Perishable Agricultural Commodities Act: Recognizing Limited Liability Companies

AGENCY:

Agricultural Marketing Service, USDA.

ACTION:

Final rule.

SUMMARY:

The Department of Agriculture (USDA) has amended the regulations under the Perishable Agricultural Commodities Act (PACA or Act) to recognize a limited liability company (LLC) as a legal entity, and also to recognize each member of an LLC, and/or any other person authorized by the members to conduct business on behalf of an LLC, as “responsibly connected” with the LLC, as defined in the PACA.

EFFECTIVE DATE:

May 30, 2000.

FOR FURTHER INFORMATION CONTACT:

Charles W. Parrott, Acting Chief, PACA Branch, Fruit and Vegetable Programs, AMS, USDA, Room 2095, So. Bldg., P.O. Box 96456, Washington, DC 20090-6456, phone (202) 720-2272. Email—charles.parrott@usda.gov.

SUPPLEMENTARY INFORMATION:

This regulation is issued under authority of section 15 of the PACA (7 U.S.C. 499o).

Background

The Perishable Agricultural Commodities Act (PACA or Act) establishes a code of fair trade practices covering the marketing of fresh and frozen fruits and vegetables in interstate and foreign commerce. The PACA protects growers, shippers, distributors, and retailers dealing in those commodities by prohibiting unfair and fraudulent trade practices. In this way, the law fosters an efficient nationwide distribution system for fresh and frozen fruits and vegetables, benefiting the whole marketing chain from farmer to consumer. USDA's Agricultural Marketing Service (AMS) administers and enforces the PACA.

Any person who buys or sells commercial quantities of fruits and vegetables in interstate or foreign commerce must be licensed under the PACA. Under the Act and regulations, the term “person” means any individual, partnership, corporation, association, or separate legal entity. 7 USC 499a(b)(1); 7 CFR 46.2(i). Separate licenses are required for each person. A person is designated as “responsibly connected” with a firm under the PACA if that person is affiliated as an owner, as a partner in a partnership, or as an officer, director or holder of more than 10 percent of the outstanding stock of a corporation or association. 7 USC 499a(b)(9); 7 CFR 46.2(ff). In the event that a licensee is found to have violated the Act and USDA suspends or revokes the firm's license, then the licensee and its “responsibly connected” principals face PACA licensing and employment restrictions which may include the denial of a license, a prohibition on employment with another PACA licensee, or the requirement that a bond be posted as a prerequisite to licensing or employment in the fruit and vegetable industry. 7 USC 499h.

Previously, the PACA regulations did not specifically define a limited liability company as a “person,” although USDA policy was to recognize an LLC as a separate legal entity, just as LLC's are recognized in most states, subject to licensing under the PACA. The regulatory amendments herein codify that policy by expanding the current regulations to include LLC's under the PACA, especially with regard to the licensing of LLC's and the responsibly connected status of LLC members and managers.

Comments

A proposed rule to amend PACA regulations was published in the Federal Register on October 25, 1999 (64 FR 57405). The proposal sought to amend several of Title 7, Part 46, to recognize an LLC as a legal entity, and also to recognize each member of an LLC, and/or any other person authorized by the members to conduct business on behalf of an LLC, as “responsibly connected” with the LLC, as defined in the PACA. The proposal also sought revision of an information collection previously approved by the Office of Management and Budget (OMB). AMS received no comments, and therefore, is making no changes to the final rule.

Executive Orders 12866 and 12988

This final rule is issued under the Perishable Agricultural Commodities Act (7 U.S.C. 499 et seq.), as amended, and has been determined to be not significant for the purposes of Executive Order 12866, and therefore, has not been reviewed by OMB.

This final rule has been reviewed under Executive Order 12988, Civil Justice Reform and is not intended to have retroactive effect. This final rule will not preempt any State or local laws, regulations, or policies, unless they present an irreconcilable conflict with this rule. There are no administrative procedures that must be exhausted prior to any judicial challenge to the provisions of this rule.

Effects on Small Businesses

Pursuant to requirements set forth in the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq., USDA has considered the economic impact of this final rule on small entities. The purpose of the RFA is to fit regulatory actions to the scale of businesses subject to such actions in order that small businesses will not be unduly or disproportionately burdened. Small agricultural service firms have been defined by the Small Business Administration (13 CFR 121) as those with less than 500 employees. The PACA requires all businesses that operate subject to its provisions to maintain a license issued by USDA. There are approximately 15,700 PACA licensees, the majority of which may be classified as small entities.

The amendments to the PACA regulations recognize a limited liability company (LLC) as a legal entity under the PACA regulations, and revise the definition of “responsibly connected” under the regulations to include any member of an LLC, and/or any other person authorized by the members to conduct business on behalf of an LLC. The LLC business structure has become widely accepted throughout the United States as a new legal entity and these regulatory amendments clarify how USDA deals with these entities and their principals under the PACA.

Like a sole proprietorship, partnership, corporation, or any other separate legal entity, a LLC, whether a small or large business, must obtain and maintain a valid PACA license if it buys or sells commercial quantities of fruits and vegetables in interstate or foreign commerce. AMS believes that this final rule will have no more impact on an LLC than the current PACA regulations have on sole proprietorships, partnerships, associations, or corporations operating subject to the PACA, whether large or small.

Since LLC's are required to be licensed under the PACA as a “separate legal entity,” they are subject to disciplinary actions by USDA for violating the PACA and regulations. Therefore, these regulatory amendments mainly impact those persons USDA considers as “responsibly connected” with the LLC. If USDA suspends or revokes a firm's license for PACA violations, the firm and any person found “responsibly connected” with the firm are restricted for a certain period of time from holding a PACA license or from being employed with another PACA licensee. These restrictions apply to any firm which has been found to have violated the PACA, regardless of the firm's size or type of ownership.

Given the preceding discussion, AMS has determined that the provisions of this final rule would not have a significant economic impact on a substantial number of small entities.

Paperwork Reduction Act

In compliance with Office of Management and Budget (OMB) regulations (5 CFR part 1320) which implement the Paperwork Reduction Act of 1995 (Pub. L. 104-13), the information collection and record keeping requirements covered by this final rule were approved by OMB on November 29, 1999, and expire on April 30, 2001.

List of Subjects in 7 CFR Part 46

• Agricultural commodities
• Brokers
• Penalties
• Reporting and recordkeeping requirements

For the reasons set forth in the preamble, 7 CFR part 46 is amended as follows:

PART 46—[AMENDED]

1. The authority citation for part 46 continues to read as follows:

Authority: Sec. 15, 46 Stat. 537; 7 U.S.C. 499o.

2. In § 46.2, paragraphs (i) and (ff) are revised to read as follows:

3. § 46.4 is amended as follows:

a. Paragraphs (b)(3) and (b)(4) are revised,

b. Paragraphs (b)(6)(ii) and (b)(6)(iii) are removed,

c. Paragraph (b)(6)(iv) is redesignated as paragraph (b)(6)(ii) and revised,

d. Paragraphs (b)(6)(v) and (b)(6)(vi) are redesignated as paragraphs (b)(6)(iii) and (b)(6)(iv), and

e. The introductory text of paragraph (b)(6), and paragraph (c) are revised to read as follows:

4. In § 46.11, the first sentence is revised to read as follows:

5. In § 46.13, paragraphs (a)(2) and (a)(5) are revised to read as follows: