I. Background
This case concerns the Perishable Agricultural Commodities Act (PACA), 7 U.S.C. §§ 499a-499t (2000). Appellants
When Certified defaulted in its payments to the growers, the growers sued not only Certified but also Transfac. Why Transfac? The growers allege that Certified’s factoring of its accounts to Transfac breached a statutory trust created by PACA for the benefit of the growers. They allege that Certified was to have held the accounts receivable in trust for the growers until the growers were paid for
On motion for summary judgment, the district court granted summary judgment for Transfae and Capital Funding. The court ruled that because Transfae had paid Certified more for the accounts ($3,297 million) than Transfae collected on them ($3,278 million), albeit less than the face value of the accounts ($4.7 million), Certified’s factoring of its accоunts did not breach the trust. In other words, because Transfae bought the accounts for at least what they were worth, maybe more, the factoring arrangement did not dissipate trust assets, and therefore, Transfae cannot bе found to have acquired the accounts in breach of the trust.
The district court entered judgment in favor of Transfae and Capital Resource Funding pursuant to Fed.R.Civ.P. 54(b). Other claims against Certified and John Messing, Certified’s principal, were not resolved by the summary judgment motion.
We have jurisdiction under 28 U.S.C. § 1291, and review the district court’s grant of summary judgment de novo. Balint v. Carson City,
II. Discussion
A. PACA.
Congress enacted PACA in 1930 to prevent unfair business practices and promote financial responsibility in the frеsh fruit and produce industry. See Sunkist Growers, Inc. v. Fisher,
Perishable agricultural commodities received by а commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full pаyment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents.
Id. at § 499e(c)(2); see also 7 C.F.R. § 46.46 (2000). As explained by the Second Circuit:
This provision imposes a “non-segregated floating trust” on the commodities and them derivatives, and permits the commingling of trust assets without defeating the trust. Through this trust, the sellers of the commodities maintain a right to recover against the purchasers superior to all creditors, including secured creditors.
Endico Potatoes, Inc. v. CIT Group/Factoring, Inc.,
By the express language of PACA, the trust applies to receivables generated by the sale of commodities, just as it does to the commodities themselves. 7 U.S.C.
That’s the easy case. The issue today concerns factoring, the commercial practice of converting receivables into cаsh by selling them at a discount. BLACK’S LAW DICTIONARY (7th ed.1999). The question before us is whether Certified breached the PACA trust by selling its accounts to Transfac pursuant to the factoring agreement.
We apply general trust principles to questions involving the PACA trust, unless thоse principles directly conflict with PACA. Sunkist,
Cоmmission merchants, dealers and brokers are required to maintain trust assets in a manner that such assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities. Any act or оmission which is inconsistent with this responsibility, including dissipation of trust assets, is unlawful and in violation of [PACA],
7 C.F.R. § 46.46(d)(1). The regulations further define “dissipation” as “any act or failure to act which could result in the diversion of trust assets or which could prejudice or impair the ability of unpaid suppliers, sellers, or agents to recover money owed in connection with produce transactions.” Id. § 46.46(a)(2).
B. Factoring agreements do not per se breach the PACA trust.
In this case, the growers аrgue that factoring agreements per se breach the PACA trust because, by definition, they contemplate the sale of trust receivables at less than their face value. However, nothing in PACA or the regulations prohibits PACA trustees from attempting to turn receivables into cash by factoring. To the contrary, a commercially reasonable sale of accounts for fair value is entirely consistent with the trustee’s primary duty under PACA and 7 C.F.R. § 46.46(d)(1) — to maintain trust assеts so that they are “freely available to satisfy outstanding obligations to sellers of perishable commodities.” The goal of PACA, after all, is not the perpetuation of unliquidated commercial paper, but to assure that growers are paid for their commodities. H.R.Rep. No. 98-543, at 3 (1983), reprinted in 1983 U.S.C.C.A.N. 405, 406; Sunkist,
Our view that factoring agreements do not per se violate the PACA trust is consistent with general trust principles. Generally, a trustee can sell trust assets unless the sale breaches the trust. RESTATEMENT (SECOND) OF TRUSTS § 190. Whether a transferee of trust assets is a bona fide purchaser becomes relevant only as a defense after it has been determined that a breach of trust has occurred. See id. at § 284(1); Albee Tomato, Inc. v. A.B. Shalom Produce Corp.,
C. This particular factoring arrangement did not breach the PACA trust.
Appellant growers argue in the alternative that, even if factoring agreements do not per se violate PACA, thе factoring agreement in this case breached the trust by dissipating the trust assets because Transfac did not pay face value for the receivables. Transfac responds that the factoring arrangement here аctually enhanced the trust because it was commercially reasonable. We agree with Transfac.
The factoring agreement allowed Certified to convert invoices that were not payable for 30 days (inсluding uncollectible and invalid invoices) into cash that Certified could have used to immediately pay growers. Far from dissipating assets, Certified actually received from Transfac $18,482 more for the accounts than the aсcounts would prove to be worth. In any case, a factoring discount of 20% was never shown to be commercially unreasonable.
The growers argue that Certified necessarily admitted a breach of the trust when it admitted thаt it was unable to pay its growers and suppliers of produce. The growers confuse breach of contract with breach of trust. The only question in this case is whether Certified breached its duty as a trustee when it sold the accounts receivable to Transfac. Certified’s contractual obligation to pay is not in issue. To the extent that the growers argue that Transfac, as a transferee of trust assets, is strictly liable to the growers because Certified, the transferor, has failed to pay, we already have held that third parties are not guarantors of the PACA trust. They are liable only if they had some role in causing the breach or dissipation of the trust. Sunkist,
Finally, we agree with the district court that the growers never proved that the trust funds were misapplied in the first place. The growers conceded that they did not knоw how Certified spent the funds it received from Transfac. If, for example, the funds were used to pay off other perishable commodities producers, no breach of the trust would have occurred. This is because the PACA trust, by definition, is а non-segregated floating trust in which assets of other growers can be commingled. 7 U.S.C. § 499e(c).
III. Conclusion
In summary, we hold that factoring does not, per se, breach a PACA trust. We also hold that the particular factoring arrangement in this casе was commercially reasonable and did not breach or otherwise dissipate the trust. The judgment of
Notes
. Appellants include Boulder Fruit Express, Continental Salеs Company, Health & Le-jeune, Heger Organic Farm Sales, Gold, Inc., Natural Selection Foods, LLC., New Harvest Organics, Pacific Organic Produce, S.A., American 4-Star Marketing, Inc., d/b/a Rainbow Valley Orchards, and Sundance Natural Foods.
.Certified is not a party to this appeal and this case was proceeding in district court against Certified and Messing when the notice of appeal was filed.
. Capital Resource Funding's liability, if any, was predicated upon and solely derivative of Transfac’s.