Nickey Gregory Co., LLC v. AGRICAP, LLC
597 F.3d 591, 2010 WL 743590, 2010 U.S. App. LEXIS 4587 (2010)
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Rule of Law:
Under the Perishable Agricultural Commodities Act (PACA), a financing arrangement is treated as a secured loan, rather than a true sale of accounts receivable, if the substance of the transaction leaves the risk of non-collection with the produce dealer. In such cases, the accounts receivable remain assets of the PACA trust, and the lender's interest is subordinate to the claims of unpaid produce sellers.
Facts:
- Robison Farms, LLC, a produce distributor, regularly purchased perishable commodities on credit from suppliers including Nickey Gregory Company and Poppell’s Produce Inc., whose invoices stated the sales were subject to a PACA trust.
- In March 2005, facing financial difficulties, Robison Farms entered into a financing arrangement with AgriCap, LLC, to obtain working capital.
- The arrangement, titled a 'Factoring Agreement,' provided that AgriCap would advance Robison Farms 80% of the face value of its accounts receivable.
- The terms of the agreement and associated documents ensured that Robison Farms retained nearly all the risk of loss if its customers failed to pay the receivables, with AgriCap having recourse against Robison Farms for unpaid accounts.
- The parties also executed a Security Agreement granting AgriCap a blanket security interest in all of Robison Farms' assets, and Robison Farms' owner personally guaranteed the obligations to AgriCap.
- On May 11, 2006, Robison Farms stopped paying Nickey Gregory and Poppell's Produce for their produce shipments.
- After Robison Farms defaulted on its payments to the suppliers, AgriCap continued to collect on Robison Farms' accounts receivable and used the proceeds to repay the funds it had advanced, plus fees and interest.
- Robison Farms ceased business operations on July 17, 2006, and filed for bankruptcy, leaving Nickey Gregory and Poppell’s Produce with a total of $106,695.86 in unpaid invoices.
Procedural Posture:
- Nickey Gregory Company, LLC, and Poppell’s Produce Inc. filed suit against AgriCap, LLC, in the U.S. District Court for the District of South Carolina.
- The plaintiffs sought disgorgement of PACA trust assets that AgriCap had received from the now-bankrupt Robison Farms, LLC.
- Following a bench trial, the district court found the financing arrangement was a secured loan and held AgriCap liable for breaching the PACA trust.
- The district court entered a judgment for the plaintiffs in the amount of $88,690.75, representing the sum it calculated AgriCap had 'retained' from the trust.
- AgriCap appealed to the U.S. Court of Appeals for the Fourth Circuit, challenging the finding that the transaction was a loan and asserting it was a bona fide purchaser.
- The plaintiffs cross-appealed, arguing the district court erred by not awarding them the full amount of their unpaid invoices, which totaled $106,695.86.
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Issue:
Does a financing arrangement, labeled as a 'factoring agreement,' constitute a secured loan subject to the claims of PACA trust beneficiaries when the finance company is insulated from the risk of non-collection on the accounts receivable?
Opinions:
Majority - Niemeyer
Yes. A financing arrangement that is labeled a 'factoring agreement' is substantively a secured loan subject to PACA trust claims when the risk of non-collection remains with the produce dealer. The court must analyze the substance of the transaction, not its form. If the arrangement were a true sale (factoring), the accounts receivable would be converted to cash and would no longer be trust assets. However, if the receivables were merely collateral for a loan, they remain PACA trust assets, and the lender's security interest is subordinate to the rights of unpaid produce sellers. Here, six factors demonstrated the transaction was a loan: (1) preliminary documents referred to a 'Lender' and 'Borrower'; (2) Robison Farms retained virtually all risk of non-collection; (3) a separate Security Agreement established a security interest to secure a 'Debt'; (4) a Subordination Agreement gave AgriCap priority as a secured creditor; (5) Robison Farms' owner provided a personal guarantee; and (6) AgriCap filed a UCC-1 financing statement. Because the transaction was a loan, the receivables remained trust assets. AgriCap's bona fide purchaser defense fails because it did not actually purchase the assets and it had notice of Robison Farms' failure to pay its PACA creditors but continued to collect the trust assets for its own benefit, which constituted a breach of the trust.
Analysis:
This decision reinforces the principle that courts will prioritize substance over form in PACA cases, ensuring that the statute's protective purpose is not defeated by creative financing labels. It provides a clear framework for analyzing purported factoring agreements, centering the inquiry on which party bears the ultimate risk of loss. The ruling serves as a significant warning to lenders in the agricultural sector that they cannot structure a secured loan as a 'sale' to circumvent the superior trust rights of unpaid produce suppliers; if they do not assume the commercial risk of a true purchaser, their claims will be subordinated.
