The Ninth Circuit sat en banc, reversed the three-judge panel by a vote of 8/3, overruled its own precedent, eliminated a split of circuits and closed a gaping loophole that the San Francisco-based appeals court had previously created in the federal Perishable Agricultural Commodities Act, or PACA (7 U.S.C. § 499a et seq.).
In Boulder Fruit Express & Heger Organic Farm Sales v. Transportation Factoring, Inc., 251 F.3d 1268 (9th Cir. 2001), the Ninth Circuit had held that a lender to a fresh produce wholesaler can circumvent the strictures of PACA by denominating a secured loan as a sale of accounts receivable.
By virtue of its en banc opinion on Feb. 22, the Ninth Circuit has now aligned itself with the Second, Fourth and Fifth Circuits by holding that a transaction must be a “true sale” before a purchaser of accounts receivable can acquire an interest in a wholesaler’s accounts ahead of the interests of produce suppliers who are beneficiaries of a PACA trust.
The PACA Loophole and the Split
Congress adopted PACA to protect farmers who were usually unpaid when a fresh produce wholesaler declared bankruptcy. The statute 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 have first required the court to decide whether a true sale actually occurred and, second, to examine whether the sale was commercially reasonable.
In Boulder Fruit in 2001, the Ninth Circuit made a loophole in PACA by holding that the court need only decide whether a 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 so long as the transaction denominated itself as a sale of receivables.
Finding itself bound by Boulder, a three-judge panel of the Ninth Circuit ruled against farmers in a per curiam decision, S&H Packing & Sales Co. v. Tanimura Distributing Inc., 850 F.3d 446 (9th Cir. Feb. 27, 2017). In a concurring opinion, two judges on the panel argued that Boulder Fruit was “wrongly decided” and urged 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, heard oral argument in September and overruled Boulder Fruit in an opinion for the majority written by Circuit Judge Ronald M. Gould.
The Majority’s Opinion
Judge Gould held that the court must first “conduct a threshold true sale inquiry” before deciding whether a hypothecation of accounts receivable was “commercially reasonable.” He based his decision on “the logical outcome of reading PACA, PACA’s legislative history, and consideration of PACA’s purpose.”
In particular, legislative history told Judge Gould that “our focus should be on the true nature of the transactions at issue.” The court, he said, “must focus on the true substance of PACA-related transactions and not on artificial indicators or labels.” Later, he added, “labels . . . should be of little or no significance.”
The lender argued that the result would be absurd if it had paid full value for receivables and was later required by PACA to pay farmers a second time for the same receivables.
Judge Gould said the lender was “wrong to describe the scenario as absurd. It is instead the result of a Congressional choice.”
Judge Gould analogized PACA to state laws pertaining to general contractors, subcontractors and owners of real estate, because state law can force an owner to pay twice, just like a PACA lender. If an owner has not obtained releases of liens by subcontractors, the owner must pay the subcontractors a second time even if the owner has paid the general contractor. The PACA lender can pay twice if it has not policed the borrower to ensure that suppliers have been paid with the proceeds of its loans.
On remand, Judge Gould instructed the court to “use all the tools at its disposal . . . to determine whether the agreement was in substance a true sale or in substance a lending agreement.”
The facts of the case suggest that the transaction was a secured loan rather than a true sale of accounts receivable, because the lender could force the wholesaler to buy back receivables proven uncollectable.
Judge Gould lauded the concurring opinion in the panel decision. He said, “This opinion is in substantial agreement with arguments made in [Circuit] Judge [Michael J.] Melloy’s concurrence and draws heavily therefrom.” Judge Melloy, from the Eighth Circuit, was sitting by designation on the three-judge panel.
The Dissent
In an opinion written by Circuit Judge Sandra S. Ikuta, the dissenters contended as a matter of policy that the majority’s rule “allows the trust to accept the benefit of a loan agreement but disregard the obligation to repay it.”
With regard to the law, Judge Ikuta relied on “basic trust principles” for the proposition that a trustee does not violate his/her fiduciary duty to trust beneficiaries by obtaining a secured loan.
Judge Gould answered the argument by saying that PACA imposes duties beyond those in trust law. He said that the dissenters gave “too little weight to the protective purposes of PACA” and disregarded “the purpose of PACA to protect agricultural growers.”
Judge Gould clerked on the Sixth Circuit and the Supreme Court before being appointed to the Ninth Circuit in 1999. Judge Ikuta clerked for the Ninth Circuit and Supreme Court before her appointment to the circuit bench in 2006.
To read ABI’s report on the decision by the three-judge panel and the concurrence, click here.