By John D. Bartley, O’Reilly Rancilio PC
Two federal statutes contain hidden risks of superior lien rights that are not currently insured by a title insurance provider or covered by reviewing the filing records of the Uniform Commercial Code. The United States Congress enacted the Perishable Agricultural Commodities Act (“PACA”) (7 U.S.C. §499a, et seq.) and the Packers and Stockyards Act (“PSA”) (7 U.S.C. §181, et seq.) to protect the sellers/suppliers of perishable agricultural commodities (“PAC”) from being treated as unsecured creditors if perishable foods are delivered to an insolvent purchaser. The standards are different depending on the category of merchant such as wholesalers, retailers, or truckers. For example, retailers involved in the sale of fresh and frozen fruit and vegetable purchases that exceeds $230,000 in a calendar year are required to obtain a PACA license from the United States Department of Agriculture (“USDA”). When licensed, all proceeds from the sale of PAC by such merchant shall be held in trust (the “Trust”) for the benefit of the supplier of such PAC until all invoices are paid. The USDA provides a public record of all businesses that have PACA licenses which also include any formal or informal complaints made by suppliers.
To preserve its rights to collect under the Trust, a supplier of PAC must meet specific notification requirements that may involve a written Notice of Intent to Preserve Trust Benefits under the PACA or PSA (a “Notice”), required within 30 days after the past due date. An unpaid supplier may then attempt in federal court to claw back any distribution of that Trust money until such supplier’s PAC invoices are paid in full. There is no requirement for the Notice to be recorded or filed in any public record. A Notice may be sufficient if it is merely included on the invoice sent to the PAC purchaser.
Although PACA and PSA do not directly involve real property law or real property interests, the lien rights and claw-back rights may suddenly arise to challenge a client’s own lien rights in connection with land. A 2013 New York State court decision caused the title insurance industry to be concerned that a purchase money lender and/or a refinance lender may have exposure to unpaid PACA claimants to claw back mortgage payments made to lenders. Lender clients should consider adding covenants to loan documents that require the borrower, such as a produce merchant or butcher, to comply with all PACA and PSA licensing requirements and to disclose any Notice received by such borrower.
Currently, a lender recording a mortgage securing the repayment of a loan to a commercial borrower licensed under PACA/PSA cannot obtain title insurance to offset any PACA/PSA risks. However, the title insurance industry may soon offer some limited PACA/PSA coverage under the proposed 2021 versions of American Land Title Association (ALTA) owners and loan policies if a Notice is duly recorded and not identified as an encumbrance to title. Although PACA/PSA laws do not include real property lien rights, the proposed ALTA provisions may intend to provide coverage in the event PAC suppliers negotiate contract provisions that allow recording of a Notice as a new remedy or if the U.S. Congress or the judiciary expands such Trust recovery rights. If limited PACA/PSA title insurance coverage is offered, I expect a PACA/PSA disclosure section within a standard owner’s affidavit will soon follow.
Additional revisions to the ALTA polices are proposed for 2021 (including coverages involving remote electronic notarization). Keep an eye out for highlights on such revisions from my colleague C. Lynn Sagar in an upcoming eNewsletter article.