Opinion: U.S. farmers losing millions due to Canadian bankruptcies
By Henkel & Cohen partner Timothy Henkel
In October 2014, the U.S. Department of Agriculture (USDA) revoked a preference given to Canadian produce exporters for the last 80 years. They are now required to post a bond of double the dollar amount of their claim against a non-paying U.S. buyer to file a "formal" administrative complaint under the Perishable Agricultural Commodities Act (PACA).
The reaction of the Canadian produce industry was to lament the major detrimental impact upon Canadian farmers, most of whom are small producers under US$100,000, who may not be able to afford such a bond and are now practically denied a PACA remedy to coerce payment by threating a non-paying U.S. buyer with their loss of their USDA PACA license. But what is the perspective of the U.S. produce industry and the USDA?
The PACA system has been almost universally praised for enhancing free trade in perishable produce in the U.S. by: requiring USDA licensing of produce traders; establishing fair trading guidelines for the industry; providing for a two-tier informal (mediation) and formal (arbitration) administrative remedy against non-paying PACA licensees in favor of all produce suppliers (domestic and foreign); and, since 1984, creating a PACA trust on all produce sold and derivatives, such as inventories and sales proceeds, until the produce seller is paid in full.
The PACA trust protection applies even if there is commingling and all trust property is exempt from creditors’ claims in a produce buyer’s bankruptcy. Since PACA was first enacted in 1930, the law has been attributed with the collection of recoveries of approximately US$1 billion. Until several months ago, exporters from Canada could file formal PACA complaints without having to post the double bond required of exporters from every other country.
The USDA's regulations allow the USDA to waive the bond requirement for a resident of a country that provides a remedy that is "substantially similar to that provided under [PACA]." In the USDA's correspondence to Canadian authorities in early October, the U.S. agency found that "Canada does not have a dispute resolution system that is comparable to the U.S. system established pursuant to the [PACA]."
From a U.S. regulatory and produce industry perspective, the USDA's action is justified. Canadian sellers can come to the U.S. to recover the unpaid sales price by using PACA's strong legal protections, but PACA does not apply in Canada when U.S. sellers seek to recover sales in that country and there is no comparable Canadian PACA law. Hence, the concerns are both fairness and reciprocity. In the past five years, Canadian sellers have filed more formal complaints than from any other country. For many years, industry and U.S. authorities have expressed growing frustration at Canad'’s failure to adopt a PACA-like structure such that the USDA's recent action was not sudden or without notice.
Canada does not offer U.S. sellers as adequate a remedy as provided under PACA. The Canadian federal government has the power to regulate international trade and commerce and the country’s bankruptcy laws. The country's laws already recognize the concept of a "deemed" trust. But, notwithstanding the power to act, there is no PACA trust law in Canada. U.S. sellers are subject to not being paid as fully under Canadian bankruptcy laws as would be the case under PACA. It is estimated that U.S. agricultural companies lose millions of dollars per year because of Canadian bankruptcies. While there is a comparable arbitration process available under the Dispute Resolution Corporation, membership in the DRC is voluntary. The only penalty for non-payment of a DRC arbitration award is potential exclusion from membership, with no loss of license. And, unlike in the U.S. under PACA trust law where an unpaid seller can freeze the buyer's assets and thereby coerce payment, there is no such provision for this remedy before the DRC.
The lack of a Canadian PACA law harms Canadian consumers and businesses. Half of Canada's annual imports of fruit and vegetables are from America in the amount of US$3.6 billion. The lack of a comparable PACA law results in less and more expensive U.S. exports to Canada. U.S. sellers must charge more (estimated to be 5 to 15% of the cost) for the risk of not as easily being able to collect in Canada and the increased due diligence in dealing with Canadian buyers. Canadian businesses export approximately 40% of the country’s agricultural production to the U.S. in the amount of $1.6 billion. The lack of a bond-free PACA complaint process increases non-recoveries for Canadian agri-business and thereby imperils profits and jobs.
The recent revocation of the Canadian bond preference does not mean that Canadian sellers have no remedy in the U.S. The USDA advised Canada in its October action that if a PACA-like regime was adopted, the bond preference may be "revisited". Until that occurs, Canadian exporters may still sue in U.S. federal courts to enforce their PACA trust rights with no pre-filing bond requirement, sue in all U.S. courts to enforce their contracts, and file informal PACA complaints with the USDA to utilize the agency's mediation services.
From a U.S. perspective, the time is overdue for Canada to comply with the spirit of NAFTA by adopting a PACA trust law to give equal treatment to U.S. exporters.
Tim Henkel is a partner of the Miami law firm of Henkel & Cohen, P.A. and represents produce industry clients in commercial litigation and arbitration, PACA, contract, and business matters.