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Amidst a takeover effort by its bank creditors and much uncertainty exhibited by both suppliers and employees, Salyer American Fresh Foods Inc. President Eric Schwartz resigned the last week of April, with the word hitting the street Tuesday, May 5.

As the week progressed, there were many rumors that the Salinas, CA-based firm would have to file for bankruptcy protection or at the very least be in receivership with a court-appointed independent party running the operation. On late Wednesday afternoon, May 6, Donald Putterman, a San Francisco attorney who represents Salyer American, told The Produce News that "a receiver has been nominated and is being appointed with SAFF's agreement. I understand the order will be signed this afternoon. We hope that the receiver will be able to get financing flowing again to protect our employees, the growers and our customers."

Though Mr. Schwartz did not return repeated phone calls, the voice message on his office phone revealed that he was no longer with the company and referred calls to Executive Vice President of Administration Lisa Crist, who also did not return repeated phone messages by The Produce News' deadline.

Salyer American told its growers April 28 not to plant any more crops for the firm and promised a grower meeting two days later. That meeting was cancelled, and some growers said that current harvesting was being turned away May 1 from the commercial cooler that Salyer American used.

In the meantime, three financial institutions filed suit in Superior Court in Monterey in late April, claiming they were owed $34.1 million by Salyer American, and asked that a receiver be named to take over the company to protect their assets and that a foreclosure sale of the company's Castroville, CA, cooler be ordered. That cooler apparently was used as partial collateral for the loans extended by the banks. Ms. Crist was quoted in the Salinas Californian on Monday, May 4, as stating that Salyer American was attempting to work with its creditors, suppliers and customers in an effort to stay in business and avoid bankruptcy proceedings.

With the company in dire straits and the banks owed a large sum of money, the focus of many produce creditors shifted to how they could secure payment of their invoices.

For PACA licensees, the issue is fairly cut and dried. Virtually all shippers in the industry use boilerplate language on their invoices that preserves their PACA Trust rights, which basically puts produce creditors first in line in the event of a bankruptcy. So any shipper that sold product to Salyer American using that common language would be protected and should be paid, assuming that there are revenues and assets covering the produce debt.

However, often growers who are not shippers are not PACA licensees, and so they must take an additional step to preserve their PACA Trust rights. A grower must file a formal "notice of intent to preserve trust benefits" in a timely fashion. A "timely fashion" depends upon the circumstances of the contractual relationship between the grower and the shipper, but typically it would allow the grower about 50 days from the delivery of product to preserve those rights by filing the notice. An individual familiar with PACA law said that growers owed money by Salyer American would be well advised to immediately file these notices in an effort to protect their rights and retain their priority position as revenues are being collected if there is a bankruptcy proceeding.

In this case, the observer, who asked not to be named, predicted that most growers would be protected if they filed these notices quickly, as most growers have indicated that the debts do not go back very far.

One interesting wrinkle in this case is the effort by the company's banks to force the foreclosure sale of a cooler used as collateral for their loans. Assuming that it was assets from the sale of produce that helped fund the building of that cooler, a PACA lawyer who also asked not to be named said that the funds from that sale, or at least a portion of those funds, could qualify as a PACA Trust asset.

Another important factor in this case is whether it becomes a receivership or turns toward bankruptcy proceedings. Mark Amendola, an attorney with Martyn & Associates in Cleveland, who is very familiar with PACA Trust law but who is not involved in the Salyer American case, said that receivership proceedings take place in state court and follow state law, while a bankruptcy is a federal action following federal laws. In an official bankruptcy proceeding, he said, there would be no doubt that the PACA Trust law, putting produce creditors first in line, would be accepted by the court. State court proceedings are a bit more tricky. He said that attorneys representing the produce creditors would still argue that PACA Trust precedent should be followed, and they may very well win that argument. But other creditors' attorneys, such as the banks' lawyers, would be expected to put up competing arguments to sway the court in their direction.

"Produce creditors should be leery of this going the receivership route," said Mr. Amendola.