Boulder Fruit Express & Heger Organic Farm Sales Continental Sales Co. Health & Lejeune Gold Inc. Natural Selection Foods, L.L.C. New Harvest Organics Pacific Organic Production, Pacific Organic Produce S.A. American 4-Star Marketing Inc., Dba Rainbow Valley Orchards Sundance Natural Foods v. Transportation Factoring, Inc., a Utah Corporation, Dba Transfac Capitol Resource Funding, Inc.

Citations: 251 F.3d 1268; 2001 Cal. Daily Op. Serv. 4530; 2001 Daily Journal DAR 5591; 2001 U.S. App. LEXIS 11611Docket: 99-56770

Court: Court of Appeals for the Ninth Circuit; June 4, 2001; Federal Appellate Court

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The case involves the Perishable Agricultural Commodities Act (PACA) and centers on a dispute between fresh fruit and vegetable growers (appellants) and Transportation Factoring, Inc. (Transfac) along with Capital Resource Funding, Inc. (defendants-appellees). The growers sold produce on credit to Certified Organics, which subsequently defaulted on payments. Certified had factored its accounts receivable to Transfac, leading the growers to allege that this transaction breached the statutory trust under PACA, which required Certified to hold the accounts receivable in trust for the growers until payment was made.

The growers contended that Transfac’s acquisition of the accounts receivable constituted a breach of this trust, demanding that Transfac return the receivables unless it could prove it was a bona fide purchaser without notice of the breach. The district court granted summary judgment in favor of Transfac and Capital Resource Funding, concluding that Transfac’s payment for the accounts was sufficient (over $3.297 million) relative to their collected value ($3.278 million), and thus did not constitute a breach of trust. The court reasoned that since Transfac paid a reasonable value for the accounts, the factoring did not dissipate trust assets. The judgment favored Transfac and Capital Resource Funding under Rule 54(b), while claims against Certified and its principal remained unresolved. The Ninth Circuit affirmed the district court's decision, exercising de novo review over the summary judgment.

PACA, enacted by Congress in 1930 and amended in 1984, aims to prevent unfair practices and ensure financial responsibility in the fresh fruit and produce industry. The 1984 amendment addressed issues caused by financing arrangements that prioritized lenders over growers, establishing a PACA trust under 7 U.S.C. 499e(c). This trust mandates that commission merchants, dealers, or brokers hold all perishable agricultural commodities and their derivatives in trust for unpaid suppliers until full payment is made. The trust operates as a non-segregated floating trust, allowing commingling of assets while maintaining the sellers' rights to recover amounts due from purchasers, even against secured creditors.

Under PACA, receivables from the sale of commodities are also included in the trust. For example, if a farmer sells oranges to a broker, and the broker sells to a supermarket, the broker must hold the resulting receivable in trust for the farmer until payment is complete. If the broker becomes bankrupt, the farmer's claim to the receivable is prioritized over any bank's secured interest.

The current issue involves whether Certified breached the PACA trust by selling its receivables to Transfac under a factoring agreement. General trust principles apply to PACA trusts unless they conflict with the statute. Breaching a trust occurs when a trustee violates duties owed to beneficiaries. PACA mandates that trustees maintain trust assets to satisfy obligations to suppliers, and any actions that divert or impair recovery of these assets constitute unlawful dissipation.

Factoring agreements do not inherently violate the PACA trust, as the regulations do not prohibit trustees from converting receivables into cash through such arrangements. The purpose of PACA is to ensure growers are compensated for their commodities, not to maintain unliquidated commercial paper. Whether a specific factoring transaction is commercially reasonable depends on its terms; a trustee selling accounts for significantly less than their value may breach the trust, whereas a fair-value sale does not.

In the case at hand, the factoring arrangement was deemed to enhance the trust rather than breach it, as it allowed Certified to convert invoices into cash that could be used to pay growers. Certified received $18,482 more than the accounts were worth, and a 20% factoring discount was not shown to be commercially unreasonable. 

The growers' argument regarding Certified's inability to pay as an admission of trust breach conflates breach of contract with breach of trust. The focus is solely on whether Certified acted within its duties as a trustee in the transaction with Transfac. Furthermore, Transfac is not liable to the growers solely based on Certified's failure to pay; liability for third parties arises only if they contributed to the breach or dissipation of trust assets.

Transfac overpaid Certified for trust assets beyond their actual worth. The growers failed to establish any misapplication of the trust funds, admitting ignorance regarding how Certified utilized the funds received from Transfac. If those funds were allocated to pay other producers of perishable commodities, no trust breach would occur, as the PACA trust allows for the commingling of assets. The court concludes that factoring does not inherently breach a PACA trust and that the specific factoring arrangement in this case was commercially reasonable, affirming the district court's judgment in favor of Transfac and Capital Resource Funding.