S & H Packing & Sales Co. v. Tanimura Distributing, Inc.
883 F.3d 797
9th Cir.2018Background
- Growers sold perishable produce to distributor Tanimura on credit; PACA creates a statutory trust in favor of unpaid growers covering the commodities, inventories, receivables, and proceeds.
- Tanimura sold produce to retailers on credit, generating accounts receivable that PACA treats as trust assets.
- Tanimura transferred those receivables to AgriCap under a written "Factoring and Security Agreement" that contained features of both a sale and a secured loan (AgriCap called itself “Lender,” took broad security interests, filed UCC statements, had repurchase/recourse provisions, and paid ~80% up front).
- Tanimura became insolvent and did not fully pay the Growers; Growers sued AgriCap alleging the transfers were not true sales but secured loans, so the receivables remained PACA trust assets and AgriCap must disgorge proceeds.
- The Ninth Circuit (en banc) adopted a two-step framework: (1) a threshold true-sale inquiry (transfer-of-risk is a primary factor); (2) if a true sale, then assess commercial reasonableness; if not a true sale, inquiry ends and assets remain in the trust. Boulder Fruit was overruled to the extent it suggested courts need only assess commercial reasonableness.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether courts must conduct a threshold true-sale inquiry before assessing commercial reasonableness of a transaction transferring PACA trust assets | Palmer: Courts should apply a threshold true-sale/transfer-of-risk test — if risk of nonpayment did not move to the transferee, transaction is a secured loan and assets remain trust property | AgriCap: Under Boulder Fruit, a trustee may remove trust assets by any commercially reasonable means; only commercial reasonableness matters | Held: Adopted a two-step test. Courts must first apply a threshold true-sale inquiry (transfer-of-risk is a key factor). If true sale, then evaluate commercial reasonableness. Overruled Boulder Fruit to the extent inconsistent. |
| Effect of characterizing the transaction as a loan vs a sale on beneficiaries' rights and remedy (disgorgement) | Palmer: If transaction is a secured loan, accounts and proceeds remain trust assets; transferee who receives trust assets in breach must disgorge proceeds to satisfy unpaid growers | AgriCap: Commercially reasonable transactions (including loans used to benefit trust) do not automatically create liability; trust law permits trustees to borrow and repay so long as terms are reasonable | Held: If transaction is a secured loan (not a true sale), assets remain in the trust and the transferee can be liable if the transfer constitutes a breach; if true sale and commercially reasonable, buyer takes free of trust. Determination of damages/remedies left to district court on remand. |
Key Cases Cited
- Boulder Fruit Express & Heger Organic Farm Sales v. Transp. Factoring, Inc., 251 F.3d 1268 (9th Cir. 2001) (held commercially reasonable factoring can be consistent with PACA; partially overruled here)
- Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063 (2d Cir. 1995) (articulated transfer-of-risk/true-sale analysis for accounts receivable transfers under PACA)
- Nickey Gregory Co. v. AgriCap, LLC, 597 F.3d 591 (4th Cir. 2010) (applied transfer-of-risk factors and held purchaser liable where arrangement was functionally a loan)
- Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336 F.3d 410 (5th Cir. 2003) (examined substance over labels; characterized factoring that retained risk with seller as secured loan)
- Sunkist Growers, Inc. v. Fisher, 104 F.3d 280 (9th Cir. 1997) (trust assets are excluded from trustee’s bankruptcy estate; general PACA trust principles)