J.D. Candidate at University of Florida
Part 1 of the PACA & Factoring Series
When factoring professionals evaluate industries for potential risk and reward, the produce sector may raise a red flag for many. This caution is not misplaced; it is rooted in a powerful and somewhat misunderstood federal law: the Perishable Agricultural Commodities Act of 1930, commonly known as PACA.[i]
PACA is not merely a regulatory burden; it is a targeted legal framework designed to stabilize a uniquely vulnerable industry. PACA primarily applies to persons buying or selling fresh fruits and vegetables in interstate or foreign commerce, including:
· growers and farmers,
· shippers and packers,
· wholesalers and distributors,
· brokers and commission merchants, and
· retailers purchasing at least 2,000 pounds of produce per week (including grocers, specialty markets, food distributors, and even some restaurants).
If your prospective client handles fresh produce at any point—from farm to warehouse to store shelf—they are likely subject to PACA’s licensing and trust rules.
For factors unfamiliar with its reach, PACA can seem like a legal minefield. It rewrites the ordinary rules of receivables financing in ways that can leave even secured creditors unexpectedly exposed to liability. Perfected liens, personal guarantees, and other familiar risk mitigants can be rendered ineffective when PACA’s statutory trust applies.[ii] Yet, as with many legal complexities, understanding PACA can transform risk into reward. PACA presents a path to access an underserved, high-volume sector with predictable cash flow, rapid receivables turnover, and relatively little competition. This article is the first part of a three-part series exploring PACA: what it is, how to mitigate risk, and what to do if you are entangled in a PACA battle.
THE BASICS: WHAT IS PACA?
A Depression-Era Solution to an Industry Problem
PACA was enacted in 1930 during the depths of the Great Depression, at a time when economic instability magnified longstanding abuses in the fresh produce trade.[iii] Sellers of perishable agricultural commodities (“Produce”), primarily wholesalers and growers, were regularly victimized by buyers who would accept shipments, but delay payment indefinitely or simply refused to pay altogether.
In the produce world, time is unforgiving. Fresh fruits and vegetables cannot sit in a warehouse awaiting payment disputes or court judgments. By the time litigation concluded, the produce was long spoiled, and the seller was left uncompensated and without any Produce to resell.
Congress intervened by enacting PACA, creating a legal safety net designed to ensure that Produce sellers could rely on timely payment. The law levels the playing field in two major ways:
1. Licensing Requirements
Anyone acting as a commission merchant, dealer, or broker in interstate produce commerce must obtain a PACA license from the U.S. Department Agriculture (USDA).[iv] In practice, this covers most wholesalers, distributors, brokers, and larger retailers or foodservice buyers, though some growers and small retailers are exempt.
The licensing system serves multiple purposes:
· Market Oversight: It creates a registry of participants in the Produce supply chain.[v]
· Dispute Resolution: It enables the USDA to administer complaint procedures, mediate disputes, and impose sanctions for violations.[vi]
· Accountability: Persistent violators can lose their license, effectively barring them from participating in the Produce trade.[vii]
For factors, your client’s PACA license status is an important due diligence checkpoint. A suspended or revoked license can be a flashing red warning.
2. The PACA Statutory Trust – The Real Game Changer
The most consequential feature of the regulations for factors is PACA’s statutory trust provision, found at 7 U.S.C. § 499e(c).
How the trust works:
· Automatic Creation: A statutory trust arises in favor of unpaid sellers when covered produce is sold to a commission merchant, dealer, or broker. The trust arises provided the seller includes proper statutory language on invoices or other documents.[viii]
· Floating in Nature: The trust extends to all assets derived from the sale of Produce. This includes receivables, cash proceeds, and even assets like inventory or processed goods, depending on how directly they are tied to Produce transactions.[ix]
· Non-segregated: Unlike a traditional escrow or fiduciary trust, PACA does not require the debtor to hold funds in a separate account. The trust exists in law, regardless of whether the money is commingled.[x]
In simple terms, if your factoring client sells produce and has unpaid suppliers, the receivables generated from those sales do not fully belong to your client and they cannot assign, pledge, or sell the receivables. Those receivables belong, in trust, to the unpaid produce suppliers until the trust is fully satisfied.
And here’s the kicker: No UCC filing can override it. Courts have repeatedly affirmed that the PACA trust supersedes Article 9 security interests.[xi] Therefore, you cannot hang your hat on your Notice of Assignment and UCC-1 filing rights.
WHY PACA MATTERS TO FACTORING COMPANIES
PACA fundamentally reshapes creditor priorities. Under Article 9 of the Uniform Commercial Code (UCC), factors and lenders who perfect security interests in receivables usually enjoy priority over other creditors, including unsecured parties.
PACA rewrites that playbook. The statutory trust grants unpaid produce sellers a super-priority over everyone, including factors with perfected security interests. Courts have consistently enforced this hierarchy, with the trust obligations surviving and prevailing even in bankruptcy proceedings.[xii]
Key Risks for Factors:
Receivables Aren’t Always What They Seem
A client may appear to own their accounts receivable on paper. But if those receivables arise from the sale of produce while suppliers remain unpaid, the receivables and the proceeds of those receivables are trust property, not free assets available for factoring.[xiii]
Collections Can Trigger Claw backs
If a factor collects on receivables subject to an unsatisfied PACA trust, those funds can be clawed back by trust beneficiaries (the growers). Courts have held factors liable for trust funds, even when the factor had no knowledge of PACA or the trust obligations.[xiv]
Personal Liability Extends to Individuals
PACA is aggressive. Courts have held that trust beneficiaries can pursue not only the company but also the individual officers, directors, and controlling persons of the debtor if trust funds are misused or diverted. That prospect of personal exposure significantly elevates the risk profile of produce-related clients.[xv]
Bankruptcy Provides No shield
The PACA trust is not part of the bankruptcy estate. Trust beneficiaries get paid first, before secured creditors or the bankruptcy trustee. If your factoring client files Chapter 11, trust claims get priority treatment, meaning your recovery could be significantly impaired.[xvi]
THE OPPORTUNITY: WHY FACTORS SHOULD STILL CARE
For those willing to learn the rules, the produce sector offers unique advantages.
High Invoice Velocity
Produce moves fast. Many buyers issue multiple invoices per week, generating regular funding opportunities and predictable cash flow.
Tight Payment Cycles
PACA’s trust encourages (and sometimes mandates) short payment terms, typically 10 days after acceptance. This reduces a factor’s credit exposure duration and increase portfolio turnover.
Relationship-Driven Industry
Produce buyers and sellers often form longstanding relationships built on reliability. These stable relationships generate highly predictable receivables patterns, which is a major plus for underwriting.
Limited Competition
Many banks and commercial lenders avoid the sector entirely due to PACA-related risks. This leaves the door wide open for factoring companies that are willing to tailor their compliance and risk management processes.
A MARKET WORTH UNDERSTANDING
Despite its legal complexity, the produce industry represents a resilient and high-velocity segment of the receivables finance market. It has weathered economic downturns, supply chain crises, and shifting consumer demand with surprising durability. People always need to eat and produce continues to move.
By understanding PACA and adopting trust-compliant practices such as, requiring payment certification, reviewing supplier lists, and drafting PACA-conscious agreements, factors can unlock access to this dynamic market.
CONCLUSION: PACA, A MAP, NOT A MINEFIELD
PACA is not a trap for the unwary; it is a framework for fairness, designed to protect the most vulnerable participants in the produce supply chain. While it does override traditional creditor priorities, it does so with clear logic: to ensure farmers, growers, and suppliers get paid.
For factoring companies accustomed to relying on security interests and lien priority, PACA feels like unfamiliar terrain. But for those who invest in understanding it, PACA is not a barrier, it is a guide. It is a map to an underserved market segment with consistent transaction volume, strong payment discipline, and relatively limited competition.
Those who see PACA not as a risk, but an opportunity can build lasting client relationships, grow their portfolios, and deliver real value to an essential part of the economy.
Next in the Series: Making PACA Work for You
Now that we’ve covered what PACA is and why it matters, Part 2 of this series focuses on how factoring companies can safely and profitably engage with PACA covered clients. We’ll explore how to identify PACA exposure by reviewing their licensing status, receivables, and supplier relationships. Factors will learn how to conduct enhanced due diligence, verify PACA compliance, and structure agreements that include trust-specific safeguards.
In part 3, we will examine what happens when PACA-affected clients default or file for bankruptcy, and how the statutory trust impacts collections, litigation, and recovery.
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] Perishable Agricultural Commodities Act of 1930, 7 U.S.C. §§ 499a-499t.
[ii] 7 U.S.C. § 499e(c).
[iii] The Perishable Agricultural Commodities Act- On Overview, The National Agricultural Law Center, https://nationalaglawcenter.org/overview/paca/.
[iv] 7 U.S.C. § 499e(c); U.S. Dep’t of Agric., Agric. Mktg. Serv., PACA Licensing, https://www.ams.usda.gov/rules-regulations/paca/licensing (last visited Nov. 19, 2025).
[v] U.S. Dep’t of Agric., PACA Licensing, supra.
[vi] 7 U.S.C. § 499e(c).
[vii] 7 U.S.C. § 499h(a).
[viii] 7 U.S.C. § 499e(c)(2); Top Banana, L.L.C. v. Dom’s Wholesale & Retail Ctr., Inc., 2005 U.S. Dist. Lexis 8976, 14 (S.D.N.Y. May 16, 2005); Frio Ice, S.A. v. Sunfruit Inc., 918 F.2d 154 (11th Cir. 1990) (“A PACA trust automatically arises in favor of a produce seller upon delivery of produce.”).
[ix] Pac. Int’l Mktg., Inc. v. A & B Produce, Inc., 462 F.3d 279 (3d Cir. 2006); United Fruits & Produce Co. v. Absolute Exterminating (In re United Fruit & Produce Co.), 242 B.R. 295 (Bankr. W.D. Pa. 1999).
[x] Id.
[xi] Uncovering Hidden Liens; Overview & Best Practices to Ensure Senior Priority Lien Status, Luis M. Lluberas (March 2023) (“the PACA Assets are removed from the scope of the lender’s lien until the obligations owed to the PACA Creditors are repaid.”).
[xii] Tom Lange Co. v. Kornblum & Co. (In re Kornblum & Co.), 81 F. 3d 280 (2d Cir. 1996); 7 U.S.C. § 499e(c)(2).
[xiii] Pac. Int’l Mktg., Inc. v. A & B Produce, Inc., 462 F.3d 279 (3d Cir. 2006); United Fruits & Produce Co. v. Absolute Exterminating (In re United Fruit & Produce Co.), 242 B.R. 295 (Bankr. W.D. Pa. 1999).
[xiv] S & H Packing & Sales Co. v. Tanimura Distr., 883 F.3d 797 (9th Cir. 2018).
[xv] PACA’s Priority: A Potential Problem for Secured Lenders, Reinharl Boerner Van Deuren (May 4, 2023) https://www.reinhartlaw.com/news-insights/pacas-priority-a-potential-problem-for-secured-lenders (last visited Nov. 19, 2025).
[xvi] 7 U.S.C. § 499e; 7 C.F.R. § 46.46(b); Nickey Gregory Co., LLC v. AgriCap, LLC, 597 F.3d 591 (4th Cir. 2010).