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Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co.

Court: Court of Appeals for the Fifth Circuit
Date filed: 2003-06-26
Citations: 336 F.3d 410
Copy Citations
77 Citing Cases
Combined Opinion
                                                           United States Court of Appeals
                                                                    Fifth Circuit
                                                                 F I L E D
              IN THE UNITED STATES COURT OF APPEALS               June 26, 2003

                         FOR THE FIFTH CIRCUIT               Charles R. Fulbruge III
                                                                     Clerk
                   __________________________

                          No. 02-10321
                   __________________________



REAVES BROKERAGE COMPANY, INC.,
                                                  Plaintiff-Appellee,

                                versus

SUNBELT FRUIT & VEGETABLE COMPANY, INC. ET AL.,
                                                             Defendants,

FIDELITY FACTORS LLC,                             Defendant-Appellant.

       ___________________________________________________

          Appeal from the United States District Court
               for the Northern District of Texas

       ___________________________________________________


Before JONES, WIENER, and DeMOSS, Circuit Judges.

WIENER, Circuit Judge:

     Defendant-Appellant    Fidelity   Factors,   L.L.C.    (“Fidelity”)

appeals the district court’s grant of summary judgment in favor of

Plaintiff-Appellee Reaves Brokerage, Inc. (“Reaves”) on its claims

for reimbursement under the Perishable Agricultural Commodities

Act, 7 U.S.C. §§ 499a-499s (“PACA”). For the following reasons, we

AFFIRM.
                        I. FACTS AND PROCEEDINGS

     Reaves sells and brokers fresh fruits and vegetables. On

several occasions, Reaves made interstate commerce sales of produce

to a wholesaler, Sunbelt Fruit & Vegetable Company (“Sunbelt”). In

March 2000, Sunbelt ceased operations, owing Reaves $195,060.55 in

unpaid invoices for produce delivered in June, July, and December

of 1999. Reaves immediately filed suit against Sunbelt seeking

damages    under    PACA.   In   July   2000,   Reaves    filed   an    amended

complaint, adding as defendants (1) Fidelity Factors, L.L.C., a

“factor”    that    contends     it   had   purchased   particular      accounts

receivable from Sunbelt, (2) James Heffington, Sr., Sunbelt’s

president and sole shareholder, and (3) Lone Star Produce Company,

Sunbelt’s alleged successor.

     In October 2000, the district court granted a default judgment

against Sunbelt in the amount of $195,060.55. Reaves eventually

filed motions to dismiss its claims against Lone Star and for

summary judgment, on its PACA trust claims against Fidelity and

Heffington.        Fidelity responded and filed a cross-motion for

summary    judgment.    The    district     court    referred   these   summary

judgment motions to a magistrate judge who recommended granting

Reaves’s motion and denying Fidelity’s cross motion. After de novo

review and consideration of Fidelity’s objections, the district

court adopted the recommendation of the magistrate judge and

entered    judgment    in     favor    of   Reaves    against   Fidelity    and



                                        2
Heffington, jointly and severally, in the amount of the default

judgment previously rendered against Sunbelt, $195,060.55. Fidelity

timely filed a notice of appeal but Heffington did not appeal.

                            II. ANALYSIS

A. Standard of Review

     We review a grant of summary judgment de novo, applying the

same standard as the district court.1        A motion for summary

judgment is properly granted only if there is no genuine issue as

to any material fact.2     An issue is material if its resolution

could affect the outcome of the action.3     In deciding whether a

fact issue has been created, we view the facts and the inferences

to be drawn therefrom in the light most favorable to the nonmoving

party.4

     The standard for summary judgment mirrors that for judgment as

a matter of law.5   Thus, the court must review all of the evidence

in the record, but make no credibility determinations or weigh any




     1
       Morris v. Covan World Wide Moving, Inc., 144 F.3d 377, 380
(5th Cir. 1998).
     2
       Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S.
317, 322 (1986).
     3
         Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
     4
       See Olabisiomotosho v. City of Houston, 185 F.3d 521, 525
(5th Cir. 1999).
     5
         Celotex Corp., 477 U.S. at 323.

                                  3
evidence.6      In reviewing all the evidence, the court must disregard

all evidence favorable to the moving party that the jury is not

required to believe, and should give credence to the evidence

favoring the nonmoving party as well as evidence supporting the

moving     party   that    is   uncontradicted   and   unimpeached.7    The

nonmoving party, however, cannot satisfy his summary judgment

burden with conclusional allegations, unsubstantiated assertions,

or only a scintilla of evidence.8

B. PACA

     PACA was enacted in 1930 to regulate the sale of perishable

commodities9 and “promote fair dealing” in the sale of fruits and

vegetables.10 In 1984, PACA was amended to extend its protection to

sellers of perishable commodities, who, because of the need to sell

their products quickly, were often unsecured creditors of buyers

whose creditworthiness they were unable to evaluate before the

sale.11    To    “remedy    this   burden   on   commerce   in   perishable



     6
       Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133,
150 (2000).
     7
          Id. at 151.
     8
       Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.
1994) (en banc).
     9
       Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67
F.3d 1063, 1066 (2d Cir. 1995).
     10
       Golman-Hayden Co. v. Fresh Source Produce, Inc., 217 F.3d
348, 350 (5th Cir. 2000).
     11
          Endico Potatoes, 67 F.3d at 1067.

                                       4
commodities,”12 Congress added the provisions in § 499(e), which

create, immediately upon delivery, a nonsegregated “floating” trust

in favor of sellers on the perishable commodities sold and the

products and proceeds derived from the commodities.13 If the seller

is not paid promptly, the trust assets must be preserved and the

seller’s    claims   prime   those    of     other   secured   and    unsecured

creditors for the full amount of the claim.14

     General    principles    of     trust     law   govern    PACA   trusts.15

Accordingly, a “bona fide purchaser” of trust assets receives the

assets free of claims by trust beneficiaries.16 Consequently, unpaid

sellers are not able to recover trust proceeds conveyed to a third

party if that party received the proceeds “for value” and “without




     12
       7 U.S.C. § 499e(c)(explaining that “[t]his subsection is
intended to remedy such burden on commerce in perishable
agricultural commodities and to protect the public interest”).
     13
       Endico Potatoes, 67 F.3d at 1067; see 7 U.S.C. §
499e(c)(2)(“Perishable agricultural commodities received by a
commission merchant, dealer, or broker . . . shall be held . . .
in trust for the benefit of all unpaid suppliers or sellers of
such commodities or agents involved in the transaction, until
full payment of the sums owing . . . have been received . . .
.”).
     14
       See Gargiulo v. G.M. Sales, Inc., 131 F.3d 995, 999 (11th
Cir. 1997)(“The PACA grants the sellers of such commodities the
right to recover against the purchasers and puts the sellers in a
position superior to all other creditors.”).
     15
          Id.
     16
          Endico Potatoes, 67 F.3d at 1067.

                                      5
notice of the breach of trust.”17 A transfer is “for value” “if

money is paid or other property is transferred or services are

rendered as consideration for the transfer of trust property.”18

Lenders who receive trust assets through enforcement of a security

agreement are not bona fide purchasers, however, because such

transfers are not “for value.”19

     The determinative issue presented in this appeal is whether,

as a matter of law, the “factoring agreement” between Sunbelt and

Fidelity was (1) a loan secured by Sunbelt’s accounts receivable or

(2) a true sale or “factoring” of the accounts receivable to

Fidelity. Reaves argues, and the district court concluded, that in

spite of its label and the terminology used, the agreement executed

between Fidelity and Sunbelt was not truly a sale of accounts

receivable, but was in substance a secured lending agreement, under

which Fidelity held all of Sunbelt’s accounts (and other assets) as

collateral    and   Sunbelt   remained   personally   liable   for   any

shortfall. Fidelity insists that it purchased Sunbelt’s accounts

and “never made a loan of any type to Sunbelt.”

     Characterization of the agreement at issue turns on “the

substance of the relationship” between Fidelity and Sunbelt, “not




     17
          Id. at 1068 (quoting Restatement (Second) of Trusts §
284).
     18
          Id. (quoting Restatement (Second) of Trusts § 298).
     19
          Gargiulo, 131 F.3d at 999-1000.

                                   6
simply the label attached to the transaction.”20 As this issue under

PACA is one of first impression in this circuit, we, like the

district court, look for guidance to the Second Circuit’s analysis

in Endico Potatoes v. CIT Group/Factoring Inc.21 In Endico Potatoes,

the court identified several elements to consider in determining

the true legal substance of a transaction involving PACA trust

assets, including (1) the right of the creditor to recover from the

debtor any deficiency if the assets assigned prove insufficient to

satisfy the debt; (2) the effect on the creditor’s right to

ownership of the assets assigned if the debtor were to pay the debt

from independent funds; (3) whether the debtor has a right to

amounts recovered from the sale of assets in excess of that

necessary to satisfy the debt; and (4) whether the assignment

itself reduces the debt.22 All these features bear on a common

question — which party bears the risk? As the Second Circuit

explained

     [w]here the lender has purchased the accounts receivable,
     the borrower’s debt is extinguished and the lender’s risk
     with regard to the performance of the accounts is direct,
     that is, the lender and not the borrower bears the risk
     of non-performance by the account debtor. If the lender
     holds only a security interest, however, the lender’s

     20
       Id.; see also Overton Distributors, Inc. v. Heritage
Bank, 179 F. Supp. 2d 818, 828 (M.D. Tenn. 2002) (noting that
“[whether the [agreement] constituted a breach of trust” “can
only be determined by the actual nature of the agreement,
regardless of the terminology used”).
     21
          67 F.3d 1063 (2d Cir. 1995).
     22
          Id. at 1068.

                                  7
     risk is derivative or secondary, that is, the borrower
     remains liable for the debt and bears the risk of non-
     payment by the account debtor, while the lender only
     bears the risk that the account debtor’s non-payment will
     leave the borrower unable to satisfy the loan.23


     Application of the Second Circuit’s risk-transfer analysis and

our own independent examination of the substance of the parties’

agreement leads us to conclude that the relationship between

Fidelity and Sunbelt was that of a secured lender and debtor, not

a seller and buyer.      At the outset, we recognize that several terms

and provisions used in the agreement are characteristic of a sale

of accounts. For example, (1) the agreement is titled “factoring

agreement” and states that “[w]e [Sunbelt] agree to sell to you

[Fidelity] as absolute owner” all accounts; (2) account debtors are

required to be notified of the sale and instructed to pay Fidelity

directly; (3) the parties agreed to a “purchase price”; and (4)

Sunbelt had no right to vary the terms of any receivable purchased

by Fidelity without Fidelity’s prior written consent. If viewed in

isolation,    these   terms   would   support   a   conclusion   that   the

agreement is a true sale.      When read in its entirety, however, all

terms and provisions of the agreement, taken as a whole, confirm

that the risk of non-payment or underpayment is borne entirely by

Sunbelt and not shifted to Fidelity.

     First, although the agreement purports to distinguish between

sales of accounts “with recourse” to Sunbelt, and those “without

     23
          Id. at 1069.

                                      8
recourse,”   in   reality,    Fidelity    would   virtually     always    have

recourse against Sunbelt if Sunbelt’s account debtors defaulted or

underperformed.    Sales     of   accounts   without    the    prior   written

approval of Fidelity are “with full recourse to” Sunbelt. Although

sales of accounts approved in writing by Fidelity (so-called

“approved receivables”) are nominally without recourse to Sunbelt,

the parties apparently did not segregate, track, or otherwise

distinguish these two categories of sales.24

     Furthermore, the approved, non-recourse sales are qualified by

two exceptions that are so significant that they essentially

swallow   non-recourse.      First,   Fidelity’s       “risk   for     approved

receivables purchased without recourse is limited to [Sunbelt’s]

customer’s financial inability to pay” — described in the agreement

as “credit risk.” In turn, “financial inability” is narrowly

defined as

     (a) [Fidelity] becoming aware that the customer on or
     before the due date of the approved receivable in
     question made an assignment for the benefit of creditors,
     had a petition filed by or against it under the Federal
     Bankruptcy Code, called a general meeting of creditors to
     compromise or adjust its debts, had a proceeding
     instituted by or against it for debtor relief under any
     state or federal insolvency law; or
     (b) [Fidelity] becoming aware that the customer on or
     before the due date of the approved receivable in
     question was financially unable to pay as determined by
     [Fidelity] on the basis of evidence submitted by

     24
       Fidelity’s president, Charles Heflin, has stated in an
affidavit that approximately $600,000 in sales were “without
recourse,” but did not compare or otherwise explain what portion
of the approximately $4.3 million in total “sales” were with
recourse.

                                      9
     [Sunbelt] or otherwise.


     The agreement further provides that Sunbelt is responsible for

the first $5,000 in losses for approved receivables and that all

receivables in amounts less than $200 “shall always be deemed to be

non-approved” and thus, with recourse to Sunbelt. These provisions

make clear that, even after the “sale” of its accounts receivable,

Sunbelt continued to have the risk of its customers’ non-payment or

underpayment;      Fidelity’s   risk,    in   contrast,   was    limited    to

receivables purchased with recourse, and then only to the extent of

any inability it might experience in collecting from these pre-

approved account debtors.

     In addition to the fact that Sunbelt retained virtually all

risk of loss, other provisions in the agreement confirm that the

parties confected — through a system of “advances” — a secured loan

or revolving line of credit, rather than a true sale of assets.

First, Fidelity agreed to advance Sunbelt up to 75% of the purchase

price of the accounts and “charge [Sunbelt’s] account therewith.”

Also, Fidelity was not required to make any advances on receivables

purchased with recourse until payment was received from the account

debtor; and even then, all advances were subject to Fidelity’s

right to “maintain a reasonable reserve” which may be “revised

upward or downward” in Fidelity’s “absolute discretion” at any

time.   Although    these   features    might   be   common     in   factoring

agreements, they too push this agreement ever closer to a loan and


                                    10
further from a true sale.

     We also note that the agreement required that Sunbelt grant

Fidelity a “continuing lien and security interest in all of [its]

accounts, instruments . . . and all proceeds of the foregoing as

security for the payment and satisfaction of any and all of our

present and future liabilities, indebtedness, and obligation[s] to

you [Fidelity] . . . .” The parties also agreed that “[r]ecourse to

any of the foregoing collateral shall not any time be required and

we hereby authorize you [Fidelity] to charge or offset our account

for the amounts of any and all of the liabilities, indebtedness,

and obligation[s] which are secured thereby.” And, under the

agreement, Fidelity was to “treat all indebtedness” as “an entire

single indebtedness for which [Sunbelt] shall remain liable for

full payment without demand” and to which Fidelity may apply any

“funds, receivables, credits, or property of [Sunbelt].”

     Even further insulating itself from risk of loss, Fidelity

obtained    two   additional   security   rights.   First,   Sunbelt’s

president, James Heffington, was required to execute a personal

continuing guaranty, in which he “unconditionally guarant[eed] to

Fidelity full payment and prompt and faithful performance by

[Sunbelt] of all it’s [sic] present and future indebtedness and

obligations to Fidelity which may arise pursuant to the [factoring

agreement].” Second, Fidelity filed a financing statement, in

accordance with the Uniform Commercial Code, listing as collateral

Sunbelt’s   “accounts,   contract   rights,   instruments,   documents,

                                    11
chattel paper” and other “general intangibles” — not just the

accounts receivable purportedly sold.25

     In reaching our conclusion, we emphasize that “the distinction

between purchase and lending transactions can be blurred,”26 and

therefore we expressly limit our holding to the facts and arguments

presented in this admittedly close case. We also stress that our

decision is guided by the policies behind PACA, which mandate

protection   of   suppliers   of   fresh   fruit   and   other   perishable

commodities. We express no opinion on the proper construction of

factoring agreements in non-PACA contexts.

     We are aware that factoring agreements may, and often do,

incorporate separate lending or financing agreements,27 yet the

defendant in this case has never argued that the advances reflect

a loan or line of credit apart from the sale of the accounts;28


     25
        “Article 9 applies to sales of accounts and chattel paper
primarily because of their financing character.” JAMES J. WHITE &
ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 30-9, at 66 (4th ed.
1995).
     26
        ASSET-BASED FINANCING: A TRANSACTIONAL GUIDE § 27.02[3], at 27-12
(Howard Ruda ed., 1985); see also WHITE & SUMMERS, UNIFORM COMMERCIAL
CODE § 30-9, at 66 (describing factors as “lenders in sheep’s
clothing”).
     27
       See, e.g., ASSET-BASED FINANCING: A TRANSACTIONAL GUIDE §
27.02[11], at 27-20 (explaining that “t]he factor can extend
loans to the client before the payment date, or collection date .
. . of the receivables . . . this is, conceptually, a second
transaction separate and apart from the purchase of
receivables”).
     28
       Fidelity consistently maintains that it “purchased
accounts from Sunbelt for 75% and then 85% of the face value of
invoices” thus disavowing any argument that the “advances” (and

                                    12
significantly, Fidelity has not offered a satisfactory alternative

explanation     for   all   the   risk-minimizing    features,    such   as   a

“reserve account,” Heffington’s personal guaranty, and the lien and

other security rights that are included in this agreement. Thus, in

the   final     analysis,    we   conclude    that   the    agreement    these

sophisticated business entities contemplated — and entered into —

is a secured lending agreement and not a true sale.

      Fidelity nevertheless seeks comfort in the Ninth Circuit’s

decision in Boulder Fruit Express & Heger Organic Farm Sales v.

Transportation Factoring, Inc.29 When reviewed in the light of our

conclusion that Sunbelt’s agreement with Fidelity constituted a

secured lending arrangement, not a sale or factoring, however,

Boulder Fruit proves to be inapt. In Boulder Fruit, the court held

that “factoring agreements do not, per se, violate PACA”; rather,

a “commercially reasonable sale of accounts for fair value is

entirely consistent with the trustee’s primary duty under PACA . .

. to maintain trust assets so that they are freely available to

satisfy      outstanding    obligations      to   sellers    of   perishable

commodities.”30 Thus, the factoring agreement at issue in Boulder

Fruit, providing for a sale of accounts receivable at 80% of their

face value after deducting a 20% “factoring discount,” was not


their accompanying interest rates) constitute a separate
transaction.
      29
           251 F.3d 1268 (9th Cir. 2001).
      30
           Id. at 1271 (internal quotations omitted).

                                      13
commercially unreasonable and did not breach the PACA trust.31

      As we conclude that the so-called factoring agreement in this

case is the functional equivalent of a secured lending agreement,

the   Ninth   Circuit’s   “commercially    reasonable”     analysis   is

inapplicable. The discrete issue before the Boulder Fruit court was

whether an    acknowledged   factoring   agreement   was   “commercially

reasonable.” Accordingly, that court did not apply a risk-transfer

analysis (or any other test) to determine whether the agreement was

a loan or sale.   In this case, however, the key issue presented is

whether the agreement is a true purchase at all, not simply, as

Fidelity argues, whether a “purchase” of accounts for 75% of their

face value is commercially reasonable. Because — in spite of its

label — the agreement provided that Sunbelt and its owner, James

Heffington, remained responsible for “any and all advances,” we are

constrained to conclude that the agreement was — for purposes of

PACA — a secured loan, not a sale.

C. Damages

      Fidelity also contends that the district court’s grant of

summary judgment was improper because the amount of damages owed to

Reaves, if any, is a disputed issue of fact. Fidelity bases this

argument on the affidavit and reports of its expert, certified


      31
       Id. 1272. Significantly, however, the purchaser-factor of
the accounts receivable in Boulder Fruit paid more for the
accounts than he was ultimately able to collect, i.e., the PACA
trustee received more for the accounts than they proved to be
worth. Id.

                                  14
public accountant Jill McKinney. According to Fidelity, McKinney’s

analysis establishes that (1) Sunbelt is owed at least $9,984.50 in

“credits” for overpaid invoices and (2) Reaves was actually paid

for   all   shipments      to     Sunbelt    after   Fidelity    contracted   with

Sunbelt, but improperly applied these payments to outstanding

balances owed on prior shipments. Fidelity concludes that even if

its PACA liability is established, the amount of damages is a

contested issue of material fact that requires vacating the grant

of summary judgment.

       We   agree   with     the    district     court’s    determination     that

McKinney’s affidavit, which focuses entirely on Sunbelt’s past

“payment history” and specifies invoices not at issue in this case,

is    irrelevant.     We    also    question     the   utility    of   McKinney’s

“analysis” which is largely speculative and bereft of supporting

documentation. In short, McKinney’s expert testimony, without more,

constitutes     the        type     of      “conclusional    allegations”     and

“unsubstantiated assertions” that are never sufficient to defeat

summary judgment.

       We note also that the amount of PACA damages that Fidelity now

challenges was conclusively established in the default judgment

entered against Sunbelt in October, 2000. Fidelity does not dispute

that it received PACA trust assets, only challenging the amount, if

any, that Sunbelt owes Reaves on unpaid invoices — the precise

issue determined in the default judgment. At the time of Sunbelt’s

default, Fidelity had been a party to this suit for several months

                                            15
and was represented by Sunbelt’s former counsel. Fidelity was well-

aware of   Sunbelt’s   default,   yet   did   not   contest   that   order,

choosing instead to frame the issue broadly as a “material fact in

dispute.” We question, without deciding, whether this is the proper

procedural vehicle to challenge the default judgment, if it indeed

remains subject to challenge.

                           III. Conclusion

     For the foregoing reasons, the judgment of the district court

is AFFIRMED.32




     32
       Fidelity’s “waiver and/or estoppel” argument, unsupported
by case law, is entirely without merit and thus merits no
discussion here.

                                  16