Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable

• Decision Date: 26 June 2003
• Docket Number: No. 02-10321.,02-10321.
• Citation: 336 F.3d 410
• Parties: REAVES BROKERAGE COMPANY, INC., Plaintiff-Appellee, v. SUNBELT FRUIT & VEGETABLE COMPANY, INC. et al., Defendants, Fidelity Factors LLC, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

336 F.3d 410

REAVES BROKERAGE COMPANY, INC., Plaintiff-Appellee, v. SUNBELT FRUIT & VEGETABLE COMPANY, INC. et al., Defendants, Fidelity Factors LLC, Defendant-Appellant.

No. 02-10321.

United States Court of Appeals, Fifth Circuit.

June 26, 2003.

Daniel Breese Jones (argued), Plano, TX, for Plaintiff-Appellee.

Bruce William Akerly (argued), Christopher Bailey Trowbridge, Bell, Nunnally & Martin, Dallas, TX, for Defendant-Appellant.

Appeal from the United States District Court for the Northern District of Texas.

Before JONES, WIENER, and DeMOSS, Circuit Judges.

WIENER, Circuit Judge:

Defendant-Appellant Fidelity Factors, L.L.C. ("Fidelity") appeals the district court's grant of summary judgment in favor of Plaintiff-Appellee Reaves Brokerage, Inc. ("Reaves") on its claims for reimbursement under the Perishable Agricultural Commodities Act, 7 U.S.C. §§ 499a-499s ("PACA"). For the following reasons, we AFFIRM.

I. FACTS AND PROCEEDINGS

Reaves sells and brokers fresh fruits and vegetables. On several occasions, Reaves made interstate commerce sales of produce to a wholesaler, Sunbelt Fruit & Vegetable Company ("Sunbelt"). In March 2000, Sunbelt ceased operations, owing Reaves $195,060.55 in unpaid invoices for produce delivered in June, July, and December of 1999. Reaves immediately filed suit against Sunbelt seeking damages under PACA. In July 2000, Reaves filed an amended complaint, adding as defendants (1) Fidelity Factors, L.L.C., a "factor" that contends it had purchased particular accounts receivable from Sunbelt, (2) James Heffington, Sr., Sunbelt's president and sole shareholder, and (3) Lone Star Produce Company, Sunbelt's alleged successor.

In October 2000, the district court granted a default judgment against Sunbelt in the amount of $195,060.55. Reaves eventually filed motions to dismiss its claims against Lone Star and for summary judgment, on its PACA trust claims against Fidelity and Heffington. Fidelity responded and filed a cross-motion for summary judgment. The district court referred these summary judgment motions to a magistrate judge who recommended granting Reaves's motion and denying Fidelity's cross motion. After de novo review and consideration of Fidelity's objections, the district court adopted the recommendation of the magistrate judge and entered judgment in favor of Reaves against Fidelity and Heffington, jointly and severally, in the amount of the default judgment previously rendered against Sunbelt, $195,060.55. Fidelity timely filed a notice of appeal but Heffington did not appeal.

II. ANALYSIS

A. Standard of Review

We review a grant of summary judgment de novo, applying the same standard as the district court.¹ A motion for summary judgment is properly granted only if there is no genuine issue as to any material fact.² An issue is material if its resolution could affect the outcome of the action.³ In deciding whether a fact issue has been created, we view the facts and the inferences to be drawn therefrom in the light most favorable to the nonmoving party.⁴

The standard for summary judgment mirrors that for judgment as a matter of law.⁵ Thus, the court must review all of the evidence in the record, but make no credibility determinations or weigh any evidence.⁶ In reviewing all the evidence, the court must disregard all evidence favorable to the moving party that the jury is not required to believe, and should give credence to the evidence favoring the nonmoving party as well as evidence supporting the moving party that is uncontradicted and unimpeached.⁷ The nonmoving party, however, cannot satisfy his summary judgment burden with conclusional allegations, unsubstantiated assertions, or only a scintilla of evidence.⁸

B. PACA

PACA was enacted in 1930 to regulate the sale of perishable commodities⁹ and "promote fair dealing" in the sale of fruits and vegetables.¹⁰ In 1984, PACA was amended to extend its protection to sellers of perishable commodities, who, because of the need to sell their products quickly, were often unsecured creditors of buyers whose creditworthiness they were unable to evaluate before the sale.¹¹ To "remedy this burden on commerce in perishable commodities,"¹² Congress added the provisions in § 499e, which create, immediately upon delivery, a nonsegregated "floating" trust in favor of sellers on the perishable commodities sold and the products and proceeds derived from the commodities.¹³ If the seller is not paid promptly, the trust assets must be preserved and the seller's claims prime those of other secured and unsecured creditors for the full amount of the claim.¹⁴

General principles of trust law govern PACA trusts.¹⁵ Accordingly, a "bona fide purchaser" of trust assets receives the assets free of claims by trust beneficiaries.¹⁶ Consequently, unpaid sellers are not able to recover trust proceeds conveyed to a third party if that party received the proceeds "for value" and "without notice of the breach of trust."¹⁷ A transfer is "for value" "if money is paid or other property is transferred or services are rendered as consideration for the transfer of trust property."¹⁸ Lenders who receive trust assets through enforcement of a security agreement are not bona fide purchasers, however, because such transfers are not "for value."¹⁹

The determinative issue presented in this appeal is whether, as a matter of law, the "factoring agreement" between Sunbelt and Fidelity was (1) a loan secured by Sunbelt's accounts receivable or (2) a true sale or "factoring" of the accounts receivable to Fidelity. Reaves argues, and the district court concluded, that in spite of its label and the terminology used, the agreement executed between Fidelity and Sunbelt was not truly a sale of accounts receivable, but was in substance a secured lending agreement, under which Fidelity held all of Sunbelt's accounts (and other assets) as collateral and Sunbelt remained personally liable for any shortfall. Fidelity insists that it purchased Sunbelt's accounts and "never made a loan of any type to Sunbelt."

Characterization of the agreement at issue turns on "the substance of the relationship" between Fidelity and Sunbelt, "not simply the label attached to the transaction."²⁰ As this issue under PACA is one of first impression in this circuit, we, like the district court, look for guidance to the Second Circuit's analysis in Endico Potatoes v. CIT Group/Factoring Inc.²¹ In Endico Potatoes, the court identified several elements to consider in determining the true legal substance of a transaction involving PACA trust assets, including (1) the right of the creditor to recover from the debtor any deficiency if the assets assigned prove insufficient to satisfy the debt; (2) the effect on the creditor's right to ownership of the assets assigned if the debtor were to pay the debt from independent funds; (3) whether the debtor has a right to amounts recovered from the sale of assets in excess of that necessary to satisfy the debt; and (4) whether the assignment itself reduces the debt.²² All these features bear on a common question — which party bears the risk? As the Second Circuit explained

[w]here the lender has purchased the accounts receivable, the borrower's debt is extinguished and the lender's risk with regard to the performance of the accounts is direct, that is, the lender and not the borrower bears the risk of non-performance by the account debtor. If the lender holds only a security interest, however, the lender's risk is derivative or secondary, that is, the borrower remains liable for the debt and bears the risk of non-payment by the account debtor, while the lender only bears the risk that the account debtor's non-payment will leave the borrower unable to satisfy the loan.²³

Application of the Second Circuit's risk-transfer analysis and our own independent examination of the substance of the parties' agreement leads us to conclude that the relationship between Fidelity and Sunbelt was that of a secured lender and debtor, not a seller and buyer. At the outset, we recognize that several terms and provisions used in the agreement are characteristic of a sale of accounts. For example, (1) the agreement is titled "factoring agreement" and states that "[w]e [Sunbelt] agree to sell to you [Fidelity] as absolute owner" all accounts; (2) account debtors are required to be notified of the sale and instructed to pay Fidelity directly; (3) the parties agreed to a "purchase price"; and (4) Sunbelt had no right to vary the terms of any receivable purchased by Fidelity without Fidelity's prior written consent. If viewed in isolation, these terms would support a conclusion that the agreement is a true sale. When read in its entirety, however, all terms and provisions of the agreement, taken as a whole, confirm that the risk of non-payment or underpayment is borne entirely by Sunbelt and not shifted to Fidelity.

First, although the agreement purports to distinguish between sales of accounts "with recourse" to Sunbelt, and those "without recourse," in reality, Fidelity would virtually always have recourse against Sunbelt if Sunbelt's account debtors defaulted or underperformed. Sales of accounts without the prior written approval of Fidelity are "with full recourse to" Sunbelt. Although sales of accounts approved in writing by Fidelity (so-called "approved receivables") are nominally without recourse to Sunbelt, the parties apparently did not segregate, track, or otherwise distinguish these two categories of sales.²⁴

Furthermore, the approved, non-recourse sales are qualified by two exceptions that are so significant that they essentially swallow non-recourse. First, Fidelity's "risk for approved receivables purchased without recourse is limited to [Sunbelt's] customer's financial inability to pay" — described in the agreement as "credit risk." In turn, "financial inability" is narrowly defined as

(a) [Fidelity] becoming aware that the customer on or before the due date of...