S & H PACKING & SALES CO., INC., DBA Season Produce Co., a California corporation, Plaintiff, and G. W. PALMER & CO., INC.; ANDREW & WILLIAMSON SALES CO., INC., DBA Andrew & Williamson Fresh Produce; EAST COAST BROKERS AND PACKERS, INC.; GARGIULO, INC., Plaintiffs-Appellants, v. TANIMURA DISTRIBUTING, INC., a California corporation, Defendant, and AGRICAP FINANCIAL CORPORATION, a Delaware corporation, Defendant-Appellee.
No. 14-56059
United States Court of Appeals, Ninth Circuit
February 22, 2018
D.C. No. 2:08-cv-05250-GW-FFM; Argued and Submitted En Banc September 20, 2017
S & H PACKING & SALES CO., INC., DBA Season Produce Co., a California corporation, Plaintiff, and APACHE PRODUCE CO., INC., DBA Plain Jane, an Arizona corporation; O.P.MURPHY PRODUCE CO., INC., DBA Murphy & Sons, a Texas corporation; OCEANSIDE PRODUCE, INC., a California corporation; WILSON PRODUCE, LLC, an Arizona Limited liability company; FRANK DONIO, INC.; ABBATE FAMILY FARMS LIMITED PARTNERSHIP; J.P.M. SALES CO., INC., an Arizona corporation, Plaintiffs-Appellants, THOMSON INTERNATIONAL, INC., assignee, Tanimura Distributing, Inc., Creditor-Appellant, v. TANIMURA DISTRIBUTING, INC., Defendant, and AGRICAP FINANCIAL CORPORATION, a Delaware corporation, Defendant-Appellee.
No. 14-56078
United States Court of Appeals, Ninth Circuit
D.C. No. 2:08-cv-05250-GW-FFM
Argued and Submitted En Banc September 20, 2017 San Francisco, California
Filed February 22, 2018
Before: Sidney R. Thomas, Stephen Reinhardt, M. Margaret McKeown, Kim McLane Wardlaw, William A. Fletcher*, Ronald M. Gould, Consuelo M. Callahan, Sandra S. Ikuta, Jacqueline H. Nguyen, Andrew D. Hurwitz and Michelle T. Friedland, Circuit Judges.
Opinion by Judge Gould; Dissent by Judge Ikuta
Perishable Agricultural Commodities Act
The en banc court vacated the district court’s summary judgment in favor of defendant AgriCap Financial Corp. in an action brought by produce growers under the Perishable Agricultural Commodities Act, and remanded for further proceedings.
The growers sold their perishable agricultural products on credit to Tanimura Distributing, Inc., a distributor, which made Tanimura a trustee over a PACA trust holding the perishable products and any resulting proceeds for the growers as PACA-trust beneficiaries. Tanimura sold the products on credit to third parties and transferred the resulting accounts receivable to AgriCap through a transaction AgriCap described as a “Factoring Agreement” or sale of accounts. Tanimura’s business later failed, and the growers did not receive payment in full from Tanimura for their products.
The growers sued AgriCap, alleging: (1) that the Factoring Agreement was merely a seсured lending arrangement structured to look like a sale; (2) that the accounts receivable and proceeds, therefore, remained trust property under PACA; (3) that because the accounts receivable remained trust property, Tanimura breached the PACA trust and AgriCap was complicit in the breach; and (4) that under PACA the PACA-trust beneficiaries,
Joining other circuits, the en banc court adopted a threshold “true sale” test to determine whether assets transferred in transactions that are labeled “sales” remain assets of a PACA trust. The en banc court held that a court must conduct a two-step inquiry when determining whether the questioned transaction is a sale or creates a security interest, i.e., a loan. First, a court must apply a threshold true sale test of which the transfer-of-risk is a key, but not the sole, factor. If a court concludes that there was a true sale, it must then determine if the transaction was commercially reasonable. To the extent that its opinion contradicted Boulder Fruit Express & Heger Organic Farm Sales v. Transp. Factoring, Inc., 251 F.3d 1268 (9th Cir. 2001), the en banc court overruled Boulder Fruit.
On remand, the district court should determine whether the transaction at issue was a true sale or a lending agreement.
Dissenting, Judge Ikuta, joined by Judges Hurwitz and Friedland, wrote that the majority’s conclusion—that if a PACA trustee borrows money from a lender in order to pay the growers, but the money runs out before all the growers are paid, then the lender has an obligation to make the unpaid growers whole—is unmoored from both the text of PACA and settled principles of trust law.
Louis W. Diess III (argued) and Mary Jean Fassett, McCarron & Diess, Washington, D.C., for Plaintiffs-Appellants G.W. Palmer & Co., Inc.; Gargiulo, Inc.; Andrew & Williamson Sales Co., Inc.; and East Coast Brokers & Packers, Inc.
Robert Porter Lewis, Jr., Law Office of Robert P. Lewis Jr., South Pasadena, California; Bradley L. Cornell, Cornell Law Firm, Pasadena, California, for Plaintiffs-Appellants Apache Produce Co., Inc; O.P. Murphy Produce Co., Inc.; Oceanside Produce, Inc.; Wilson Produce, LLC; Frank Donio, Inc.; Abbate Family Farms Limited Partnership; JPM Sales Co., Inc.; and Thomson International, Inc.
Cristoph Carl Heisenberg (argued), Hinckley & Heisenberg LLP, New York, New York, for Defendant-Appellee AgriCap Financial Corporation.
GOULD, Circuit Judge:
Appellant produce growers (“Growers”)1 sold their perishable agricultural products on credit to a distributor, Tanimura Distributing, Inc. (“Tanimura”). Under the Perishable Agricultural Commodities Act (“PACA”),
Although described as a sale of accounts, the Factoring Agreement involved some hallmarks of a secured lending arrangement: AgriCap referred to itself as “Lender,” and the written agreement was entitled “AgriCap Financial Corporation Factoring and Security Agreement.” Further, AgriCap was granted security interests in accounts receivable and all other asset classes except inventory; UCC financing statements were filed; other debts were subordinated; and there was a measure of recourse for
The central dispute in this case developed after Tanimura’s business failed, and Growers did not receive full payment from Tanimura for their produce.3 Growers sued AgriCap alleging: (1) that the Factoring Agreement was merely a secured lending arrangement structured to look like a sale; (2) that the accounts receivable and proceeds, therefore, remained trust property under PACA; (3) that because the accounts receivable remained trust property, Tanimura breached the PACA trust and AgriCap was complicit in the breach; and (4) that under PACA the PACA-trust beneficiaries, including Growers, held an interest superior to that of any secured lender. Hence, AgriCap was liable to Growers to repay the value of the accounts receivable.
AgriCap moved for summary judgment arguing that, under Boulder Fruit Express & Heger Organic Farm Sales v. Transportation Factoring, Inc., 251 F.3d 1268 (9th Cir. 2001), a trustee is allowed to remove assets from the trust in any commercially reasonable way without breaching the trust. And, it argued, the factoring agreement was commercially reasonable, like the one upheld in Boulder Fruit. Growers acknowledged that a PACA trustee generally may sell PACA-trust assets on commercially reasonable terms without breaching trust duties. They
On appeal, Growers argued to the three-judge panel that we are not bound by Boulder Fruit because Boulder Fruit did not discuss the transfer-of-risk test, leaving open the question of whether that test should apply in the Ninth Circuit. AgriCap countered by contrast with its argument that Boulder Fruit settled the issue because the PACA-trust beneficiaries in Boulder Fruit asked the Court to apply the transfer-of-risk test; the parties in that case briefed the issue; the issue was squarely before the Court; and yet, the Court did not apply the test.
The three-judge panel agreed with the district court’s conclusion that Boulder Fruit controlled the outcome in this case. S & H Packing & Sales Co., Inc. v. Tanimura Distrib.,Inc., 850 F.3d 446, 450–51 (9th Cir.), reh’g en banc granted, 868 F.3d 1047 (9th Cir. 2017); see Arizona v. Tohono O’odham Nation, 818 F.3d 549, 555 (9th Cir. 2016); see also United States v. Lucas, 963 F.2d 243, 247 (9th Cir. 1992) (noting that subsequent panels are bound by prior panel decisions and only the en banc court may overrule panel precedent). The three-judge panel reasoned that had the Boulder Fruit court not implicitly rejected the transfer-of-risk test, the holding of the case necessarily would have been different. Judge Melloy wrote a separate concurring opinion suggesting that the Ninth Circuit, sitting en banc, should eliminate a circuit split and expressly adopt a separate threshold transfer-of-risk test joining several other circuits. S & H Packing & Sales Co., 850 F.3d at 451 (Melloy, J., concurring).7 A majority of the active judges on this Court agreed to rehear this appeal en banc.
I
We have jurisdiction under
II
Although the parties ask us to answer many particularized questions on appeal, we resolve only one issue: whether, in the context of determining the assets
III
We elaborate on the principles just summarized, with reference to pertinent authorities and reasoning.
A
“Congress enacted PACA in 1930 to prevent unfair business practices and promote financial responsibility in the fresh fruit and produce industry.” Boulder Fruit, 251 F.3d
Perishable agricultural commodities received by a 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 payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents.
The House Report explaining the 1984 PACA amendments states:
[Purchasers/Distributors of perishable agricultural commodities] in the normal
course of their business transactions, operate on bank loans secured by the inventories, proceeds or assigned receivables from sales of perishable agricultural commodities, giving the lender a secured position in the case of insolvency. Under present law, sellers of fresh fruits and vegetables are unsecured creditors and receive little protection in any suit for recovery of damages where a buyer has failed to make payment as required by contract.
H.R. Rep. No. 98-543 at *3 (1984), as reprinted in 1984 U.S.C.C.A.N. 405, 407. The Second Circuit, citing this report, explained:
According to Congress, due to the need to sell perishable commodities quickly, sellers of perishable commodities are often placed in the position of being unsecured creditors of companies whose creditworthiness the seller is unable to verify. Due to a large number of defaults by the purchasers, and the sellers’ status as unsecured creditors, the sellers recover, if at all, only after banks and other lenders who have obtained security interests in the defaulting purchaser’s inventories, proceeds, and receivables.
Endico Potatoes, 67 F.3d at 1067. Given this history, it is evident that our focus should be upon the true nature of the transactions at issue and the true nature of the parties’ roles—that of seller and buyer or that of secured lender and borrower.
B
We apply general trust principles to questions involving PACA trusts, unless those principles directly conflict with PACA. Boulder Fruit, 251 F.3d at 1271; see also Endico Potatoes, 67 F.3d at 1067; Reaves, 336 F.3d at 413. Because ordinary principles of trust law apply to trusts created under PACA, trust assets are excluded from the bankruptcy estate if the PACA trustee goes bankrupt. Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 282 (9th Cir. 1997).
A breach of trust occurs when there is “a violation by the trustee of any duty which as trustee he owes to the beneficiary.” Boulder Fruit, 251 F.3d at 1271 (quoting Restatement (Second) of Trusts § 201 (1959)). A trustee is required by federal regulation “to maintain trust assets in a manner that such assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities.” Id. (quoting
C
Against this industry and legal background, a PACA trustee’s true sale of accounts receivable for a commercially reasonable discount from the accounts’ face value is not a dissipation of trust assets and, therefore, is not a breach of the PACA trustee’s duties. Nickey Gregory, 597 F.3d at 598 (“The assets of the trust would thus have been converted into cash and the receivables would no longer have been trust assets. Obviously, under this scenario, [the factoring agent] would own the accounts receivable and would be able to do with them what it wished.”); Reaves Brokerage, 336 F.3d at 413–14 (holding that “a ‘bonafide purchaser’ of trust assets receives the assets free of claims by trust beneficiaries” and noting that the determinative issue on appeal is whether the “factoring agreement” was a loan secured by accounts receivable or a true sale of accounts receivable); Boulder Fruit, 251 F.3d at 1271–72 (“[N]othing 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.”); Endico Potatoes, 67 F.3d at 1067–69 (noting that “the well recognized principle from trust law that a bona fide purchaser of trust assets receives the assets free of any claim
The Second, Fourth, and Fifth Circuits have held that any purported security interest for a lender in PACA-trust assets is inferior to the trust beneficiaries’ claims and rights. See, e.g., Nickey Gregory, 597 F.3d at 598–99 (“Thus, if the accounts receivable were held by [the factoring agent] as collateral to secure repayment of a loan, they would also have been held for the benefit of produce sellers, and the produce sellers would have еffectively enjoyed a first-creditor position in them.”); Endico Potatoes, 67 F.3d at 1069 (“Because [the factoring agent] held only a security interest . . . its interest is subject to the rights of the PACA trust beneficiaries. . . . [The factoring agent] must, therefore, disgorge amounts collected on the accounts after [the distributor’s] bankruptcy filing to the extent necessary to satisfy claims of PACA trust beneficiaries.”); A&J Produce, 542 F.3d at 58 (“A creditor holding ‘only a security interest,’ therefore, retains that interest ‘subject to the rights of the trust beneficiaries.’”). Notwithstanding the absence of discussion of a “true-sale” or “transfer-of-risk” test, even Boulder Fruit made clear that a lender’s use of PACA-trust assets as collateral to secure a debt could not create a priority security interest ahead of the position enjoyed by PACA trust beneficiaries.8
IV
The treatment of true sales and security interests under PACA and trust law is reasonably clear. But what is at issue here, and is not perfectly clear, is the proper analysis to apply when the true nature of the transaction is ambiguous—i.e., when it resembles a sale in some respects and yet looks like a secured transaction in others. Growers and the Second, Fourth, and Fifth Circuits would apply a threshold transfer-of-risk test to determine if a transaction is a true sale or is more accurately viewed as a secured lending relationship. AgriCap, relying on Boulder Fruit, argues vigorously that the court need only ask if the transaction was commercially reasonable.
A
Boulder Fruit held that factoring agreements do not per se breach the PACA trust because “a trustee can sell trust assets unless the sale breaches the trust.” 251 F.3d at 1272. The court concluded that “a commercially reasonable sale of accounts for fair value is entirely consistent with the trustee’s primary duty under PACA and
The Boulder Fruit panel, in reaching its conclusion, said that the factoring agreement “actually enhanced the trust.” Id. at 1272. Boulder Fruit considered not only the initial up-front payment from the factoring agent to the distributor but also the actual sums paid to the distributor by the factoring agent while performing the factoring agreement.9 Id. Boulder Fruit did not, however, examine the substance of the rights transferred to determine what the factoring agent agreed to do, what risk the factoring agent accepted when it accepted the right to collect on the transferred accounts, and whether the transaction should properly be deemed a true sale rather than a mere secured lending arrangement. Rather, Boulder Fruit characterized the transaction as a sale or factoring agreement without discussing the factoring agent’s rights and ability to seek recourse against the distributor.
In sharp contrast, the Second, Fourth, and Fifth Circuits found it necessary to examine the rights and risks transferred between the parties to a factoring agreement. The courts in
The Endico Potatoes court resolved a case wherein Merberg, a deаler in perishable agricultural commodities received financing from CIT, and CIT held security interests in all Merberg’s assets including accounts receivable. 67 F.3d at 1066. Merberg went through a bankruptcy and the growers sought reimbursement from CIT for the amounts left unpaid. Id. The court defined the issue before it as whether the transaction between CIT and Merberg constituted a purchase for value or whether the exchange gave CIT no more than a security interest. Id. at 1068. The court reasoned, “[i]n determining the substance of the transaction, the Court may look to a number of factors, including the right of the creditor to recover from the debtor any deficiency if the assets assigned are not sufficient to satisfy the debt, the effect on the creditor’s right to the assets assigned if the debtor were to pay the debt from independent funds, whether the debtor has a right to any funds recovered from the sale of assets above that necessary to satisfy the debt, and whether the assignment itself reduces debt.” Id. That court found, “[t]he root of all of these factors is the transfer of risk.” Id. at 1069. The court relied upon the fact
A question may be raised whether the Second Circuit no longer espouses the view that the substance of an agreement must be analyzed when determining the rights of the parties. In E. Armata, Inc. v. Korea Commercial Bank of New York, 367 F.3d 123, 126 (2d Cir. 2004), the Second Circuit considered whether, under PACA, a bank was liable to the beneficiaries of a PACA trust for receipt of funds when the bank extended revolving overdraft privileges to the produce dealer and applied deposited PACA funds to reduce the negative balance in the produce dealer‘s overdrawn account. Id. The court, in concluding that the bank was not liable tо PACA trust beneficiaries, reasoned that the bank did not breach the trust. Id. at 131; see also American Banana Co., Inc. v. Republic Nat‘l Bank of NY, N.A., 362 F.3d 33, 42 (2d Cir. 2004) (“Nor are we convinced that a trustee‘s payments of commercially reasonable fees and interest in exchange for routine banking services such as check cashing services and overdraft privileges extended to facilitate payments to beneficiaries constitute a breach of the PACA trust.“). The Second Circuit in its E. Armata decision, while it cited Boulder Fruit for specified purposes,10 did not purport to overrule Endico Potatoes or to limit it.
In Reaves, the Fifth Circuit considered a case where Reaves, a produce seller, sold produce to Sunbelt Fruit & Vegetable Company, a wholesaler, and Sunbelt ceased operations owing Reaves almost $200,000 in unpaid invoices. 336 F.3d at 412. Reaves sued Fidelity Factors, LLC, because Fidelity had purchased particular accounts receivable from Sunbelt. Id. The court framed the issue before it as whether the “factoring agreement” between Sunbelt and Fidelity was a loan secured by accounts receivable or a sale of accounts receivable. Id. at 414. The court reasoned that the “[c]haracterization of the agreement turns on the ‘substance of the relationship’ between Fidelity and Sunbelt, ‘not simply the label attached to the transaction.‘” Id. The court looked to the Second Circuit‘s risk-transfer analysis and also conducted an independent
In Nickey Gregory, the Fourth Circuit addressed a case where Robison Farms, a distributor of produce, bought produce from growers on short-term credit, and distributed the produce to restaurants and school systems on credit creating accounts receivable. 597 F.3d at 596. When Robison Farms began experiencing financial difficulties it sought a line of credit from AgriCap and assigned the accounts receivable to AgriCap in exchange for an advance of 80% of the face value of the accounts. Id. AgriCap collected the accounts receivable, kept the 80% for itself, and remitted the remaining 20% to Robison Farms minus fees and interest. Id. Notwithstanding the credit agreement, Robison Farms closed its doors without paying the growers what was owing and filed for bankruptcy. Id. at 596-97. The court framed the issue before it as whether the district court erred in concluding that AgriCap‘s transaction was a loan agreement. Id at 600. The Fourth Circuit upheld the
The Fourth Circuit distinguished Boulder Fruit concluding that in Boulder Fruit there was a “true factoring relationship, in which the receivables were actually sold to the factor.” Id. at 604. The Fourth Circuit found that Boulder Fruit did not question whether there had actually been a sale. Id. at 604.
The weight of authority and reasoning in the Second, Fourth and Fifth Circuit cases suggest that “transfer of risk” and “true sale” considerations should be assessed before considering commercial reasonableness when considering the propriety of a transfer of trust assets. We conclude that
B
Given the remedy that Congress created to alleviate the perceived problem of conflict in rights of agricultural growers and secured lenders—creation of the trust elevating сommodities sellers’ interests over lenders’ interests—Congress‘s clear concern with the relative interests of secured lenders and commodities sellers, and the general contours of trust law—in particular, a trustee‘s ability to sell or convert trust assets—courts must focus on the true substance of PACA-related transactions and not on artificial indicators or labels. It runs counter to PACA and its history to allow the simple use of the words “sale,” “purchase,” or “factoring agreement” to be central for purposes of assessing the relative rights of lenders and produce growers.
AgriCap at oral argument asserted that the AgriCap transaction benefitted Growers as AgriCap paid Tanimura more than the 80% discount on the accounts receivable and never used the recourse provision. The Second, Fourth, and Fifth Circuits conclude, however, that a transfer of the primary or direct risk of non-payment on the accounts is the hallmark of a true sale. Nickey Gregory, 597 F.3d at 601-03; Reaves Brokerage, 336 F.3d at 417; Endico Potatoes, 67 F.3d at 1068-69. See also In re Arctic Exp. Inc., 636 F.3d 781, 800 (6th Cir. 2011) (“The rationale of the Fourth Circuit‘s decision in Nickey Gregory is transferable to the case at bar, which involves a similar revolving loan agreement secured by Arctic‘s accounts receivable.“). These courts and PACA regulations assess trust asset encumbrance in terms of what a factoring agreement could authorize and not in terms of what money was actually paid
In assessing whether a true sale occurred, the Fourth Circuit adopted the transfer-of-risk test developed by the Second Circuit in Endico Potatoes. Nickey Gregory, 597 F.3d at 600-03. There, the Second Circuit distinguished between direct risk and secondary or derivative risk. Endico Potatoes, 67 F.3d at 1068-69. The Endico court said that it was appropriate to examine several factors such as “[1] the right of the creditor to recover from the debtor any deficiеncy if the assets assigned are not sufficient to satisfy the debt, [2] the effect on the creditor‘s right to the assets assigned if the debtor were to pay the debt from independent funds, [3] whether the debtor has a right to any funds recovered from the sale of assets above that necessary to satisfy the debt, and [4] whether the assignment itself reduces the debt.” Endico Potatoes, 67 F.3d at 1068. The court in Endico Potatoes concluded: “The root of all of these factors is the transfer of risk.” Id. at 1069. Finally, the court there summarized:
Where the lender has purchased the accounts receivable, the borrower‘s debt is extinguished and the lender‘s risk with regard to the performance of the accounts is direct, that is, the lender and not the borrower bears the risk of non-performance by the account debtor. If the lender holds only a security interest, however, the lender‘s risk is derivative or secondary, that is, the borrower
remains liable for the debt and bears the risk of non-payment by the account debtor, while the lender only bears the risk that the account debtor‘s non-payment will leave the borrower unable to satisfy the loan.
Id. (emphasis in original).
We conclude that this transfer-of-risk test should be applied to avoid reliance on labels in factoring agreements that would defeat the purposes of PACA. As Judge Melloy reasoned in his separate concurrence in the three-judge panel‘s decision: “A factoring agent who accepts risk of non payment on the transferred accounts is the owner of the accounts, for better or worse . . . [internal citation omitted]. That risk will be reflected in the price. A factoring agent who functionally serves only as a lender and collection firm, however, accepts accounts for collection but enjoys the right to force the distributor to repurchase non-performing accounts. Such a factoring agent faces much less risk—risk measured only by the limitations on the repurchase provisions and by the distributor‘s solvency and ability to perform under the agreement.” S & H Packing & Sales Co., 850 F.3d at 457. The price paid for the accounts with and without recourse will differ.
AgriCap nevertheless argues that adoption of the transfer-of-risk test would lead to absurd results in which a factoring agent remains liable to growers even though the factoring agent‘s payments to a distributor were sufficient, in theory, for the distributor to pay growers. AgriCap is wrong to describe such a scenario as absurd. It is instead the result of a congressional policy choice. There is an analogy in the relationship between general contractors, subcontractors, and property owners in the context of
Similarly, by placing the burden of due diligence on lenders rather than growers, Congress was well aware of the effect it was imposing on the lending industry. As Judge Melloy previously observed, “Congress concluded, however, that lenders could adapt. The House Committee
The propriety of comparing the PACA situation to mechanics’ liens finds support in an examination of the regulations promulgated under PACA. Again, the reasoning in Judge Melloy‘s concurrence is helpful: “These regulations do not ask whether a factoring arrangement in fact resulted in a transfer of funds sufficient to pay growers throughout the course of performance under a factoring agreement. Rather, the regulations ask whether such an arrangement could impair trust assets. See
Similarly here, Congress has made a clear policy choice giving PACA creditors priority over secured creditors. We must keep PACA‘s purpose in mind when reviewing transactions that may in substance limit that congressional policy.
C
The dissent is not incorrect in asserting that the distinction between a sale and a secured lending agreement does not ordinarily make a difference under general trust principles, so long as the transaction at issue is commercially reasonable. But we respectfully and forcefully disagree that this is true in the context of a PACA trust. See Boulder Fruit, 251 F.3d at 1271 (“[G]eneral trust principles [apply] to questions involving the PACA trust, unless those principles directly conflict with PACA.“).
PACA was enacted to protect trust beneficiaries, who were often in the position of unsecured creditors, from receiving little or nothing when a distributor went bankrupt. See
When there is a secured lending agreement or loan, however, the accounts receivable remain trust assets and are only collateral to the lender. See Nickey Gregory, 597 F.3d at 603. In that context, the trustee under PACA is obligated not to dissipate those trust assets. See id. at 604. As the court in Nickey Gregory correctly concluded, in those circumstances, there is a breach of trust whenever the lender recovers its fee or percentage from the accounts receivable while the trust beneficiaries have not been fully compensated. 597 F.3d at 604; see
Here, whether the transaction at issue was a sale or a loan makes a difference because a sale removes the accounts receivable from the PACA trust while the enforcement of a loan in this case would have breached the PACA trust because AgriCap received its full payment while GW Palmer remained unpaid. Therefore, the district court must dеtermine whether the transaction was in substance a sale or a loan.11
Congress intended PACA to prevent secured lenders from defeating the rights of PACA-trust beneficiaries. The growers in this Circuit will have effectively lost that protection if lenders gain protection by labeling what are in substance security agreements as if they were factoring agreements. The Congressional focus upon the relative rights of these two groups, growers and lenders, is evident. For this reason, before a court assesses the commercial reasonableness of a factoring agreement, it should first examine the substance of a factoring agreement to ensure that a true sale of the accounts receivable has occurred. Absent a true sale, the labels surrounding a factoring agreement should be of little or no consequence. The substance of the transaction controls. If the substance of a transaction reveals a secured lending arrangement rather than a true sale, the accounts receivable remain trust assets. In that case, unpaid trust beneficiaries will hold an interest in accounts receivable and their proceeds superior to all unsecured and secured creditors such that the trust beneficiaries should prevail.12
The dominant consideration here is that the Congress of the United States in its language in the PACA statute and in the policy considerations underlying PACA has made a clear choice that the rights of agricultural growers are to be given priority over the rights of secured lenders through the vehicle of the PACA trust. If Tanimura made a true sale of its receivables to AgriCap, acting as a factor, and if it was for fair value and a commercially reasonable amount, then the
We hold that before considering the commercial reasonableness of a transaction, a court must first apply a threshold true sale test for which the transfer-of-risk is a primary factor.13 To the extent that our en banc opinion today contradicts Boulder Fruit, we overrule Boulder Fruit.
We vacate the judgment of the district court and remand for further proceedings consistent with this opinion.
VACATED and REMANDED.
Each party shall bear their own costs.
Congress enacted the Perishable Agricultural Commodities Act (PACA) trust,
The appeal before us today poses a related scenario: If a PACA trustee borrows money from a lender (using the trust assets as collateral) in order to pay the growers, but the money runs out before all the growers are paid, does the lender have an obligation to make the unpaid growers whole? The majority says yes: if the trustee fails to reimburse the growers, the lender is on the hook. The majority posits that the growers have a priority lien оn their produce, which allows the trust to accept the benefit of a loan agreement but disregard the obligation to repay it. Because this surprising conclusion is unmoored from both the text of PACA and settled principles of trust law, I dissent.
I
Congress initially enacted PACA,
Over time, it became evident that PACA gave growers insufficient protection when distributors went bankrupt. H.R. Rep. No. 98-543, at 3 (1983), as reprinted in 1984 U.S.C.C.A.N. 405, 407. As the House Committee explained in its report on the proposed 1984 Amendments, sales of perishable goods “must be made quickly or they are not made at all.” Id. As a result, produce growers are usually compelled to sell their goods on credit, even though it is “often difficult to make credit checks, conditional sales agreements, and tak[e] other traditional safeguards.” Id.
This led to especially harsh consequences when distributors went bankrupt. Distributors typically operate “on bank loans secured by the inventories, proceeds or assigned receivables from sales of perishable agricultural commodities.” Id. Before Congress intervened, a distributor could give the lender a security interest in all its assets, including the produce it had purchased from growers on credit and accounts receivable it received from the sale of the produce to retailers. If the distributor went bankrupt, the lender would have a secured claim in everything the distributor owned. In contrast, the growers would be “unsecured creditors and receive little protection in any suit for recovery of damages where a buyer has failed to make payment as required by the contract.” Id. The unsecured growers would often receive only cents on the dollar on the distributor‘s unsecured IOUs. See A Bill to Amend the Perishable Agricultural Commodities Act, 1930: Hearing on S. 2052 Before the Subcomm. on Agric. Prod., Mktg. &
In light of this concern, Congress added a trust mechanism to PACA in 1984. H.R. Rep. No. 98-543, at 4. The 1984 Amendments’ operative trust provision,
A
We “apply general trust principles to questions involving the PACA trust, unless those principles directly conflict with
Two key principles of trust law are crucial to understanding the trust mechanism in PACA. First, by making the distributor a trustee and the growers’ produce and the proceeds trust assets, Congress transformed how these assets are treated in bankruptcy. A PACA trustee-distributor wears two hats in a bankruptcy proceeding. All of the debtor‘s own assets are subject to the claims of its creditors. But the trust assets do not belong to the debtor; the distributor as trustee holds only a nonbeneficial, bare legal title to such assets. Restatement (Third) of Trusts § 42
Second, by making the distributor a trustee of the PACA trust, Congress authorized the distributor to manage the produce and any resulting assets for the growers’ benefit, subject to the standards that govern trustees.3 Under basic trust principles, a trustee has the same powers over trust property as any other owner of property, “except as limited by statute or the terms of the trust,” id. § 85; accord
There is an important exception to this rule. If (1) the trustee breaches its fiduciary duties when selling a trust asset or granting a security interest in a trust asset, and (2) the third party is on notice of this breach, the third party does not take the asset or security interest free of the trust. Restatement (Second) of Trusts § 288. Rather, the third party takes the asset in “a constructive trust for the beneficiary of the trust,” id. § 288 cmt. a., and may be compelled to restore the asset
B
The facts in this case must be understood in light of these principles. Tanimura Distributing, Inc. (TDI) was in the business of distributing produce. TDI bought produce on credit from numerous growers, including the plaintiffs in this action (collectively, “Palmer“). TDI then resold this produce to retail outlets, usually on credit. Under a Factoring Agreement, TDI gave Agricap Financial Corp. an interest in
These relationships are easier to understand by using a hypothetical example. Let‘s say Palmer sells four bushels of tomatoes to TDI for $100 on credit. Per PACA, TDI holds the bushels in trust. See
The Factoring Agreement provided AgriCap some protections in exchange for taking the risk that the receivables would not be collectible. Among other things, AgriCap could require TDI to repurchase accounts receivable in certain circumstances, primarily if TDI had made an error in calculating the amount of produce sold to
In sum, TDI received an 80 percent advance on the value of its accounts receivable and would receive up to 97 percent of their face value. Because PACA creates a nonsegregated floating trust, TDI was statutorily authorized to use the money it received from AgriCap to pay all the growers, including Palmer, and with the 80 percent advance on each account receivable, was able to do so with increased speed.
Although the Factoring Agreement states that TDI sold the accounts receivable to AgriCap, it is possible, as the mаjority suggests, to characterize the transaction as a loan. Maj. Op. at 12. If the arrangement is viewed as a loan, TDI, acting as a trustee, has borrowed $160 from AgriCap for the benefit of all the growers (the beneficiaries), and assigned the $200 Safeway account receivable to AgriCap as security for the loan. A lender taking only a security interest in an account receivable would typically not have any ability to collect the account receivable (unless the borrower defaulted). But the Factoring Agreement provides that once the $200 account receivable is assigned to AgriCap, it is the sole entity authorized to collect it. Therefore, to maintain the recharacterization of this transaction as a loan, we must view TDI as authorizing AgriCap to act as its collection agency, in addition to AgriCap‘s role as secured lender. See Nickey Gregory, 597 F.3d at 603 (explaining, in the context of a similar agreement, that if the third party was “not a purchaser of the accounts receivable,” then it was “a lender and collection agent“). As TDI‘s agent, AgriCap collects the $200 that Safeway owed TDI. Those funds are used to pay back the $160 loan to AgriCap, plus a $6 finance fee, leaving
This relationship—however characterized—broke down in August 2008, when TDI failed to pay Palmer amounts owed for its produce. After Palmer sued TDI, the distributor filed for Chapter 7 bankruptcy protection. In re Tanimura Distrib., Inc., No. 2:08-bk-22644-TD (Bankr. C.D. Cal. Aug. 13, 2008), ECF No. 1.
When it declared bankruptcy, TDI owed Palmer roughly $845,000.10 Absent PACA, Palmer would have been an unsecured creditor. Instead, the assets of the PACA trust were available for distribution to Palmer, and TDI‘s secured creditors could not touch them. The administrator of TDI‘s bankruptcy estate thus went about “identifying, recovering, and liquidating the PACA trust assets of [TDI] and preserving those funds for the benеfit of all PACA trust creditors.” Stipulation for Order Establishing PACA Trust Claims Procedure and Surcharge for Administrative Expenses at 11, In re Tanimura Distrib., Inc., No. 2:08-bk-22644-TD, (Bankr. C.D. Cal. Jan. 26, 2009), ECF No. 60 (approved by bankruptcy court, ECF No. 67).11
After TDI‘s bankruptcy filing, Palmer added AgriCap to its complaint in this case, alleging that TDI‘s accounts receivable were PACA trust assets and AgriCap should
II
Under trust law, AgriCap‘s potential liability primarily turns on whether the TDI breached its fiduciary duty. As explained above, if TDI breached its fiduciary duty to Palmer and the growers by entering into the Factoring Agreement or by performing its obligations under the Factoring Agreement, and AgriCap was on notice of the breach, AgriCap would hold any security interest in the trust assets or any proceeds derived from those assets, in a constructive trust for the benefit of the growers.
Because a PACA trustee can give a lender a security interest in trust assets, TDI did not breach its fiduciary duty to the growers merely by entering into the Factoring Agreement. The parties do not argue that the Factoring Agreement is commercially unreasonable; indeed, there would be no basis for doing so. In our example, TDI as trustee would get $194, or 97 percent of the $200 account receivable. This far exceeds the 80 percent return that we have approved in the sale of assets. See Boulder Fruit, 251 F.3d at 1272 (“[A] factoring discount of 20% was never shown to be commercially unreasonable“). And, in the loan scenario, AgriCap is merely acting as a collection agent, and
In short, TDI did not breach its fiduciary duties as trustee when it entered into an agreement under which it received an 80 percent advance on each account receivable in exchange for repaying the advance plus a fee of 3 percent.
III
The majority agrees that basic trust principles apply to PACA trusts. Maj. Op. at 15. It also agrees that trust assets are excluded from the distributor‘s bankruptcy estate if the distributor goes bankrupt. Maj. Op. at 15. It agrees that if a trustee “transfers trust property to a third person . . . [without] commit[ting] a breach of trust, the third person holds the interest so transferred or created free of the trust, and is under no liability to the beneficiary.” Maj. Op. at 16 (quoting Restatement (Second) of Trusts § 283). Finally, the majority agrees that a trustee can give a lender a security interest in PACA trust assets without violating PACA. Maj. Op. at 32-33.
So how does the majority nonetheless reach the striking conclusion that if the Factoring Agreement is deemed to be a loan transaction, then AgriCap, which paid TDI $194 for a $200 trust asset, is liable to Palmer for the same $200?13 See Maj. Op. at 27-28. The majority reasons that under a loan
In reaching its conclusion that a trustee would breach its fiduciary duty by repaying the loan from trust assets “while the trust beneficiaries have not been fully compensated,” Maj. Op. at 32, the majority relies on Nickey Gregory Co. v. AgriCap, LLC, which analyzed a similar agreement between AgriCap and a PACA trustee. See 597 F.3d at 596, 601-02. The Fourth Circuit reasoned that the trustee‘s arrangement with AgriCap “authorized trust assets to be used to repay AgriCap aheаd of the commodities sellers, who went unpaid,” and such an arrangement “breached the PACA
The majority adopts this reasoning. While conceding that this result has no basis in trust principles, Maj. Op. at 31, the majority contends that this result is required by PACA, and quotes the regulation stating that PACA trustees “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,” and this precludes a trustee from repaying a loan to the trust. Maj. Op. at 32 (quoting
The majority‘s analysis, like that in Nickey Gregory, is critically flawed. First, the majority misunderstands the nature of trust assets. In the case of a loan, the trustee maintains two assets available for the growers: the $194 that the trustee received from the lender ($160 as an advance, $34 post-collection), and the accounts receivable subject to the lender‘s $160 lien. The trustee‘s repayment of the $160 to the lender does not dissipate the trust‘s assets, because the trust is not entitled to that $160 under the terms of the loan agreement. The typical produce sales arrangement seems more questionable under the majority‘s reasoning, because TDI relinquished the produce (an asset of the estate that is no longer freely available to the growers) to Safeway, and received only a promise to pay in return. Of course, Congress did not intend to preclude this sort of arrangement.
Second, the majority misunderstands the nature of a trustee‘s obligation in a loan agreement. Just like any trustee who takes out a loan for the benefit of the beneficiaries and
allows the trustee to disregard such an obligation, and we “do not construe statutes in a manner that would lead to absurd results,” nor “impute to Congress an intent to create a law that produces an unreasonable result.” United States v. Casasola, 670 F.3d 1023, 1029 (9th Cir. 2012).
But were the issue before us, basic principles of trust law establish that AgriCap would have the same rights with respect to those accounts receivables as it would to the proceeds. If TDI, as trustee, did not breach its fiduciary duties when it borrowed money from AgriCap (or AgriCap did not have knowledge of the breach), and the trustee still owed AgriCap money on the loan, then AgriCap would be entitled to foreclose its security interest on the accounts receivable according to the terms of the loan agreement. See Restatement (Second) of Trusts §§ 283-84, 288 (explaining that a third-party lender holds its security interest in trust property free of the trust unless the grant of the interest was a breach of the trustee‘s fiduciary duty, the lender had notice, and the lender did not give value).
While AgriCap‘s counsel stated in response to questioning that a lender‘s interest in the accounts receivable would be subordinate to the growers’ interests as beneficiaries, Maj. Op. at 33 n.11, we do not construe statutes based on passing statements at oral argument. Roberts v. Galen of Va., Inc., 525 U.S. 249, 253 (1999) (per curiam) (“[T]he concession of a point on appeal by [a party] is by no means dispositive of a legal issue.“). Here, the growers’ interests would be superior only to creditоrs of TDI as a debtor, not to creditors of TDI as trustee.
Perhaps realizing that there is no statutory basis for holding that a PACA trustee cannot repay a lender pursuant to the terms of the loan agreement, the majority posits that if a PACA trustee borrows from a lender, and secures the loan with an interest in trust property, the beneficiaries have a priority lien on the trust property over all other lenders. Maj. Op. at 27-28. The majority analogizes to circumstances where state law protects a creditor by giving that creditor a priority lien over all other creditors. Maj. Op. at 27-31.
This framework, however, is divorced from the language of PACA and basic principles of trust law. Congress could
Although the majority purports to follow the lead of three other circuits, only the Fourth Circuit has adopted the theory that a trustee‘s loan repayments in the ordinary course of business are a breach of trust. In Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336 F.3d 410, 413-14 (5th Cir. 2003), and Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1067-68 (2d Cir. 1995), the courts analyzed whether a transaction between a PACA trustee and a third party constituted a loan or “true sale” in order to determine whether the transferee was a bona fide purchaser under section 284 of the Restatement
Moreover, the Second Circuit has recognized, consistent with Boulder Fruit, “that it is not a breach of trust for a PACA dealer to use PACA funds to enter into ‘commercially reasonable’ transactions with parties not protected by PACA, particularly where such transactions facilitate a PACA dealer‘s fulfillment of his obligations to PACA beneficiaries.” E. Armata, Inc. v. Korea Commercial Bank of N.Y., 367 F.3d 123, 133 (2d Cir. 2004); see also D.M. Rothman & Co. v. Korea Commercial Bank of N.Y., 411 F.3d 90, 96 (2d Cir. 2005) (holding that a third-party bank was not liable for its receipt of a PACA trustee‘s account fees, interest, and any other funds whose “retention was commercially reasonable“).
At bottom, the majority‘s concern appears to be that trust principles are insufficiently protective of growers here. But the majority offers no principled distinction for why a trustee can sell produce for cash, sell an account receivable for cash, but not borrow cash secured by the produce or account receivable, even though the trustee gets substantially the
Once we discard the majority‘s theory of breach, its discussion of the test for a “true sale” becomes irrelevant. Maj. Op. at 26-27. In the trust context, the key question is not whether the trustee is engaged in a sale or loan, but whether the trustee breached its fiduciary duty in entering into the loan agreement (and complying with it according to its terms). The answer to that question turns primarily on the commercial reasonableness of the individual transaction and its terms.
IV
By enacting PACA, Congress provided significant protection to growers by ensuring that a distributor who buys their produce on credit owes the growers a fiduciary duty to manage the trust assets (the produce and its proceeds) for their benefit. Contrary to the majority‘s assertion, this protection does not entitle growers to disregard obligations undertaken by the trustee on their behalf. If the trustee borrows money for the benefit of the beneficiaries in a commercially reasonable transaction, the lender is entitled to be paid back from trust assets. Under trust principles and PACA, there is an exception to this rule only if the trustee breached its fiduciary duties when it entered into the loan
The majority‘s approach is inconsistent with PACA, and that should be enough to reject it. “[W]e will not presume with [appellants] that any result consistent with their account of the statute‘s overarching goal must be the law but will presume more modestly instead ‘that [the] legislature says . . . what it means and means . . . what it says.‘” Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718, 1725 (2017) (third, fourth, and fifth alterations in original) (quoting Dodd v. United States, 545 U.S. 353, 357 (2005)).
But the majority‘s approach also makes no sense as a practical matter. Under the majority‘s decision, a transaction in which the trustee made a commercially reasonable sale of a $200 account receivable to AgriCap and received $150 in return would not constitute a dissipation of trust assets, and AgriCap could keep the $200 it collected on the account receivable from the retailer. But a transaction in which the trustee received a $200 loan from AgriCap (secured by a security interest in the same $200 account receivable) and agreed to pay back the loan when it collected the $200 from
Moreover, the majority‘s approach will hurt PACA beneficiaries in the long run. If lenders face the prospect that any repayments they receive will be a breach of trust and subject to disgorgement, they will either refuse to engage in factoring transactions or impose more severe terms to account for the heightened risk.21
Notes
If the trustee transfers trust property to a third person or creates a legal or equitable interest in the subject matter of the trust in a third person, and the trustee in making the transfer or in creating the interest does not commit a breach of trust, the third person holds the interest so transferred or created free of the trust, and is under no liability to the beneficiary.
Endico Potatoes, 67 F.3d at 1069. Equity recognizes some exceptions to this rule. A third party that has conferred a benefit on the trust estate may be entitled to reimbursement from trust assets. See, e.g., Restatement (Second) of Trusts § 291 cmt. o (“If the trustee in breach of trust transfers trust property to a person who takes with notice of the breach of trust and who pays value for the trust property, and the beneficiary compels him to restore the property to the trust or to account for its value or for the proceeds, the transferee is entitled to credit for the amount which he paid for the trust property to the extent to which the trust estate has the benefit thereof.“); id. § 269 (“A person who has conferred a benefit on the trust estate and cannot obtain satisfaction of his claim out of the trustee‘s individual property can by a proceeding in equity reach trust property and apply it to the satisfaction of his claim to the extent to which the trust estate has been benefited, unless under the circumstances it is inequitable to allow him such remedy.“); see also Thomas v. Provident Life & Tr. Co., 138 F. 348, 349 (9th Cir. 1905) (holding that even if the trustee granted a lender a mortgage on trust property in breach of the trust, the trust estate “having received the benefit of the money, ought, in equity, to repay it, with interest.“).Where the lender has purchased the accounts receivable, the borrower’s debt is extinguished and the lender’s risk with regard to the performance of the accounts is direct, that is, the lender and not the borrower bears the risk of non-performance by the account debtor. If the lender holds only a security interest, however, the lender’s risk is derivative or secondary, that is, the borrower remains liable for the debt and bears the risk of non-payment by the account debtor, while the lender only bears the risk that the account debtor’s non-payment will leave the borrower unable to satisfy the loan.
Boulder Fruit, 251 F.3d at 1271. Dissipation is defined 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.”Farmer sells oranges on credit to Broker. Broker turns around and sells the oranges on credit to Supermarket,
generating an account receivable from Supermarket. Broker then obtains a loan from Bank and grants Bank a security interest in the account receivable to secure the loan. Broker goes bankrupt. Under PACA, Broker is required to hold the receivаble in trust for Farmer until Farmer was paid in full; use of the receivable as collateral was a breach of the trust. Therefore, Farmer’s rights in the Supermarket receivable are superior to Bank’s. In fact, as a trust asset, the Supermarket receivable is not even part of the bankruptcy estate.
- First, the dissent says that “[t]he majority posits that the growers have a priority lien on their produce, which allows the trust to accept the benefit of a loan agreement but disregard the obligation to repay it.” Dissent at 37. But nowhere do we suggest that trusts are free to disregard their obligations to lenders. A trustee cannot, however, enforce an obligation to a lender above its statutory obligation to trust beneficiaries to not dissipate trust assets.
- Second, the dissent suggests that if “the trustee still owed AgriCap money on the loan, then AgriCap would be entitled to foreclose its security interest on the accounts receivable according to the terms of the loan agreement.” Dissеnt at 53 n.15. This argument exceeds what even the Appellee AgriCap
understands PACA to allow. AgriCap‘s counsel admitted during oral argument, that if it was a true lending agreement, any interest that it had in the accounts receivable as a creditor would be subordinate to the growers. Ninth Circuit Court of Appeals, Oral Argument 14-56069 G.W. Palmer v. AgriCap Financial Corp., YOUTUBE 27:07-28:47 (Sept. 20, 2017), https://www.youtube.com/watch?v=iikaXV7nkaw.Only an argument in desperation would ignore this concession. - Third, the dissent contends that we have not considered the implications of our decision today. Dissent at 60-61 n.21. That is incorrect. We have stated what we believe to be the proper test for the district court to employ in the first instance, realizing the limits of our ability to review issues like damages when there is no prior development of the record on appeal on those and related issues. Our court should not participate in the dissent‘s interested speculation and conjecture on issues not before us.
- Fourth, the dissent offers no judicial authority supporting its view that under PACA a commercially reasonable lending agreement can displace the trust beneficiary rights of the agricultural growers. Further, while challenging the strength of the various circuit precedents that we contend are aligned with our decision, the dissent unmistakably concedes that its position would squarely conflict with the decision of the Fourth Circuit in Nickey Gregory. Dissent at 54-55. The dissent makes this concession arguing more or less that it thinks Nickey Gregory is “critically flawed.” Dissent at 52. However, given the language and purposes of PACA, we see no reason why we should engineer a conflict with the Fourth Circuit‘s decision in Nickey Gregory. See Kelton Arms Condo. Owners Ass‘n, Inc. v. Homestead Ins. Co., 346 F.3d 1190, 1192 (9th Cir. 2003) (“[W]e decline to create a circuit split unless there is a compelling reason to do so” particularly when “rules are best applied uniformly.“); CTIA-The Wireless Ass‘n v. City of Berkeley, California, 873 F.3d 774, 776 (9th Cir. 2017).
Similarly, the majority argues we should not consider the consequences of its theory of breach, because it remands to the district court for a determination of damages. Maj. Op. at 33 n.11. But it
requires no “interested speculation and conjecture” to conclude that, if the Factoring Agreement is deemed to be a loan, AgriCap would have to return all loan payments it received, up to the value of TDI‘s debts to Palmer. See Nickey Gregory, 597 F.3d at 607 n.2 (“As we have noted, because the accounts receivable and their proceeds were trust assets, the unpaid commodities sellers have a prior interest in them and can recover from AgriCap to the full satisfaction of their debts up to the limit of trust assets held while they remained unpaid.“).