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