Opinion ID: 8414542
Heading Depth: 1
Heading Rank: 4

Heading: Transfer of Risk in the Factoring Agreement and in Boulder Fruit

Text: Turning to the actual factoring agreements in the present case and in Boulder Fruit, it is helpful to describe the 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 [Tani-mura’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 Tan-imura 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 accounts had remained outstanding. After retaining its fees and maintaining a reserve account, Agricap would pay to Tani-mura 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 (ie., 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 Tanimu-ra 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 insolvency by Tanimura at a time when the reserve account was insufficient to fund the unpaid accounts. In other words, assuming Tani-mura’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 a UGC financing statement to this effect. Also, Tanimu-ra 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 nonpayment 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 Agrieap’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 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.