Greenberg Traurig Alert
Third Circuit Rules that PACA Applies to Restaurants
By John B. Hutton, Greenberg Traurig, Miami
View or download the PDF version of this Alert here.
In a decision that contravenes the position taken by the United States Department of
Agriculture ("USDA") for the past seventy years, the Third Circuit Court of
Appeals has recently ruled that a restaurant chain that operates fifteen restaurants is a
"dealer" of "perishable agricultural products" subject to the trust
provisions Perishable Commodities Act, 7 U.S.C. § 499 et. seq. ("PACA"). In
re Magic Restaurants, Inc., ___ F.3d ___, 2000 WL 230310 (3d Cir. March 1, 2000). This
judicial decision threatens to impair the priority of financing liens granted by
restaurants and other businesses in the food service industry, by creating a trust in
favor of unpaid produce suppliers. The trust provisions of PACA impose a floating,
non-segregated trust on produce buyers for the benefit of unpaid produce suppliers, which
grants the unpaid supplier an interest in the trust corpus superior to the interest of any
other lien or secured creditor.
The corpus of the PACA trust is comprised of (1) the perishable agricultural
commodities purchased from these suppliers, (2) all inventories of food or other products
derived from the perishable agricultural commodities, and (3) receivables or proceeds from
the sale of such commodities or products. The unpaid supplier loses the benefits of the
trust unless written notice of intent to preserve the trust is given to the trustee within
thirty calendar days after payment must be made. As a practical matter, many produce
suppliers include such a notice on their invoices.
The Third Circuit is the highest court to rule on this issue, and the decision was
rendered by a split panel, with one judge dissenting. In rejecting the USDAs
long-held interpretation of the statute, the majority on the panel held that the
restaurant chain was a "dealer" under the plain language of PACA, which applies
to "any person engaged in the business of buying or selling in wholesale or jobbing
quantities . . . any perishable agricultural commodity . . ." 7 U.S.C. § 499a(b)(1).
The term "wholesale or jobbing quantities" is defined by USDA regulations as
"aggregate quantities of all types of produce totaling one ton (2,000 pounds) or more
in weight in any day shipped, received, or contracted to be shipped or received." The
definition of dealer, however, provides an exception for persons whose invoice cost of
produce in any calendar year is not in excess of $230,000. The restaurant chain had argued
that it was not a "dealer" because it was not primarily engaged in the business
of buying and selling produce, but the Third Circuit did not believe the statutory
definition was restricted to those primarily in such business. The Court acknowledged that
the USDA, the federal agency charged with administering PACA, has consistently indicated
for seven decades since the enactment of the statute that it does not have jurisdiction
over restaurants, but rejected this position as contrary to the clear and unambiguous
language of the statute.
Among other things, the Courts ruling requires "dealers" under PACA to
apply for licenses with the Secretary of Agriculture. Because any person doing business
without a license is subject to monetary penalties, the Third Circuit acknowledged that
its ruling would mean that the many restaurants that have never applied for licenses under
PACA have been in violation of federal law for decades. At the same time, the Third
Circuit expressed doubt as to whether the Secretary of Agriculture would aggressively
pursue such "violations," and anticipated that currently unlicensed restaurants
would have certain defenses to any attempted retroactive application of the licensing
The decision has broad implications for many types of businesses that purchase
"wholesale or jobbing quantities" of produce, other than just restaurants, and
potentially applies to schools, hospitals, nursing home chains, hotels and cruise lines.
As noted by the dissent in the case, "[t]he majority reading would make most prisons
dealers, yet prisons are not engaged in the perishable commodity-buying
business." Any such entity that consumes large quantities of produce should consider
whether it needs to apply now for a license under PACA.
In addition, lenders to such entities (including restaurants) that may now be
considered "dealers" under PACA need to increase their monitoring or they could
be primed on both inventory and accounts. Prospectively, lenders to "dealers"
need to evaluate their collateral position with respect to produce inventory and its
The Courts decision in Magic Restaurant is binding upon all lower courts
in the Third Circuit, including Delaware, Pennsylvania and New Jersey. Although the Third
Circuit is the only federal circuit court to rule on the issue, the decision is
controversial, and it is not clear at this point whether lower courts in states outside of
the Third Circuit will apply this precedent. At the same time, many major bankruptcies are
filed in Delaware (as the state of incorporation), and this holding may apply in such
bankruptcies, even if the business is operated elsewhere.
Greenberg Traurig attorneys are prepared to advise on the applicability of PACA to any
entity, license companies as dealers, set up a monitoring program for lenders, review loan
documents for lenders, and lobby congress for legislative reform.
© 2000 Greenberg Traurig
This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our clients’
individual legal needs.