S & H Packing & Sales Co. v. Tanimura Distributing, Inc.
883 F.3d 797 (2018)
Rule of Law:
Under the Perishable Agricultural Commodities Act (PACA), courts must use a 'transfer-of-risk' test to determine if a transaction involving accounts receivable is a true sale or a secured loan; only a true sale removes assets from the PACA trust, while a secured loan leaves the assets subject to the superior claims of produce growers.
Facts:
- Appellant produce growers ('Growers') sold perishable agricultural products to Tanimura Distributing, Inc. ('Tanimura') on credit.
- By operation of federal law (PACA), Tanimura held the produce and any resulting proceeds in a statutory trust for the benefit of the unpaid Growers.
- Tanimura sold the produce to third parties, generating accounts receivable (rights to payment).
- Tanimura entered into a 'Factoring Agreement' with Appellee AgriCap Financial ('AgriCap') to transfer these accounts receivable in exchange for cash.
- Under the agreement, AgriCap paid Tanimura approximately 80% of the face value of the accounts upfront.
- Crucially, the agreement gave AgriCap a right of recourse, allowing it to force Tanimura to repurchase accounts that remained unpaid or were disputed.
- Tanimura's business eventually failed, leaving the Growers unpaid for their produce.
- The Growers sought to recover the value of the accounts receivable from AgriCap, arguing the transaction was a loan, not a sale, and the assets therefore belonged to the trust.
Procedural Posture:
- Growers filed a lawsuit against AgriCap in the U.S. District Court alleging breach of the PACA trust.
- AgriCap filed a motion for summary judgment.
- The District Court granted summary judgment in favor of AgriCap, relying on the 'commercial reasonableness' standard from 'Boulder Fruit'.
- Growers appealed the judgment to the U.S. Court of Appeals for the Ninth Circuit.
- A three-judge panel of the Ninth Circuit affirmed the District Court's decision, finding 'Boulder Fruit' controlling.
- The Ninth Circuit granted a rehearing en banc to review the panel's decision.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a court need to conduct a threshold 'true sale' inquiry, focusing on the transfer of risk, before determining whether a PACA trustee's transfer of assets was a commercially reasonable sale?
Opinions:
Majority - Judge Gould
Yes, a court must look beyond the labels of a transaction and apply a threshold 'true sale' test to determine if PACA trust assets were actually sold or merely used as collateral for a loan. The Court reasoned that PACA was enacted specifically to protect growers from the risk of being unsecured creditors while lenders held superior security interests. To fulfill this Congressional intent, the Court adopted the 'transfer-of-risk' test used by the Second, Fourth, and Fifth Circuits. Under this framework, if the 'factor' (AgriCap) does not bear the primary risk of non-payment (e.g., if they have recourse to demand repayment from the distributor), the transaction is a secured loan, not a sale. If it is a loan, the assets remain part of the PACA trust, and the lender's interest is subordinate to the growers' claims. The Court overruled its prior precedent in 'Boulder Fruit' to the extent it allowed courts to skip this inquiry and look only at 'commercial reasonableness.'
Dissent - Judge Ikuta
No, the court should apply standard trust law principles which allow a trustee to borrow money or sell assets so long as the transaction is commercially reasonable. The dissent argued that the majority's new rule is unmoored from the text of PACA and basic trust law. Judge Ikuta contended that a trustee does not breach their fiduciary duty by entering into a commercially reasonable loan or factoring agreement, and if there is no breach of trust, the third party (AgriCap) should hold the assets free of the trust. The dissent warned that this decision essentially makes lenders guarantors of the PACA trust and will harm the industry by making financing more difficult to obtain.
Analysis:
This decision represents a significant shift in Ninth Circuit jurisprudence, explicitly overruling the 'Boulder Fruit' precedent which had previously prioritized 'commercial reasonableness' over the structural nature of the transaction. By aligning with the Second, Fourth, and Fifth Circuits, the court solidifies a circuit consensus that prioritizes the statutory protection of growers over the commercial interests of lenders and factoring companies. This ruling forces financial institutions to restructure factoring agreements; if they wish to avoid liability to growers, they must structure deals as 'true sales' where they assume the full risk of non-payment (non-recourse), likely leading to higher fees or tighter credit for produce distributors.
