The Perishable Agricultural Commodities Act (“PACA”) and its sister statute “Packers and Stockyards Act (“PASA”) provide federal statutory lien protection to vendors of fresh foods and bulk meat. In the Bashas’ bankruptcy, pre-petition supplier claims covered by these two acts are substantial. Bashas’ estimates the combined claims will exceed $6.8 million — $4.2 million in pre-petition claims potentially subject to PACA and $2.6 million in pre-petition claims potentially subject to PASA .  Bashas’ asked for blanket bankruptcy court approval to allow (but not require) the debtor to pay PASA and PACA claims. The pre-petition secured lenders have said “Not so fast”. Our first question: “Why are the pre-petition secured lenders concerned about this to begin with?”

Bashas’ Motivation to Resolve PACA and PASA Claims

The rights of vendors whose goods are covered by PACA and PASA are far-reaching. These two federal acts create a first-priority, floating, non-segregated statutory lien and trust for the benefit of the unpaid vendors providing certain fresh foods and bulk meats. The lien/trust rights extend to the food inventories themselves, all products derived from them and the proceeds and receivables from their sale. In certain circumstances, “control persons” (such as officers, directors or members of a corporate purchaser) may be held personally liable if they breach the statutory fiduciary duty to preserve the affected assets for the benefit of the vendors.

Certainly, Bashas’ primary concern is for the lien and trust claims that might be raised under PACA and PASA. However, Bashas’ also characterized vendors with PACA and PASA covered claims as “critical” to its reorganization, for all the usual reasons (sole source, daily deliveries, spoilage, etc.)

The Objection of the Pre-Petition Secured Lenders

The pre-petition secured lenders objected to the Bashas’ motion on three primary grounds. First, they want “a representative of the Lenders to participate in the analysis and determination of the validity of PACA [and PASA] Claims.” If this participation is not authorized by the Bankruptcy Court, they want the right to review and object to the Debtors’ PACA [and PASA] claim determinations.

Second, the pre-petition secured lenders requested modification of the order proposed by Bashas’ to require any vendor receiving payment of PACA and PASA claims to waive both claims under 503(b)(9) and reclamation claims.

Finally, the pre-petition secured lenders challenged whether Bashas’ is even subject to PASA. They doubted that Bashas’ met the definition of a “packer” in order for PASA to apply.

The first two objections raise specific concerns for suppliers. The first objection raises the prospect that one creditor will directly participate in a debtor in possession’s determination of a statutory entitlement of another creditor.

The second objection raises the theoretical prospect that a creditor will be required to relinquish one set of statutorily prescribed rights in order to obtain the debtor’s voluntary satisfaction of another set of rights. This would occur in any instance where a supplier had pre-petition claims that exceeded the amount of its PACA/PASA claims – e.g. the supplier also provided goods not covered by those acts.

Why Should the Pre-Petition Secured Lender Care

We have asked ourselves: “Why would the pre-petition secured lender want to micro manage the PACA/PASA claims resolution process.” This is more than just idle curiosity for us. In monitoring bankruptcies, we always pay close attention to the conduct of the pre-petition secured lenders. They almost always have access to extensive and current debtor information (financial, appraisals, etc) and have the resources to thoroughly evaluate the debtor’s prospects. Like the proverbial canary in a mine, the reaction of the pre-petition secured lenders is often the first indication of a problem.

The pre-petition secured lenders stated reason for their concern is the size of the PACA/PASA claims. $6.8 million is a substantial number, but in isolation, simply being a big number does not explain the lenders’ conduct. Secured lenders typically don’t object to these types of motions unless there is a concern that payment is going to impact the extent of the secured lenders’ recovery.

In Beshas’ this might mean that the pre-petition secured lenders are concerned about their collateral coverage – i.e. they are concerned that their secured loan amount exceeds the value of their collateral. In that case, to the extent of any under-collateralization, the pre-petition secured lenders would have a portion of their loan thrown into the general unsecured pot. This would be one possible explanation for why the pre-petition secured lenders are looking to pinch pennys at the front end of this bankruptcy.

What about Bankruptcy Preferences for PACA and PASA Claimants?

In a later post, we are going to discuss the interaction of PACA and PASA claims with potential bankruptcy preference actions.  For now a quick heads up –  don’t assume PACA and PASA claimants are immune from preference claims.