The following is a case update written by Reno Fernandez, a bankruptcy appellate specialist with California Appellate Law Group, LLP, analyzing a recent decision of interest:
On July 8, 2022, the U.S. Court of Appeals for the Ninth Circuit reversed a district court’s dismissal of an action under the Perishable Agricultural Commodities Act (“PACA”), determining that the allegations of a provider of alternative financing were sufficient to show that it acted as a seller of produce and not necessarily as a lender. Produce Pay, Inc. v. Izguerra Produce, Inc., 39 F.4th 1158 (9th Cir. 2022).
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Produce Pay, Inc. brought an action in the U.S. District Court for the Central District of California against Izguerra Produce, Inc. for violations of the Perishable Agricultural Commodities Act, 7 U.S.C. §§ 499a, et seq. (“PACA”), among other claims. In its complaint, Produce Pay alleged that it holds a PACA license, that it buys and sells wholesale produce through its online platform, and that it also offers loans and advances to growers. Specifically, growers post to the online platform when produce is available, and participating distributors can arrange for the produce to be shipped directly to them. Izguerra Produce, Inc. is such a distributor.
Produce Pay further alleged that, notwithstanding direct shipping from the grower to the distributor, Produce Pay takes title to the produce when the distributor receives and accepts shipment. Upon receipt, the distributor informs Produce Pay how much of the shipment is marketable, and Produce Pay pays the grower. The distributor then resells the produce “on consignment,” remitting the gross proceeds to Produce Pay, plus a charge for using the online platform (called a “marketplacing commission”), less the distributor’s commission and expenses. But if the distributor cannot sell the produce at the expected price, the distributor must still pay the marketplacing commission to Produce Pay. These transactions are governed by a Distribution Agreement between the distributor and Produce Pay, a copy of which was attached to the complaint as an exhibit.
In April 2019, Izguerra bought 40,000 pounds of avocados through Produce Pay’s online platform. Upon confirmation of Izguerra’s receipt of shipment from the grower, Produce Pay issued an invoice to Izguerra for $70,560, representing the expected net proceeds from the avocados, with “subject to the [PACA] statutory trust” printed on the invoice. Izguerra ultimately paid less than $7,000. Consequently, Produce Pay brought its action to recover the remaining balance of approximately $63,000, alleging a priority interest in the avocados and their proceeds pursuant to a PACA trust.
Izguerra brought a motion to dismiss the action under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted. Izguerra argued that Produce Pay acted as a lender and not a seller of wholesale produce. The district court granted the motion and dismissed the action with prejudice, concluding that Produce Pay was not a seller and therefore was not entitled to protection under PACA.
Produce Pay timely appealed. In a split decision, a panel of the U.S. Court of Appeals for the Ninth Circuit reversed the dismissal. Izguerra filed a petition for rehearing en banc on July 13, 2022.
To state a PACA claim, a plaintiff must allege that: (1) the commodities sold were perishable agricultural commodities, (2) the purchaser was a commission merchant, dealer, or broker, (3) the transaction occurred in contemplation of interstate or foreign commerce, (4) the seller has not received full payment on the transaction, and (5) the seller preserved its trust rights by including statutory language referencing the trust on its invoices. Here, Produce Pay’s complaint alleged that the avocados are perishable, that Izguerra is a dealer of avocados, that the transaction crossed state and national boundaries, that Produce Pay is owed $63,786.56, and that Produce Pay’s invoices stated that the avocados were sold “subject to the [PACA] statutory trust.” If PACA applies, then the produce and its proceeds are subject to a trust for the benefit of the seller. The key issue in this case was whether the allegations are contradicted by the Distribution Agreement or whether they are consistent with, or superior to, the terms of the agreement.
The district court scrutinized the Distribution Agreement and determined that its terms are more consistent with a secured loan than a sale. In particular, the district court applied the “transfer of risk” test established in S&H Packing & Sales Co. v. Tanimura Distributing, Inc., 883 F.3d 797 (9th Cir. 2018) (en banc). Under Tanimura, courts analyze whether the transaction is a “true sale,” in which the risk of nonpayment is transferred to the putative buyer, among other factors. Id. at 801-802. In a true sale, the buyer assumes all risk of default (by its own customers), while the seller is paid and relieved of such risk; by contrast, a lender indirectly shares in the risk of default. If the transaction is a true sale, then PACA applies and protects the seller. If not, then the putative seller is not a seller and is not entitled to PACA protection.
Here, the district court found that the arrangement between Produce Pay and Izguerra was less like a true sale and more like a loan. Accordingly, the court dismissed the complaint.
The Ninth Circuit reviewed the district court’s opinion de novo under the standards applicable to dismissal under Rule 12(b)(6). A complaint will withstand dismissal only if it alleges facts sufficient to raise a plausible claim. Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). The court focused in particular on the corollary rules that conclusory allegations are insufficient and that contradictory material attached to or referenced in a complaint may provide grounds for dismissal. Sprewell v. Golden State Warriors, 266 F.3d 979 (9th Cir. 2001).
In this case, a majority of the panel determined that the Distribution Agreement was not inconsistent with Produce Pay’s factual allegations supporting a sale. In fact, the majority found that the terms of the agreement were consistent with a consignment arrangement, which is a form of sale that is eligible for PACA protection. 7 U.S.C. § 499b(2), (4); 7 C.F.R. § 46.2(aa)(1), (2). Accordingly, the Ninth Circuit reversed the district court’s dismissal and remanded for further proceedings. Judge Milan D. Smith, Jr. dissented.
The majority distinguished Tanimura (as well as a recent Sixth Circuit opinion applying Tanimura) on a number of grounds, including that Tanimura was decided at the summary-judgment stage. Moreover, the majority would cabin Tanimura to its particular facts, which involved whether a putative sale of accounts receivable was really a factoring arrangement. In general, the majority determined that the “substantive, fact-intensive” test in Tanimura is inappropriate at the pleadings stage.
The majority focused on the allegations of Produce Pay’s complaint and downplayed the Distribution Agreement. As a result, the majority held that Produce Pay’s allegations were sufficient to state a claim and that the action should not have been dismissed.
The dissent takes issue with the majority’s elevation of Produce Pay’s allegations over the terms of the Distribution Agreement, arguing that the majority has been “led astray” by Produce Pay’s artful pleading. The dissent would rely more heavily on the Distribution Agreement, which the dissent found provides for a secured loan and not a true sale. Among other reasons, the dissent pointed out that Produce Pay did not take possession of any produce and did not take title until after Izguerra accepted shipment, which was received directly from growers. Indeed, the growers sent Izguerra their own invoice. In other words, the dissent considers the growers to be the proper sellers, comparing Produce Pay’s role to a typical home-mortgage lender.
The dissent also takes issue with the majority’s disregard for Tanimura, which the dissent characterizes as the Ninth Circuit’s seminal opinion on the issue. The dissent describes the holding in Tanimura as broadly applicable and not limited to its facts. Accordingly, the dissent would have affirmed the district court’s dismissal of Produce Pay’s action.
This story is probably not over. Given that the panel was split over whether Tanimura (itself an en banc decision) should apply, this opinion is an excellent candidate for review en banc. As mentioned above, a petition for review en banc was pending at the time of writing.
The panel’s judges also disagreed over the extent to which exhibits and other material incorporated in a complaint control over the allegations of the complaint itself. Although the dissent’s comments are not binding, they indicate that this is a live issue that practitioners should take into account in drafting (and attacking) complaints. En banc review of the opinion might clarify this issue.
As a final point of interest, the opinion includes a dialog between the majority and the dissent over the use of secondary sources. Specifically, the dissent criticizes the majority for relying on “un-pleaded” descriptions of the produce industry provided by an amicus brief and a law review article. The majority retorts that the dissent also relies on secondary sources, including a law dictionary, certain treatises, and Produce Pay’s website. The extent to which background circumstances may be taken into account at the pleadings stage, without judicial notice, is interesting as a matter of practice, but it is unlikely to be outcome-determinative if the opinion is reviewed en banc.
This review was written by Reno Fernandez, a bankruptcy appellate specialist with California Appellate Law Group, LLP, a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.