Client Alert: From the Scheer Law Group: Lenders with Liens on Wholesaler Produce Beware!!

Client Alert: From the

Note: The following is a general discussion on the specified topic or issue and may not be relied on as legal advice in any specific case or matter you encounter. You should review any applicable case, or matter with counsel experienced in this area of law and should not generally rely on the discussion in this Alert.

Date: February  26, 2018
Client Alert:
To: All Scheer Law Group Clients and Affiliates:
Subject:  Update:  9th Circuit Reverses Ruling on PACA Claims, Favoring Growers.

Previously, sent an alert entitled: 9th Circuit to Determine if Lender Liens “Trump” PACA Claims. The Court has determined!

In essence, Court was considering who wins in a battle for lien priority between lenders financing produce wholesalers, and growers of the wholesaler’s produce, which are given certain priority rights under the Perishable Agricultural Commodities Act (“PACA”), (7 U.S.C. § 499a et seq.),  Prior case law allowed lenders the priority over the growers, if the lender structured its lien rights  as a purchase of the wholesaler’s accounts receivable instead of a loan to the wholesaler secured by the crop or produce. The 9th Circuit Court of Appeals has now spoken and is supporting the growers.

The bottom line: Much like a lender that finances a construction project may have to pay subcontractors if the borrower/builder does not, lenders will also have to pay PACA claimants if their wholesaler/borrower does not, unless the lender obtains its lien via a true purchase of the borrower’s accounts receivable and the purchase is commercially reasonable.

The ruling can be found in the case of  S H Packing Sales Co., Inc. v. Tanimura Distributing, Inc. (9th Cir. 2017) 850 F.3d 446, reh’g en banc granted (9th Cir. 2017) 868 F.3d 1047, and on reh’g en banc (9th Cir., Feb. 22, 2018, No. 14-56059) 2018 WL 1003855.  The ruling overturns prior 9th Circuit precedent and holds that in order for a purchaser of accounts receivable (Lender) to acquire an interest in wholesaler accounts ahead of the interest of a produce supplier under PACA, the transaction must be a “true sale” for the lender to obtain the priority.

Note: A true purchase not found in this case because the lender had the right to require the wholesaler to buy back receivables that could not be collected.

Practically this plays out in bankruptcy proceedings when a wholesaler files bankruptcy (e.g. many many wineries in recent years) and there are competing lien claims between the lender and a grower claiming rights under PACA.

An example of how this might work is: 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 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.”

However, when the produce wholesaler factors (sells the receivables) to a third party the PACA lien is not superior to a lien taken by the purchaser of the factored receivables under the exception listed in the statute, if there is a true sale of the receivables and the sale is commercially reasonable (See Boulder Fruit Exp. Heger Organic Farm Sales v. Transportation Factoring, Inc. at 1272).   The 9th Circuit Court of appeals in S H PACKING SALES CO, case has now upheld this.

Please call or email if you want to discuss.

Spencer Scheer

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