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Inc. v. Tanimura Distributing, Inc.

United States Court of Appeals, Ninth Circuit

February 22, 2018

5 & H Packing & Sales Co., Inc., DBA Season Produce Co., a California corporation, Plaintiff,
v.
Tanimura Distributing, Inc., a California corporation, Defendant, and G. W. Palmer & Co., Inc.; Andrew 6 Williamson Sales Co., Inc., DBA Andrew & Williamson Fresh Produce; East Coast Brokers and Packers, Inc.; Gargiulo, Inc., Plaintiffs-Appellants, and AgriCap Financial Corporation, a Delaware corporat ion, 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.

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

         Appeal from the United States District Court for the Central District of California George H. Wu, District Judge, Presiding o. 2:08-cv-05250-GW-FFM

          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.

         SUMMARY[**]

         Perishable Agricultural Commodities Act

         The en banc court vacated the district court's summary judgment in favor of defendant AgriCap Financial Corp. in an action brought by produce growers under the Perishable Agricultural Commodities Act, and remanded for further proceedings.

         The growers sold their perishable agricultural products on credit to Tanimura Distributing, Inc., a distributor, which made Tanimura a trustee over a PACA trust holding the perishable products and any resulting proceeds for the growers as PACA-trust beneficiaries. Tanimura sold the products on credit to third parties and transferred the resulting accounts receivable to AgriCap through a transaction AgriCap described as a "Factoring Agreement" or sale of accounts. Tanimura's business later failed, and the growers did not receive payment in full from Tanimura for their products.

         The 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 the growers, held an interest superior to that of any secured lender. Hence, AgriCap was liable to the growers to repay the value of the accounts receivable.

         Joining other circuits, the en banc court adopted a threshold "true sale" test to determine whether assets transferred in transactions that are labeled "sales" remain assets of a PACA trust. The en banc court held 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. To the extent that its opinion contradicted Boulder Fruit Express & Heger Organic Farm Sales v. Transp. Factoring, Inc., 251 F.3d 1268 (9th Cir. 2001), the en banc court overruled Boulder Fruit.

         On remand, the district court should determine whether the transaction at issue was a true sale or a lending agreement.

         Dissenting, Judge Ikuta, joined by Judges Hurwitz and Friedland, wrote that the majority's conclusion-that if a PACA trustee borrows money from a lender in order to pay the growers, but the money runs out before all the growers are paid, then the lender has an obligation to make the unpaid growers whole-is unmoored from both the text of PACA and settled principles of trust law.

          OPINION

          GOULD, CIRCUIT JUDGE

         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 should look to the substance of the transaction to determine whether the transaction is a true sale or a secured loan. In doing so, the transfer of risk should be a primary factor to which a court looks.

         III

         We elaborate on the principles just summarized, with reference to pertinent authorities and reasoning.

         A

         "Congress enacted PACA in 1930 to prevent unfair business practices and promote financial responsibility in the fresh fruit and produce industry." Boulder Fruit, 251 F.3d at 1270. Congress amended PACA in 1984 "'to remedy [the] burden on commerce in perishable agricultural commodities and to protect the public interest' caused by accounts receivable financing arrangements that 'encumber or give lenders a security interest' in the perishable agricultural commodities superior to the growers." Id. (alteration in original) (quoting 7 U.S.C. § 499e(c)(1)). PACA creates a statutory trust in an effort to remedy this burden:

Perishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents.

7 U.S.C. § 499e(c)(2). "This provision imposes a 'non-segregated floating trust' on the commodities and their derivatives, and permits the commingling of trust assets without defeating the trust." Endico Potatoes, 67 F.3d at 1067 (citation omitted).

         The House Report explaining the 1984 PACA amendments states:

[Purchasers/Distributors of perishable agricultural commodities] in the normal course of their business transactions, operate on bank loans secured by the inventories, proceeds or assigned receivables from sales of perishable agricultural commodities, giving the lender a secured position in the case of insolvency. Under present law, sellers of fresh fruits and vegetables are unsecured creditors and receive little protection in any suit for recovery of damages where a buyer has failed to make payment as required by contract.

H.R. Rep. No. 98-543 at *3 (1984), as reprinted in 1984 U.S.C.C.A.N. 405, 407. The Second Circuit, citing this report, explained:

According to Congress, 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.

Endico Potatoes, 67 F.3d at 1067. Given this history, it is evident that our focus should be upon the true nature of the transactions at issue and the true nature of the parties' roles-that of seller and buyer or that of secured lender and borrower.

         Perhaps most importantly, Congress intended to shield agricultural growers from risk in enacting PACA "to protect the public interest." 7 U.S.C. § 499e(c)(1). 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.

         B

         We apply general trust principles to questions involving PACA trusts, unless those principles directly conflict with PACA. Boulder Fruit, 251 F.3d at 1271; see also Endico Potatoes, 67 F.3d at 1067; Reaves, 336 F.3d at 413. Because ordinary principles of trust law apply to trusts created under PACA, trust assets are excluded from the bankruptcy estate if the PACA trustee goes bankrupt. Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 282 (9th Cir. 1997).

         A breach of trust occurs when there is "a violation by the trustee of any duty which as trustee he owes to the beneficiary." Boulder Fruit, 251 F.3d at 1271 (quoting Restatement (Second) of Trusts § 201 (1959)). A trustee is required by federal regulation "to maintain trust assets in a manner that such assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities." Id. (quoting 7 C.F.R. § 46.46(d)(1)). The duty to maintain trust assets is far-reaching. Federal regulation dictates that "[a]ny act or omission which is inconsistent with this responsibility, including dissipation of trust assets, is unlawful and in violation of [PACA]." Id. (second alteration in original) (quoting 7 C.F.R. § 46.46(d)(1)). Non-segregated floating trusts under PACA permit the commingling of trust assets and allow the PACA trustee to convert trust assets into proceeds. Boulder Fruit, 251 F.3d at 1272; see also Endico Potatoes, 67 F.3d at 1067; A&J Produce Corp. v. Bronx Overall Econ. Dev. Corp., 542 F.3d 54, 57-58 (2d Cir. 2008). The transferees of trust assets, such as AgriCap here, "are liable only if they had some role in causing the breach or dissipation of the trust." Boulder Fruit, 251 F.3d at 1272; Restatement (Second) of Trusts § 283 (1959) ("If the trustee transfers trust property to a third person . . . [without] commit[ting] a breach of trust, the third person holds the interest so transferred or created free of the trust, and is under no liability to the beneficiary.").

         C

         Against this industry and legal background, 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. Nickey Gregory, 597 F.3d at 598 ("The assets of the trust would thus have been converted into cash and the receivables would no longer have been trust assets. Obviously, under this scenario, [the factoring agent] would own the accounts receivable and would be able to do with them what it wished."); Reaves Brokerage, 336 F.3d at 413-14 (holding that "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); Boulder Fruit, 251 F.3d at 1271-72 ("[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."); Endico Potatoes, 67 F.3d at 1067-69 (noting that "the well recognized principle from trust law that a bona fide purchaser of trust assets receives the assets free of any claim by the trust beneficiaries" was determinative, and because the financier had received only a security interest, its interest was subject to the rights of the growers). That sale is, in substance, a conversion of trust assets from accounts receivable into cash. See Boulder Fruit, 251 F.3d at 1271.

         The Second, Fourth, and Fifth Circuits have held that any purported security interest for a lender in PACA-trust assets is inferior to the trust beneficiaries' claims and rights. See, e.g., Nickey Gregory, 597 F.3d at 598-99 ("Thus, if the accounts receivable were held by [the factoring agent] as collateral to secure repayment of a loan, they would also have been held for the benefit of produce sellers, and the produce sellers would have effectively enjoyed a first-creditor position in them."); Endico Potatoes, 67 F.3d at 1069 ("Because [the factoring agent] held only a security interest . . . its interest is subject to the rights of the PACA trust beneficiaries. . . . [The factoring agent] must, therefore, disgorge amounts collected on the accounts after [the distributor's] bankruptcy filing to the extent necessary to satisfy claims of PACA trust beneficiaries."); A&J Produce, 542 F.3d at 58 ("A creditor holding 'only a security interest, ' therefore, retains that interest 'subject to the rights of the trust beneficiaries.'"). Notwithstanding the absence of discussion of a "true-sale" or "transfer-of-risk" test, even Boulder Fruit made clear that a lender's use of PACA-trust assets as collateral to secure a debt could not create a priority security interest ahead of the position enjoyed by PACA trust beneficiaries.[8]

          IV

         The treatment of true sales and security interests under PACA and trust law is reasonably clear. But what is at issue here, and is not perfectly clear, is the proper analysis to apply when the true nature of the transaction is ambiguous-i.e., when it resembles a sale in some respects and yet looks like a secured transaction in others. Growers and the Second, Fourth, and Fifth Circuits would apply a threshold transfer-of-risk test to determine if a transaction is a true sale or is more accurately viewed as a secured lending relationship. AgriCap, relying on Boulder Fruit, argues vigorously that the court need only ask if the transaction was commercially reasonable.

         A

         Boulder Fruit held that factoring agreements do not per se breach the PACA trust because "a trustee can sell trust assets unless the sale breaches the trust." 251 F.3d at 1272. The court concluded that "a commercially reasonable sale of accounts for fair value is entirely consistent with the trustee's primary duty under PACA and 7 C.F.R. § 46.46(d)(1)-to maintain trust assets so that they are 'freely available to satisfy outstanding obligations to sellers of perishable commodities.'" Id. at 1271. Boulder Fruit reasoned that the commercial reasonableness of a factoring agreement depends upon the terms of the agreement. For example, "[a] PACA trustee who sells accounts for pennies on the dollar, just to turn a quick buck, might well have breached the PACA trust, while a trustee who factors accounts at a commercially reasonable rate would not." Id.

         The Boulder Fruit panel, in reaching its conclusion, said that the factoring agreement "actually enhanced the trust." Id. at 1272. Boulder Fruit considered not only the initial up-front payment from the factoring agent to the distributor but also the actual sums paid to the distributor by the factoring agent while performing the factoring agreement.[9] Id. Boulder Fruit did not, however, examine the substance of the rights transferred to determine what the factoring agent agreed to do, what risk the factoring agent accepted when it accepted the right to collect on the transferred accounts, and whether the transaction should properly be deemed a true sale rather than a mere secured lending arrangement. Rather, Boulder Fruit characterized the transaction as a sale or factoring agreement without discussing the factoring agent's rights and ability to seek recourse against the distributor.

         In sharp contrast, the Second, Fourth, and Fifth Circuits found it necessary to examine the rights and risks transferred between the parties to a factoring agreement. The courts in these cases examined the text and legislative history of PACA and the regulations promulgated under PACA to conclude that Congress intended to promote the interests of produce growers above the interests of secured lenders. See, e.g., Nickey Gregory, 597 F.3d at 594-95, 598-99; Endico Potatoes, 67 F.3d at 1066-68. The Fourth Circuit stressed that representatives of the secured lending community had voiced concern over PACA's likely effect upon secured lenders and the factoring industry. Nickey Gregory, 597 F.3d at 599. That court concluded that Congress nevertheless found that the balance of policy interests favored placing those lenders in a position inferior to unpaid growers. Id.

         The Endico Potatoes court resolved a case wherein Merberg, a dealer in perishable agricultural commodities received financing from CIT, and CIT held security interests in all Merberg's assets including accounts receivable. 67 F.3d at 1066. Merberg went through a bankruptcy and the growers sought reimbursement from CIT for the amounts left unpaid. Id. The court defined the issue before it as whether the transaction between CIT and Merberg constituted a purchase for value or whether the exchange gave CIT no more than a security interest. Id. at 1068. The court reasoned, "[i]n determining the substance of the transaction, the Court may look to a number of factors, including the right of the creditor to recover from the debtor any deficiency if the assets assigned are not sufficient to satisfy the debt, the effect on the creditor's right to the assets assigned if the debtor were to pay the debt from independent funds, whether the debtor has a right to any funds recovered from the sale of assets above that necessary to satisfy the debt, and whether the assignment itself reduces debt." Id. That court found, "[t]the root of all of these factors is the transfer of risk." Id. at 1069. The court relied upon the fact that the agreement had a provision that let CIT demand payment at any time and a provision that terminated CIT's interest if Merberg paid its outstanding obligation. Id. The court held that because CIT only held a security interest in Merberg's accounts receivable, CIT's interest was subject to the rights of the PACA trust beneficiaries. Id.

         A question may be raised whether the Second Circuit no longer espouses the view that the substance of an agreement must be analyzed when determining the rights of the parties. In E. Armata, Inc. v. Korea Commercial Bank of New York, 367 F.3d 123, 126 (2d Cir. 2004), the Second Circuit considered whether, under PACA, a bank was liable to the beneficiaries of a PACA trust for receipt of funds when the bank extended revolving overdraft privileges to the produce dealer and applied deposited PACA funds to reduce the negative balance in the produce dealer's overdrawn account. Id. The court, in concluding that the bank was not liable to PACA trust beneficiaries, reasoned that the bank did not breach the trust. Id. at 131; see also American Banana Co., Inc. v. Republic Nat'l Bank of NY, N.A., 362 F.3d 33, 42 (2d Cir. 2004) ("Nor are we convinced that a trustee's payments of commercially reasonable fees and interest in exchange for routine banking services such as check cashing services and overdraft privileges extended to facilitate payments to beneficiaries constitute a breach of the PACA trust."). The Second Circuit in its E. Armata decision, while it cited Boulder Fruit for specified purposes, [10] did not purport to overrule Endico Potatoes or to limit it.

          A subsequent Second Circuit opinion, A&J Produce Corp. v. Bronx Overall Economic Development Corp, held that a lender who had a lien on trust assets held that lien "subject to the rights of the trust beneficiaries" i.e., the growers. 542 F.3d 54, 58 (2d Cir. 2008). It further noted that "[a]ny other result would elevate the rights of secured creditors above those of PACA creditors, contrary to the intent to the statute. Id. at 59; see also Coosemans Specialties, Inc. v. Gargiulo, 485 F.3d 701, 707 (2d Cir. 2007) (noting that in E. Armata they did not hold that any commercially reasonable transaction avoids breaching fiduciary responsibilities but that "whether a transaction is commercially reasonable is simply one factor that may be relevant in determining whether a PACA trustee has met its ultimate burden of proving that trust assets remained freely available to plaintiffs").

         In Reaves, the Fifth Circuit considered a case where Reaves, a produce seller, sold produce to Sunbelt Fruit & Vegetable Company, a wholesaler, and Sunbelt ceased operations owing Reaves almost $200, 000 in unpaid invoices. 336 F.3d at 412. Reaves sued Fidelity Factors, LLC, because Fidelity had purchased particular accounts receivable from Sunbelt. Id. The court framed the issue before it as whether the "factoring agreement" between Sunbelt and Fidelity was a loan secured by accounts receivable or a sale of accounts receivable. Id. at 414. The court reasoned that the "[c]haracterization of the agreement turns on the 'substance of the relationship' between Fidelity and Sunbelt, 'not simply the label attached to the transaction.'" Id. The court looked to the Second Circuit's risk-transfer analysis and also conducted an independent examination of the substance of the agreement and concluded that the relationship between Fidelity and Sunbelt was that of a secured lender and debtor. Id. The court reasoned that the agreement and its provisions, when read in their entirety, "confirm that the risk of non-payment or underpayment is entirely borne by Sunbelt." Id. at 415 (emphasis in original). The court pointed to continuing lien and single indebtedness language, a personal guaranty from Sunbelt's president, and recordation of the agreement with the UCC to support its conclusion. Id. at 416. The court also distinguished Boulder Fruit because it found ...


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