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

• Decision Date: 22 February 2018
• Docket Number: No. 14-56078,No. 14-56059,14-56059
• Citation: 883 F.3d 797
• Parties: S & H PACKING & SALES CO., INC., DBA Season Produce Co., a California corporation, Plaintiff, and G. W. Palmer & Co., Inc.; Andrew & Williamson Sales Co., Inc., DBA Andrew & Williamson Fresh Produce; East Coast Brokers and Packers, Inc. ; Gargiulo, Inc., Plaintiffs–Appellants, v. TANIMURA DISTRIBUTING, INC., a California corporation, Defendant, and AgriCap Financial Corporation, a Delaware corporation, Defendant–Appellee. S & H Packing & Sales Co., Inc., DBA Season Produce Co., a California corporation, Plaintiff, and Apache Produce Co., Inc., DBA Plain Jane, an Arizona corporation; O.P. Murphy Produce Co., Inc., DBA Murphy & Sons, a Texas corporation; 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.
• Court: U.S. Court of Appeals — Ninth Circuit

883 F.3d 797

S & H PACKING & SALES CO., INC., DBA Season Produce Co., a California corporation, Plaintiff,

and

G. W. Palmer & Co., Inc.; Andrew & Williamson Sales Co., Inc., DBA Andrew & Williamson Fresh Produce; East Coast Brokers and Packers, Inc. ; Gargiulo, Inc., Plaintiffs–Appellants,

v.TANIMURA DISTRIBUTING, INC., a California corporation, Defendant,andAgriCap Financial Corporation, a Delaware corporation, Defendant–Appellee.

S & H Packing & Sales Co., Inc., DBA Season Produce Co., a California corporation, Plaintiff,

and

Apache Produce Co., Inc., DBA Plain Jane, an Arizona corporation; O.P. Murphy Produce Co., Inc., DBA Murphy & Sons, a Texas corporation; 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,andAgriCap Financial Corporation, a Delaware corporation, Defendant–Appellee.

No. 14-56059

No. 14-56078

United States Court of Appeals, Ninth Circuit.

Argued and Submitted En Banc September 20, 2017, San Francisco, California

Filed February 22, 2018

Louis W. Diess III (argued) and Mary Jean Fassett, McCarron & Diess, 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, Jr., Law Office of Robert P. Lewis Jr., South Pasadena, California; Bradley L. Cornell, Cornell Law Firm, 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: Sidney R. Thomas, Stephen Reinhardt, M. Margaret McKeown, Kim McLane Wardlaw, William A. Fletcher^* , Ronald M. Gould, Consuelo M. Callahan, Sandra S. Ikuta, Jacqueline H. Nguyen, Andrew D. Hurwitz and Michelle T. Friedland, Circuit Judges.

Dissent by Judge Ikuta

Appellant produce growers ("Growers")¹ sold their perishable agricultural products on credit to a distributor, Tanimura Distributing, Inc. ("Tanimura"). Under the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. §§ 499a – 499s, this arrangement made Tanimura a trustee over a PACA trust holding the perishable products and any resulting proceeds for Growers as PACA-trust beneficiaries. Tanimura sold the agricultural products on credit to third parties. It then transferred the resulting accounts receivable to Appellee AgriCap Financial ("AgriCap") through a transaction AgriCap describes as a "Factoring Agreement" or sale of accounts.²

Although described as a sale of accounts, the Factoring Agreement involved some hallmarks of a secured lending arrangement: AgriCap referred to itself as "Lender," and the written agreement was entitled "AgriCap Financial Corporation Factoring and Security Agreement." Further, AgriCap was granted security interests in accounts receivable and all other asset classes except inventory; UCC financing statements were filed; other debts were subordinated; and there was a measure of recourse for AgriCap against Tanimura if AgriCap could not 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.

The central dispute in this case developed after Tanimura's business failed, and Growers did not receive full payment from Tanimura for their produce.³ Growers sued AgriCap alleging: (1) that the Factoring Agreement was merely a secured lending arrangement structured to look like a sale; (2) that the accounts receivable and proceeds, therefore, remained trust property under PACA; (3) that because the accounts receivable remained trust property, Tanimura breached the PACA trust and AgriCap was complicit in the breach; and (4) that under PACA the PACA-trust beneficiaries, including Growers, held an interest superior to that of any secured lender. Hence, AgriCap was liable to Growers to repay the value of the accounts receivable.

AgriCap moved for summary judgment arguing that, under Boulder Fruit Express & Heger Organic Farm Sales v. Transportation Factoring, Inc. , 251 F.3d 1268 (9th Cir. 2001), a trustee is allowed to remove assets from the trust in any commercially reasonable way without breaching the trust. And, it argued, the factoring agreement was commercially reasonable, like the one upheld in Boulder Fruit . Growers acknowledged that a PACA trustee generally may sell PACA-trust assets on commercially reasonable terms without breaching trust duties. They argued, however, that under precedents from the Second, Fourth and Fifth Circuits,⁴ a court should not review the commercial reasonableness of a factoring agreement unless and until the court first determines that a true sale actually occurred.⁵ According to Growers, a true sale only occurs when a PACA trustee transfers not only the right to collect the underlying accounts, but also the risk of non-payment on those accounts.⁶

The district court described the cited cases as a circuit split and granted summary judgment in favor of AgriCap relying on Boulder Fruit . The district court reasoned that the Ninth Circuit in Boulder Fruit expressly addressed the commercial reasonableness of a factoring agreement but implicitly rejected a separate, transfer-of-risk test. The district court further reasoned that the factoring agreement in Boulder Fruit transferred even less risk than did the Factoring Agreement here—in Boulder Fruit , the factoring agent enjoyed unrestricted discretion to force the distributor to repurchase accounts. The district court concluded that, even if Boulder Fruit could accommodate the transfer-of-risk test, the facts of Boulder Fruit controlled and precluded relief for Growers. The district court finally concluded that the Factoring Agreement was commercially reasonable because AgriCap paid Tanimura 80% of the face value of the accounts, an amount that has never been found to be unreasonable, as an up-front payment and AgriCap ultimately paid Tanimura an even greater percentage of the face value of the transferred accounts.

On appeal, Growers argued to the three-judge panel that we are not bound by Boulder Fruit because Boulder Fruit did not discuss the transfer-of-risk test, leaving open the question of whether that test should apply in the Ninth Circuit. AgriCap countered by contrast with its argument 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; and yet, the Court did not apply the test.

The three-judge panel agreed with the district court's conclusion that Boulder Fruit controlled the outcome in this case. S & H Packing & Sales Co., Inc. v. Tanimura Distrib.,Inc ., 850 F.3d 446, 450–51 (9th Cir.), reh'g en banc granted, 868 F.3d 1047 (9th Cir. 2017) ; see Arizona v. Tohono O'odham Nation , 818 F.3d 549, 555 (9th Cir. 2016) ; see also 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). The three-judge panel reasoned that had the Boulder Fruit court not implicitly rejected the transfer-of-risk test, the holding of the case necessarily would have been different. Judge Melloy wrote a separate concurring opinion suggesting that the Ninth Circuit, sitting en banc, should eliminate a circuit split and expressly adopt a separate threshold transfer-of-risk test joining several other circuits. S & H Packing & Sales Co. , 850 F.3d at 451 (Melloy, J., concurring).⁷ A majority of the active judges on this Court agreed to rehear this appeal en banc .

I

We have jurisdiction under 28 U.S.C. § 1291. Boulder Fruit , 251 F.3d at 1270. "We review grants of summary judgment de novo." Balint v. Carson City, Nev. , 180 F.3d 1047, 1050 (9th Cir. 1999). We must determine, viewing the evidence in the light most favorable to the nonmoving party, whether the district court applied the substantive law correctly. Id.

II

Although the parties ask us to answer many particularized questions on appeal, we resolve only one issue: whether, in the context of determining the assets included in a PACA trust, a court needs to conduct a threshold true sale inquiry before it determines whether a transaction transferring PACA trust assets was a commercially reasonable sale. For the reasons stated below, we join the Second, Fourth and Fifth Circuits in adopting a threshold true sale test to determine whether assets transferred in transactions that are labeled "sales" remain assets of a PACA trust. We hold that a court must conduct a two-step inquiry when determining whether the questioned transaction is a sale or creates a security interest, i.e., a loan. First, a court must apply a threshold true sale test of which the transfer-of-risk is a key, but not the sole, factor. If a court concludes that there was a true sale, it must then determine if the transaction was commercially reasonable. If there was not a true sale, the court's inquiry stops there and the assets remain in the trust. If there was a true sale but the sale was not commercially reasonable, there is a breach of the trust and the assets likewise remain in the trust. If, however, the court concludes that there was a true sale and that the transaction was commercially reasonable, the buyer owns the assets free and clear of the trust. We hold that a district court...