Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-14-56078/USCOURTS-ca9-14-56078-0/pdf.json

Nature of Suit Code: 891
Nature of Suit: Agricultural Acts
Cause of Action: 

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

S & H PACKING & SALES CO., INC., a

California corporation, DBA Season

Produce Co.,

Plaintiff,

and

G. W. PALMER & CO., INC.; ANDREW

& WILLIAMSON SALES CO., INC.,

DBA Andrew & Williamson Fresh

Produce; EAST COAST BROKERS AND

PACKERS, INC.; GARGIULO, INC.,

Plaintiffs-Appellants,

v.

TANIMURA DISTRIBUTING, INC., a

California corporation,

Defendant,

and

AGRICAP FINANCIAL CORPORATION,

a Delaware corporation,

Defendant-Appellee.

No. 14-56059

D.C. No.

2:08-cv-05250-

GW-FFM

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2 G.W. PALMER & CO. V. AGRICAP FINANCIAL

S & H PACKING & SALES CO., INC., a

California corporation, DBA Season

Produce Co.,

Plaintiff,

and

APACHE PRODUCE CO., INC., an

Arizona corporation, DBA Plain

Jane; O.P. MURPHY PRODUCE CO.,

INC., a Texas corporation, DBA

Murphy & Sons; 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

No. 14-56078

D.C. No.

2:08-cv-05250-

GW-FFM

OPINION

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 3

AGRICAP FINANCIAL CORPORATION,

a Delaware corporation,

Defendant-Appellee.

Appeal from the United States District Court

for the Central District of California

The Honorable George H. Wu, District Judge

Argued and Submitted on June 6, 2016

Pasadena, California

Filed February 27, 2017

Before: Ronald M. Gould, Michael J. Melloy,

*

and Andrew D. Hurwitz, Circuit Judges.

Per Curiam Opinion;

Concurrence by Judge Melloy

* The Honorable Michael J. Melloy, Senior Circuit Judge for the U.S.

Court of Appeals for the Eighth Circuit, sitting by designation.

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4 G.W. PALMER & CO. V. AGRICAP FINANCIAL

SUMMARY**

Perishable Agricultural Commodities Act

The panel affirmed the district court’s summary judgment

in favor of the defendant in an action brought by produce

growers under the Perishable Agricultural Commodities Act.

The growers sold their perishable agricultural products on

credit to a distributor, which made the distributor a trustee

over a PACA trust holding the perishable products and any

resulting proceeds for the growers as PACA-trust

beneficiaries. The distributor sold the products on credit to

third parties and, through a transaction described as a

“factoring agreement,” transferred its own resulting accounts

receivable to defendant Agricap Financial Corp. The

distributor’s business later failed, and the growers did not

receive payment in full from the distributor for their produce. 

The growers sued Agricap.

The panel affirmed the district court’s holding that,

pursuant to Boulder Fruit Express & Heger Organic Farm

Sales v. Transp. Factoring, Inc., 251 F.3d 128 (9th Cir.

2001), a commercially reasonable factoring agreement

removes accounts receivable from the PACA trust without a

trustee’s breach of trust, thus defeating the growers’ claims. 

The growers argued that a PACA trustee’s true sale of trust

assets, which does not breach trust duties, occurs when the

trustee transfers not merely the right to collect the underlying

accounts, but also the risk of non-payment on those accounts. 

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 5

The panel concluded that Boulder Fruit implicitly rejected the

transfer-of-risk test, and this implicit rejection was necessary

to its holding. Accordingly, Boulder Fruit controlled the

outcome of the growers’ case.

Concurring, Judge Melloy, joined by Judge Gould, wrote

that Boulder Fruit was wrongly decided and that the Ninth

Circuit, sitting en banc, should eliminate a circuit split, speak

expressly to this issue, and join the Second, Fourth, and Fifth

Circuits by adopting a separate, threshold, transfer-of-risk

test.

COUNSEL

Louis W. Diess, III (argued) and Mary Jean Fassett,

McCarron & Deiss, Washington, D.C., for PlaintiffsAppellants G.W. Palmer & Co., Inc.; Gargiulo, Inc.; Andrew

& Williamson Sales Co., Inc.; and East Coast Brokers &

Packers, Inc.

Robert Porter Lewis (argued), Jr., Law Office of Robert P.

Lewis Jr., South Pasadena, California, for PlaintiffsAppellants Apache Produce Co., Inc; O.P. Murphy Produce

Co., Inc.; Oceanside Produce, Inc.; Wilson Produce, LLC;

Frank Donio, Inc.; Abbate FamilyFarms 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.

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6 G.W. PALMER & CO. V. AGRICAP FINANCIAL

OPINION

PER CURIAM:

Appellants are produce growers (“Growers”) who sold

their perishable agricultural products on credit to a

distributor, Tanimura Distributing, Inc. (“Tanimura”). 

Pursuant to the Perishable Agricultural Commodities Act

(“PACA”), 7 U.S.C. §§ 499a–499t, this arrangement made

Tanimura a trustee over a PACA trust holding the perishable

products and any resulting proceeds for the Growers as

PACA-trust beneficiaries. Tanimura then sold the products

on credit to third parties and transferred its own resulting

accounts receivable to Appellee Agricap Financial

(“Agricap”) through a transaction Agricap describes as a

“Factoring Agreement” or sale of accounts.1 Although

described as a sale of accounts, Agricap initially referred to

the arrangement as a “credit facility,” and the written

agreement was entitled “Agricap Financial Corporation

Factoring and Security Agreement.” Further, the Factoring

Agreement involved many hallmarks of a secured lending

arrangement, including: security interests in accounts and all

other asset classes except inventory; UCC financing

statements; subordination of other debts; and substantial

recourse for Agricap against Tanimura in the event Agricap

was unable to collect from Tanimura’s customers (for

example, Agricap was entitled to force Tanimura to

“repurchase” accounts that remained unpaid after 90 days,

1 Factoring is “the commercial practice of converting receivables into

cash by selling them at a discount.” Boulder Fruit Express & Heger

Organic Farm Sales v. Transp. Factoring, Inc., 251 F.3d 1268, 1271 (9th

Cir. 2001) (citing Black’s Law Dictionary (7th ed. 1999)).

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 7

and Agricap could enforce this right bywithholding payments

from Tanimura).

Tanimura’s business later failed, and Growers did not

receive payment in full from Tanimura for their produce. 

Growers sued Agricap alleging: (1) the Factoring Agreement

was merely a secured lending arrangement structured to look

like a sale but transferring no substantial risk of nonpayment

on the accounts; (2) the accounts receivable and proceeds

remained trust property under PACA; (3) because the

accounts receivable remained trust property, Tanimura

breached the PACA trust and Agricap was complicit in the

breach; and (4) PACA-trust beneficiaries such as Growers

held an interest superior to Agricap, and Agricap was liable

to Growers.

Agricap moved for summary judgment arguing that,

pursuant to Boulder Fruit Express & Heger Organic Farm

Sales v. Transportation Factoring, Inc., 251 F.3d 1268 (9th

Cir. 2001), a commercially reasonable factoring agreement

removes accounts receivable from the PACA trust without a

trustee’s breach of trust, thus defeating the Growers’s claims. 

Growers acknowledged that a PACA trustee generally may

sell trust assets on commercially reasonable terms without

breaching trust duties. Growers argued, however, that

pursuant to Nickey Gregory Co., LLC v. Agricap, LLC,

597 F.3d 591, 598–99 (4th Cir. 2010), Reaves Brokerage Co.,

Inc. v. Sunbelt Fruit &Vegetable Co., Inc., 336 F.3d 410, 414

(5th Cir. 2003), and Endico Potatoes, Inc. v. CIT

Group/Factoring, Inc., 67 F.3d 1063, 1067–69 (2d Cir. 1995),

a court should not review the commercial reasonableness of

a factoring agreement unless the court first determines a true

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8 G.W. PALMER & CO. V. AGRICAP FINANCIAL

sale actually occurred.2 According to Growers, a true sale

occurs when a PACA trustee transfers not merely the right to

collect the underlying accounts, but also the risk of nonpayment on those accounts.3

Relying on Boulder Fruit and describing the cited cases

as a circuit split, the district court granted summary judgment. 

The district court noted the Ninth Circuit in Boulder Fruit

expressly addressed the commercial reasonableness of a

factoring agreement but implicitly rejected a separate,

transfer-of-risk test. Further, the court noted the factoring

agreement in Boulder Fruit transferred even less risk than the

2

See, e.g., Reaves Brokerage, 336 F.3d at 414 (“Characterization of

the agreement at issue turns on the substance of the relationship . . . , not

simply the label attached to the transaction. . . . Application of the Second

Circuit’s risk-transfer analysis and our own independent examination of

the substance of the parties’ agreement leads us to conclude that the

relationship . . . was that of a secured lender and debtor, not a seller and

buyer.” (internal citations and quotation marks omitted)).

3

 The Second Circuit described the transfer-of-risk test as follows:

Where the lender has purchased the accounts

receivable, the borrower’s debt is extinguished and the

lender’s risk with regard to the performance of the

accounts is direct, that is, the lender and not the

borrower bears the risk of non-performance by the

account debtor. If the lender holds only a security

interest, however, the lender’s risk is derivative or

secondary, that is, the borrower remains liable for the

debt and bears the risk of non-payment by the account

debtor, while the lender only bears the risk that the

account debtor’s non-payment will leave the borrower

unable to satisfy the loan.

Endico Potatoes, 67 F.3d at 1069.

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 9

Factoring Agreement in the present case—in Boulder Fruit,

the factoring agent enjoyed unrestricted discretion to force

the distributor to repurchase accounts. The court therefore

held that, even if Boulder Fruit could accommodate the

transfer-of-risk test, the facts of Boulder Fruit controlled and

precluded relief for Growers. Finally, the court concluded

that the Factoring Agreement was commercially reasonable

because Agricap paid to Tanimura 80% of the face value of

the accounts as an up-front payment and ultimately paid to

Tanimura an even greater percentage of the face value of the

transferred accounts.

On appeal, Growers argue that we are not bound by

Boulder Fruit because the absence of discussion of the

transfer-of-risk test in Boulder Fruit leaves open the question

of whether that test should apply in the Ninth Circuit. 

Agricap counters 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; yet,

the Court did not apply the test.

Applying de novo review, Arizona v. Tohono O’odham

Nation, 818 F.3d 549, 555 (9th Cir. 2016), we agree with the

district court’s conclusion that Boulder Fruit controls the

outcome in the present case. See 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). In some cases, an

earlier panel’s election not to discuss an argument may

prevent future panels from concluding the earlier panel

implicitly accepted or rejected an argument. After all, “under

the doctrine of stare decisis a case is important only for what

it decides—for the ‘what,’ not for the ‘why,’ and not for the

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10 G.W. PALMER & CO. V. AGRICAP FINANCIAL

‘how.’” In re Osborne, 76 F.3d 306, 309 (9th Cir. 1996)

(“[T]he doctrine of stare decisis concerns the holdings of

previous cases, not the rationales[.]”). In Boulder Fruit,

however, implicit rejection of the transfer-of-risk test was

necessary to the holding. We reach this conclusion because

the factoring agreement in Boulder Fruit involved virtually

no transfer of risk from the distributor to the factoring agent.4

Had the Boulder Fruit court not implicitly rejected the

transfer-of-risk test, the holding of the case necessarilywould

have been different.

Further, because the Factoring Agreement in the present

case transferred a small degree of risk of non-payment, at

least when compared to the agreement at issue in Boulder

Fruit, we agree that Boulder Fruit would preclude relief to

the Growers even if it were possible for our panel to adopt the

transfer-of-risk test.

Finally, Growers do not seriously contend on appeal that

the Factoring Agreement was otherwise commercially

unreasonable. The Factoring Agreement in the present case

is, in many material respects, similar to the agreement in

Boulder Fruit. And, Agricap paid to Tanimura under the

current Factoring Agreement well in excess of what the Ninth

Circuit previously described as a reasonable factoring rate. 

Boulder Fruit, 251 F.3d at 1272 (“In any case, a factoring

4 The factoring agreement from Boulder Fruit is part of the current

summary judgment record, and the briefs in that case are a matter of

public record. See, e.g., Brief of Appellants, Boulder Fruit, 251 F.3d 1268

(9th Cir. 2001) (No. 99-56770), 2000 WL 33989585. To the extent such

notice may be necessary, we take judicial notice of the Boulder Fruit

parties’ positions as set forth in their briefs.

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 11

discount of 20% was never shown to be commercially

unreasonable.”).

We therefore affirm the judgment of the district court.

AFFIRMED.

MELLOY,Circuit Judge, with whom GOULD, Circuit Judge,

joins, concurring:

We concur. We write further, however, because we

believe Boulder Fruit was wrongly decided and the Ninth

Circuit, sitting en banc, should eliminate this circuit split,

speak expressly to this issue, and join the Second, Fourth,

and Fifth Circuits by adopting a separate, threshold, transferof-risk test.

Congress intended PACA to prevent secured lenders from

defeating the rights of PACA-trust beneficiaries. The

congressional focus upon the relative rights of these two

groups is unmistakable. As such, before assessing the

commercial reasonableness of a factoring agreement, it is first

necessary to examine the substance of a factoring agreement

to ensure a true sale has occurred. In the absence of a true

sale, superficial indicators and labels surrounding a factoring

agreement should be of no consequence. The substance of

the transaction matters. If the substance of a transaction

reveals a secured lending arrangement rather than a true sale,

the accounts receivable remain trust assets. Thus, unpaid

trust beneficiaries hold an interest in accounts receivable and

their proceeds superior to all unsecured and secured creditors

such that the trust beneficiaries should prevail.

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12 G.W. PALMER & CO. V. AGRICAP FINANCIAL

This conclusion enjoys further support in the simple fact

that any attempt to assess the commercial reasonableness of

a factoring agreement without carefully examining the

substance of the rights transferred is an incomplete and

abstract exercise. Whether a factoring discount of 10%, 20%,

or more is reasonable in any given situation cannot be

determined without first assessing what the factoring agent

has contracted to do and what risk the factoring agent has

accepted. Analyzing a factoring discount by looking

exclusively at an initial payment without considering the

availability of recourse and without assessing the nature of

the rights and risks actually transferred from the distributor to

the factoring agent examines only part of the transaction. 

Such an exercise is not grounded in reality and is akin to

declaring a price to be reasonable without first identifying the

product or service that carried that price.

We address below the structure and purpose of PACA, the

circuit split regarding the transfer-of-risk test, and the

application of that test to this case.

I. The PACA Trust

“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 attempts to

remedy this burden through the creation of a statutory trust:

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 13

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 ‘nonsegregated 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).

“[G]eneral trust principles [apply] to questions involving

the PACA trust, unless those principles directly conflict with

PACA.” Boulder Fruit, 251 F.3d at 1271. And, because

“[o]rdinary principles of trust law apply to trusts created

under PACA, . . . the trust assets are excluded from the estate

should the dealer [i.e., the PACA trustee] go bankrupt.” 

Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 282 (9th Cir.

1997).

Under general trust principles, 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

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14 G.W. PALMER & CO. V. AGRICAP FINANCIAL

(1959)). Federal regulations set forth a PACA trustee’s

primary duties, requiring the trustee “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 broad, such 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)).

Because the non-segregated floating trust under PACA

permits the commingling of trust assets and permits the

PACA trustee to convert trust assets into proceeds, the

transferees of trust assets, such as Agricap here, “are liable

only if they had some role in causing [a] breach or dissipation

of the trust.” Boulder Fruit, 251 F.3d at 1272; see also

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.”).

Against this backdrop, the current parties and all circuit

courts addressing the issue agree that 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. See 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

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 15

413–14; Boulder Fruit, 251 F.3d at 1271–72; Endico

Potatoes, 67 F.3d at 1067–68. Such a sale is merely a

conversion of trust assets from accounts receivable into cash. 

These circuits also agree 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 . . . 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 . . .

disgorge amounts collected on the accounts after [the

distributor’s] bankruptcy filing to the extent necessary to

satisfy claims of PACA trust beneficiaries.”). In fact, in

Boulder Fruit, notwithstanding the absence of discussion of

a “true-sale” or “transfer-of-risk” test, the Ninth Circuit

provided an illustration making clear that use of PACA-trust

assets as collateral to secure a debt could not create a priority

security interest for a lender greater than the position enjoyed

by PACA trust beneficiaries:

Farmer sells oranges on credit to Broker.

Broker turns around and sells the oranges on

credit to Supermarket, generating an account

receivable from Supermarket. Broker then

obtains a loan from Bank and grants Bank a

security interest in the account receivable to

secure the loan. Broker goes bankrupt. Under

PACA, Broker is required to hold the

receivable in trust for Farmer until Farmer

was paid in full; use of the receivable as

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16 G.W. PALMER & CO. V. AGRICAP FINANCIAL

collateral was a breach of the trust. Therefore,

Farmer’s rights in the Supermarket receivable

are superior to Bank’s. In fact, as a trust

asset, the Supermarket receivable is not even

part of the bankruptcy estate.

Boulder Fruit, 251 F.3d at 1271.

II. Transfer-of-Risk Test for Identifying True Sales

The treatment of true sales and security interests,

therefore, is clear. What remains unclear is the analysis to

apply when the true nature of the transaction is ambiguous. 

How should a court treat a transaction if the parties to a

factoring agreement label the transaction a sale of accounts

but provide substantial recourse for the factoring agent, such

as requiring the distributor to “repurchase” non-performing

accounts or permitting the factoring agent to withhold

payments or otherwise recoup payments already made to the

distributor? What if, such labels notwithstanding, the

recourse and security provided include a security interest in

the accounts receivable? Has a true sale actually occurred?

Growers and the Second, Fourth, and Fifth Circuits apply

a threshold transfer-of-risk test to determine if such a

transaction is a true sale or a mere secured lending

relationship. Agricap, relying on Boulder Fruit, argues the

court need only ask if the transaction was commercially

reasonable.

In Boulder Fruit, the Ninth Circuit held factoring

agreements do not per se breach the PACA trust because,

consistent with general trust principles, “a trustee can sell

trust assets unless the sale breaches the trust.” 251 F.3d at

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 17

1272. The court concluded “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 (internal quotation

marks omitted). The court indicated that whether a factoring

agreement is commercially reasonable 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.

In reaching its conclusion, the Boulder Fruit panel stated

the factoring agreement “actually enhanced the trust” for

three reasons. Id. at 1272. First, it allowed the distributor to

quickly convert accounts receivable to cash.1Id. Second, in

the course of performance, the distributor “actually received

. . . more for the accounts than the accounts would prove to be

worth.” Id. And third, “a factoring discount of 20% was

never shown to be commercially unreasonable.” Id. The

Ninth Circuit therefore considered not only the up-front

payment from factoring agent to distributor but also the actual

sums paid to the distributor by the factoring agent during the

1 Further, because the price of such commodities tend to rise as the

commodities move through the distribution chain from grower to final

customer, sales of an intermediate distributor’s accounts receivable, even

at a commercially reasonable discount to face value, reasonably might be

expected to result in adequate funds for the PACA trustee to pay the

produce growers.

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18 G.W. PALMER & CO. V. AGRICAP FINANCIAL

course of performance of the factoring agreement.2 The

Ninth Circuit 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 properly should be deemed a sale

rather than a mere secured lending arrangement. Rather, the

Ninth Circuit in Boulder Fruit merely 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 contrast, the Fourth, Fifth, and Second Circuits

considered it necessary to examine the rights and risks

transferred between the parties to a factoring agreement. See

Nickey Gregory, 597 F.3d at 600–03; Reaves Brokerage,

336 F.3d at 414–16; Endico Potatoes, 67 F.3d at 1068–69. 

As the Fourth Circuit stated, “[I]f 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 [the factoring agent’s] security interest.” 

Nickey Gregory, 597 F.3d at 598 (emphasis in original). 

Whether the accounts receivable remained accounts or were

converted into cash, however, the factoring agent’s “position

with respect to that cash would have been subordinate to the

claims of produce sellers while they remained unpaid.” Id.

In contrast, “[i]f [the distributor] had transferred these trust

2 The 20% discount at issue in Boulder Fruit as referenced above

represented a discount from the accounts’ face value as paid in an initial

payment from the factoring agent to the PACA trustee. It did not

represent the final amount paid nor did it represent a floor or a ceiling on

what the factoring agreement in Boulder Fruit could have caused the

factoring agent ultimately to pay. The detailed terms of the factoring

agreement in Boulder Fruit are addressed below.

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 19

assets . . . 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.” Id. at 599. If such a true

sale had occurred, “the accounts receivable would no longer

have remained trust assets, and the commodities sellers would

not have had any claim for payment from them.” Id. at

599–600.

Nickey Gregory, 597 F.3d at 594, and Reaves Brokerage,

336 F.3d at 412, involved factual patterns similar to the

present case. Endico Potatoes involved a similar question:

whether a “purchaser” of accounts was a bona fide purchaser

for true value or merely a lender. 67 F.3d at 1065–66. In

these cases, the courts examined the text and legislative

history of PACA, as well as the regulations promulgated

under PACA, to conclude Congress intended to elevate 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 noted in particular that representatives of the secured

lending community had expressed concern over PACA’s

likely effect upon secured lenders and the factoring industry. 

Nickey Gregory, 597 F.3d at 599. The court concluded that

Congress nevertheless found the balance of policy interests to

favor placing those lenders in a position subordinate to

unpaid growers. Id.

For example, the House Report explaining the 1984

PACA amendments states:

[Purchasers/Distributors of perishable

agricultural commodities] in the normal

course of their business transactions, operate

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20 G.W. PALMER & CO. V. AGRICAP FINANCIAL

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 focus, it

becomes evident that this circuit’s focus, too, should be upon

the true nature of the transactions at issue and the true nature

of the parties’ roles, i.e., that of seller and buyer or that of

secured lender and borrower.

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 21

Importantly, Congress not only knew it was elevating the

interests of growers above the interests of secured lenders,

Congress expressly found the secured lenders’ practices had

been resulting in a “burden on commerce,” H.R. Rep. No. 98-

543, at 4, and further found the creation of statutory trust

would aid commerce. As recognized in Nickey Gregory, the

American Bankers Association had testified to Congress that

creation of the PACA trust would create “difficult[ies for]

lenders . . . in administering their secured loans.” 597 F.3d at

599. Congress nevertheless “made th[e] 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.” Id. The House Report

stated:

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 [PACA] will

protect the interests of the borrower, the

money lender, and the fruit and vegetable

industry. Prompt payments should generate

trade confidence and new business which

yields increased cash and receivables, the

prime security factors to the money lender.

H.R. Rep. No. 98-543, at 4.

Given the remedy Congress created to address the

perceived problem (creation of the trust elevating

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22 G.W. PALMER & CO. V. AGRICAP FINANCIAL

commodities sellers’ interests over lenders’ interests), given

Congress’s clear concern with the relative interests of secured

lenders and commodities sellers, and given the general

backdrop of trust law (in particular, a trustee’s ability to sell

or convert trust assets), courts must focus on the true

substance of PACA-related transactions and not on

superficial indicators or labels. Simply put, it runs counter to

PACA and its history to permit the simple use of the words

“sale” or “purchase” or “factoring agreement” to control for

purposes of assessing the relative rights of lenders and

produce growers.

III. Transfer of Primary or Direct Risk as the Hallmark of

a True Sale

The Second, Fourth, and Fifth Circuits conclude a transfer

of the primary or direct risk of non-payment on the accounts

stands as the hallmark of a true sale. Nickey Gregory,

597 F.3d at 601–03; Reaves Brokerage, 336 F.3d at 417;

Endico Potatoes, 67 F.3d at 1068–69. In addition, these

courts (as well as the regulations under PACA) focus upon

trust asset encumbrance and dissipation in relation to what the

terms of a factoring agreement could permit rather than how

the parties actually performed under a factoring agreement. 

See, e.g., 7 C.F.R. § 46.46(a)(2) (“‘Dissipation’ means 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.” (emphasis added)). 

This focus is important because, although a factoring agent

might pay to a distributor/PACA trustee sums adequate for

the trustee to pay the beneficiaries, and although those

amounts might represent a commercially reasonable discount

from the accounts’ face values, the payment of such amounts

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 23

should be immaterial if (1) the trustee does not pay the

beneficiaries in full; and (2) the accounts receivable and their

proceeds remain trust assets.

In assessing whether a true sale occurred, the Fourth

Circuit adopted the transfer-of-risk test as set forth and

explained by the Second Circuit in Endico Potatoes. Nickey

Gregory, 597 F.3d at 600–03. There, the Second Circuit

distinguished between direct risk, on the one hand, and

secondary or derivative risk, on the other. Endico Potatoes,

67 F.3d at 1068–69. The Second Circuit stated it was

appropriate to examine several factors such as “[1] the right

of the creditor to recover from the debtor any deficiency if the

assets assigned are not sufficient to satisfy the debt, [2] the

effect on the creditor’s right to the assets assigned if the

debtor were to pay the debt from independent funds,

[3] whether the debtor has a right to any funds recovered

from the sale of assets above that necessary to satisfy the

debt, and [4] whether the assignment itself reduces the debt.” 

Endico Potatoes, 67 F.3d at 1068. The court concluded, “The

root of all of these factors is the transfer of risk.” Id. at 1069. 

Finally, the court summarized:

Where the lender has purchased the accounts

receivable, the borrower’s debt is

extinguished and the lender’s risk with regard

to the performance of the accounts is direct,

that is, the lender and not the borrower bears

the risk of non-performance by the account

debtor. If the lender holds only a security

interest, however, the lender’s risk is

derivative or secondary, that is, the borrower

remains liable for the debt and bears the risk

of non-payment by the account debtor, while

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24 G.W. PALMER & CO. V. AGRICAP FINANCIAL

the lender only bears the risk that the account

debtor’s non-payment will leave the borrower

unable to satisfy the loan.

Id.

We conclude this transfer-of-risk test must apply to avoid

reliance on self-serving labels inserted into factoring

agreements to defeat clear congressional intent. We also

conclude it follows quite naturally that it is not even possible

to assess the commercial reasonableness of a factoring

agreement without first understanding the true nature of the

transferred risks and transferred rights. A factoring agent

who accepts risk of non-payment on the transferred accounts

is the owner of the accounts, for better or worse. See Nickey

Gregory, 597 F.3d at 601 (“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.”); id. at 598

(“Obviously, under this scenario, [the factoring agent] would

own the accounts receivable and would be able to do with

them what it wished.”). That risk will be reflected in the

price. A factoring agent who functionally serves only as a

lender and collection firm, however, accepts accounts for

collection but enjoys the right to force the distributor to

repurchase non-performing accounts. Such a factoring agent

faces much less risk—risk measured only by the limitations

on the repurchase provisions and by the distributor’s solvency

and ability to perform under the agreement. Common sense

dictates that the price paid for the accounts with and without

recourse will differ. Common sense also dictates that

commercial reasonableness cannot be assessed without first

examining the substance of the transaction.

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 25

Agricap nevertheless argues adoption of the transfer-ofrisk test would lead to absurd results in which a factoring

agent remains liable to growers even though the factoring

agent’s payments to a distributor were sufficient, in theory,

for the distributor to pay growers. Agricap overstates its case

in characterizing such a scenario as absurd. It is merely the

result of a clear policy choice set forth by Congress. In fact,

such a result is not even uncommon.

To see an everyday example where a similar scenario

plays out, it is only necessary to look to the relationship

between general contractors, subcontractors, and property

owners in the context of mechanics’ liens. It is well

established beyond the need for citations that a property

owner who makes final payment to a general contractor

without first securing a release of subcontractors’ mechanics’

liens holds the property subject to those liens and faces direct

exposure to the subcontractors’ claims. This is true

regardless of whether the amount the property owner paid to

the general contractor was sufficient to pay the

subcontractors. If the subcontractors are not paid, their

interests prevail over the property owner (who may seek

recourse against the general contractor, but who still faces

direct liability to the subcontractors). State legislatures made

the policy choice to put the interests of subcontractors ahead

of those of property owners. Property owners, of course, may

guard against this risk by performing due diligence and

ensuring subcontractors’ liens are released before making

final payment to a general contractor.

Similarly, by putting the burden of due diligence on

lenders rather than growers, Congress was well aware of the

effect it was imposing on the lending industry. Congress

concluded, however, that lenders could adapt. The House

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26 G.W. PALMER & CO. V. AGRICAP FINANCIAL

Committee expressly noted that anticipated improvements to

commerce would offset the lenders’ anticipated burdens. 

H.R. Rep. No. 98-543, at 4 (“[T]he statutory trust

requirements . . . 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 [PACA] will protect the interests of the borrower, the

money lender, and the fruit and vegetable industry.”).

The propriety of comparing the PACA situation to

mechanics’ liens is shown by examining the longstanding

regulations promulgated under PACA. These regulations do

not ask whether a factoring arrangement in fact resulted in a

transfer of funds sufficient to pay growers throughout the

course of performance under a factoring agreement. Rather,

the regulations ask whether such an arrangement “could”

impair trust assets. 7 C.F.R. § 46.46(a)(2). Just as a property

owner must conduct due diligence to avoid liability to a

subcontractor before making final payment to a general, a

factoring agent with knowledge of PACA must act with

diligence. It does not matter that a factoring agent paid a

distributor sufficient funds to pay growers any more than it

matters that a property owner paid a general contractor

sufficient funds to pay subcontractors. In light of these

protections, it cannot be the case that a distributor and

factoring agent may defeat trust beneficiaries’ rights merely

by invoking the labels “sale” or “factoring agreement.”

IV. Transfer of Risk in the Factoring Agreement and in

Boulder Fruit

Turning to the actual factoring agreements in the present

case and in Boulder Fruit, it is helpful to describe the

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 27

relationship between Tanimura and Agricap and how the

parties came to enter into the Factoring Agreement.

In late 2007, Tanimura found itself facing cash flow

difficulties and reached out to Agricap in an effort to

“improve [Tanimura’s] working capital situation and

[Tanimura’s] ability to pay vendors.” In December 2007,

Tanimura completed an application for a “factoring line”

from Agricap. In response, Agricap asked for a fee to

conduct due diligence and referenced the possibility of

“entering into certain arrangements to provide a factoring

facility.” In a “term sheet” attached to this response, Agricap 

referred to itself as the “lender,” referred to Tanimura as the

“seller,” and referred to the “factoring facility” as a “credit

facility.” It also stated Agricap would provide to Tanimura

“collection services.” From inception, then, it seems clear

Agricap viewed itself as a lender providing collection

services to Tanimura rather than a true purchaser of accounts

collecting for itself on the accounts it would truly own. 

Nevertheless, Agricap also indicated “Seller would sell to

Agricap, and Agricap would purchase from Seller, all of

Seller’s accounts receivable.” Agricap then investigated

Tanimura’s finances and completed a “Client Credit

Approval Form” dated January 8, 2008.

On February 4, 2008, Tanimura and Agricap entered into

the “Agricap Financial Corporation Factoring and Security

Agreement.” The Factoring Agreement provided that

Agricap would “purchase” Tanimura’s accounts receivable

for 80% of the face value and would hold the remaining 20%

in a reserve account. Agricap would then collect on the

accounts from Tanimura’s customers, pay itself a financing

fee as a percentage of the face value of the accounts, and also

pay itself an interest fee based upon the length of time the

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28 G.W. PALMER & CO. V. AGRICAP FINANCIAL

accounts had remained outstanding. After retaining its fees

and maintaining a reserve account, Agricap would pay to

Tanimura the balance of the collected amounts.

The Factoring Agreement, however, transferred to

Agricap very little in the way of primary or direct risk of nonpayment. The Factoring Agreement granted Agricap the

unilateral ability to increase the reserve account (i.e.,

withhold payments to Tanimura of funds collected from

accounts) by “such additional reserves as are deemed

necessary and appropriate in [Agricap’s] sole discretion.” It

also granted Agricap the ability to force Tanimura to

purchase back certain accounts based upon the occurrence of

certain events. For example, if a dispute arose between

Tanimura and a customer, Agricap could force Tanimura to

repurchase the customer’s account.

Importantly, Tanimura agreed to repurchase any accounts

that remained uncollected after 90 days. And, in the event of

Tanimura’s insolvency, the repurchase amount could be

deducted from the reserve account. Agricap’s only practical

risk, therefore, was possible insolvencybyTanimura at a time

when the reserve account was insufficient to fund the unpaid

accounts. In other words, assuming Tanimura’s continued

solvency, Agricap could obtain full recourse against

Tanimura for 90-day-old unpaid accounts, and Agricap’s risk

of non-payment by Tanimura’s customers was cabined to 90-

day windows (during which Agricap received a financing fee

and interest).

The parties also executed ancillary documents when

entering into the Factoring Agreement. Tanimura’s principal

executed a personal guarantee. Agricap took a priority

interest in all of Tanimura’s assets other than inventory, filing

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G.W. PALMER & CO. V. AGRICAP FINANCIAL 29

a UCC financing statement to this effect. Also, Tanimura

itself and Tanimura’s other primary lender agreed to

subordinate their debt to Agricap.

The parties disagree as to the actual amounts of money

that changed hands between Tanimura and Agricap, but it

appears undisputed that the transferred accounts exceeded

$20 million and Agricap ultimately paid to Tanimura an

amount in excess of 90% of the face value of those accounts.

The factoring agreement at issue in Boulder Fruit was

substantially similar to the Factoring Agreement in the

present case. The factoring agent in Boulder Fruit, however,

was not subject to the same express limitations on the timing

or reasons for forcing the PACA trustee to repurchase

accounts. Rather, the factoring agreement in Boulder Fruit

permitted the factoring agent to force the PACA trustee to

repurchase any account the factoring agent determined, “in its

sole and absolute discretion . . . is or may not be fully

collectible.”

Reviewing these provisions, we conclude that neither the

present Factoring Agreement nor the agreement in Boulder

Fruit transferred primary or direct risk of non-payment to the

factoring agents. In the absence of controlling precedent,

therefore, we would hold neither agreement effected a true

sale of trust assets. Rather, both were mere secured financing

arrangements, as further indicated by Agricap’s descriptions

of itself as “lender” and the Factoring Agreement as a “credit

facility.”

In summary, Congress created a system to protect

growers of fruits, vegetables, and other perishable

commodities. The growers in this Circuit have effectively

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30 G.W. PALMER & CO. V. AGRICAP FINANCIAL

lost that protection due to lenders merely labeling true

security agreements as factoring agreements. This is not an

isolated issue in a cottage industry. Perishable agricultural

commodities are a multi-billion dollar enterprise in this

Circuit as well as nationwide. We would encourage an en

banc court to consider bringing the Ninth Circuit into line

with the other circuits that have considered this issue.

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