Two of the three judges on an appeals court panel urged their brothers and sisters on the Ninth Circuit to grant rehearing en banc and eliminate a circuit split on a major issue involving the federal Perishable Agricultural Commodities Act, or PACA (7 U.S.C. § 499a et seq.).
The issue is critically important in California, a major agricultural producer, because existing Ninth Circuit precedent, Boulder Fruit Express & Heger Organic Farm Sales v. Transportation Factoring, Inc., 251 F.3d 1268 (9th Cir. 2001), created a loophole precluding farmers from being protected by PACA.
Originally adopted by Congress in 1930, PACA creates a statutory trust protecting growers from not being paid for their fresh produce. Congress amended PACA in 1984 to give producers rights ahead of accounts receivable financing.
A true sale of accounts receivable precludes farmers from recourse under PACA against purchasers of the receivables. Before an accounts receivable purchaser is protected from claims by farmers, the Second, Fourth and Fifth Circuits require the court first to decide if a true sale actually occurred and, second, to examine whether the sale was commercially reasonable.
In Boulder Fruit, the Ninth Circuit split with its sister circuits by holding, in the case of documentation labeled as a sale of accounts receivable, that the court need only decide whether the transaction was commercially reasonable before cutting off PACA protection. In the Ninth Circuit, there has been no threshold test of whether the transaction qualifies as a true sale.
In what appears to be a test case coming before the Ninth Circuit, a transaction labeled as a sale of receivables gave the receivables purchaser the right to force the seller to repurchase accounts not paid within 90 days.
Fresh produce sellers sued the lender. Bound by Boulder Fruit, even though the transaction may not qualify as a true sale, the district court dismissed the suit.
Also obliged to follow Boulder Fruit, the Ninth Circuit affirmed in an unsigned per curiam opinion on Feb. 27.
Circuit Judge Ronald M. Gould and Circuit Judge Michael J. Melloy, sitting by designation from the Eighth Circuit, wrote a 19-page concurrence arguing that Boulder Fruit was “wrongly decided” and urging the circuit to sit en banc to bring “the Ninth Circuit into line with the other circuits that have considered the issue.”
The two judges said the amendment to PACA was intended by Congress “to prevent secured lenders from defeating the rights of PACA-trust beneficiaries.” They said that “superficial indicators and labels surrounding a factoring agreement should be of no consequence.”
They described the other circuits as applying “a threshold transfer-of-risk test to determine if such a transaction is a true sale or a mere secured lending relationship” where farmers have rights ahead of lenders. Otherwise, inserting “self-serving labels . . . into factoring agreements [would] defeat clear congressional intent.”
They concluded their concurrence by saying that farmers in California, a major agricultural producer, “have effectively lost that protection due to lenders merely labeling true security agreements as factoring agreements.”