Factoring Companies and PACA

E. Armata, Inc. v. Factoring Company (S.D.N.Y. 1995) 887 F. Supp. 590

District Court rejected a factor’s argument that it should be treated as a bona fide purchaser of accounts receivable from a produce firm. The Court observed that since the Factoring Company, was aware of the nature of the produce firm’s business, it would be deemed to have notice that the funds of the produce firm, Andrews, were subject to the PACA trust. The District Court also held that since Factoring Company knew that Andrews was having trouble paying its bills, the factor should be deemed to have constructive notice of a breach of the PACA trust. The District Court said:

“Factoring Company’s claim that it was a bona fide purchaser fails because it had constructive knowledge of the trust and constructive knowledge of the breach of trust. The trust in this case, a PACA trust, is created by federal statute. Accordingly, the lender had constructive notice of the existence of the trust by virtue of its knowledge of the nature of the borrower’s business . . . Having knowledge of the trust’s existence, Factoring Company, being advised that Andrews was having difficulty paying its suppliers and having notice that two creditors had turned bills owing from Andrews over for collection, had a duty to do more than check as to the filing of any judgments or liens against Andrews. That information put Factoring Company on notice that a breach of trust could have occurred. It had rights under the Factoring Agreement to conduct an audit of Andrews’ books and records, including review of bank accounts and cancelled checks . . . Conducting such an audit in April 1994 would have revealed at least one bounced check and PACA filings in April 1994, as well as outstanding amounts due for suppliers’ deliveries in February 1994 . . . Under these facts, Factoring Company should have known that the PACA trust was in breach. Therefore, Factoring Company is liable to plaintiffs for $80,466.60 held by Andrews in the PACA trust.”

887 F. Supp. at 594.

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