This is Part 2 of a two part article.  If you have not yet read Part One, I suggest that you click the prior article on the right. 

In Part 1 we discussed the decision issued in February, 2017  by the Ninth Circuit Court of Appeals when it ruled that the assignment of PACA receivables to a Factor was not subject to disgorgement when the factored client went bankrupt and the  produce growers did not get paid for their product.  In making its ruling the Ninth Circuit followed a prior precedent of that court that did not require an analysis of whether the assignment to the Factor was a true sale.  The case was later accepted to be heard by Ninth Circuit en banc.

This, then, is the time to explain how circuit courts establish precedent.  First, remember that the circuit courts of appeal hear appeals from the District Courts (the trial courts) in their circuits.  The District Court is where the facts are determined (either by a jury or by the judge, if there is no jury).  The District Court will always determine the law.  On appeal, absent a serious error, the findings of fact will remain untouched but the legal conclusions are reviewed de novo (anew).

When circuit courts of appeal reach different legal conclusions, those cases often find their way to the United States Supreme Court (the next and last stop in the appeal process).  40 judges sit on the Ninth Circuit.  Each case is heard by a panel of 3 judges.  Typically, the panels are assigned for each day of argument.  Thus, a judge is sitting on a panel with 2 different judges for each daily calendar.  Those decisions are either unanimous or by a majority, sometimes with a dissenting opinion.

Just as judges on a panel can disagree on what the law is or should be, panels of judges may make rulings that conflict with the rulings of other panels.  In those instances it becomes common for the entire circuit court[1] to hear another round of the appeal.  That is called en banc.

The Circuit Court that made the ruling in the appeal discussed in Part 1, expressed some concerns regarding the holdings in the prior case that it relied upon as precedent, which precedent was not in line with those of other circuit courts that had addressed the same issue.

Specifically, the Ninth Circuit relying on the prior precedent did not first engage in a true sale examination before considering the commercial reasonableness of the factoring agreement.  The Court described the situation as:

The central dispute in this case developed after [Client]’s business failed, and Growers did not receive full payment from [Client] for their produce.  Growers sued [Factor] 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, [Client] breached the PACA trust and [Factor] 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, [Factor] was liable to Growers to repay the value of the accounts receivable.

As might be expected the parties to the appeal presented many questions to the en banc panel to consider.  However the Court determined to answer only one:  “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.”  The Court reversed the three judge circuit panel and the District Court below and joined 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.

The Ninth Circuit joined the reasoning of the Second Circuit quoting it as follows:

 …due to the need to sell perishable commodities quickly, sellers of perishable commodities are often placed in the position of being unsecured creditors of companies whose creditworthiness the seller is unable to verify. Due to a large number of defaults by the purchasers, and the sellers’ status as unsecured creditors, the sellers recover, if at all, only after banks and other lenders who have obtained security interests in the defaulting purchaser’s inventories, proceeds, and receivables.

… Congress intended to shield agricultural growers from risk in enacting PACA “to protect the public interest.” … PACA’s purpose is not to give a one-sided boon to growers, but instead, to benefit all parties and society by ensuring that growers are protected; lenders know their risk; and agricultural commerce is encouraged to benefit society.

But the Court did not stop there.  It went on to confirm that a factor who purchases accounts from growers (whether directly or through a distributor or broker) in true sales is free from a claim of trust fund diversion.

…. a PACA trustee’s true sale of accounts receivable for a commercially reasonable discount from the accounts’ face value is not a dissipation of trust assets and, therefore, is not a breach of the PACA trustee’s duties. (“The assets of the trust would thus have been converted into cash and the receivables would no longer have been trust assets.”… “[A] ‘bonafide purchaser’ of trust assets receives the assets free of claims by trust beneficiaries” and noting that the determinative issue on appeal is whether the “factoring agreement” was a loan secured by accounts receivable or a true sale of accounts receivable); (“[N]othing in PACA or the regulations prohibits PACA trustees from attempting to turn receivables into cash by factoring. To the contrary a commercially reasonable sale of accounts for fair value is entirely consistent with the trustee’s primary duty.”)…

I leave it to my readers to determine whether this story has a happy ending.  The good news is certainly that a true sale factor can be comfortable in factoring PACA receivables provided it is factoring on a true sale basis.

One last thought.  Despite the title Uniform Commercial Code we must keep in mind that the UCC is state law and that there are non-uniform provisions.  Consider the “law of the land” now in the Second, Fourth, Fifth and Ninth Circuits (as discussed in these articles) and the non-uniform UCC provisions in states such as Louisiana which provides:

…the parties’ characterization of a transaction as a sale of accounts…. shall be conclusive that the transaction is a true sale and is not a secured transaction …

I take it that as long as there are issues like these, lawyers like me can continue to earn a living.


S&H Packing & Sales Co., Inc. v Tanimura Distributing, Inc.  (Ninth Circuit en banc 2018)   2018 WL 1003855




[1] The Ninth Circuit hears cases en banc by a limited en banc court consisting of ten judges selected by lot and led by the Chief Judge.  Thus, a Ninth Circuit en banc court consists of eleven judges.

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