To decide whether there will continue to be a circuit split on a critical issue involving the federal Perishable Agricultural Commodities Act, or PACA (7 U.S.C. § 499a et seq.), the Ninth Circuit heard argument en banc on Sept. 20 in S&H Packing & Sales Co. v. Tanimura Distributing Inc., 14-56059 (9th Cir.).
The outcome will determine whether lenders to produce wholesalers can easily circumvent PACA in California and elsewhere in the Ninth Circuit by denominating transactions as sales of receivables when courts otherwise would declare them to be disguised financings. If the en banc decision overturns existing Ninth Circuit precedent, the appeals court will be protecting farmers at the expense of lenders, but there will be no circuit split.
If the circuit upholds its precedent and continues disagreeing with three other circuits, the farmers can cite an entrenched circuit split as grounds for the Supreme Court to grant certiorari.
The PACA Loophole and the Split
To protect farmers who were usually unpaid if a fresh produce wholesaler declared bankruptcy, Congress adopted PACA, which creates a statutory trust protecting growers by putting them ahead of accounts receivable lenders. Farmers, however, do not have recourse under PACA against purchasers of receivables. In deciding whether a financial institution is immune from PACA, the Second, Fourth and Fifth Circuits require the court first to decide whether a true sale actually occurred and, second, to examine whether the sale was commercially reasonable.
In Boulder Fruit Express & Heger Organic Farm Sales v. Transportation Factoring, Inc., 251 F.3d 1268 (9th Cir. 2001), the Ninth Circuit charted a different course and created a gaping hole in PACA 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. There was no threshold test in the Ninth Circuit to determine whether the transaction was a true sale.
Concluding that it was bound by Boulder, a three-judge panel of the Ninth Circuit ruled against the farmers in a per curiam decision in February. S&H Packing & Sales Co. v. Tanimura Distributing Inc., 850 F.3d 446 (9th Cir. Feb. 27, 2017).
Two judges on the panel nonetheless 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 Ninth Circuit granted rehearing en banc in June and heard oral argument this week.
Oral Argument
Eleven circuit judges sitting in San Francisco actively questioned the lawyers in an hour’s argument. The judges’ comments and questions do not indicate how the appeals court will rule or even what questions the circuit will decide.
Initially, argument did not go well for Louis W. Diess, III, from McCarron & Diess in Washington, D.C., counsel for the farmers. Some of the circuit judges either did not understand PACA or disagreed with the policy decision that Congress made in giving preference to farmers over lenders.
Some judges seemed not to understand how a lender could be liable to farmers when the lender had advanced funds under a loan agreement. They characterized the farmers as demanding that the lender pay twice for the same receivables.
En banc, the circuit’s first assignment is to decide whether the existence of a true sale makes any difference in the outcome if the documentation purports to be a sale of accounts receivable. Nonetheless, the judges spent more time discussing the factors to be analyzed if disguised financings are subject to PACA’s creation of a statutory trust.
The concurring opinion from the three-judge panel concluded that the transaction was a disguised financing because it did not transfer “primary or direct risk of non-payment to the factoring agents.” Were they unbound by Boulder, those two judges would have handed victory to the farmers and declared that the transaction was a disguised financing.
By focusing much of oral argument on the indicia of a disguised financing, the en banc court may have been signaling an inclination to overrule Boulder.
Counsel for the lender, Christoph C. Heisenberg from Hinckley & Heisenberg LLP in New York City, offered a middle ground that could be appealing to judges who believe that the farmer’s interpretation of PACA will make accounts receivable financing too expensive for fresh produce wholesalers. Even if a disguised financing is subject to PACA, Heisenberg said that the lender should only be liable to turn over uncollected accounts receivable to the farmers.
To read ABI’s discussion of the February per curiam, click here. To read the February opinion and the concurrence, click here. To watch a video of the en banc oral argument, click here.