Packers and Stockyards Act Provisions For Unpaid Cash Sellers of Livestock

Overview

The Packers and Stockyards Act (PSA) of 1921 was enacted with the purpose of ensuring fair competition in and trade practices involving livestock marketing, meat and poultry.  7 U.S.C. §§181-229.  See also Armour & Company v. United States, 402 F.2d 712 (7th Cir. 1968).  The scope of the PSA is quite broad, vesting in the U.S. Secretary of Agriculture (Secretary) wide discretion to investigate and regulate all activities connected with livestock marketing.  See, e.g., Rice v. Wilcox, 630 F.2d 586 (8th Cir. 1980). 

What happens when a livestock packer, market agency or a livestock dealer fails to pay for livestock that it buys from a livestock seller?  The “prompt payment rule and the statutory trust of the PSA – that’s the topic of today’s post.

Rules Governing Payment For Livestock

Prompt payment rule.  The PSA provides for failure to make prompt and full payment for livestock.  Generally, to not be deemed to be engaged in an “unfair practice” under the PSA, a packer must make full payment of the livestock’s purchase price “before the close of the next business day following the purchase of livestock and transfer of possession thereof.”  7 U.S.C. §§228b(a) and (c).  A packer subject to the prompt payment rule is defined as “any person engaged in the business (a) of buying livestock in commerce for purposes of slaughter, or (b) of manufacturing or preparing meats or meat food products for sale or shipment in commerce, or (c) of marketing meats, meat food products, or livestock products in an unmanufactured form acting as a wholesale broker, dealer, or distributor in commerce.”  7 U.S.C. §191.  When livestock is purchased for slaughter, payment must be made to the seller or the seller’s representative at the point of transfer or the funds must be wired to the seller’s account by the close of the next business day.  Id.  If the sale is based on carcass weight, or is a grade/yield sale, the same rule applies once the purchase amount has been determined.  Id.  If the seller (or the seller’s agent) is not present to receive payment at the point of sale, the packer is to either wire the funds to the seller and put a check in the mail for the full amount by the close of the next business day.  Id. 

The prompt payment requirement can be waived by written agreement that is entered into before the purchase or sale of livestock.  7 U.S.C. §228(b)(b).  The regulations provide a format for the waiver.  9 C.F.R. §201.200(a).  The agreement must be disclosed in the business records of the buyer and the seller, and on the accounts or other documents that the buyer issues relating to the transaction.  7 U.S.C. §228b(b).  But, if the prompt payment requirement is waived, the seller will lose any interest the seller has in the statutory trust (discussed below).  7 U.S.C. §196(c). 

The prompt payment rule also applies to “market agencies” and “dealers” in addition to packers (as defined above).  A “market agency” is any person “engaged in the business of (1) buying or selling in commerce livestock on a commission basis or (2) furnishing stockyard services.” 7 U.S.C. §201(c).  Simply denoting “commission” on an invoice does not, by itself, indicate that the sale was on a commission basis.  It’s the nature of the business relationship of the parties and the surrounding facts and circumstances that are determinative.  See, e.g., Ferguson v. United States Department of Agriculture, 911 F.2d 1273 (8th Cir. 1990).  A “dealer” is “any person, not a market agency, engaged in the business of buying or selling in commerce livestock, either on his own account or as the employee or agent of the vendor or purchaser.”  7 U.S.C. §201(d).  In Kelly v. United States, 202 F.2d 838 (10th Cir. 1953), the court said that a person can be a “dealer” even if the buying and selling of livestock is not the person’s only business. 

A violation of the prompt payment rule constitutes an “unfair practice” under the PSA.  7 U.S.C. §228b(c).  The same is true for the issuance of an insufficient funds check and the failure to pay when due.  7 U.S.C. §213(a); 7 U.S.C. §228(b). 

The inability to make prompt payment is sometimes tied to the financial condition of the buyer. Consequently, all market agencies are prohibited from operating while insolvent – when current liabilities exceed current assets.  7 U.S.C. §204.  See also United States v. Ocala Livestock Market, Inc., 861 F. Supp. 2d 1328 (M.D. Fla. 2012). 

Statutory Trust.  For packers with average annual purchases of livestock exceeding $500,000, the PSA establishes a statutory trust for the benefit of unpaid cash sellers.  A “cash sale” is any sale where the seller does not expressly extend credit to the packer.  7 U.S.C. §196(a); Kunkel v. Sprague National Bank, 128 F.3d 636 (8th Cir. 1997).  The provision extends to “all inventories of, or receivables or proceeds from meat, meat food products, or livestock products derived therefrom….”  7 U.S.C. §196(b).  The funds must be held in the trust for the benefit of al unpaid cash sellers of livestock until full payment has been received by the unpaid seller.  Id. 

If a packer files bankruptcy, assets contained in the statutory trust are not part of the bankruptcy estate.  11 U.S.C. §541(d).  This means that the unpaid cash sellers of livestock do not have to compete with the bankrupt debtor’s secured creditors for the assets contained in the trust.  See, e.g., Rogers and King, Collier Farm Bankruptcy Guide §105[1].  Claims for payment from the statutory trust will defeat a properly perfected Uniform Commercial Code lien.  See, e.g., In re Gotham Provision Company, 669 F.2d 1000 (5th Cir. 1982).  Likewise, a bank creditor of a packer is not able to setoff funds held in the statutory trust.  See, e.g., In re Jack-Rich, Inc., 176 B.R. 476 (Bankr. C.D. Ill. 1994).  Also, payment from a statutory trust to livestock sellers are not recoverable as a preference item in bankruptcy.  But, what constitutes cash collateral can present issues. 

An unpaid cash seller can make a claim against trust assets by providing notice to the Secretary within 30 days of the final date for making prompt payment under 7 U.S.C. §228(b) or within 15 business days of being notified that the seller’s check has been dishonored, whichever is later.  7 U.S.C. §196(b); see also 9 C.F.R. §203.15.

The statutory trust requirement does not apply to livestock purchases by market agencies and dealers.  However, payments that a livestock buyer makes to a market agency for sales on commission are considered to be trust funds that must be deposited into a custodial account.  9 C.F.R.§201.42(a), (b).  In other words, a market agency or a dealer must maintain a custodial account for trust funds.    By close of the next business day after an auction, market agencies must deposit into the custodial account:  (1) all proceeds collected from the auction, and (2) an amount equal to the proceeds receivable from the livestock sale that are due from the market agency; any owner, employee, or officer of the market agency; and any buyer to whom the market agency has extended credit. 7 U.S.C. §201.42(c)-(d); 9 C.F.R. §201.42(c).  In addition, a market agency must deposit an amount equal to all of the remaining proceeds receivable into the custodial account within seven days of the auction, even if some of the proceeds remain uncollected.  Id.  Funds in the custodial account can only be withdrawn to remit the net proceeds due a seller, to pay lawful charges which the market agency is required to pay, and to obtain sums due the market agency as compensation for its services.  9 C.F.R. §201.42(d).  A market agency must transmit or deliver the net proceeds received from the sale to the seller by the close of business on the day after the sale.  7 U.S.C. §228b(a); 9 C.F.R. §201.43(a). 

To make a statutory trust claim, written notice must be given to the buyer and the Grain Inspection Packers and Stockyards Administration (GIPSA).    The livestock not paid for must be identified along with the date of delivery.  The applicable “look-back” period is 30 days before receipt by the buyer and the Secretary. 

Note:  Effective November 29, 2018, GIPSA is no longer a standalone agency within the United States Department of Agriculture (USDA), but is contained within the USDA’s Agricultural Marketing Service (AMS).  The USDA final rule detailing the reorganization is found at 83 FR 61309 (Nov. 29, 2018).   

Remedies

Reparation.  A livestock seller that has sustained a PSA “injury” at the hands of a market agency or a dealer can sue in federal district court “for the full amount of damages sustained in consequence of such violation.”  7 U.S.C. §209(a), (b).  Another option for a disaffected livestock seller is to begin a reparation proceeding for money damages.  7 U.S.C. §§209(b); 210.  A filing for a reparation proceeding must be made within 90 days after the cause of action accrues.  7 U.S.C. §210(a).  See also 9 C.F.R. §§202.101-.123.  The filing is made with the Secretary at the AMS/GIPSA Regional Office.  The complaint must state the cause of the action; the date of the transaction; amount of damages; method of computation; place where the transaction occurred; and the name of the parties.  No particular Form is needed to file the complaint, however the P&SP Form 5000 is recommended. The Form is available here: https://www.gipsa.usda.gov/psp/forms-psp/PSP5000.pdf 

Once the complaint is processed and investigated, AMS/GIPSA will serve the complaint on the defendant.  The defendant will then have 20 days upon receipt to file an answer to the complaint.  Once an answer is received, or the time for responding has expired, the complaint is filed with a GIPS hearing clerk.  A hearing will be scheduled will be in writing unless an oral hearing is requested and claimed damages exceed $10,000.  An oral hearing can also occur if necessary to establish the facts and circumstances that gave rise to the controversy.  If AMS/GIPSA determines that a hearing should be in writing, each party will be given notice and 20 days to file objections.  Written hearings allow for additional evidence to be given, and have additional procedures that must be followed.   

If the Secretary determines that the livestock seller is entitled to damages, the Secretary will order the defendant “to pay to the complainant the sum to which he is entitled on or before a day named.”  7 U.S.C. §210(b).  AMS/GIPSA cannot enforce payment of any award, but the order can be enforced by the applicable federal district court (or any state court having general jurisdiction of the parties) upon an enforcement action being filed with the court within one year of the date of the order.  The order is deemed to be prima facie evidence of the facts stated in the order, and a prevailing livestock seller is entitled to reasonable attorney fees.  Id. 

A complaint can be withdrawn at any time to terminate the reparation unless there is a counterclaim. 

Injunction.  7 U.S.C. §228a authorizes a statutory injunction and allows the United States to apply for a temporary injunction or restraining order when it has reason to believe that any person governed by the PSA has “(a) failed to pay or is unable to pay for livestock, meats, meat food products, or livestock products in unmanufactured form, … or has failed to remit to the person entitled thereto the net proceeds from the sale of any such commodity sold on a commission basis; or (b) has operated while insolvent, or otherwise in violation of [the PSA] in a manner which may reasonably be expected to cause irreparable damage to another person; or (c) does not have the required bond; and that it would be in the public interest to enjoin such person from operating subject to this chapter or enjoin him from operating subject to this chapter except under such conditions as would protect vendors or consignors of such commodities or other affected persons.”  When the United States makes such a “proper showing,” the court “shall…issue a temporary injunction or restraining order.”  Id. 

Conclusion

The PSA is a major piece of legislation significantly regulating livestock sales involving covered entities.  It provides a level of protection for livestock sellers in terms of ensuring payment.  In addition, it is a good practice for lenders that finance PSA-covered entities to ensure that these entities promptly pay for all livestock purchased.