Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca4-09-01130/USCOURTS-ca4-09-01130-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 

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PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

NICKEY GREGORY COMPANY, LLC; 

POPPELL’S PRODUCE INCORPORATED,

Plaintiffs-Appellees,

v.  No. 09-1130

AGRICAP, LLC, a/k/a AgriCap

Financial Corporation,

Defendant-Appellant. 

NICKEY GREGORY COMPANY, LLC; 

POPPELL’S PRODUCE INCORPORATED,

Plaintiffs-Appellants,

v.  No. 09-1162

AGRICAP, LLC, a/k/a AgriCap

Financial Corporation,

Defendant-Appellee. 

Appeals from the United States District Court

for the District of South Carolina, at Greenville.

Henry M. Herlong, Jr., Senior District Judge.

(6:07-cv-03605-HMH)

Argued: December 3, 2009

Decided: March 4, 2010

Before TRAXLER, Chief Judge, NIEMEYER, Circuit

Judge, and John Preston BAILEY, Chief United States

District Judge for the Northern District of West Virginia,

sitting by designation.

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Affirmed in part, vacated in part, and remanded with instructions by published opinion. Judge Niemeyer wrote the opinion, in which Chief Judge Traxler and Judge Bailey joined.

COUNSEL

ARGUED: Christoph Carl Heisenberg, TRAIGER &

HINCKLEY, LLP, New York, New York, for AgriCap, LLC,

a/k/a AgriCap Financial Corporation. Stephen P. McCarron,

MCCARRON & DIESS, Washington, D.C., for Nickey Gregory Company, LLC, and Poppell’s Produce Incorporated. ON

BRIEF: Kirsten E. Small, NEXSEN PRUET, LLC, Greenville, South Carolina, for AgriCap LLC, a/k/a AgriCap Financial Corporation. Mary Jean Fassett, MCCARRON & DIESS,

Washington, D.C., for Nickey Gregory Company, LLC, and

Poppell’s Produce Incorporated.

OPINION

NIEMEYER, Circuit Judge:

Two sellers of perishable agricultural commodities, Nickey

Gregory Company, LLC, and Poppell’s Produce Inc., commenced this action under the Perishable Agricultural Commodities Act, 1930 ("PACA"), 7 U.S.C. §§ 499a-499t, to

recover $106,696 owed them for the sale of produce to Robison Farms, LLC., a bankrupt South Carolina produce distributor. They named as defendant AgriCap, LLC, a finance

company that provided secured financing to Robison Farms

for working capital, and they demanded that AgriCap disgorge the proceeds of Robison Farms’ accounts receivable

held by AgriCap as collateral to secure repayment of monies

advanced by AgriCap to Robison Farms. The two produce

sellers claim that 7 U.S.C. § 499e(c)(2) created a trust for

their benefit over the proceeds of their produce, including the

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accounts receivable that Robison Farms used for collateral in

its arrangement with AgriCap, and that they therefore had a

superior interest in the accounts receivable and proceeds held

by AgriCap.

AgriCap claimed that it purchased Robison Farms’

accounts receivable under a traditional factoring agreement

and that it therefore held no assets of Robison Farms that

were subject to a PACA trust. It also asserted as a defense that

it was a bona fide purchaser for value.

The district court rejected AgriCap’s position and found

that AgriCap’s arrangement with Robison Farms was a lending arrangement secured by Robison Farms’ accounts receivable. Accordingly, it concluded that AgriCap held the

accounts receivable as part of the PACA trust, the assets of

which had to be used to pay unpaid commodities sellers

before any other creditor.

For the reasons that follow, we affirm the district court’s

conclusion that Robison Farms’ accounts receivable were

held by AgriCap as collateral for a loan and therefore were

subject to a PACA trust, but we disagree with the amount that

the district court required AgriCap to pay the commodities

sellers. Accordingly, we affirm in part, vacate in part, and

remand for a reassessment of damages in accordance with this

opinion.

I

The Perishable Agriculture Commodities Act, which was

enacted in 1930 to suppress unfair and fraudulent business

practices in the marketing of perishable commodities, was

amended in 1984 to provide unique credit protection to sellers

of perishable agricultural commodities. Because sellers of

perishable commodities had a need to move their inventories

quickly, they were often required to become unsecured creditors of their purchasers, whose credit they were often unable

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to verify. As these sellers of perishable commodities increasingly suffered the risk of the uncollectability of amounts owed

by the purchasers, especially because the purchasers gave

superior security interests to their lenders, Congress enacted

the 1984 amendments to protect the commodities sellers by

giving them a priority position over even secured creditors.

As Congress explained:

[Purchasers 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 the contract.

H.R. Rep. No. 98-543 ("House Report"), at 3 (1984),

reprinted in 1984 U.S.C.C.A.N. 405, 407 (emphasis added).

The House Report noted that the delay or nonreceipt of payment to perishable commodities sellers had increased substantially, creating a "burden on commerce." Id. at 3-4.

The 1984 amendments create, upon the sale of perishable

agricultural commodities, a trust for the benefit of the unpaid

sellers of the commodities on (1) the commodities, (2) the

inventory or products derived from them, and (3) the proceeds

of the inventory or products. 7 U.S.C. § 499e(c)(1)-(2); see

also House Report at 3 (recounting congressional findings);

Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336

F.3d 410, 413 (5th Cir. 2003) (same). As amended, PACA

requires that purchasers of perishable agricultural commodities maintain the trust by retaining the commodities or their

proceeds until the commodities sellers are paid, and it makes

it unlawful to "fail to maintain the trust as required." 7 U.S.C.

§ 499b(4). PACA confers jurisdiction on district courts to

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entertain "actions by trust beneficiaries to enforce payment

from the trust." Id. § 499e(c)(5).

The trust created by PACA is a "nonsegregated ‘floating’

trust" on perishable agricultural commodities and their derivatives until all sellers of such commodities are paid. 7 C.F.R.

§ 46.46(b). Because the governing regulations specifically

contemplate the comingling of trust assets without defeating

the trust, see id., the trustee of such a trust is permitted to convert trust assets into other property, provided that the trustee

honors its obligation to "maintain trust assets in a manner that

such assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities," id.

§ 46.46(d)(1). Any act inconsistent with maintaining the trust,

including "dissipation" of trust assets, is deemed unlawful and

a violation of PACA. See 7 U.S.C. § 499b; 7 C.F.R.

§ 46.46(d)(1). "Dissipation" is defined as "any act or failure

to act which could result in the diversion of trust assets or

which could prejudice or impair the ability of unpaid suppliers, sellers, or agents to recover money owed in connection

with produce transactions." 7 C.F.R. § 46.46(a)(2).

PACA trusts thus give sellers of perishable agricultural

commodities a right of recovery that is superior to the right

of all other creditors, including secured creditors. 7 U.S.C.

§ 499e(c)(1). Indeed, in the event of bankruptcy, trust assets

do not even become a part of the bankruptcy estate. See Boulder Fruit Express & Heger Organic Farm Sales v. Transp.

Factoring, Inc., 251 F.3d 1268, 1271 (9th Cir. 2001).

General trust principles govern PACA trusts unless the

principle conflicts with PACA. See Reaves Brokerage Co.,

336 F.3d at 413; Boulder Fruit Express, 251 F.3d at 1271.

Thus, when trust assets are held by a third party, resulting in

the failure of the trustee to pay unpaid sellers of perishable

agricultural commodities, the third party may be required to

disgorge the trust assets unless the third party can establish

that it has some defense, such as having taken the assets as a

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bona fide purchaser without notice of the breach of trust. See

Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d

1063, 1067-68 (2d Cir. 1995); Restatement (Second) of Trusts

§ 284.

In this case, Nickey Gregory and Poppell’s Produce claim

to have been the beneficiaries of a PACA trust, the assets of

which had been transferred to AgriCap, and therefore they

seek disgorgement from AgriCap of those assets in amounts

sufficient to pay them as unpaid sellers of perishable agricultural commodities.

II

Robison Farms, LLC., a South Carolina limited liability

company that operated in Greenville, South Carolina, was,

during the relevant periods, engaged in the business of distributing produce to restaurants and school systems in North Carolina and South Carolina. It purchased the produce from

wholesalers who sold the produce to Robison Farms on credit

under the protection of PACA’s trust arrangement. Two of its

suppliers, Nickey Gregory Company, LLC, and Poppell’s

Produce, Inc., who are the plaintiffs in this action, sold their

produce to Robison Farms on a continuing basis, extending

short term credit to Robison Farms "subject to the statutory

trust authorized by [PACA]," as indicated on their invoices.

In early March 2005, when Robison Farms was experiencing financial difficulties, it applied to AgriCap, L.L.C., for

financing to provide it with working capital "to restructure

[its] payables." AgriCap approved a line of credit that was

geared to the amount of Robison Farms’ accounts receivable.

As Robison Farms assigned accounts receivable to AgriCap,

AgriCap advanced Robison Farms 80% of the face amount of

the receivables, up to a limit of $500,000 outstanding at any

given time. As AgriCap collected on the receivables, it

retained the 80% amount and remitted the remaining 20% to

Robison Farms, less its fees and interest for the period during

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which its advances on the accounts receivable were outstanding.

To memorialize the arrangement, AgriCap and Robison

Farms entered into (1) an agreement entitled "Factoring

Agreement," which described in detail how AgriCap would

advance funds against accounts receivable; (2) a "Security

Agreement," granting AgriCap a blanket security interest in

all of Robison Farms’ assets; and (3) a "Subordination Agreement," subordinating all of Robison Farms’ debts to the payment of the amounts that would become owed to AgriCap. In

addition, Cindy Robison, the president and owner of Robison

Farms, personally guaranteed Robison Farms’ debts to AgriCap, and AgriCap filed a UCC-1 "Financing Statement," listing as collateral virtually all of Robison Farms’ assets,

including crops, inventory, and accounts receivable.

Notwithstanding this financing arrangement, Robison

Farms continued to experience financial difficulties. Indeed,

in May 2006, AgriCap noted that "[t]here are still quite a bit

of past dues in the PACA payables." Even though the produce

suppliers continued to deliver produce throughout the spring

and early summer, Robison Farms stopped paying them on

May 11, 2006, and on July 17, 2006, it closed its doors for

business. The next day, July 18, 2006, AgriCap noted, in an

internal memorandum written in response to Robison Farms’

notice that it had closed its doors, "The company has been in

a constant struggle due to heavy debt load." Less than a

month later, Robison Farms filed a Chapter 7 bankruptcy petition to liquidate all of its assets.

After receiving a portion of the amounts owed them from

the bankruptcy estate, Nickey Gregory and Poppell’s Produce

are still owed $66,411.25 and $40,284.61, respectively, for a

total of $106,695.86, and Nickey Gregory is also owed attorneys’ fees.1

1

In its supply arrangement with Nickey Gregory, Robison Farms agreed

to pay Nickey Gregory its attorneys’ fees for the collection of PACA

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At the time when Robison Farms stopped paying the produce suppliers—May 11, 2006—AgriCap was holding over

$150,000 in face amount of Robison Farms’ accounts receivable, and from May 11 until the date when Robison Farms

closed its doors, AgriCap received additional accounts receivable from Robison Farms worth over $500,000 in face

amount. When Robison Farms ceased doing business on July

17, AgriCap still held over $160,000 in Robison Farms’

accounts receivable. AgriCap was able to convert nearly all of

Robison Farms’ accounts receivable into cash, which it used

to repay itself without paying Nickey Gregory or Poppell’s

Produce.

Nickey Gregory and Poppell’s Produce commenced this

action against AgriCap, contending that the accounts receivable that AgriCap received from Robison Farms after May 11,

2006, were, under PACA, trust assets held by AgriCap for the

benefit of unpaid commodities sellers such as them. See 7

U.S.C. § 499e(c). They allege that by not paying them, AgriCap wrongfully held assets in breach of the trust, incurring

liability to them in the amount owed to them by Robison

Farms—$106,695.06, plus Nickey Gregory’s attorneys’ fees.

Following a bench trial, the district court found in favor of

the produce suppliers, entering judgment in their favor for

$88,690.75, from which the court directed that Nickey Gregory also be paid its attorneys’ fees. Nickey Gregory Co. v.

AgriCap, LLC, 592 F. Supp. 2d 862 (D.S.C. 2008). The court

debts. The district court held that produce suppliers with the requisite

attorneys’ fees language on their invoices can collect reasonable attorneys’

fees as "sums owing in connection with such transactions," under 7 U.S.C.

§ 499e(c)(2). See Nickey Gregory Co. v. AgriCap, LLC, 592 F. Supp. 2d

862, 878-79 (D.S.C. 2008) (citing Coosemans Specialties, Inc. v. Gargiulo, 485 F.3d 701, 708-09 (2d Cir. 2007); Country Best v. Christopher

Ranch, LLC, 361 F.3d 629, 632 (11th Cir. 2004); Middle Mountain Land

& Produce, Inc. v. Sound Commodities, Inc., 307 F.3d 1220, 1224 (9th

Cir. 2002)). AgriCap does not challenge this holding by the district court.

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rejected AgriCap’s contention that its relationship with Robison Farms was a traditional factoring agreement, under which

it purchased Robison Farms’ accounts receivable for a reasonable, discounted price, and that therefore the accounts receivable were no longer in the PACA trust, subject to the claims

of produce suppliers. Rather, the court concluded that the

arrangement was a loan arrangement, under which AgriCap

was holding Robison Farms’ accounts receivable as collateral.

Thus, when AgriCap failed to pay Robison Farms’ produce

suppliers as beneficiaries of the PACA trust, the trust was

breached, in violation of 7 U.S.C. § 499b(4). The court

awarded damages of $88,690.75. The court determined that

this figure represented the total of the "retained trust assets"

held by AgriCap, calculated by subtracting the total amount

that it loaned to Robison Farms in respect to those accounts

from the total amount that AgriCap collected on Robison

Farms’ accounts receivable. 

AgriCap filed this appeal, contending that the district court

erred in rejecting its claim that the arrangement was a true

factoring agreement not subject to PACA. It also contends

that in any event it was a bona fide purchaser for value of the

accounts receivable, providing it with a complete defense.

Finally, it asserts that the district court erred in requiring it to

disgorge the entirety of the "retained trust assets" and not

merely the $16,339.49 in fees and interest that it retained after

Robison Farms stopped paying produce suppliers on May 11,

2006. 

The produce suppliers filed a cross-appeal, contending that

the district court erred by not awarding them damages in the

full amount of their claims against the PACA trust. They

assert that the amount of accounts receivable that AgriCap

held while they remained unpaid was more than sufficient to

satisfy their claims.

III

For its central argument, AgriCap contends that PACA did

not prohibit Robison Farms from transferring PACA trust

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assets to it, so long as the transfers were for fair value and

therefore were commercially reasonable, because the Act

creates liability only when trust assets are dissipated and the

trust is thereby breached. AgriCap asserts that the question

whether the transaction between it and Robison Farms was a

loan or a sale, as addressed by the district court, was irrelevant to resolving whether the trust was breached. It maintains

that the relevant question is whether the accounts receivable

were transferred by Robison Farms to AgriCap in a commercially reasonable transaction. If they were, it argues, then the

transaction did not violate PACA because PACA permits trust

assets to be converted into other assets. It explains that

PACA’s prohibition against dissipation only "ensur[es] that

assets are ‘available’ to satisfy obligations [of commodities

sellers] [and] does not restrict the ability of the trustee to convert the trust assets into another form. Indeed, PACA contemplates that the trustee can convert the trust assets (the

produce) into another form (cash, or a receivable)." It concludes accordingly that its transaction with Robison Farms

was just that, a commercially reasonable transfer that was not

prohibited.

This argument, however, is a straw man. Articulated in this

form, the issue answers itself, as neither the statute nor any

case law suggests that trust assets cannot be converted into a

different form of assets.

Rather, to be successful, AgriCap’s argument must also

assume that the conversion of accounts receivable into cash

was part of a true factoring arrangement because, in that case,

Robison Farms would have relinquished its interest in the

accounts receivable and received the cash in lieu of them. 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, AgriCap would own the

accounts receivable and would be able to do with them what

it wished.

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But if the accounts receivable were not sold but rather were

given as collateral for a loan, then the accounts receivable

would have remained trust assets, subject to AgriCap’s security interest. Consequently, when AgriCap converted the

receivables into cash, the cash would have become trust assets

and, as a result, could not have been used first to pay back

AgriCap the advances it had earlier made to Robison Farms

along with interest and fees, because AgriCap’s position with

respect to that cash would have been subordinate to the claims

of produce sellers while they remained unpaid. Thus, if the

accounts receivable were held by AgriCap 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.

This is precisely what the district court found in this case.

Yet, AgriCap refuses to recognize the significance of the

court’s finding, attempting to relegate its relevance to only

whether AgriCap is a bona fide purchaser for value. We agree

with the district court that resolving the question of whether

the transaction was a loan or a sale is central to determining

AgriCap’s PACA liability in this case.

At its core, PACA imposes a trust on commodities sold to

produce distributors or dealers, such as Robison Farms, as

well as the proceeds of those commodities, for the benefit of

the commodities sellers. 7 U.S.C. § 499e(c)(2); 7 C.F.R.

§ 46.46(b). The trustee of this trust is required to maintain

trust assets—the commodities themselves, the products of the

commodities, or the proceeds from the sale of the commodities or products, see 7 U.S.C. § 499e(c)(2)—"in a manner that

such assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities," 7

C.F.R. § 46.46.(d)(1) (emphasis added). And the commodities

sellers’ beneficial interest in the trust assets while outstanding

obligations exist is superior to secured creditors of the trustee,

even when the security interest of such creditors is explicitly

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imposed on the perishable commodities, proceeds, and

accounts receivable. See Endico Potatoes, Inc., 67 F.3d at

1067.

When Congress made this policy choice to make the unsecured credit extended by commodities sellers superior to the

position of lenders holding a security interest in those commodities and proceeds, it recognized the difficulty that lenders

might have in administering their secured loans. Indeed, it

received testimony to that effect from the American Bankers

Association. In the end, however, Congress determined that

those concerns were outweighed by other considerations:

The Committee believes that the statutory trust

requirements will not be a burden to the lending

institutions. They will be known to and considered

by prospective lenders in extending credit. The

assurance the trust provision gives that raw products

will be paid for promptly and that there is a monitoring system provided for under the Act will protect

the interests of the borrower, the money lender, and

the fruit and vegetable industry. Prompt payment

should generate trade confidence and new business

which yields increased cash and receivables, the

prime security factors to the money lender.

House Report at 4.

Thus, when Robison Farms purchased perishable agricultural commodities from the sellers in this case, the commodities and the proceeds from them became assets of the PACA

trust, to be maintained to pay the sellers’ loans before payment of any other loan, whether secured or not. As relevant

to this case, in May 2006, when the invoices of the commodities sellers went unpaid, the accounts receivable generated

from the resale of the commodities to the school systems and

restaurants, being proceeds of the commodities, were PACA

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trust assets that had to be maintained for payment first to the

unpaid commodities sellers.

If Robison Farms had transferred these trust assets to AgriCap by means of a sale in exchange for cash, the transaction

would have been nothing more than a permissible conversion

of trust assets from one form to another—i.e., from accounts

receivable into cash. Following this form of transaction, the

accounts receivable would no longer have remained trust

assets, and the commodities sellers would not have had any

claim for payment from them. Thus, AgriCap would have

been entitled to collect on the accounts receivable and to

retain the proceeds without interference by Nickey Gregory

and Poppell’s Produce.

But if, in contrast, Robison Farms had transferred the

accounts receivable to AgriCap as collateral for a secured

loan, the receivables and their proceeds would have remained

trust assets, even though held by AgriCap. As AgriCap has

asserted, such a transfer again is permitted by PACA. But

PACA provides that any security interest so created would be

subject to the interest of unpaid commodities sellers. Moreover, the commodities sellers’ interest in the assets would not

have been affected by how much the secured lender loaned

against those assets to the trustee or by how much the trustee

paid the lender back. The commodities sellers’ interest would

have been in the collateral and would have been superior to

the lender’s interest.

It is therefore highly relevant to the disposition of this case

to determine whether Robison Farms’ accounts receivable

were indeed sold for value to AgriCap under a factoring

agreement or whether they were simply subjected to a security interest to collateralize a loan that AgriCap made to Robison Farms. If the accounts receivable were only subjected to

a security interest, then the security interest was subordinate

to the prior statutory trust created for the benefit of the commodities sellers.

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Following a bench trial, the district court found that "the

Agreement between AgriCap and Robison Farms [was] actually a loan secured by accounts receivable." Nickey Gregory

Co., 592 F. Supp. 2d at 877. The court reached this conclusion

because it found that throughout the transaction Robison

Farms bore all of the risks of nonpayment on the accounts

receivable. It reasoned that if Robison Farms had actually sold

the accounts receivable to AgriCap, then AgriCap would have

borne the risks of nonpayment of the receivables, and Robison

Farms would have received the price paid for the receivables

as trust assets.

While AgriCap does not in its brief address the significance

of the district court’s holding, it does maintain that it was the

purchaser of the accounts receivable for value and that therefore the accounts receivable were no longer trust assets. Inherently, this argument also includes the argument that the

transaction was not a loan arrangement in which the accounts

receivable were provided simply as collateral. We now turn

to resolve that question, whether the district court erred in

concluding that this was a loan arrangement.

IV

AgriCap characterizes the transaction between it and Robison Farms as a contract of sale under which it purchased

Robison Farms’ accounts receivable for 80% of the receivables’ face value plus deferred payments to be made after collection on the accounts receivable in the amount of the

remaining 20%, less interest and fees. It claims that after each

exchange the receivable no longer remained an asset of the

PACA trust. Because a PACA trust is nonsegregated and

"floating," see 7 C.F.R. § 46.46(b), a trustee does not breach

the trust by selling trust assets for value, provided the value

the trustee received is "commercially reasonable," see Boulder Fruit Express, 251 F.3d at 1271-72. As the accounts

receivable themselves were no longer trust assets, AgriCap

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concludes that the commodities sellers had no right to recover

from them.

Numerous indicators in the transaction’s documentation

support AgriCap’s characterization. First, the principal document describing the relationship between the parties and their

rights and duties was denominated "Factoring Agreement,"

which traditionally involves the sale of accounts receivable at

a discounted price. See Black’s Law Dictionary 671 (9th ed.

2009) (defining factoring as "[t]he buying of accounts receivable at a discount"). Under the traditional form of such an

agreement, the seller gives up the possibility of receiving the

face value of the accounts receivable to have a discounted but

unconditional sum certain in hand. The purchaser assumes the

risk of collection, betting that its success in collecting on the

accounts receivable will yield a return exceeding the discounted price it paid for the asset. If it is completely successful in collecting the accounts, it recovers not only the price it

paid to the seller, but also an additional amount representing

the difference between the price it paid and the face amount

of the receivable. On the other hand, if the receivable proves

uncollectible or uncollectible in part, the purchaser bears the

loss. 

In addition to the title of the principal document, language

sprinkled throughout the Factoring Agreement referred to

AgriCap as the "buyer," Robison Farms as the "seller," and

the transaction as a "purchase" or "sale." And, consistent with

this usage, the document contained warranties that traditionally accompany the sale of an asset.

Looking at the Factoring Agreement substantively, at least

at a general level, one could characterize it as involving the

sale of accounts receivable at a price amounting to 80% of

their face value and, after collection, an additional payment

calculated by subtracting from 20% of their face value the

purchaser’s costs for collection and the costs for the seller’s

use of the money during the period between the initial transfer

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of each account receivable and collection on it. This is the

characterization advanced by AgriCap to support its claim

that the accounts receivable in this case were sold to it and no

longer remained in the PACA trust.

Relying on only these superficial indicators, however,

amounts to a serious oversimplification of the transaction that

overlooks its substance, as the district court recognized. A

closer examination of the transaction’s documentation demonstrates that, as the district court found, the transaction was a

loan transaction.

First, the Preliminary Term Sheet, which AgriCap prepared

before the transaction and sent to Robison Farms for the purpose of describing the transaction and receiving Robison

Farms’ assent to it, described a "credit" facility up to the

lesser of $500,000 or 80% of Robison Farms’ accounts

receivable. The document referred to AgriCap as the "Lender"

and Robison Farms as the "Borrower." It also described the

"interest on advances" (the lesser of 12% or 6% over prime)

and the required collateral. Finally, the document specified

that the purpose of the credit facility was "to fund Borrower’s

working capital needs." Remarkably, this Preliminary Term

Sheet, which succinctly described the entire transaction, recognized that the accounts receivable were part of a PACA

trust subject to claims by produce suppliers, as the document

required "reserves [of accounts receivable] as deemed appropriate from time to time in AgriCap’s sole discretion . . . to

cover past due balances due from vendors covered under the

PACA Trust."

Second, under the terms of the documents, Robison Farms

did not enter into a traditional factoring arrangement in the

sense that it transferred the risk of the noncollection of the

accounts receivable to AgriCap. Rather, under the transaction,

virtually all of the risk of noncollection remained with Robison Farms. The Factoring Agreement ensured that AgriCap

16 NICKEY GREGORY COMPANY v. AGRICAP

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had almost total recourse against Robison Farms if a receivable went unpaid. Section 4.1 provided:

[Robison Farms] agrees to pay [AgriCap], on

demand, the full face amount, or any unpaid portion

of, any [account receivable]:

(a) which remains unpaid for the Payment Period

unless, prior to the duration of the Payment

Period, the subject Account Debtor has become

Insolvent; or

(b) with respect to which there has been any breach

o[f] warranty or representation set forth in Section 6 of this Agreement or any breach of any

covenant contained in this Agreement; or

(c) with respect to the Account Debtor asserts any

Dispute which remains unsettled thirty (30)

days after the due date of such [account receivable].

Under this provision, AgriCap had the right to demand that

Robison Farms "repurchase" any receivable that went unpaid

or was disputed, unless the account debtor became insolvent.

Accordingly, unpaid invoices would ultimately be returned to

Robison Farms except in the instance where an account debtor’s insolvency occurred during the pendency of the invoice.

But even the risk associated with the account debtor’s

insolvency was not likely to fall on AgriCap. Under Section

6.1(g) of the agreement, Robison Farms warranted:

At the time that [AgriCap] makes an Advance relating to [an account receivable], none of the Account

Debtors set forth in the Schedule of Accounts is

Insolvent and Seller has no knowledge that the

NICKEY GREGORY COMPANY v. AGRICAP 17

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Account Debtors are Insolvent or may become Insolvent within the Payment Period.

Thus, in conjunction with Section 4, AgriCap could require

Robison Farms to repurchase a receivable if Robison Farms

had knowledge that the debtor on that receivable was insolvent or might become insolvent within the payment period. In

this manner, whatever transfer of risk was associated with the

possibility of an intervening insolvency under Section 4.1 was

virtually negated by Section 6.

Insofar as the most likely reasons for nonpayment by an

account debtor would be that it did not have the money or that

it disputed the debt, the district court was justified in finding

that the agreement between the parties in this case effectively

insulated AgriCap from loss and was therefore a loan rather

than a factoring sale. See Reaves Brokerage Co., 336 F.3d at

414-16 (examining a similar purported "factoring" arrangement and finding that provisions preventing the transfer of

risk rendered the agreement a loan and not a sale).

Third, other documents in the transaction indicated that the

transaction was a loan, in which the accounts receivable were

held by AgriCap as collateral for repayment of the advances

made to Robison Farms as loans. The Security Agreement

executed by the parties referred to Robison Farms as the

"debtor" and AgriCap as the "secured party," and it gave

AgriCap a security interest in virtually all of Robison Farms’

assets—including crops, inventory, and accounts receivable—

to secure repayment of Robison Farms’ obligations under the

Factoring Agreement. The Security Agreement also referred

to the Factoring Agreement as "the Loan Agreement," and the

obligations under the Security Agreement were triggered by

Robison Farms’ failure to pay the "Debt."

Fourth, in addition to the Security Agreement, the parties

entered into a Subordination Agreement, in which Robison

Farms subordinated its other debts "to the payment in full of

18 NICKEY GREGORY COMPANY v. AGRICAP

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AgriCap Indebtedness" and gave AgriCap "a first priority

security interest in the Collateral."

Fifth, treating AgriCap’s money advances to Robison

Farms as loans, Cindy Robison, the owner of Robison Farms,

gave AgriCap a personal guarantee for the "full payment . . .

of any obligations under the Factoring Agreement with regard

to . . . the advances . . . including all interest and other charges

stated therein."

And sixth, AgriCap filed a UCC-1 Financing Statement

with respect to the transaction, claiming liens in all of Robison Farms’ assets to secure "the prompt and full payment and

performance of Secured Obligations." That document again

referred to Robison Farms as "the Debtor."

Thus, the transaction is more accurately characterized as a

revolving line of credit, secured by accounts receivable and

other assets, and repaid from monies collected by AgriCap on

the receivables. When Robison Farms transferred a receivable

to AgriCap, AgriCap advanced, as a loan, 80% of the receivable’s face value. When AgriCap collected on the receivable,

as it was hired to do, it retained (1) 80% as repayment of the

loan; (2) a collection fee of 1.5%; and (3) interest at a rate of

the lesser of 12% or 6% over prime for the period during

which the 80% amount was outstanding. It then remitted the

balance to Robison Farms. AgriCap was thus only a lender

and collection agent, not a purchaser of the accounts receivable that assumed the risks of collecting on the receivables.

Because these substantive aspects of the transaction are inconsistent with an outright sale of the assets, we agree with the

district court that the transaction was in its essence a loan in

the form of a revolving line of credit secured by accounts

receivable.

As already noted, the distinction between a sale and a loan

controls the issue of whether AgriCap purchased the assets

free of the PACA trust or merely held the assets to collateralNICKEY GREGORY COMPANY v. AGRICAP 19

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ize its loans to Robison Farms, in which case the receivables

would have remained subject to the PACA trust and would

have been required, by the terms of regulations, to be made

"freely available" to pay obligations to commodities sellers. 7

C.F.R. § 46.46(d)(1). Because we conclude that the transaction in this case was a loan, we also conclude that the

accounts receivable and their proceeds never left the PACA

trust and that therefore the accounts receivable and their proceeds had to be made available for payment first to the claims

of unpaid PACA creditors, such as Nickey Gregory and Poppell’s Produce. The district court therefore ruled properly that

AgriCap must disgorge from the assets of the PACA trust

amounts sufficient to pay unpaid PACA creditors. See Endico

Potatoes, Inc., 67 F.3d at 1069.

AgriCap nonetheless contends that even if the transaction

was a loan, no provision of PACA prohibits the trustee from

granting a security interest in trust assets to collateralize a

loan. While we agree with this proposition, its accuracy does

not advance AgriCap’s position. It was not the creation of a

security interest in the accounts receivable that subjected

AgriCap to liability but rather its collection on them and payment of the proceeds to itself ahead of the commodities sellers. It is not disputed that, in this case, AgriCap used its

position as collection agent and lender to satisfy Robison

Farms’ obligations to it ahead of Robison Farms’ obligations

to its PACA creditors. It was this use of trust assets to pay

itself before paying commodities sellers that amounted to a

violation of PACA, even though the payments were authorized by the arrangement with Robison Farms. Under PACA,

Robison Farms was obligated to ensure that trust assets

remained freely available to pay PACA creditors first. See 7

U.S.C. §§ 499(b)(4), 499e(c)(2); 7 C.F.R. § 46.46(a)(2). Yet,

through its arrangement with AgriCap, it authorized trust

assets to be used to repay AgriCap ahead of the commodities

sellers, who went unpaid. Since the arrangement and the

transactions under it breached the PACA trust, AgriCap, as a

third-party transferee of the trust assets, must, under estab20 NICKEY GREGORY COMPANY v. AGRICAP

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lished trust principles, disgorge the proceeds of the receivables unless it has a defense.

Finally, AgriCap contends that whether the transaction was

a loan is not important so long as the transaction was commercially reasonable. For this proposition, it relies on Boulder

Fruit Express, 251 F.3d at 1272, where the Ninth Circuit

found that a particular factoring arrangement was "commercially reasonable" and not in violation of the PACA trust, as

well as a trilogy of cases from the Second Circuit holding that

a trustee did not breach the PACA trust by establishing with

a bank a checking account with overdraft privileges, which

effectively functioned as a revolving line of credit. See D.M.

Rothman & Co. v. Korea Commercial Bank of N.Y., 411 F.3d

90 (2d Cir. 2005); E. Armata, Inc. v. Korea Commercial Bank

of N.Y., 367 F.3d 123 (2d Cir. 2004); Am. Banana Co. v.

Republic Nat’l Bank of N.Y., N.A., 362 F.3d 33 (2d Cir. 2004).

First, Boulder Fruit Express is inapposite. That case

involved a true factoring relationship, in which the receivables were actually sold to the factor. Thus, unlike in this

case, the receivables no longer remained PACA trust assets.

The Second Circuit’s cases involving checking accounts

with overdraft privileges are also distinguishable. In those

cases, PACA creditors sued commercial banks, in which

PACA dealers had checking accounts with overdraft privileges, to recover unpaid amounts for produce delivered to the

PACA dealers. The PACA creditors argued that because the

accounts were perpetually overdrawn and replenished by

incoming checks made payable to the dealers, the overdraft

privileges effectively functioned as revolving lines of credit in

which the banks were paid ahead of the PACA creditors. The

PACA creditors sought disgorgement from the banks of the

amounts necessary to pay their debts. The Second Circuit

rejected the PACA creditors’ claims, reasoning that it was not

possible for a PACA dealer to do business without a commercial checking account with a bank and that it was never anticiNICKEY GREGORY COMPANY v. AGRICAP 21

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pated that banks would have to ensure that commercial

checking account holders maintain reserves sufficient to satisfy PACA creditors. See, e.g., E. Armata, Inc., 367 F.3d at

134 ("[I]t is difficult to imagine how a PACA trustee would

make funds available to its PACA creditors without entering

into some relationship with a bank"). Moreover, the Second

Circuit in those cases pointed out that, rather than rendering

PACA trust assets less than "freely available" or "impair[ing]"

payment to PACA creditors, allowing checking accounts with

overdraft protection would likely make assets more readily

available to pay PACA creditors. Id. at 133-34

("[M]aintaining a checking account . . . may facilitate, rather

than impede, the fulfillment of a PACA trustee’s duty to

maintain trust assets so that they are freely available to satisfy

outstanding obligations to sellers of perishable commodities"

(internal quotation marks and citations omitted)); cf. Am.

Banana Co., 362 F.3d at 42 ("The imposition of liability [on

the bank] . . . would . . . run the serious risk of complicating

—if not eliminating altogether—overdraft procedures that

directly benefit PACA beneficiaries"). 

It might be argued that these cases carve out a narrow

exception to PACA for bank checking accounts with overdraft

privileges, although the Second Circuit believed that its holdings were facilitating the prompt payment of PACA creditors

and therefore were consistent with PACA. We do not, however, determine here whether we agree with the Second Circuit’s interpretation addressing whether PACA imposes a

trust on bank checking accounts. Even were we to follow the

Second Circuit, however, we could find its reasoning persuasive only insofar as its holdings apply to bank checking

accounts that are subject to banking rules and regulations. To

apply the cases more broadly to general credit arrangements

would undoubtedly conflict with the purpose and effect of

PACA. In creating PACA trusts, Congress clearly had in

focus general credit arrangements with lenders, including

banks, and determined to subordinate their positions, even

when secured by inventory and proceeds, to the credit posi22 NICKEY GREGORY COMPANY v. AGRICAP

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tions of commodities sellers, even when unsecured and later

in time. See, e.g., House Report at 4. Because the circumstances before us do not involve bank checking accounts, we

conclude that these Second Circuit cases are not applicable

here. 

Accordingly, we affirm the district court’s conclusion that

AgriCap held PACA trust assets at a time when PACA creditors went unpaid in violation of the trust. As a third-party

transferee of trust assets, AgriCap must therefore disgorge

those assets unless it can establish a defense.

V

AgriCap contends that it has a complete defense to liability

as a bona fide purchaser ("BFP") because it received PACA

trust assets (1) in exchange for value and (2) without notice

of the breach of the trust. Recognizing that trust principles are

applicable in enforcing PACA, at least to the extent not inconsistent with PACA, see Reaves Brokerage Co., 336 F.3d at

413; Boulder Fruit Express, 251 F.3d at 1271, AgriCap relies

on the Restatement (Second) of Trusts § 284(1), which provides:

If the trustee in breach of trust transfers trust property to, or creates a legal interest in the subject matter of the trust in, a person who takes for value and

without notice of the breach of trust, and who is not

knowingly taking part in an illegal transaction, the

latter holds the interest so transferred or created free

of the trust, and is under no liability to the beneficiary.

This argument, however, fails to take into account the limitations to the BFP defense that exist with regard to both the

requirements that the party take "for value" and that it take

"without notice." 

NICKEY GREGORY COMPANY v. AGRICAP 23

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First, AgriCap cannot assert reasonably that it was without

knowledge of unpaid obligations to PACA creditors. When

AgriCap entered into the transaction, it reserved the right to

require Robison Farms to reserve sufficient amounts of

accounts receivable, as determined by AgriCap in its "sole

discretion," to "cover past due balances due from vendors

covered under the PACA trust." AgriCap also reserved the

right to "perform field exams on a periodic basis, as determined in AgriCap’s sole discretion." In its first examination

of Robison Farms’ financial circumstances, conducted days

before the transaction was consummated, AgriCap noted that

accounts payable to PACA creditors had an average age of 68

days when their terms required payment within 30 days or

within a shorter period and that past due accounts (with an

age of over 90 days) constituted 12% of the accounts payable.

The Factoring Agreement itself required as a condition:

"PACA Payables. Arrangement satisfactory to [AgriCap] shall

have been made for the direct payment of certain trade payables designated by [AgriCap] from the proceeds of the Purchased Receivables." The president of AgriCap acknowledged

in his affidavit that AgriCap was concerned about PACA

creditors and monitored the situation to ensure that there were

"no PACA lien issues." And in May 2006, after it had

reviewed Robison Farms’ books, AgriCap observed that

"[t]here are still quite a bit of past dues in the PACA payables." Yet, during the period when PACA creditors were not

being paid and even after Robison Farms went out of business

and closed its doors on July 17, 2006, AgriCap continued to

collect on Robison Farms’ accounts receivable, using the proceeds to pay itself ahead of the PACA creditors while knowing that the PACA creditors were unpaid. From May 11, 2006

(when Robison Farms stopping paying these PACA creditors), until September 5, 2006 (when AgriCap completed collection on the accounts receivable), AgriCap held and

collected on $668,387 of Robison Farms’ accounts receivable,

and from July 17, 2006 (when Robison Farms went out of

business), until September 5, 2006, AgriCap held and collected on $162,070 of Robison Farms’ accounts receivable.

24 NICKEY GREGORY COMPANY v. AGRICAP

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Either of these amounts was more than sufficient to pay

Nickey Gregory and Poppell’s Produce in full. AgriCap cannot, accordingly, claim to be without notice of the breach of

the PACA trust. See Restatement (Second) of Trusts § 297

("A person has notice of a breach of trust if he knows or

should know of the breach of trust"). 

Second, AgriCap contends that it received Robison Farms’

accounts receivable "for value" because each time Robison

Farms transferred a receivable to AgriCap, AgriCap paid

Robison Farms 80% of the receivable’s face value. This argument, however, fails for the same reason that AgriCap is

incorrect to characterize the transaction as a sale rather than

a loan. AgriCap did not purchase the account receivable but

merely held it as collateral for the 80% loan and as collection

agent. It therefore was not a purchaser for value, having never

become owner of the receivable.

The district court properly rejected AgriCap’s BFP defense.

VI

Both AgriCap and the commodities sellers, Nickey Gregory

and Poppell’s Produce (by cross-appeal), contend that the district court erred in determining damages.

The district court entered an award in favor of the commodities sellers in the amount of $88,690.75. The court reasoned

that AgriCap could only be liable in the amount of trust assets

that it "retained" in violation of the trust and that imposing

greater liability would elevate AgriCap’s liability over that of

Robison Farms. To arrive at the amount of trust assets AgriCap retained, the court took the total amount that AgriCap

had collected on the receivables, $4,053,596.21, and deducted

the amount that AgriCap paid to Robison Farms on those

receivables, $3,964,905.46, arriving at the $88,690.75 figure.

AgriCap contends that it should be required to disgorge

only $16,339.49, the amount it received in interest and fees

NICKEY GREGORY COMPANY v. AGRICAP 25

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after May 11, 2006, when Robison Farms first failed to pay

the PACA creditors’ invoices. Nickey Gregory and Poppell’s

Produce contend that they are entitled to disgorgement of the

entire amount of their PACA claims—$106,695.86, plus

Nickey Gregory’s attorneys’ fees—because AgriCap held a

sufficient amount of trust assets to pay the full amount.

The problem with the district court’s damages calculation

is that it effectively conceptualized AgriCap’s receipt of the

accounts receivable and their proceeds as a purchase, rather

than a loan, by offsetting AgriCap’s payments to Robison

Farms against what it collected on the receivables. If, however, the transaction was a loan transaction, as the district

court concluded and as we affirm, then the amounts loaned to

Robison Farms would not reduce the value of the collateral

held by AgriCap, which always remained trust assets. The

accounts receivable and their proceeds never ceased to be

assets of the trust, and AgriCap’s use of the proceeds of the

accounts receivable to pay itself ahead of the commodities

sellers was in violation of the trust. Permitting AgriCap to

retain collections on the receivables after Robison Farms had

ceased to pay its PACA creditors would effectively elevate

AgriCap’s position, as a secured lender, above the PACA

creditors’ position, contrary to PACA’s requirement that the

funds go first to pay PACA creditors.

Nickey Gregory and Poppell’s Produce rightly contend that

AgriCap is required to disgorge receivables in full satisfaction

of their claims, inasmuch as the value of the receivables in the

PACA trust after May 11, 2006, always exceeded the amount

of their claims. According to AgriCap’s records, it received

over $668,000 in Robison Farms’ accounts receivable after

May 11, 2006, when Robison Farms stopped paying the

PACA creditors. All of these assets were subject to the superior interests of the unpaid PACA creditors, and to the extent

that Robison Farms’ agreement with AgriCap resulted in the

payment of the proceeds of those accounts receivable to Agri26 NICKEY GREGORY COMPANY v. AGRICAP

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Cap ahead of those PACA creditors, the trust was breached.2

See 7 U.S.C. § 499e(c)(2).

Accordingly, we vacate the district court’s damage award

and remand with instructions that the district court award

Nickey Gregory and Poppell’s Produce the full amount of

their unpaid balance, including Nickey Gregory’s reasonable

attorneys’ fees.

VII

We recognize that applying the provisions of PACA in this

case raises genuine concerns, indeed frustration, for AgriCap

and lenders such as AgriCap, who, in providing operating

capital to small businesses in need, anticipate a level of protection from their secured creditor positions. Their efforts,

however, are trumped by Congress’ policy choice to give produce suppliers a favored creditor position, not only in the produce they sell, but also in derivative products and comingled

proceeds in the hands of PACA dealers, which subordinates

the lenders’ secured position in those assets. This reordering

of priorities, not unlike what is done in the Bankruptcy Code,

could perhaps lead to adjustments by lenders in the PACA

context who might find it necessary to raise their prices for

money, alter their lending practices, or even hesitate to extend

credit, ultimately weakening a link in the chain of agricultural

commerce. The judiciary, however, should not insert itself in

2As we have noted, because the accounts receivable and their proceeds

were trust assets, the unpaid commodities sellers have a prior interest in

them and can recover from AgriCap to the full satisfaction of their debts

up to the limit of trust assets held while they remained unpaid. Of course,

AgriCap returned some of the trust assets to Robison Farms in the form

of cash collected on the accounts receivable in the amount of 20% of the

receivables less fees and interest. Accordingly, it cannot be required to

disgorge these amounts so returned. Even after this deduction, however,

the total amount of trust assets held by AgriCap well exceeded the

amounts necessary to satisfy Robison Farms’ debts to Nickey Gregory and

Poppell’s Produce. 

NICKEY GREGORY COMPANY v. AGRICAP 27

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these policy matters by questioning or debating legislative

judgments, as it is constituted only to comprehend, interpret,

and apply what Congress has duly provided.

AFFIRMED IN PART, VACATED IN PART,

AND REMANDED WITH INSTRUCTIONS 

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