Dealer Trust Would Prevent Preferential Transfer in Bankruptcy Claims

The concept of preferential transfer allows for payments made by an insolvent and eventually bankrupt party (here, the buyer of livestock) 90 days before the bankruptcy petition is filed to be called back by the bankruptcy trustee. Yes, not only could a seller (market or producer) be on the hook for the cattle originally not paid for, it could also have to come up with money to equal three months of purchases.

If a Dealer Statutory Trust were added to the Packers and Stockyard Act, this would give unpaid sellers first priority in livestock and accounts receivable in the event of a dealer default. In addition, previous payments from that dealer made to sellers would be considered trust funds and not eligible to be pulled into bankruptcy proceedings through a preferential transfer claim.

Courts have ruled that no valid preferential transfer claim exists when the item/funds in question are covered by a statutory trust which exists upon delivery of a commodity. This is because the debtor (here the dealer) did not transfer their interest in property. The money paid would not be their property, but rather the unpaid sellers’ property held in trust for the benefit of that unpaid seller.

For an example of this analysis, see In Re Fresh Approach, Inc., 51 B.R. 412 (Bankr. N.D. Tex. 1985). This case indicates that the Perishable Agriculture Commodity Act Trust, with is modeled after the Packer Statutory Trust in the Packers and Stockyards Act, makes it so sales subject to that trust cannot be pulled in to a bankruptcy proceeding as a preferential transfer claim. HR 4058, creating a Dealer Statutory Trust, is also modeled after the Packer Statutory Trust.