On February 22, 2018, the U.S. Court of Appeals for the Ninth Circuit issued an en banc opinion (consisting of eleven judges, with three judges dissenting), strengthening the rights of growers and suppliers under the PACA trust, by reversing a prior ruling that court made in 2001. En banc review is necessary to overturn or reverse a prior case.
The Court explained that Congress intended PACA to prevent secured lenders from defeating the rights of PACA beneficiaries. However, there have been cases in which growers and suppliers have lost trust rights based on alleged sales of PACA trust assets through factoring arrangements.
With this opinion, the 9th Circuit joined other circuits in the U.S. (2nd, 4th and 5th), which had adopted a “true sale” test to determine if a factoring agreement was actually a financing arrangement that violated the rights of PACA trust creditors. The Court held there must be a threshold inquiry to determine if the transaction is a loan, which is governed by PACA, or a true sale of the accounts receivable, which is not.
In this case, growers sold their produce to a produce dealer, a PACA trustee. The dealer then sold the produce on credit to third parties and generated accounts receivable. The dealer then allegedly transferred the accounts receivable to a “factor”, pursuant to a document called a “Factoring Agreement”.
The Court held that, “Although described as a sale of accounts, the Factoring Agreement involved hallmarks of a secured lending arrangement.” These included the “factor” referring to itself as a lender, and stating the agreement was a Security Agreement. The “factor” also had security interests in the accounts receivable, and filed UCC finance statements, which indicated the transaction was nothing more than a loan secured by the accounts receivable and not a true sale of the accounts receivable.
The court sent the case back down to the district court for a determination of whether the financing arrangement was a loan or a true sale. If the district court finds that the arrangement was a loan disguised as a sale, the “factor” may be liable for the funds it received from the accounts receivable.
The decision is important because it reverses a bad case precedent and creates consistency on a pivotal issue involving the PACA trust.
The case was argued by Louis W. Diess, III, with Mary Jean Fassett on the brief, of the law firm of McCarron & Diess.