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S & H Packing & Sales Co., Inc. v. Tanimura Distributing, Inc.

United States Court of Appeals, Ninth Circuit

February 27, 2017

S & H Packing & Sales Co., Inc., a California corporation, DBA Season Produce Co., Plaintiff,
v.
Tanimura Distributing, Inc., a California corporation, Defendant, and G. W. Palmer & Co., Inc.; Andrew 6 Williamson Sales Co., Inc., DBA Andrew & Williamson Fresh Produce; East Coast Brokers and Packers, Inc.; Gargiulo, Inc., Plaintiffs-Appellants, and Agricap Financial Corporation, a Delaware corporation, Defendant-Appellee. S & H Packing & Sales Co., Inc., a California corporation, DBA Season Produce Co., Plaintiff, and Apache Produce Co., Inc., an Arizona corporation, DBA Plain Jane; O.P. Murphy Produce Co., Inc., a Texas corporation, DBA Murphy & Sons; 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.

          Argued and Submitted on June 6, 2016 Pasadena, California

         Appeal from the United States District Court for the Central District of California The Honorable George H. Wu, District Judge D.C. No. 2:08-cv-05250-GW-FFM

          Louis W. Diess, III (argued) and Mary Jean Fassett, McCarron & Deiss, 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 (argued), Jr., Law Office of Robert P. Lewis Jr., South 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.

          Before: Ronald M. Gould, Michael J. Melloy, [*] and Andrew D. Hurwitz, Circuit Judges.

         SUMMARY[**]

         Perishable Agricultural Commodities Act

         The panel affirmed the district court's summary judgment in favor of the defendant in an action brought by produce growers under the Perishable Agricultural Commodities Act.

         The growers sold their perishable agricultural products on credit to a distributor, which made the distributor a trustee over a PACA trust holding the perishable products and any resulting proceeds for the growers as PACA-trust beneficiaries. The distributor sold the products on credit to third parties and, through a transaction described as a "factoring agreement, " transferred its own resulting accounts receivable to defendant Agricap Financial Corp. The distributor's business later failed, and the growers did not receive payment in full from the distributor for their produce. The growers sued Agricap.

         The panel affirmed the district court's holding that, pursuant to Boulder Fruit Express & Heger Organic Farm Sales v. Transp. Factoring, Inc., 251 F.3d 128 (9th Cir. 2001), a commercially reasonable factoring agreement removes accounts receivable from the PACA trust without a trustee's breach of trust, thus defeating the growers' claims. The growers argued that a PACA trustee's true sale of trust assets, which does not breach trust duties, occurs when the trustee transfers not merely the right to collect the underlying accounts, but also the risk of non-payment on those accounts. The panel concluded that Boulder Fruit implicitly rejected the transfer-of-risk test, and this implicit rejection was necessary to its holding. Accordingly, Boulder Fruit controlled the outcome of the growers' case.

         Concurring, Judge Melloy, joined by Judge Gould, wrote that Boulder Fruit was wrongly decided and that the Ninth Circuit, sitting en banc, should eliminate a circuit split, speak expressly to this issue, and join the Second, Fourth, and Fifth Circuits by adopting a separate, threshold, transfer-of-risk test.

          OPINION

          PER CURIAM

         Appellants are produce growers ("Growers") who sold their perishable agricultural products on credit to a distributor, Tanimura Distributing, Inc. ("Tanimura"). Pursuant to the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. §§ 499a-499t, this arrangement made Tanimura a trustee over a PACA trust holding the perishable products and any resulting proceeds for the Growers as PACA-trust beneficiaries. Tanimura then sold the products on credit to third parties and transferred its own resulting accounts receivable to Appellee Agricap Financial ("Agricap") through a transaction Agricap describes as a "Factoring Agreement" or sale of accounts.[1] Although described as a sale of accounts, Agricap initially referred to the arrangement as a "credit facility, " and the written agreement was entitled "Agricap Financial Corporation Factoring and Security Agreement." Further, the Factoring Agreement involved many hallmarks of a secured lending arrangement, including: security interests in accounts and all other asset classes except inventory; UCC financing statements; subordination of other debts; and substantial recourse for Agricap against Tanimura in the event Agricap was unable to collect from Tanimura's customers (for example, Agricap was entitled to force Tanimura to "repurchase" accounts that remained unpaid after 90 days, and Agricap could enforce this right by withholding payments from Tanimura).

         Tanimura's business later failed, and Growers did not receive payment in full from Tanimura for their produce. Growers sued Agricap alleging: (1) the Factoring Agreement was merely a secured lending arrangement structured to look like a sale but transferring no substantial risk of nonpayment on the accounts; (2) the accounts receivable and proceeds remained trust property under PACA; (3) because the accounts receivable remained trust property, Tanimura breached the PACA trust and Agricap was complicit in the breach; and (4) PACA-trust beneficiaries such as Growers held an interest superior to Agricap, and Agricap was liable to Growers.

         Agricap moved for summary judgment arguing that, pursuant to Boulder Fruit Express & Heger Organic Farm Sales v. Transportation Factoring, Inc., 251 F.3d 1268 (9th Cir. 2001), a commercially reasonable factoring agreement removes accounts receivable from the PACA trust without a trustee's breach of trust, thus defeating the Growers's claims. Growers acknowledged that a PACA trustee generally may sell trust assets on commercially reasonable terms without breaching trust duties. Growers argued, however, that pursuant to Nickey Gregory Co., LLC v. Agricap, LLC, 597 F.3d 591, 598-99 (4th Cir. 2010), Reaves Brokerage Co., Inc. v. Sunbelt Fruit & Vegetable Co., Inc., 336 F.3d 410, 414 (5th Cir. 2003), and Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1067-69 (2d Cir. 1995), a court should not review the commercial reasonableness of a factoring agreement unless the court first determines a true sale actually occurred.[2] According to Growers, a true sale occurs when a PACA trustee transfers not merely the right to collect the underlying accounts, but also the risk of nonpayment on those accounts.[3]

         Relying on Boulder Fruit and describing the cited cases as a circuit split, the district court granted summary judgment. The district court noted the Ninth Circuit in Boulder Fruit expressly addressed the commercial reasonableness of a factoring agreement but implicitly rejected a separate, transfer-of-risk test. Further, the court noted the factoring agreement in Boulder Fruit transferred even less risk than the Factoring Agreement in the present case-in Boulder Fruit, the factoring agent enjoyed unrestricted discretion to force the distributor to repurchase accounts. The court therefore held that, even if Boulder Fruit could accommodate the transfer-of-risk test, the facts of Boulder Fruit controlled and precluded relief for Growers. Finally, the court concluded that the Factoring Agreement was commercially reasonable because Agricap paid to Tanimura 80% of the face value of the accounts as an up-front payment and ultimately paid to Tanimura an even greater percentage of the face value of the transferred accounts.

         On appeal, Growers argue that we are not bound by Boulder Fruit because the absence of discussion of the transfer-of-risk test in Boulder Fruit leaves open the question of whether that test should apply in the Ninth Circuit. Agricap counters 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; yet, the Court did not apply the test.

         Applying de novo review, Arizona v. Tohono O'odham Nation, 818 F.3d 549, 555 (9th Cir. 2016), we agree with the district court's conclusion that Boulder Fruit controls the outcome in the present case. See 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). In some cases, an earlier panel's election not to discuss an argument may prevent future panels from concluding the earlier panel implicitly accepted or rejected an argument. After all, "under the doctrine of stare decisis a case is important only for what it decides-for the 'what, ' not for the 'why, ' and not for the 'how.'" In re Osborne, 76 F.3d 306, 309 (9th Cir. 1996) ("[T]he doctrine of stare decisis concerns the holdings of previous cases, not the rationales[.]"). In Boulder Fruit, however, implicit rejection of the transfer-of-risk test was necessary to the holding. We reach this conclusion because the factoring agreement in Boulder Fruit involved virtually no transfer of risk from the distributor to the factoring agent.[4]Had the Boulder Fruit court not implicitly rejected the transfer-of-risk test, the holding of the case necessarily would have been different.

         Further, because the Factoring Agreement in the present case transferred a small degree of risk of non-payment, at least when compared to the agreement at issue in Boulder Fruit, we agree that Boulder Fruit would preclude relief to the Growers even if it were possible for our panel to adopt the transfer-of-risk test.

         Finally, Growers do not seriously contend on appeal that the Factoring Agreement was otherwise commercially unreasonable. The Factoring Agreement in the present case is, in many material respects, similar to the agreement in Boulder Fruit. And, Agricap paid to Tanimura under the current Factoring Agreement well in excess of what the Ninth Circuit previously described as a reasonable factoring rate. Boulder Fruit, 251 F.3d at 1272 ("In any case, a factoring discount of 20% was never shown to be commercially unreasonable.").

         We therefore affirm the judgment of the district court.

         AFFIRMED.

          MELLOY, Circuit Judge, with whom GOULD, Circuit Judge, joins, concurring:

         We concur. We write further, however, because we believe Boulder Fruit was wrongly decided and the Ninth Circuit, sitting en banc, should eliminate this circuit split, speak expressly to this issue, and join the Second, Fourth, and Fifth Circuits by adopting a separate, threshold, transfer-of-risk test.

         Congress intended PACA to prevent secured lenders from defeating the rights of PACA-trust beneficiaries. The congressional focus upon the relative rights of these two groups is unmistakable. As such, before assessing the commercial reasonableness of a factoring agreement, it is first necessary to examine the substance of a factoring agreement to ensure a true sale has occurred. In the absence of a true sale, superficial indicators and labels surrounding a factoring agreement should be of no consequence. The substance of the transaction matters. If the substance of a transaction reveals a secured lending arrangement rather than a true sale, the accounts receivable remain trust assets. ...


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