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Battered And Coated French
Fries As A Fresh Vegetable
Eligible For PACA Protection:
Are You Kidding?
INTRODUCTION
THE PACA STATUTE
The Perishable Agricultural Commodities Act (“PACA”)
grants preferred trust fund protection to eligible unpaid
sellers and suppliers of perishable agricultural commodities. If the buyer of perishable agricultural commodities
files bankruptcy, eligible unpaid sellers and suppliers are
entitled to full payment of their PACA trust claims ahead
of the claims of the secured and unsecured creditors.
Congress enacted PACA in 1930 to regulate the interstate
sale and marketing of produce. Congress wanted to protect small farmers and growers from unscrupulous brokers that reject the produce in a declining market.
Congress was particularly concerned about the vulnerability of the produce seller to the perishability of its
goods, the great distances between the seller and buyer
and the expense and impracticality of recovering the seller’s goods and otherwise enforcing the seller’s claim.
PACA defines “perishable agricultural commodities” as
fresh fruits and vegetables of every kind and character,
whether or not frozen or packed in ice. However, PACA
does not elaborate further on the meaning of “fresh fruits
and vegetables”. Congress has left it to the United States
Department of Agriculture (“USDA”) to fill in the blanks
by promulgating the rules necessary to carry out the purposes of PACA. The USDA has adopted regulations concerning which agricultural products qualify as “fresh
fruits and vegetables”.
Well, ladies and gentlemen of the credit world, the battered and coated french fry has arrived—at least in the
world of PACA! Effective June 2, 2003, the USDA promulgated a rule that granted PACA-protection to battered and
coated potato products (we’ll call the rule the “French Fry
Rule”). This represents a significant extension of PACA
trust protection to my favorite food, the french fry, which
few people think of as a fresh vegetable.A recent decision
of the United States District Court, Eastern District
of Texas in Fleming Companies, Inc. v. USDA, has upheld
the French Fry Rule. So the french fry is a “fresh
vegetable” entitled to the protection afforded by PACA.
Only in America!
In the early 1980’s, Congress reexamined PACA in
response to a sharp increase in defaults by produce buyers, and decided that produce sellers and suppliers needed more protection. Congress amended PACA to include a
floating, non-segregated statutory trust for the benefit of
unpaid produce suppliers, sellers and their agents that
comply with all of PACA’s requirements.
The PACA trust grants eligible produce suppliers a superpriority right to recover the purchase price of their goods
ahead the claims of all other creditors, including secured
creditors. PACA trust assets are not part of the buyer’s
bankruptcy estate and the buyer lacks a sufficient interest
in the PACA trust assets for any security interest to attach.
Since the PACA trust arises upon delivery of the produce,
an unpaid PACA seller retains title to the goods and the
goods are not subject to the security interest of the
buyer’s secured creditors until the seller is paid in full.
Secured creditors may be directed to disgorge collateral
proceeds that are PACA trust funds otherwise payable to
eligible sellers of perishable agricultural commodities.
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food of a different kind and character.” 1 Until 2003, the
following operations did not change an agricultural product into a food of a different character:
HOW PACA WORKS
The PACA trust applies only to perishable agricultural
commodities. Perishable agricultural commodities are
unprocessed or minimally processed fruits and vegetables, whether or not frozen or packed in ice.
“Water, steam, or oil blanching, chopping, color adding,
curing, cutting, dicing, drying for the removal of surface
moisture; fumigating, gassing, heating for insect control,
ripening and coloring; removal of seed, pits, stems, calyx,
husk pods, rind, skin, peel, et cetera; polishing, precooling,
refrigerating, shredding, slicing, trimming, washing without or without chemicals; waxing, adding of sugar or
other sweetening agents; adding ascorbic acid or other
agents to retard oxidation; mixing of several kinds
of sliced, chopped or diced fruit or vegetables for packaging in any type of containers; or comparable methods
of preparation.” 2
PACA does not regulate all sales of perishable agricultural
commodities. PACA applies to sales to licensed commission merchants, brokers and dealers. Commission merchants and brokers buy and sell produce on behalf of
third parties.A dealer is engaged in the business of buying
or selling in wholesale or jobbing quantities, which represents at least one ton of produce shipped, received or
contracted for shipment or receipt on any given day.
An unpaid PACA seller must state its intent to preserve
PACA trust benefits, in writing, within 30 days after (a) the
expiration of the prescribed time for payment, 10 days
after delivery, as set forth in regulations promulgated by
the United States Department of Agriculture; (b) the due
date for such payment agreed to in writing by the parties
before entering into the transaction; or (c) seller’s receipt
of notice of dishonor of the payment.A produce seller can
satisfy this requirement by including a statement in its
bills or invoices that the goods are being sold subject to
the PACA trust.
Treatment Of Battered And Coated Potato
Products In The Ameriserve Bankruptcy Case
On January 31, 2000, Ameriserve Food Distribution, Inc.
(“Ameriserve”), then the largest food distributor in the
United States, filed Chapter 11. Ameriserve argued that
PACA does not protect coated and battered potato products, rejecting five PACA trust claims exceeding $11 million asserted by five of the largest french fry manufacturers in the United States. Well, that was too much for the
french fry manufacturers to swallow and they sued
Ameriserve.That precipitated the USDA’s promulgation of
the French Fry Rule.
The maximum payment terms that qualify under PACA is
30 days after the buyer’s receipt and acceptance of the
goods. A written, and possibly even an oral, agreement
between the parties that extends the due date of the seller’s invoices beyond the maximum 30-day period disqualifies the seller from the protections of the PACA trust.
A short summary of the coating and battering process,
with the help of the USDA, should help put this discussion
into better context. One coats and batters a potato product by dipping potato strips into a mixture of water and
natural vegetable starch. A crisping or chemical leavening
agent is then added to the potato product. The potato
product is then air blown to remove all but a thin layer of
the coating, oil blanched and frozen to become the french
fry that we know and love. 3
The PACA trust is a non-segregated “floating trust”. The
trust arises in favor of the PACA seller upon delivery of
the goods to the purchaser. The trust continues until the
PACA seller’s claim is paid in full. The trust includes the
produce supplied by the PACA supplier and all other
PACA suppliers, all food products derived from such produce, and all accounts receivable and other cash and noncash proceeds from the sale of these goods, regardless of
the source of the goods. No tracing is necessary—PACA
trust fund claims attach to all of the debtor’s perishable
agricultural commodity inventory and all proceeds,
whether or not they can be traced from the original PACA
produce. This allows the produce buyer to commingle
PACA trust assets. Some courts have even held that when
PACA produce proceeds are commingled with non-PACA
proceeds, the PACA seller is still entitled to a full recovery
from all proceeds (PACA and non- PACA alike) without
tracing the proceeds of its produce. The buyer must then
prove the proceeds were not from PACA goods and, therefore, not subject to the trust.
The USDA’s New Rule Protecting
Battered And Coated Potato Products
Following Ameriserve’s refusal to pay its french fry manufacturers’ claims, efforts were undertaken to have the
USDA amend the definition of “fresh fruits and vegetables”
to provide that battering and coating do not change a perishable vegetable into an article of food of different kind
of character, and, therefore, pass muster under PACA. First
the Frozen Potato Products Institute (“FPPI”) requested
that the USDA give a written opinion regarding whether
battered and coated frozen potato products are eligible
for protection under PACA. The FPPI is a national trade
association, whose members are frozen potato processors
and account for 95 percent of all frozen potato products
in the United States. In response, in August 2000,
the USDA gave an opinion that battered and coated
potato products are protected by PACA because “coating
or battering does not alter the essential character of the
potato product.”
FLEMING VS. USDA
USDA Regulations Defining
Fresh Fruits And Vegetables
Since 1940, the USDA has been the rulemaker in determining what agricultural products qualify as “fresh fruits
and vegetables”.The USDA ruled that “fresh fruits and vegetables does not include those perishable fruits and vegetables which have been manufactured into articles of
In June 2001, the FPPI petitioned the USDA to amend the
definition of “fresh fruits and vegetables” to state that battering and coating are processes that do not change a per-
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ishable fruit or vegetable into an article of food of a different kind or character. After granting interested parties an
opportunity to comment, the USDA promulgated a new
rule, the French Fry Rule, effective June 2, 2003, that
granted PACA protection to battered and coated potato
products. That means french fries, folks!
bles”. During that time, the USDA has refined the meaning
of the term “fresh fruits and vegetables”.
The USDA’s rule-making efforts have expanded PACA coverage to an ever increasing number of agricultural products of varying character.The French Fry Rule, that battering and coating do not change the kind and character of a
fruit and vegetable, is the most recent step in the process,
building on the USDA’s 1996 rule adding “oil blanching” to
the list of processes that do not disqualify a fresh fruit or
vegetable from PACA protection. The court concluded
that the French Fry Rule serves PACA’s remedial purpose
of protecting PACA sellers and insuring full payment of
their claims by granting PACA protection to an additional
category of agricultural product.
In announcing the French Fry Rule, the USDA stated its
belief that coating and battering preserve the color, crispness and texture of a potato product, do not alter the
essential character of potato products, and are similar to
such processes as oil blanching, chopping and adding
ascorbic acid that USDA regulations had already recognized as not disqualifying the produce from PACA protection. The USDA also concluded that excluding battered
and coated potato products would contradict the
Congressional intent behind PACA. A substantial amount
of the frozen potato products produced each year in the
United States are coated and battered. Depriving PACA
protection for these products would harm a substantial
part of the frozen products industry.
Finally, the USDA was acting in response to Ameriserve’s
rejection of the PACA claims of french fry manufacturers.
The USDA concluded that french fry manufacturers are
entitled to PACA protection because the battering and
coating processes used in the manufacturing of french
fries are similar to processes already approved as conforming to PACA. The USDA interpretation of PACA was
reasonable and the court is bound to follow it.
The Fleming Law Suit
Fleming apparently could not stomach the French Fry
Rule granting PACA protection to battered and coated
potato products. Fleming was a grocer, wholesaler and distributor that frequently purchased food products, such as
battered and coated french fries. Fleming filed Chapter 11
on April 1, 2003 and recently exited Chapter 11 with a
confirmed Chapter 11 plan that became effective on
August 23, 2004.
CONCLUSION
Only in the topsy-turvy world of PACA could a french fry
be considered a fresh vegetable.That does not necessarily
mean the french fry has become more nutritious. It speaks
volumes of the benefits of special interest groups’ lobbying for the benefit of their constituents.
Fleming sued the USDA on October 15, 2003, seeking to
invalidate the USDA’s new rule extending PACA protection to the french fry as a battered and coated potato
product. Fleming alleged that the processing of a raw
potato into a french fry changed the PACA-protected raw
potato into food of a different kind or character that
deprived PACA-protection for the finished product—the
french fry.The United States District Court for the Eastern
District of Texas disagreed.
Bottom line, the recent USDA rule, the French Fry Rule,
which adds battering and coating to the list of processes
approved under PACA, has been upheld in a recent United
States District Court decision. The USDA regulation
amounts to a significant expansion of PACA protection to
include battered and coated french fries! Wow, give me
some fries and a shake, please!
The court observed that PACA is silent on the question of
whether battered and coated potato products qualify as
“fresh vegetables”. PACA does not define the term “fresh
vegetables”. However, since PACA protects fresh fruits and
vegetables of every kind or character, it suggests that a
fruit or vegetable might be subjected to certain food
processes and still retain its fresh character.
Bruce S. Nathan, Esq. is a Partner in the law firm of
Lowenstein Sandler PC in New York, NY. He is also a
member of NACM and the American Bankruptcy
Institute. He can be reached via e-mail at
[email protected].
The task of determining whether battered and coated
potato products qualify as “fresh fruits and vegetables of
every kind or character”, and, therefore, subject to PACA,
has been left to the USDA. The USDA promulgated the
French Fry Rule that battered and coated potato products
are entitled to PACA protection.The court upheld the rule
as complying with PACA.
1. 7 C.F.R. § 46.2 (u) (2002).
2. 7 C.F.R. § 46.2(u) (2002).
3. See Perishable Agricultural Commodities Act
(PACA): Amending Regulations to Extend PACA
Coverage to Fresh and Frozen Fruits and Vegetables
That Are Coated or Battered, 67 Fed. Reg. 77, 002,
77,002
(Dec. 16, 2002) (to be codified at 7 C.F.R. § 46).
PACA’s general purpose is to regulate the marketing of
fresh fruits and vegetables in interstate and foreign commerce. For over 60 years, the USDA has been responsible
for filling in the gaps in the PACA statute and determining
which agricultural products are “fresh fruits and vegeta-
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