PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
NICKEY GREGORY COMPANY, LLC;
POPPELL’S PRODUCE INCORPORATED,
Plaintiffs-Appellees,
v. No. 09-1130
AGRICAP, LLC, a/k/a AgriCap
Financial Corporation,
Defendant-Appellant.
NICKEY GREGORY COMPANY, LLC;
POPPELL’S PRODUCE INCORPORATED,
Plaintiffs-Appellants,
v. No. 09-1162
AGRICAP, LLC, a/k/a AgriCap
Financial Corporation,
Defendant-Appellee.
Appeals from the United States District Court
for the District of South Carolina, at Greenville.
Henry M. Herlong, Jr., Senior District Judge.
(6:07-cv-03605-HMH)
Argued: December 3, 2009
Decided: March 4, 2010
Before TRAXLER, Chief Judge, NIEMEYER, Circuit
Judge, and John Preston BAILEY, Chief United States
District Judge for the Northern District of West Virginia,
sitting by designation.
2 NICKEY GREGORY COMPANY v. AGRICAP
Affirmed in part, vacated in part, and remanded with instruc-
tions by published opinion. Judge Niemeyer wrote the opin-
ion, in which Chief Judge Traxler and Judge Bailey joined.
COUNSEL
ARGUED: Christoph Carl Heisenberg, TRAIGER &
HINCKLEY, LLP, New York, New York, for AgriCap, LLC,
a/k/a AgriCap Financial Corporation. Stephen P. McCarron,
MCCARRON & DIESS, Washington, D.C., for Nickey Greg-
ory Company, LLC, and Poppell’s Produce Incorporated. ON
BRIEF: Kirsten E. Small, NEXSEN PRUET, LLC, Green-
ville, South Carolina, for AgriCap LLC, a/k/a AgriCap Finan-
cial Corporation. Mary Jean Fassett, MCCARRON & DIESS,
Washington, D.C., for Nickey Gregory Company, LLC, and
Poppell’s Produce Incorporated.
OPINION
NIEMEYER, Circuit Judge:
Two sellers of perishable agricultural commodities, Nickey
Gregory Company, LLC, and Poppell’s Produce Inc., com-
menced this action under the Perishable Agricultural Com-
modities Act, 1930 ("PACA"), 7 U.S.C. §§ 499a-499t, to
recover $106,696 owed them for the sale of produce to Robi-
son Farms, LLC., a bankrupt South Carolina produce distribu-
tor. They named as defendant AgriCap, LLC, a finance
company that provided secured financing to Robison Farms
for working capital, and they demanded that AgriCap dis-
gorge the proceeds of Robison Farms’ accounts receivable
held by AgriCap as collateral to secure repayment of monies
advanced by AgriCap to Robison Farms. The two produce
sellers claim that 7 U.S.C. § 499e(c)(2) created a trust for
their benefit over the proceeds of their produce, including the
NICKEY GREGORY COMPANY v. AGRICAP 3
accounts receivable that Robison Farms used for collateral in
its arrangement with AgriCap, and that they therefore had a
superior interest in the accounts receivable and proceeds held
by AgriCap.
AgriCap claimed that it purchased Robison Farms’
accounts receivable under a traditional factoring agreement
and that it therefore held no assets of Robison Farms that
were subject to a PACA trust. It also asserted as a defense that
it was a bona fide purchaser for value.
The district court rejected AgriCap’s position and found
that AgriCap’s arrangement with Robison Farms was a lend-
ing arrangement secured by Robison Farms’ accounts receiv-
able. Accordingly, it concluded that AgriCap held the
accounts receivable as part of the PACA trust, the assets of
which had to be used to pay unpaid commodities sellers
before any other creditor.
For the reasons that follow, we affirm the district court’s
conclusion that Robison Farms’ accounts receivable were
held by AgriCap as collateral for a loan and therefore were
subject to a PACA trust, but we disagree with the amount that
the district court required AgriCap to pay the commodities
sellers. Accordingly, we affirm in part, vacate in part, and
remand for a reassessment of damages in accordance with this
opinion.
I
The Perishable Agriculture Commodities Act, which was
enacted in 1930 to suppress unfair and fraudulent business
practices in the marketing of perishable commodities, was
amended in 1984 to provide unique credit protection to sellers
of perishable agricultural commodities. Because sellers of
perishable commodities had a need to move their inventories
quickly, they were often required to become unsecured credi-
tors of their purchasers, whose credit they were often unable
4 NICKEY GREGORY COMPANY v. AGRICAP
to verify. As these sellers of perishable commodities increas-
ingly suffered the risk of the uncollectability of amounts owed
by the purchasers, especially because the purchasers gave
superior security interests to their lenders, Congress enacted
the 1984 amendments to protect the commodities sellers by
giving them a priority position over even secured creditors.
As Congress explained:
[Purchasers of perishable agricultural commodities]
in the normal course of their business transactions,
operate on bank loans secured by the inventories,
proceeds or assigned receivables from sales of per-
ishable agricultural commodities, giving the lender a
secured position in the case of insolvency. Under
present law, sellers of fresh fruits and vegetables are
unsecured creditors and receive little protection in
any suit for recovery of damages where a buyer has
failed to make payment as required by the contract.
H.R. Rep. No. 98-543 ("House Report"), at 3 (1984),
reprinted in 1984 U.S.C.C.A.N. 405, 407 (emphasis added).
The House Report noted that the delay or nonreceipt of pay-
ment to perishable commodities sellers had increased substan-
tially, creating a "burden on commerce." Id. at 3-4.
The 1984 amendments create, upon the sale of perishable
agricultural commodities, a trust for the benefit of the unpaid
sellers of the commodities on (1) the commodities, (2) the
inventory or products derived from them, and (3) the proceeds
of the inventory or products. 7 U.S.C. § 499e(c)(1)-(2); see
also House Report at 3 (recounting congressional findings);
Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336
F.3d 410, 413 (5th Cir. 2003) (same). As amended, PACA
requires that purchasers of perishable agricultural commodi-
ties maintain the trust by retaining the commodities or their
proceeds until the commodities sellers are paid, and it makes
it unlawful to "fail to maintain the trust as required." 7 U.S.C.
§ 499b(4). PACA confers jurisdiction on district courts to
NICKEY GREGORY COMPANY v. AGRICAP 5
entertain "actions by trust beneficiaries to enforce payment
from the trust." Id. § 499e(c)(5).
The trust created by PACA is a "nonsegregated ‘floating’
trust" on perishable agricultural commodities and their deriva-
tives until all sellers of such commodities are paid. 7 C.F.R.
§ 46.46(b). Because the governing regulations specifically
contemplate the comingling of trust assets without defeating
the trust, see id., the trustee of such a trust is permitted to con-
vert trust assets into other property, provided that the trustee
honors its obligation to "maintain trust assets in a manner that
such assets are freely available to satisfy outstanding obliga-
tions to sellers of perishable agricultural commodities," id.
§ 46.46(d)(1). Any act inconsistent with maintaining the trust,
including "dissipation" of trust assets, is deemed unlawful and
a violation of PACA. See 7 U.S.C. § 499b; 7 C.F.R.
§ 46.46(d)(1). "Dissipation" is defined as "any act or failure
to act which could result in the diversion of trust assets or
which could prejudice or impair the ability of unpaid suppli-
ers, sellers, or agents to recover money owed in connection
with produce transactions." 7 C.F.R. § 46.46(a)(2).
PACA trusts thus give sellers of perishable agricultural
commodities a right of recovery that is superior to the right
of all other creditors, including secured creditors. 7 U.S.C.
§ 499e(c)(1). Indeed, in the event of bankruptcy, trust assets
do not even become a part of the bankruptcy estate. See Boul-
der Fruit Express & Heger Organic Farm Sales v. Transp.
Factoring, Inc., 251 F.3d 1268, 1271 (9th Cir. 2001).
General trust principles govern PACA trusts unless the
principle conflicts with PACA. See Reaves Brokerage Co.,
336 F.3d at 413; Boulder Fruit Express, 251 F.3d at 1271.
Thus, when trust assets are held by a third party, resulting in
the failure of the trustee to pay unpaid sellers of perishable
agricultural commodities, the third party may be required to
disgorge the trust assets unless the third party can establish
that it has some defense, such as having taken the assets as a
6 NICKEY GREGORY COMPANY v. AGRICAP
bona fide purchaser without notice of the breach of trust. See
Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d
1063, 1067-68 (2d Cir. 1995); Restatement (Second) of Trusts
§ 284.
In this case, Nickey Gregory and Poppell’s Produce claim
to have been the beneficiaries of a PACA trust, the assets of
which had been transferred to AgriCap, and therefore they
seek disgorgement from AgriCap of those assets in amounts
sufficient to pay them as unpaid sellers of perishable agricul-
tural commodities.
II
Robison Farms, LLC., a South Carolina limited liability
company that operated in Greenville, South Carolina, was,
during the relevant periods, engaged in the business of distrib-
uting produce to restaurants and school systems in North Car-
olina and South Carolina. It purchased the produce from
wholesalers who sold the produce to Robison Farms on credit
under the protection of PACA’s trust arrangement. Two of its
suppliers, Nickey Gregory Company, LLC, and Poppell’s
Produce, Inc., who are the plaintiffs in this action, sold their
produce to Robison Farms on a continuing basis, extending
short term credit to Robison Farms "subject to the statutory
trust authorized by [PACA]," as indicated on their invoices.
In early March 2005, when Robison Farms was experienc-
ing financial difficulties, it applied to AgriCap, L.L.C., for
financing to provide it with working capital "to restructure
[its] payables." AgriCap approved a line of credit that was
geared to the amount of Robison Farms’ accounts receivable.
As Robison Farms assigned accounts receivable to AgriCap,
AgriCap advanced Robison Farms 80% of the face amount of
the receivables, up to a limit of $500,000 outstanding at any
given time. As AgriCap collected on the receivables, it
retained the 80% amount and remitted the remaining 20% to
Robison Farms, less its fees and interest for the period during
NICKEY GREGORY COMPANY v. AGRICAP 7
which its advances on the accounts receivable were outstand-
ing.
To memorialize the arrangement, AgriCap and Robison
Farms entered into (1) an agreement entitled "Factoring
Agreement," which described in detail how AgriCap would
advance funds against accounts receivable; (2) a "Security
Agreement," granting AgriCap a blanket security interest in
all of Robison Farms’ assets; and (3) a "Subordination Agree-
ment," subordinating all of Robison Farms’ debts to the pay-
ment of the amounts that would become owed to AgriCap. In
addition, Cindy Robison, the president and owner of Robison
Farms, personally guaranteed Robison Farms’ debts to Agri-
Cap, and AgriCap filed a UCC-1 "Financing Statement," list-
ing as collateral virtually all of Robison Farms’ assets,
including crops, inventory, and accounts receivable.
Notwithstanding this financing arrangement, Robison
Farms continued to experience financial difficulties. Indeed,
in May 2006, AgriCap noted that "[t]here are still quite a bit
of past dues in the PACA payables." Even though the produce
suppliers continued to deliver produce throughout the spring
and early summer, Robison Farms stopped paying them on
May 11, 2006, and on July 17, 2006, it closed its doors for
business. The next day, July 18, 2006, AgriCap noted, in an
internal memorandum written in response to Robison Farms’
notice that it had closed its doors, "The company has been in
a constant struggle due to heavy debt load." Less than a
month later, Robison Farms filed a Chapter 7 bankruptcy peti-
tion to liquidate all of its assets.
After receiving a portion of the amounts owed them from
the bankruptcy estate, Nickey Gregory and Poppell’s Produce
are still owed $66,411.25 and $40,284.61, respectively, for a
total of $106,695.86, and Nickey Gregory is also owed attor-
neys’ fees.1
1
In its supply arrangement with Nickey Gregory, Robison Farms agreed
to pay Nickey Gregory its attorneys’ fees for the collection of PACA
8 NICKEY GREGORY COMPANY v. AGRICAP
At the time when Robison Farms stopped paying the pro-
duce suppliers—May 11, 2006—AgriCap was holding over
$150,000 in face amount of Robison Farms’ accounts receiv-
able, and from May 11 until the date when Robison Farms
closed its doors, AgriCap received additional accounts receiv-
able from Robison Farms worth over $500,000 in face
amount. When Robison Farms ceased doing business on July
17, AgriCap still held over $160,000 in Robison Farms’
accounts receivable. AgriCap was able to convert nearly all of
Robison Farms’ accounts receivable into cash, which it used
to repay itself without paying Nickey Gregory or Poppell’s
Produce.
Nickey Gregory and Poppell’s Produce commenced this
action against AgriCap, contending that the accounts receiv-
able that AgriCap received from Robison Farms after May 11,
2006, were, under PACA, trust assets held by AgriCap for the
benefit of unpaid commodities sellers such as them. See 7
U.S.C. § 499e(c). They allege that by not paying them, Agri-
Cap wrongfully held assets in breach of the trust, incurring
liability to them in the amount owed to them by Robison
Farms—$106,695.06, plus Nickey Gregory’s attorneys’ fees.
Following a bench trial, the district court found in favor of
the produce suppliers, entering judgment in their favor for
$88,690.75, from which the court directed that Nickey Greg-
ory also be paid its attorneys’ fees. Nickey Gregory Co. v.
AgriCap, LLC, 592 F. Supp. 2d 862 (D.S.C. 2008). The court
debts. The district court held that produce suppliers with the requisite
attorneys’ fees language on their invoices can collect reasonable attorneys’
fees as "sums owing in connection with such transactions," under 7 U.S.C.
§ 499e(c)(2). See Nickey Gregory Co. v. AgriCap, LLC, 592 F. Supp. 2d
862, 878-79 (D.S.C. 2008) (citing Coosemans Specialties, Inc. v. Gargi-
ulo, 485 F.3d 701, 708-09 (2d Cir. 2007); Country Best v. Christopher
Ranch, LLC, 361 F.3d 629, 632 (11th Cir. 2004); Middle Mountain Land
& Produce, Inc. v. Sound Commodities, Inc., 307 F.3d 1220, 1224 (9th
Cir. 2002)). AgriCap does not challenge this holding by the district court.
NICKEY GREGORY COMPANY v. AGRICAP 9
rejected AgriCap’s contention that its relationship with Robi-
son Farms was a traditional factoring agreement, under which
it purchased Robison Farms’ accounts receivable for a reason-
able, discounted price, and that therefore the accounts receiv-
able were no longer in the PACA trust, subject to the claims
of produce suppliers. Rather, the court concluded that the
arrangement was a loan arrangement, under which AgriCap
was holding Robison Farms’ accounts receivable as collateral.
Thus, when AgriCap failed to pay Robison Farms’ produce
suppliers as beneficiaries of the PACA trust, the trust was
breached, in violation of 7 U.S.C. § 499b(4). The court
awarded damages of $88,690.75. The court determined that
this figure represented the total of the "retained trust assets"
held by AgriCap, calculated by subtracting the total amount
that it loaned to Robison Farms in respect to those accounts
from the total amount that AgriCap collected on Robison
Farms’ accounts receivable.
AgriCap filed this appeal, contending that the district court
erred in rejecting its claim that the arrangement was a true
factoring agreement not subject to PACA. It also contends
that in any event it was a bona fide purchaser for value of the
accounts receivable, providing it with a complete defense.
Finally, it asserts that the district court erred in requiring it to
disgorge the entirety of the "retained trust assets" and not
merely the $16,339.49 in fees and interest that it retained after
Robison Farms stopped paying produce suppliers on May 11,
2006.
The produce suppliers filed a cross-appeal, contending that
the district court erred by not awarding them damages in the
full amount of their claims against the PACA trust. They
assert that the amount of accounts receivable that AgriCap
held while they remained unpaid was more than sufficient to
satisfy their claims.
III
For its central argument, AgriCap contends that PACA did
not prohibit Robison Farms from transferring PACA trust
10 NICKEY GREGORY COMPANY v. AGRICAP
assets to it, so long as the transfers were for fair value and
therefore were commercially reasonable, because the Act
creates liability only when trust assets are dissipated and the
trust is thereby breached. AgriCap asserts that the question
whether the transaction between it and Robison Farms was a
loan or a sale, as addressed by the district court, was irrele-
vant to resolving whether the trust was breached. It maintains
that the relevant question is whether the accounts receivable
were transferred by Robison Farms to AgriCap in a commer-
cially reasonable transaction. If they were, it argues, then the
transaction did not violate PACA because PACA permits trust
assets to be converted into other assets. It explains that
PACA’s prohibition against dissipation only "ensur[es] that
assets are ‘available’ to satisfy obligations [of commodities
sellers] [and] does not restrict the ability of the trustee to con-
vert the trust assets into another form. Indeed, PACA contem-
plates that the trustee can convert the trust assets (the
produce) into another form (cash, or a receivable)." It con-
cludes accordingly that its transaction with Robison Farms
was just that, a commercially reasonable transfer that was not
prohibited.
This argument, however, is a straw man. Articulated in this
form, the issue answers itself, as neither the statute nor any
case law suggests that trust assets cannot be converted into a
different form of assets.
Rather, to be successful, AgriCap’s argument must also
assume that the conversion of accounts receivable into cash
was part of a true factoring arrangement because, in that case,
Robison Farms would have relinquished its interest in the
accounts receivable and received the cash in lieu of them. The
assets of the trust would thus have been converted into cash
and the receivables would no longer have been trust assets.
Obviously, under this scenario, AgriCap would own the
accounts receivable and would be able to do with them what
it wished.
NICKEY GREGORY COMPANY v. AGRICAP 11
But if the accounts receivable were not sold but rather were
given as collateral for a loan, then the accounts receivable
would have remained trust assets, subject to AgriCap’s secur-
ity interest. Consequently, when AgriCap converted the
receivables into cash, the cash would have become trust assets
and, as a result, could not have been used first to pay back
AgriCap the advances it had earlier made to Robison Farms
along with interest and fees, because AgriCap’s position with
respect to that cash would have been subordinate to the claims
of produce sellers while they remained unpaid. Thus, if the
accounts receivable were held by AgriCap as collateral to
secure repayment of a loan, they would also have been held
for the benefit of produce sellers, and the produce sellers
would have effectively enjoyed a first-creditor position in
them.
This is precisely what the district court found in this case.
Yet, AgriCap refuses to recognize the significance of the
court’s finding, attempting to relegate its relevance to only
whether AgriCap is a bona fide purchaser for value. We agree
with the district court that resolving the question of whether
the transaction was a loan or a sale is central to determining
AgriCap’s PACA liability in this case.
At its core, PACA imposes a trust on commodities sold to
produce distributors or dealers, such as Robison Farms, as
well as the proceeds of those commodities, for the benefit of
the commodities sellers. 7 U.S.C. § 499e(c)(2); 7 C.F.R.
§ 46.46(b). The trustee of this trust is required to maintain
trust assets—the commodities themselves, the products of the
commodities, or the proceeds from the sale of the commodi-
ties or products, see 7 U.S.C. § 499e(c)(2)—"in a manner that
such assets are freely available to satisfy outstanding obliga-
tions to sellers of perishable agricultural commodities," 7
C.F.R. § 46.46.(d)(1) (emphasis added). And the commodities
sellers’ beneficial interest in the trust assets while outstanding
obligations exist is superior to secured creditors of the trustee,
even when the security interest of such creditors is explicitly
12 NICKEY GREGORY COMPANY v. AGRICAP
imposed on the perishable commodities, proceeds, and
accounts receivable. See Endico Potatoes, Inc., 67 F.3d at
1067.
When Congress made this policy choice to make the unse-
cured credit extended by commodities sellers superior to the
position of lenders holding a security interest in those com-
modities and proceeds, it recognized the difficulty that lenders
might have in administering their secured loans. Indeed, it
received testimony to that effect from the American Bankers
Association. In the end, however, Congress determined that
those concerns were outweighed by other considerations:
The Committee believes that the statutory trust
requirements will not be a burden to the lending
institutions. They will be known to and considered
by prospective lenders in extending credit. The
assurance the trust provision gives that raw products
will be paid for promptly and that there is a monitor-
ing system provided for under the Act will protect
the interests of the borrower, the money lender, and
the fruit and vegetable industry. Prompt payment
should generate trade confidence and new business
which yields increased cash and receivables, the
prime security factors to the money lender.
House Report at 4.
Thus, when Robison Farms purchased perishable agricul-
tural commodities from the sellers in this case, the commodi-
ties and the proceeds from them became assets of the PACA
trust, to be maintained to pay the sellers’ loans before pay-
ment of any other loan, whether secured or not. As relevant
to this case, in May 2006, when the invoices of the commodi-
ties sellers went unpaid, the accounts receivable generated
from the resale of the commodities to the school systems and
restaurants, being proceeds of the commodities, were PACA
NICKEY GREGORY COMPANY v. AGRICAP 13
trust assets that had to be maintained for payment first to the
unpaid commodities sellers.
If Robison Farms had transferred these trust assets to Agri-
Cap by means of a sale in exchange for cash, the transaction
would have been nothing more than a permissible conversion
of trust assets from one form to another—i.e., from accounts
receivable into cash. Following this form of transaction, the
accounts receivable would no longer have remained trust
assets, and the commodities sellers would not have had any
claim for payment from them. Thus, AgriCap would have
been entitled to collect on the accounts receivable and to
retain the proceeds without interference by Nickey Gregory
and Poppell’s Produce.
But if, in contrast, Robison Farms had transferred the
accounts receivable to AgriCap as collateral for a secured
loan, the receivables and their proceeds would have remained
trust assets, even though held by AgriCap. As AgriCap has
asserted, such a transfer again is permitted by PACA. But
PACA provides that any security interest so created would be
subject to the interest of unpaid commodities sellers. More-
over, the commodities sellers’ interest in the assets would not
have been affected by how much the secured lender loaned
against those assets to the trustee or by how much the trustee
paid the lender back. The commodities sellers’ interest would
have been in the collateral and would have been superior to
the lender’s interest.
It is therefore highly relevant to the disposition of this case
to determine whether Robison Farms’ accounts receivable
were indeed sold for value to AgriCap under a factoring
agreement or whether they were simply subjected to a secur-
ity interest to collateralize a loan that AgriCap made to Robi-
son Farms. If the accounts receivable were only subjected to
a security interest, then the security interest was subordinate
to the prior statutory trust created for the benefit of the com-
modities sellers.
14 NICKEY GREGORY COMPANY v. AGRICAP
Following a bench trial, the district court found that "the
Agreement between AgriCap and Robison Farms [was] actu-
ally a loan secured by accounts receivable." Nickey Gregory
Co., 592 F. Supp. 2d at 877. The court reached this conclusion
because it found that throughout the transaction Robison
Farms bore all of the risks of nonpayment on the accounts
receivable. It reasoned that if Robison Farms had actually sold
the accounts receivable to AgriCap, then AgriCap would have
borne the risks of nonpayment of the receivables, and Robison
Farms would have received the price paid for the receivables
as trust assets.
While AgriCap does not in its brief address the significance
of the district court’s holding, it does maintain that it was the
purchaser of the accounts receivable for value and that there-
fore the accounts receivable were no longer trust assets. Inher-
ently, this argument also includes the argument that the
transaction was not a loan arrangement in which the accounts
receivable were provided simply as collateral. We now turn
to resolve that question, whether the district court erred in
concluding that this was a loan arrangement.
IV
AgriCap characterizes the transaction between it and Robi-
son Farms as a contract of sale under which it purchased
Robison Farms’ accounts receivable for 80% of the receiv-
ables’ face value plus deferred payments to be made after col-
lection on the accounts receivable in the amount of the
remaining 20%, less interest and fees. It claims that after each
exchange the receivable no longer remained an asset of the
PACA trust. Because a PACA trust is nonsegregated and
"floating," see 7 C.F.R. § 46.46(b), a trustee does not breach
the trust by selling trust assets for value, provided the value
the trustee received is "commercially reasonable," see Boul-
der Fruit Express, 251 F.3d at 1271-72. As the accounts
receivable themselves were no longer trust assets, AgriCap
NICKEY GREGORY COMPANY v. AGRICAP 15
concludes that the commodities sellers had no right to recover
from them.
Numerous indicators in the transaction’s documentation
support AgriCap’s characterization. First, the principal docu-
ment describing the relationship between the parties and their
rights and duties was denominated "Factoring Agreement,"
which traditionally involves the sale of accounts receivable at
a discounted price. See Black’s Law Dictionary 671 (9th ed.
2009) (defining factoring as "[t]he buying of accounts receiv-
able at a discount"). Under the traditional form of such an
agreement, the seller gives up the possibility of receiving the
face value of the accounts receivable to have a discounted but
unconditional sum certain in hand. The purchaser assumes the
risk of collection, betting that its success in collecting on the
accounts receivable will yield a return exceeding the dis-
counted price it paid for the asset. If it is completely success-
ful in collecting the accounts, it recovers not only the price it
paid to the seller, but also an additional amount representing
the difference between the price it paid and the face amount
of the receivable. On the other hand, if the receivable proves
uncollectible or uncollectible in part, the purchaser bears the
loss.
In addition to the title of the principal document, language
sprinkled throughout the Factoring Agreement referred to
AgriCap as the "buyer," Robison Farms as the "seller," and
the transaction as a "purchase" or "sale." And, consistent with
this usage, the document contained warranties that tradition-
ally accompany the sale of an asset.
Looking at the Factoring Agreement substantively, at least
at a general level, one could characterize it as involving the
sale of accounts receivable at a price amounting to 80% of
their face value and, after collection, an additional payment
calculated by subtracting from 20% of their face value the
purchaser’s costs for collection and the costs for the seller’s
use of the money during the period between the initial transfer
16 NICKEY GREGORY COMPANY v. AGRICAP
of each account receivable and collection on it. This is the
characterization advanced by AgriCap to support its claim
that the accounts receivable in this case were sold to it and no
longer remained in the PACA trust.
Relying on only these superficial indicators, however,
amounts to a serious oversimplification of the transaction that
overlooks its substance, as the district court recognized. A
closer examination of the transaction’s documentation demon-
strates that, as the district court found, the transaction was a
loan transaction.
First, the Preliminary Term Sheet, which AgriCap prepared
before the transaction and sent to Robison Farms for the pur-
pose of describing the transaction and receiving Robison
Farms’ assent to it, described a "credit" facility up to the
lesser of $500,000 or 80% of Robison Farms’ accounts
receivable. The document referred to AgriCap as the "Lender"
and Robison Farms as the "Borrower." It also described the
"interest on advances" (the lesser of 12% or 6% over prime)
and the required collateral. Finally, the document specified
that the purpose of the credit facility was "to fund Borrower’s
working capital needs." Remarkably, this Preliminary Term
Sheet, which succinctly described the entire transaction, rec-
ognized that the accounts receivable were part of a PACA
trust subject to claims by produce suppliers, as the document
required "reserves [of accounts receivable] as deemed appro-
priate from time to time in AgriCap’s sole discretion . . . to
cover past due balances due from vendors covered under the
PACA Trust."
Second, under the terms of the documents, Robison Farms
did not enter into a traditional factoring arrangement in the
sense that it transferred the risk of the noncollection of the
accounts receivable to AgriCap. Rather, under the transaction,
virtually all of the risk of noncollection remained with Robi-
son Farms. The Factoring Agreement ensured that AgriCap
NICKEY GREGORY COMPANY v. AGRICAP 17
had almost total recourse against Robison Farms if a receiv-
able went unpaid. Section 4.1 provided:
[Robison Farms] agrees to pay [AgriCap], on
demand, the full face amount, or any unpaid portion
of, any [account receivable]:
(a) which remains unpaid for the Payment Period
unless, prior to the duration of the Payment
Period, the subject Account Debtor has become
Insolvent; or
(b) with respect to which there has been any breach
o[f] warranty or representation set forth in Sec-
tion 6 of this Agreement or any breach of any
covenant contained in this Agreement; or
(c) with respect to the Account Debtor asserts any
Dispute which remains unsettled thirty (30)
days after the due date of such [account receiv-
able].
Under this provision, AgriCap had the right to demand that
Robison Farms "repurchase" any receivable that went unpaid
or was disputed, unless the account debtor became insolvent.
Accordingly, unpaid invoices would ultimately be returned to
Robison Farms except in the instance where an account debt-
or’s insolvency occurred during the pendency of the invoice.
But even the risk associated with the account debtor’s
insolvency was not likely to fall on AgriCap. Under Section
6.1(g) of the agreement, Robison Farms warranted:
At the time that [AgriCap] makes an Advance relat-
ing to [an account receivable], none of the Account
Debtors set forth in the Schedule of Accounts is
Insolvent and Seller has no knowledge that the
18 NICKEY GREGORY COMPANY v. AGRICAP
Account Debtors are Insolvent or may become Insol-
vent within the Payment Period.
Thus, in conjunction with Section 4, AgriCap could require
Robison Farms to repurchase a receivable if Robison Farms
had knowledge that the debtor on that receivable was insol-
vent or might become insolvent within the payment period. In
this manner, whatever transfer of risk was associated with the
possibility of an intervening insolvency under Section 4.1 was
virtually negated by Section 6.
Insofar as the most likely reasons for nonpayment by an
account debtor would be that it did not have the money or that
it disputed the debt, the district court was justified in finding
that the agreement between the parties in this case effectively
insulated AgriCap from loss and was therefore a loan rather
than a factoring sale. See Reaves Brokerage Co., 336 F.3d at
414-16 (examining a similar purported "factoring" arrange-
ment and finding that provisions preventing the transfer of
risk rendered the agreement a loan and not a sale).
Third, other documents in the transaction indicated that the
transaction was a loan, in which the accounts receivable were
held by AgriCap as collateral for repayment of the advances
made to Robison Farms as loans. The Security Agreement
executed by the parties referred to Robison Farms as the
"debtor" and AgriCap as the "secured party," and it gave
AgriCap a security interest in virtually all of Robison Farms’
assets—including crops, inventory, and accounts receivable—
to secure repayment of Robison Farms’ obligations under the
Factoring Agreement. The Security Agreement also referred
to the Factoring Agreement as "the Loan Agreement," and the
obligations under the Security Agreement were triggered by
Robison Farms’ failure to pay the "Debt."
Fourth, in addition to the Security Agreement, the parties
entered into a Subordination Agreement, in which Robison
Farms subordinated its other debts "to the payment in full of
NICKEY GREGORY COMPANY v. AGRICAP 19
AgriCap Indebtedness" and gave AgriCap "a first priority
security interest in the Collateral."
Fifth, treating AgriCap’s money advances to Robison
Farms as loans, Cindy Robison, the owner of Robison Farms,
gave AgriCap a personal guarantee for the "full payment . . .
of any obligations under the Factoring Agreement with regard
to . . . the advances . . . including all interest and other charges
stated therein."
And sixth, AgriCap filed a UCC-1 Financing Statement
with respect to the transaction, claiming liens in all of Robi-
son Farms’ assets to secure "the prompt and full payment and
performance of Secured Obligations." That document again
referred to Robison Farms as "the Debtor."
Thus, the transaction is more accurately characterized as a
revolving line of credit, secured by accounts receivable and
other assets, and repaid from monies collected by AgriCap on
the receivables. When Robison Farms transferred a receivable
to AgriCap, AgriCap advanced, as a loan, 80% of the receiv-
able’s face value. When AgriCap collected on the receivable,
as it was hired to do, it retained (1) 80% as repayment of the
loan; (2) a collection fee of 1.5%; and (3) interest at a rate of
the lesser of 12% or 6% over prime for the period during
which the 80% amount was outstanding. It then remitted the
balance to Robison Farms. AgriCap was thus only a lender
and collection agent, not a purchaser of the accounts receiv-
able that assumed the risks of collecting on the receivables.
Because these substantive aspects of the transaction are incon-
sistent with an outright sale of the assets, we agree with the
district court that the transaction was in its essence a loan in
the form of a revolving line of credit secured by accounts
receivable.
As already noted, the distinction between a sale and a loan
controls the issue of whether AgriCap purchased the assets
free of the PACA trust or merely held the assets to collateral-
20 NICKEY GREGORY COMPANY v. AGRICAP
ize its loans to Robison Farms, in which case the receivables
would have remained subject to the PACA trust and would
have been required, by the terms of regulations, to be made
"freely available" to pay obligations to commodities sellers. 7
C.F.R. § 46.46(d)(1). Because we conclude that the transac-
tion in this case was a loan, we also conclude that the
accounts receivable and their proceeds never left the PACA
trust and that therefore the accounts receivable and their pro-
ceeds had to be made available for payment first to the claims
of unpaid PACA creditors, such as Nickey Gregory and Pop-
pell’s Produce. The district court therefore ruled properly that
AgriCap must disgorge from the assets of the PACA trust
amounts sufficient to pay unpaid PACA creditors. See Endico
Potatoes, Inc., 67 F.3d at 1069.
AgriCap nonetheless contends that even if the transaction
was a loan, no provision of PACA prohibits the trustee from
granting a security interest in trust assets to collateralize a
loan. While we agree with this proposition, its accuracy does
not advance AgriCap’s position. It was not the creation of a
security interest in the accounts receivable that subjected
AgriCap to liability but rather its collection on them and pay-
ment of the proceeds to itself ahead of the commodities sell-
ers. It is not disputed that, in this case, AgriCap used its
position as collection agent and lender to satisfy Robison
Farms’ obligations to it ahead of Robison Farms’ obligations
to its PACA creditors. It was this use of trust assets to pay
itself before paying commodities sellers that amounted to a
violation of PACA, even though the payments were autho-
rized by the arrangement with Robison Farms. Under PACA,
Robison Farms was obligated to ensure that trust assets
remained freely available to pay PACA creditors first. See 7
U.S.C. §§ 499(b)(4), 499e(c)(2); 7 C.F.R. § 46.46(a)(2). Yet,
through its arrangement with AgriCap, it authorized trust
assets to be used to repay AgriCap ahead of the commodities
sellers, who went unpaid. Since the arrangement and the
transactions under it breached the PACA trust, AgriCap, as a
third-party transferee of the trust assets, must, under estab-
NICKEY GREGORY COMPANY v. AGRICAP 21
lished trust principles, disgorge the proceeds of the receiv-
ables unless it has a defense.
Finally, AgriCap contends that whether the transaction was
a loan is not important so long as the transaction was com-
mercially reasonable. For this proposition, it relies on Boulder
Fruit Express, 251 F.3d at 1272, where the Ninth Circuit
found that a particular factoring arrangement was "commer-
cially reasonable" and not in violation of the PACA trust, as
well as a trilogy of cases from the Second Circuit holding that
a trustee did not breach the PACA trust by establishing with
a bank a checking account with overdraft privileges, which
effectively functioned as a revolving line of credit. See D.M.
Rothman & Co. v. Korea Commercial Bank of N.Y., 411 F.3d
90 (2d Cir. 2005); E. Armata, Inc. v. Korea Commercial Bank
of N.Y., 367 F.3d 123 (2d Cir. 2004); Am. Banana Co. v.
Republic Nat’l Bank of N.Y., N.A., 362 F.3d 33 (2d Cir. 2004).
First, Boulder Fruit Express is inapposite. That case
involved a true factoring relationship, in which the receiv-
ables were actually sold to the factor. Thus, unlike in this
case, the receivables no longer remained PACA trust assets.
The Second Circuit’s cases involving checking accounts
with overdraft privileges are also distinguishable. In those
cases, PACA creditors sued commercial banks, in which
PACA dealers had checking accounts with overdraft privi-
leges, to recover unpaid amounts for produce delivered to the
PACA dealers. The PACA creditors argued that because the
accounts were perpetually overdrawn and replenished by
incoming checks made payable to the dealers, the overdraft
privileges effectively functioned as revolving lines of credit in
which the banks were paid ahead of the PACA creditors. The
PACA creditors sought disgorgement from the banks of the
amounts necessary to pay their debts. The Second Circuit
rejected the PACA creditors’ claims, reasoning that it was not
possible for a PACA dealer to do business without a commer-
cial checking account with a bank and that it was never antici-
22 NICKEY GREGORY COMPANY v. AGRICAP
pated that banks would have to ensure that commercial
checking account holders maintain reserves sufficient to sat-
isfy PACA creditors. See, e.g., E. Armata, Inc., 367 F.3d at
134 ("[I]t is difficult to imagine how a PACA trustee would
make funds available to its PACA creditors without entering
into some relationship with a bank"). Moreover, the Second
Circuit in those cases pointed out that, rather than rendering
PACA trust assets less than "freely available" or "impair[ing]"
payment to PACA creditors, allowing checking accounts with
overdraft protection would likely make assets more readily
available to pay PACA creditors. Id. at 133-34
("[M]aintaining a checking account . . . may facilitate, rather
than impede, the fulfillment of a PACA trustee’s duty to
maintain trust assets so that they are freely available to satisfy
outstanding obligations to sellers of perishable commodities"
(internal quotation marks and citations omitted)); cf. Am.
Banana Co., 362 F.3d at 42 ("The imposition of liability [on
the bank] . . . would . . . run the serious risk of complicating
—if not eliminating altogether—overdraft procedures that
directly benefit PACA beneficiaries").
It might be argued that these cases carve out a narrow
exception to PACA for bank checking accounts with overdraft
privileges, although the Second Circuit believed that its hold-
ings were facilitating the prompt payment of PACA creditors
and therefore were consistent with PACA. We do not, how-
ever, determine here whether we agree with the Second Cir-
cuit’s interpretation addressing whether PACA imposes a
trust on bank checking accounts. Even were we to follow the
Second Circuit, however, we could find its reasoning persua-
sive only insofar as its holdings apply to bank checking
accounts that are subject to banking rules and regulations. To
apply the cases more broadly to general credit arrangements
would undoubtedly conflict with the purpose and effect of
PACA. In creating PACA trusts, Congress clearly had in
focus general credit arrangements with lenders, including
banks, and determined to subordinate their positions, even
when secured by inventory and proceeds, to the credit posi-
NICKEY GREGORY COMPANY v. AGRICAP 23
tions of commodities sellers, even when unsecured and later
in time. See, e.g., House Report at 4. Because the circum-
stances before us do not involve bank checking accounts, we
conclude that these Second Circuit cases are not applicable
here.
Accordingly, we affirm the district court’s conclusion that
AgriCap held PACA trust assets at a time when PACA credi-
tors went unpaid in violation of the trust. As a third-party
transferee of trust assets, AgriCap must therefore disgorge
those assets unless it can establish a defense.
V
AgriCap contends that it has a complete defense to liability
as a bona fide purchaser ("BFP") because it received PACA
trust assets (1) in exchange for value and (2) without notice
of the breach of the trust. Recognizing that trust principles are
applicable in enforcing PACA, at least to the extent not incon-
sistent with PACA, see Reaves Brokerage Co., 336 F.3d at
413; Boulder Fruit Express, 251 F.3d at 1271, AgriCap relies
on the Restatement (Second) of Trusts § 284(1), which pro-
vides:
If the trustee in breach of trust transfers trust prop-
erty to, or creates a legal interest in the subject mat-
ter of the trust in, a person who takes for value and
without notice of the breach of trust, and who is not
knowingly taking part in an illegal transaction, the
latter holds the interest so transferred or created free
of the trust, and is under no liability to the benefi-
ciary.
This argument, however, fails to take into account the limita-
tions to the BFP defense that exist with regard to both the
requirements that the party take "for value" and that it take
"without notice."
24 NICKEY GREGORY COMPANY v. AGRICAP
First, AgriCap cannot assert reasonably that it was without
knowledge of unpaid obligations to PACA creditors. When
AgriCap entered into the transaction, it reserved the right to
require Robison Farms to reserve sufficient amounts of
accounts receivable, as determined by AgriCap in its "sole
discretion," to "cover past due balances due from vendors
covered under the PACA trust." AgriCap also reserved the
right to "perform field exams on a periodic basis, as deter-
mined in AgriCap’s sole discretion." In its first examination
of Robison Farms’ financial circumstances, conducted days
before the transaction was consummated, AgriCap noted that
accounts payable to PACA creditors had an average age of 68
days when their terms required payment within 30 days or
within a shorter period and that past due accounts (with an
age of over 90 days) constituted 12% of the accounts payable.
The Factoring Agreement itself required as a condition:
"PACA Payables. Arrangement satisfactory to [AgriCap] shall
have been made for the direct payment of certain trade pay-
ables designated by [AgriCap] from the proceeds of the Pur-
chased Receivables." The president of AgriCap acknowledged
in his affidavit that AgriCap was concerned about PACA
creditors and monitored the situation to ensure that there were
"no PACA lien issues." And in May 2006, after it had
reviewed Robison Farms’ books, AgriCap observed that
"[t]here are still quite a bit of past dues in the PACA pay-
ables." Yet, during the period when PACA creditors were not
being paid and even after Robison Farms went out of business
and closed its doors on July 17, 2006, AgriCap continued to
collect on Robison Farms’ accounts receivable, using the pro-
ceeds to pay itself ahead of the PACA creditors while know-
ing that the PACA creditors were unpaid. From May 11, 2006
(when Robison Farms stopping paying these PACA credi-
tors), until September 5, 2006 (when AgriCap completed col-
lection on the accounts receivable), AgriCap held and
collected on $668,387 of Robison Farms’ accounts receivable,
and from July 17, 2006 (when Robison Farms went out of
business), until September 5, 2006, AgriCap held and col-
lected on $162,070 of Robison Farms’ accounts receivable.
NICKEY GREGORY COMPANY v. AGRICAP 25
Either of these amounts was more than sufficient to pay
Nickey Gregory and Poppell’s Produce in full. AgriCap can-
not, accordingly, claim to be without notice of the breach of
the PACA trust. See Restatement (Second) of Trusts § 297
("A person has notice of a breach of trust if he knows or
should know of the breach of trust").
Second, AgriCap contends that it received Robison Farms’
accounts receivable "for value" because each time Robison
Farms transferred a receivable to AgriCap, AgriCap paid
Robison Farms 80% of the receivable’s face value. This argu-
ment, however, fails for the same reason that AgriCap is
incorrect to characterize the transaction as a sale rather than
a loan. AgriCap did not purchase the account receivable but
merely held it as collateral for the 80% loan and as collection
agent. It therefore was not a purchaser for value, having never
become owner of the receivable.
The district court properly rejected AgriCap’s BFP defense.
VI
Both AgriCap and the commodities sellers, Nickey Gregory
and Poppell’s Produce (by cross-appeal), contend that the dis-
trict court erred in determining damages.
The district court entered an award in favor of the commod-
ities sellers in the amount of $88,690.75. The court reasoned
that AgriCap could only be liable in the amount of trust assets
that it "retained" in violation of the trust and that imposing
greater liability would elevate AgriCap’s liability over that of
Robison Farms. To arrive at the amount of trust assets Agri-
Cap retained, the court took the total amount that AgriCap
had collected on the receivables, $4,053,596.21, and deducted
the amount that AgriCap paid to Robison Farms on those
receivables, $3,964,905.46, arriving at the $88,690.75 figure.
AgriCap contends that it should be required to disgorge
only $16,339.49, the amount it received in interest and fees
26 NICKEY GREGORY COMPANY v. AGRICAP
after May 11, 2006, when Robison Farms first failed to pay
the PACA creditors’ invoices. Nickey Gregory and Poppell’s
Produce contend that they are entitled to disgorgement of the
entire amount of their PACA claims—$106,695.86, plus
Nickey Gregory’s attorneys’ fees—because AgriCap held a
sufficient amount of trust assets to pay the full amount.
The problem with the district court’s damages calculation
is that it effectively conceptualized AgriCap’s receipt of the
accounts receivable and their proceeds as a purchase, rather
than a loan, by offsetting AgriCap’s payments to Robison
Farms against what it collected on the receivables. If, how-
ever, the transaction was a loan transaction, as the district
court concluded and as we affirm, then the amounts loaned to
Robison Farms would not reduce the value of the collateral
held by AgriCap, which always remained trust assets. The
accounts receivable and their proceeds never ceased to be
assets of the trust, and AgriCap’s use of the proceeds of the
accounts receivable to pay itself ahead of the commodities
sellers was in violation of the trust. Permitting AgriCap to
retain collections on the receivables after Robison Farms had
ceased to pay its PACA creditors would effectively elevate
AgriCap’s position, as a secured lender, above the PACA
creditors’ position, contrary to PACA’s requirement that the
funds go first to pay PACA creditors.
Nickey Gregory and Poppell’s Produce rightly contend that
AgriCap is required to disgorge receivables in full satisfaction
of their claims, inasmuch as the value of the receivables in the
PACA trust after May 11, 2006, always exceeded the amount
of their claims. According to AgriCap’s records, it received
over $668,000 in Robison Farms’ accounts receivable after
May 11, 2006, when Robison Farms stopped paying the
PACA creditors. All of these assets were subject to the supe-
rior interests of the unpaid PACA creditors, and to the extent
that Robison Farms’ agreement with AgriCap resulted in the
payment of the proceeds of those accounts receivable to Agri-
NICKEY GREGORY COMPANY v. AGRICAP 27
Cap ahead of those PACA creditors, the trust was breached.2
See 7 U.S.C. § 499e(c)(2).
Accordingly, we vacate the district court’s damage award
and remand with instructions that the district court award
Nickey Gregory and Poppell’s Produce the full amount of
their unpaid balance, including Nickey Gregory’s reasonable
attorneys’ fees.
VII
We recognize that applying the provisions of PACA in this
case raises genuine concerns, indeed frustration, for AgriCap
and lenders such as AgriCap, who, in providing operating
capital to small businesses in need, anticipate a level of pro-
tection from their secured creditor positions. Their efforts,
however, are trumped by Congress’ policy choice to give pro-
duce suppliers a favored creditor position, not only in the pro-
duce they sell, but also in derivative products and comingled
proceeds in the hands of PACA dealers, which subordinates
the lenders’ secured position in those assets. This reordering
of priorities, not unlike what is done in the Bankruptcy Code,
could perhaps lead to adjustments by lenders in the PACA
context who might find it necessary to raise their prices for
money, alter their lending practices, or even hesitate to extend
credit, ultimately weakening a link in the chain of agricultural
commerce. The judiciary, however, should not insert itself in
2
As we have noted, because the accounts receivable and their proceeds
were trust assets, the unpaid commodities sellers have a prior interest in
them and can recover from AgriCap to the full satisfaction of their debts
up to the limit of trust assets held while they remained unpaid. Of course,
AgriCap returned some of the trust assets to Robison Farms in the form
of cash collected on the accounts receivable in the amount of 20% of the
receivables less fees and interest. Accordingly, it cannot be required to
disgorge these amounts so returned. Even after this deduction, however,
the total amount of trust assets held by AgriCap well exceeded the
amounts necessary to satisfy Robison Farms’ debts to Nickey Gregory and
Poppell’s Produce.
28 NICKEY GREGORY COMPANY v. AGRICAP
these policy matters by questioning or debating legislative
judgments, as it is constituted only to comprehend, interpret,
and apply what Congress has duly provided.
AFFIRMED IN PART, VACATED IN PART,
AND REMANDED WITH INSTRUCTIONS