                 FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT


S & H PACKING & SALES CO., INC., a      No. 14-56059
California corporation, DBA Season
Produce Co.,                               D.C. No.
                           Plaintiff,   2:08-cv-05250-
                                           GW-FFM
                and

G. W. PALMER & CO., INC.; ANDREW
& WILLIAMSON SALES CO., INC.,
DBA Andrew & Williamson Fresh
Produce; EAST COAST BROKERS AND
PACKERS, INC.; GARGIULO, INC.,
               Plaintiffs-Appellants,

                 v.

TANIMURA DISTRIBUTING, INC., a
California corporation,
                        Defendant,

                and

AGRICAP FINANCIAL CORPORATION,
a Delaware corporation,
               Defendant-Appellee.
2     G.W. PALMER & CO. V. AGRICAP FINANCIAL

S & H PACKING & SALES CO., INC., a       No. 14-56078
California corporation, DBA Season
Produce Co.,                                D.C. No.
                           Plaintiff,    2:08-cv-05250-
                                            GW-FFM
                 and
                                           OPINION
APACHE PRODUCE CO., INC., an
Arizona corporation, DBA Plain
Jane; O.P. MURPHY PRODUCE CO.,
INC., a Texas corporation, DBA
Murphy & Sons; OCEANSIDE
PRODUCE, INC., a California
corporation; WILSON PRODUCE,
LLC, an Arizona Limited liability
company; FRANK DONIO, INC.;
ABBATE FAMILY FARMS LIMITED
PARTNERSHIP; J.P.M. SALES CO.,
INC., an Arizona corporation,
                Plaintiffs-Appellants,

THOMSON INTERNATIONAL, INC.,
assignee, Tanimura Distributing,
Inc.,
                Creditor-Appellant,

                  v.

TANIMURA DISTRIBUTING, INC.,
                      Defendant,

                 and
         G.W. PALMER & CO. V. AGRICAP FINANCIAL                      3

 AGRICAP FINANCIAL CORPORATION,
 a Delaware corporation,
                Defendant-Appellee.


        Appeal from the United States District Court
            for the Central District of California
        The Honorable George H. Wu, District Judge

            Argued and Submitted on June 6, 2016
                    Pasadena, California

                     Filed February 27, 2017

        Before: Ronald M. Gould, Michael J. Melloy,*
          and Andrew D. Hurwitz, Circuit Judges.

                    Per Curiam Opinion;
                 Concurrence by Judge Melloy




   *
     The Honorable Michael J. Melloy, Senior Circuit Judge for the U.S.
Court of Appeals for the Eighth Circuit, sitting by designation.
4        G.W. PALMER & CO. V. AGRICAP FINANCIAL

                            SUMMARY**


         Perishable Agricultural Commodities Act

    The panel affirmed the district court’s summary judgment
in favor of the defendant in an action brought by produce
growers under the Perishable Agricultural Commodities Act.

    The growers sold their perishable agricultural products on
credit to a distributor, which made the distributor a trustee
over a PACA trust holding the perishable products and any
resulting proceeds for the growers as PACA-trust
beneficiaries. The distributor sold the products on credit to
third parties and, through a transaction described as a
“factoring agreement,” transferred its own resulting accounts
receivable to defendant Agricap Financial Corp. The
distributor’s business later failed, and the growers did not
receive payment in full from the distributor for their produce.
The growers sued Agricap.

    The panel affirmed the district court’s holding that,
pursuant to Boulder Fruit Express & Heger Organic Farm
Sales v. Transp. Factoring, Inc., 251 F.3d 128 (9th Cir.
2001), a commercially reasonable factoring agreement
removes accounts receivable from the PACA trust without a
trustee’s breach of trust, thus defeating the growers’ claims.
The growers argued that a PACA trustee’s true sale of trust
assets, which does not breach trust duties, occurs when the
trustee transfers not merely the right to collect the underlying
accounts, but also the risk of non-payment on those accounts.

    **
       This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
        G.W. PALMER & CO. V. AGRICAP FINANCIAL                 5

The panel concluded that Boulder Fruit implicitly rejected the
transfer-of-risk test, and this implicit rejection was necessary
to its holding. Accordingly, Boulder Fruit controlled the
outcome of the growers’ case.

    Concurring, Judge Melloy, joined by Judge Gould, wrote
that Boulder Fruit was wrongly decided and that the Ninth
Circuit, sitting en banc, should eliminate a circuit split, speak
expressly to this issue, and join the Second, Fourth, and Fifth
Circuits by adopting a separate, threshold, transfer-of-risk
test.


                         COUNSEL

Louis W. Diess, III (argued) and Mary Jean Fassett,
McCarron & Deiss, Washington, D.C., for Plaintiffs-
Appellants G.W. Palmer & Co., Inc.; Gargiulo, Inc.; Andrew
& Williamson Sales Co., Inc.; and East Coast Brokers &
Packers, Inc.

Robert Porter Lewis (argued), Jr., Law Office of Robert P.
Lewis Jr., South Pasadena, California, for Plaintiffs-
Appellants Apache Produce Co., Inc; O.P. Murphy Produce
Co., Inc.; Oceanside Produce, Inc.; Wilson Produce, LLC;
Frank Donio, Inc.; Abbate Family Farms Limited Partnership;
JPM Sales Co., Inc.; and Thomson International, Inc.

Cristoph Carl Heisenberg (argued), Hinckley & Heisenberg
LLP, New York, New York, for Defendant-Appellee Agricap
Financial Corporation.
6        G.W. PALMER & CO. V. AGRICAP FINANCIAL

                              OPINION

PER CURIAM:

    Appellants are produce growers (“Growers”) who sold
their perishable agricultural products on credit to a
distributor, Tanimura Distributing, Inc. (“Tanimura”).
Pursuant to the Perishable Agricultural Commodities Act
(“PACA”), 7 U.S.C. §§ 499a–499t, this arrangement made
Tanimura a trustee over a PACA trust holding the perishable
products and any resulting proceeds for the Growers as
PACA-trust beneficiaries. Tanimura then sold the products
on credit to third parties and transferred its own resulting
accounts receivable to Appellee Agricap Financial
(“Agricap”) through a transaction Agricap describes as a
“Factoring Agreement” or sale of accounts.1 Although
described as a sale of accounts, Agricap initially referred to
the arrangement as a “credit facility,” and the written
agreement was entitled “Agricap Financial Corporation
Factoring and Security Agreement.” Further, the Factoring
Agreement involved many hallmarks of a secured lending
arrangement, including: security interests in accounts and all
other asset classes except inventory; UCC financing
statements; subordination of other debts; and substantial
recourse for Agricap against Tanimura in the event Agricap
was unable to collect from Tanimura’s customers (for
example, Agricap was entitled to force Tanimura to
“repurchase” accounts that remained unpaid after 90 days,



    1
      Factoring is “the commercial practice of converting receivables into
cash by selling them at a discount.” Boulder Fruit Express & Heger
Organic Farm Sales v. Transp. Factoring, Inc., 251 F.3d 1268, 1271 (9th
Cir. 2001) (citing Black’s Law Dictionary (7th ed. 1999)).
        G.W. PALMER & CO. V. AGRICAP FINANCIAL               7

and Agricap could enforce this right by withholding payments
from Tanimura).

    Tanimura’s business later failed, and Growers did not
receive payment in full from Tanimura for their produce.
Growers sued Agricap alleging: (1) the Factoring Agreement
was merely a secured lending arrangement structured to look
like a sale but transferring no substantial risk of nonpayment
on the accounts; (2) the accounts receivable and proceeds
remained trust property under PACA; (3) because the
accounts receivable remained trust property, Tanimura
breached the PACA trust and Agricap was complicit in the
breach; and (4) PACA-trust beneficiaries such as Growers
held an interest superior to Agricap, and Agricap was liable
to Growers.

    Agricap moved for summary judgment arguing that,
pursuant to Boulder Fruit Express & Heger Organic Farm
Sales v. Transportation Factoring, Inc., 251 F.3d 1268 (9th
Cir. 2001), a commercially reasonable factoring agreement
removes accounts receivable from the PACA trust without a
trustee’s breach of trust, thus defeating the Growers’s claims.
Growers acknowledged that a PACA trustee generally may
sell trust assets on commercially reasonable terms without
breaching trust duties. Growers argued, however, that
pursuant to Nickey Gregory Co., LLC v. Agricap, LLC,
597 F.3d 591, 598–99 (4th Cir. 2010), Reaves Brokerage Co.,
Inc. v. Sunbelt Fruit & Vegetable Co., Inc., 336 F.3d 410, 414
(5th Cir. 2003), and Endico Potatoes, Inc. v. CIT
Group/Factoring, Inc., 67 F.3d 1063, 1067–69 (2d Cir. 1995),
a court should not review the commercial reasonableness of
a factoring agreement unless the court first determines a true
8          G.W. PALMER & CO. V. AGRICAP FINANCIAL

sale actually occurred.2 According to Growers, a true sale
occurs when a PACA trustee transfers not merely the right to
collect the underlying accounts, but also the risk of non-
payment on those accounts.3

    Relying on Boulder Fruit and describing the cited cases
as a circuit split, the district court granted summary judgment.
The district court noted the Ninth Circuit in Boulder Fruit
expressly addressed the commercial reasonableness of a
factoring agreement but implicitly rejected a separate,
transfer-of-risk test. Further, the court noted the factoring
agreement in Boulder Fruit transferred even less risk than the


    2
       See, e.g., Reaves Brokerage, 336 F.3d at 414 (“Characterization of
the agreement at issue turns on the substance of the relationship . . . , not
simply the label attached to the transaction. . . . 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 . . . was that of a secured lender and debtor, not a seller and
buyer.” (internal citations and quotation marks omitted)).
    3
        The Second Circuit described the transfer-of-risk test as follows:

           Where 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 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.

Endico Potatoes, 67 F.3d at 1069.
        G.W. PALMER & CO. V. AGRICAP FINANCIAL                  9

Factoring Agreement in the present case—in Boulder Fruit,
the factoring agent enjoyed unrestricted discretion to force
the distributor to repurchase accounts. The court therefore
held that, even if Boulder Fruit could accommodate the
transfer-of-risk test, the facts of Boulder Fruit controlled and
precluded relief for Growers. Finally, the court concluded
that the Factoring Agreement was commercially reasonable
because Agricap paid to Tanimura 80% of the face value of
the accounts as an up-front payment and ultimately paid to
Tanimura an even greater percentage of the face value of the
transferred accounts.

    On appeal, Growers argue that we are not bound by
Boulder Fruit because the absence of discussion of the
transfer-of-risk test in Boulder Fruit leaves open the question
of whether that test should apply in the Ninth Circuit.
Agricap counters that Boulder Fruit settled the issue because
the PACA-trust beneficiaries in Boulder Fruit asked the
Court to apply the transfer-of-risk test; the parties in that case
briefed the issue; the issue was squarely before the Court; yet,
the Court did not apply the test.

    Applying de novo review, Arizona v. Tohono O’odham
Nation, 818 F.3d 549, 555 (9th Cir. 2016), we agree with the
district court’s conclusion that Boulder Fruit controls the
outcome in the present case. See United States v. Lucas,
963 F.2d 243, 247 (9th Cir. 1992) (noting that subsequent
panels are bound by prior panel decisions and only the en
banc court may overrule panel precedent). In some cases, an
earlier panel’s election not to discuss an argument may
prevent future panels from concluding the earlier panel
implicitly accepted or rejected an argument. After all, “under
the doctrine of stare decisis a case is important only for what
it decides—for the ‘what,’ not for the ‘why,’ and not for the
10       G.W. PALMER & CO. V. AGRICAP FINANCIAL

‘how.’” In re Osborne, 76 F.3d 306, 309 (9th Cir. 1996)
(“[T]he doctrine of stare decisis concerns the holdings of
previous cases, not the rationales[.]”). In Boulder Fruit,
however, implicit rejection of the transfer-of-risk test was
necessary to the holding. We reach this conclusion because
the factoring agreement in Boulder Fruit involved virtually
no transfer of risk from the distributor to the factoring agent.4
Had the Boulder Fruit court not implicitly rejected the
transfer-of-risk test, the holding of the case necessarily would
have been different.

    Further, because the Factoring Agreement in the present
case transferred a small degree of risk of non-payment, at
least when compared to the agreement at issue in Boulder
Fruit, we agree that Boulder Fruit would preclude relief to
the Growers even if it were possible for our panel to adopt the
transfer-of-risk test.

     Finally, Growers do not seriously contend on appeal that
the Factoring Agreement was otherwise commercially
unreasonable. The Factoring Agreement in the present case
is, in many material respects, similar to the agreement in
Boulder Fruit. And, Agricap paid to Tanimura under the
current Factoring Agreement well in excess of what the Ninth
Circuit previously described as a reasonable factoring rate.
Boulder Fruit, 251 F.3d at 1272 (“In any case, a factoring



     4
      The factoring agreement from Boulder Fruit is part of the current
summary judgment record, and the briefs in that case are a matter of
public record. See, e.g., Brief of Appellants, Boulder Fruit, 251 F.3d 1268
(9th Cir. 2001) (No. 99-56770), 2000 WL 33989585. To the extent such
notice may be necessary, we take judicial notice of the Boulder Fruit
parties’ positions as set forth in their briefs.
        G.W. PALMER & CO. V. AGRICAP FINANCIAL              11

discount of 20% was never shown to be commercially
unreasonable.”).

   We therefore affirm the judgment of the district court.

   AFFIRMED.



MELLOY, Circuit Judge, with whom GOULD, Circuit Judge,
joins, concurring:

    We concur. We write further, however, because we
believe Boulder Fruit was wrongly decided and the Ninth
Circuit, sitting en banc, should eliminate this circuit split,
speak expressly to this issue, and join the Second, Fourth,
and Fifth Circuits by adopting a separate, threshold, transfer-
of-risk test.

    Congress intended PACA to prevent secured lenders from
defeating the rights of PACA-trust beneficiaries. The
congressional focus upon the relative rights of these two
groups is unmistakable. As such, before assessing the
commercial reasonableness of a factoring agreement, it is first
necessary to examine the substance of a factoring agreement
to ensure a true sale has occurred. In the absence of a true
sale, superficial indicators and labels surrounding a factoring
agreement should be of no consequence. The substance of
the transaction matters. If the substance of a transaction
reveals a secured lending arrangement rather than a true sale,
the accounts receivable remain trust assets. Thus, unpaid
trust beneficiaries hold an interest in accounts receivable and
their proceeds superior to all unsecured and secured creditors
such that the trust beneficiaries should prevail.
12      G.W. PALMER & CO. V. AGRICAP FINANCIAL

    This conclusion enjoys further support in the simple fact
that any attempt to assess the commercial reasonableness of
a factoring agreement without carefully examining the
substance of the rights transferred is an incomplete and
abstract exercise. Whether a factoring discount of 10%, 20%,
or more is reasonable in any given situation cannot be
determined without first assessing what the factoring agent
has contracted to do and what risk the factoring agent has
accepted. Analyzing a factoring discount by looking
exclusively at an initial payment without considering the
availability of recourse and without assessing the nature of
the rights and risks actually transferred from the distributor to
the factoring agent examines only part of the transaction.
Such an exercise is not grounded in reality and is akin to
declaring a price to be reasonable without first identifying the
product or service that carried that price.

    We address below the structure and purpose of PACA, the
circuit split regarding the transfer-of-risk test, and the
application of that test to this case.

I. The PACA Trust

    “Congress enacted PACA in 1930 to prevent unfair
business practices and promote financial responsibility in the
fresh fruit and produce industry.” Boulder Fruit, 251 F.3d at
1270. Congress amended PACA in 1984 “‘to remedy [the]
burden on commerce in perishable agricultural commodities
and to protect the public interest’ caused by accounts
receivable financing arrangements that ‘encumber or give
lenders a security interest’ in the perishable agricultural
commodities superior to the growers.” Id. (alteration in
original) (quoting 7 U.S.C. § 499e(c)(1)). PACA attempts to
remedy this burden through the creation of a statutory trust:
        G.W. PALMER & CO. V. AGRICAP FINANCIAL              13

       Perishable agricultural commodities received
       by a commission merchant, dealer, or broker
       in all transactions, and all inventories of food
       or other products derived from perishable
       agricultural commodities, and any receivables
       or proceeds from the sale of such
       commodities or products, shall be held by
       such commission merchant, dealer, or broker
       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 in connection with such
       transactions has been received by such unpaid
       suppliers, sellers, or agents.

7 U.S.C. § 499e(c)(2). “This provision imposes a ‘non-
segregated floating trust’ on the commodities and their
derivatives, and permits the commingling of trust assets
without defeating the trust.” Endico Potatoes, 67 F.3d at
1067 (citation omitted).

    “[G]eneral trust principles [apply] to questions involving
the PACA trust, unless those principles directly conflict with
PACA.” Boulder Fruit, 251 F.3d at 1271. And, because
“[o]rdinary principles of trust law apply to trusts created
under PACA, . . . the trust assets are excluded from the estate
should the dealer [i.e., the PACA trustee] go bankrupt.”
Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 282 (9th Cir.
1997).

    Under general trust principles, a breach of trust occurs
when there is “a violation by the trustee of any duty which as
trustee he owes to the beneficiary.” Boulder Fruit, 251 F.3d
at 1271 (quoting Restatement (Second) of Trusts § 201
14      G.W. PALMER & CO. V. AGRICAP FINANCIAL

(1959)). Federal regulations set forth a PACA trustee’s
primary duties, requiring the trustee “to maintain trust assets
in a manner that such assets are freely available to satisfy
outstanding obligations to sellers of perishable agricultural
commodities.” Id. (quoting 7 C.F.R. § 46.46(d)(1)). The
duty to maintain trust assets is broad, such that “[a]ny act or
omission which is inconsistent with this responsibility,
including dissipation of trust assets, is unlawful and in
violation of [PACA].” Id. (second alteration in original)
(quoting 7 C.F.R. § 46.46(d)(1)).

    Because the non-segregated floating trust under PACA
permits the commingling of trust assets and permits the
PACA trustee to convert trust assets into proceeds, the
transferees of trust assets, such as Agricap here, “are liable
only if they had some role in causing [a] breach or dissipation
of the trust.” Boulder Fruit, 251 F.3d at 1272; see also
Restatement (Second) of Trusts § 283 (1959) (“If the trustee
transfers trust property to a third person . . . [without]
commit[ting] a breach of trust, the third person holds the
interest so transferred or created free of the trust, and is under
no liability to the beneficiary.”).

    Against this backdrop, the current parties and all circuit
courts addressing the issue agree that a PACA trustee’s true
sale of accounts receivable for a commercially reasonable
discount from the accounts’ face value is not a dissipation of
trust assets and, therefore, is not a breach of the PACA
trustee’s duties. See Nickey Gregory, 597 F.3d at 598 (“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, [the factoring agent] would
own the accounts receivable and would be able to do with
them what it wished.”); Reaves Brokerage, 336 F.3d at
        G.W. PALMER & CO. V. AGRICAP FINANCIAL                15

413–14; Boulder Fruit, 251 F.3d at 1271–72; Endico
Potatoes, 67 F.3d at 1067–68. Such a sale is merely a
conversion of trust assets from accounts receivable into cash.
These circuits also agree that any purported security interest
for a lender in PACA-trust assets is inferior to the trust
beneficiaries’ claims and rights. See, e.g., Nickey Gregory,
597 F.3d at 598–99 (“Thus, if the accounts receivable were
held . . . 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.”); Endico Potatoes, 67 F.3d at
1069 (“Because [the factoring agent] held only a security
interest . . . its interest is subject to the rights of the PACA
trust beneficiaries. . . . [The factoring agent] must . . .
disgorge amounts collected on the accounts after [the
distributor’s] bankruptcy filing to the extent necessary to
satisfy claims of PACA trust beneficiaries.”). In fact, in
Boulder Fruit, notwithstanding the absence of discussion of
a “true-sale” or “transfer-of-risk” test, the Ninth Circuit
provided an illustration making clear that use of PACA-trust
assets as collateral to secure a debt could not create a priority
security interest for a lender greater than the position enjoyed
by PACA trust beneficiaries:

        Farmer sells oranges on credit to Broker.
        Broker turns around and sells the oranges on
        credit to Supermarket, generating an account
        receivable from Supermarket. Broker then
        obtains a loan from Bank and grants Bank a
        security interest in the account receivable to
        secure the loan. Broker goes bankrupt. Under
        PACA, Broker is required to hold the
        receivable in trust for Farmer until Farmer
        was paid in full; use of the receivable as
16     G.W. PALMER & CO. V. AGRICAP FINANCIAL

       collateral was a breach of the trust. Therefore,
       Farmer’s rights in the Supermarket receivable
       are superior to Bank’s. In fact, as a trust
       asset, the Supermarket receivable is not even
       part of the bankruptcy estate.

Boulder Fruit, 251 F.3d at 1271.

II. Transfer-of-Risk Test for Identifying True Sales

    The treatment of true sales and security interests,
therefore, is clear. What remains unclear is the analysis to
apply when the true nature of the transaction is ambiguous.
How should a court treat a transaction if the parties to a
factoring agreement label the transaction a sale of accounts
but provide substantial recourse for the factoring agent, such
as requiring the distributor to “repurchase” non-performing
accounts or permitting the factoring agent to withhold
payments or otherwise recoup payments already made to the
distributor? What if, such labels notwithstanding, the
recourse and security provided include a security interest in
the accounts receivable? Has a true sale actually occurred?

    Growers and the Second, Fourth, and Fifth Circuits apply
a threshold transfer-of-risk test to determine if such a
transaction is a true sale or a mere secured lending
relationship. Agricap, relying on Boulder Fruit, argues the
court need only ask if the transaction was commercially
reasonable.

    In Boulder Fruit, the Ninth Circuit held factoring
agreements do not per se breach the PACA trust because,
consistent with general trust principles, “a trustee can sell
trust assets unless the sale breaches the trust.” 251 F.3d at
         G.W. PALMER & CO. V. AGRICAP FINANCIAL                       17

1272. The court concluded “a commercially reasonable sale
of accounts for fair value is entirely consistent with the
trustee’s primary duty under PACA and 7 C.F.R.
§ 46.46(d)(1)—to maintain trust assets so that they are freely
available to satisfy outstanding obligations to sellers of
perishable commodities.” Id. at 1271 (internal quotation
marks omitted). The court indicated that whether a factoring
agreement is commercially reasonable depends upon the
terms of the agreement. For example, “[a] PACA trustee who
sells accounts for pennies on the dollar, just to turn a quick
buck, might well have breached the PACA trust, while a
trustee who factors accounts at a commercially reasonable
rate would not.” Id.

      In reaching its conclusion, the Boulder Fruit panel stated
the factoring agreement “actually enhanced the trust” for
three reasons. Id. at 1272. First, it allowed the distributor to
quickly convert accounts receivable to cash.1 Id. Second, in
the course of performance, the distributor “actually received
. . . more for the accounts than the accounts would prove to be
worth.” Id. And third, “a factoring discount of 20% was
never shown to be commercially unreasonable.” Id. The
Ninth Circuit therefore considered not only the up-front
payment from factoring agent to distributor but also the actual
sums paid to the distributor by the factoring agent during the




    1
       Further, because the price of such commodities tend to rise as the
commodities move through the distribution chain from grower to final
customer, sales of an intermediate distributor’s accounts receivable, even
at a commercially reasonable discount to face value, reasonably might be
expected to result in adequate funds for the PACA trustee to pay the
produce growers.
18       G.W. PALMER & CO. V. AGRICAP FINANCIAL

course of performance of the factoring agreement.2 The
Ninth Circuit did not, however, examine the substance of the
rights transferred to determine what the factoring agent
agreed to do, what risk the factoring agent accepted when it
accepted the right to collect on the transferred accounts, and
whether the transaction properly should be deemed a sale
rather than a mere secured lending arrangement. Rather, the
Ninth Circuit in Boulder Fruit merely characterized the
transaction as a sale or factoring agreement without
discussing the factoring agent’s rights and ability to seek
recourse against the distributor.

    In contrast, the Fourth, Fifth, and Second Circuits
considered it necessary to examine the rights and risks
transferred between the parties to a factoring agreement. See
Nickey Gregory, 597 F.3d at 600–03; Reaves Brokerage,
336 F.3d at 414–16; Endico Potatoes, 67 F.3d at 1068–69.
As the Fourth Circuit stated, “[I]f 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 [the factoring agent’s] security interest.”
Nickey Gregory, 597 F.3d at 598 (emphasis in original).
Whether the accounts receivable remained accounts or were
converted into cash, however, the factoring agent’s “position
with respect to that cash would have been subordinate to the
claims of produce sellers while they remained unpaid.” Id.
In contrast, “[i]f [the distributor] had transferred these trust

     2
      The 20% discount at issue in Boulder Fruit as referenced above
represented a discount from the accounts’ face value as paid in an initial
payment from the factoring agent to the PACA trustee. It did not
represent the final amount paid nor did it represent a floor or a ceiling on
what the factoring agreement in Boulder Fruit could have caused the
factoring agent ultimately to pay. The detailed terms of the factoring
agreement in Boulder Fruit are addressed below.
        G.W. PALMER & CO. V. AGRICAP FINANCIAL              19

assets . . . 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.” Id. at 599. If such a true
sale had occurred, “the accounts receivable would no longer
have remained trust assets, and the commodities sellers would
not have had any claim for payment from them.” Id. at
599–600.

    Nickey Gregory, 597 F.3d at 594, and Reaves Brokerage,
336 F.3d at 412, involved factual patterns similar to the
present case. Endico Potatoes involved a similar question:
whether a “purchaser” of accounts was a bona fide purchaser
for true value or merely a lender. 67 F.3d at 1065–66. In
these cases, the courts examined the text and legislative
history of PACA, as well as the regulations promulgated
under PACA, to conclude Congress intended to elevate the
interests of produce growers above the interests of secured
lenders. See, e.g., Nickey Gregory, 597 F.3d at 594–95,
598–99; Endico Potatoes, 67 F.3d at 1066–68. The Fourth
Circuit noted in particular that representatives of the secured
lending community had expressed concern over PACA’s
likely effect upon secured lenders and the factoring industry.
Nickey Gregory, 597 F.3d at 599. The court concluded that
Congress nevertheless found the balance of policy interests to
favor placing those lenders in a position subordinate to
unpaid growers. Id.

  For example, the House Report explaining the 1984
PACA amendments states:

       [Purchasers/Distributors of perishable
       agricultural commodities] in the normal
       course of their business transactions, operate
20      G.W. PALMER & CO. V. AGRICAP FINANCIAL

       on bank loans secured by the inventories,
       proceeds or assigned receivables from sales of
       perishable 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
       contract.

H.R. Rep. No. 98-543, at 3 (1984), as reprinted in 1984
U.S.C.C.A.N. 405, 407. The Second Circuit, citing this
report, explained:

       According to Congress, due to the need to sell
       perishable commodities quickly, sellers of
       perishable commodities are often placed in
       the position of being unsecured creditors of
       companies whose creditworthiness the seller
       is unable to verify. Due to a large number of
       defaults by the purchasers, and the sellers’
       status as unsecured creditors, the sellers
       recover, if at all, only after banks and other
       lenders who have obtained security interests
       in the defaulting purchaser’s inventories,
       proceeds, and receivables.

Endico Potatoes, 67 F.3d at 1067. Given this focus, it
becomes evident that this circuit’s focus, too, should be upon
the true nature of the transactions at issue and the true nature
of the parties’ roles, i.e., that of seller and buyer or that of
secured lender and borrower.
        G.W. PALMER & CO. V. AGRICAP FINANCIAL               21

    Importantly, Congress not only knew it was elevating the
interests of growers above the interests of secured lenders,
Congress expressly found the secured lenders’ practices had
been resulting in a “burden on commerce,” H.R. Rep. No. 98-
543, at 4, and further found the creation of statutory trust
would aid commerce. As recognized in Nickey Gregory, the
American Bankers Association had testified to Congress that
creation of the PACA trust would create “difficult[ies for]
lenders . . . in administering their secured loans.” 597 F.3d at
599. Congress nevertheless “made th[e] policy choice to
make the unsecured credit extended by commodities sellers
superior to the position of lenders holding a security interest
in those commodities and proceeds.” Id. The House Report
stated:

       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 monitoring
       system provided for under [PACA] will
       protect the interests of the borrower, the
       money lender, and the fruit and vegetable
       industry. Prompt payments should generate
       trade confidence and new business which
       yields increased cash and receivables, the
       prime security factors to the money lender.

H.R. Rep. No. 98-543, at 4.

    Given the remedy Congress created to address the
perceived problem (creation of the trust elevating
22      G.W. PALMER & CO. V. AGRICAP FINANCIAL

commodities sellers’ interests over lenders’ interests), given
Congress’s clear concern with the relative interests of secured
lenders and commodities sellers, and given the general
backdrop of trust law (in particular, a trustee’s ability to sell
or convert trust assets), courts must focus on the true
substance of PACA-related transactions and not on
superficial indicators or labels. Simply put, it runs counter to
PACA and its history to permit the simple use of the words
“sale” or “purchase” or “factoring agreement” to control for
purposes of assessing the relative rights of lenders and
produce growers.

III.    Transfer of Primary or Direct Risk as the Hallmark of
        a True Sale

    The Second, Fourth, and Fifth Circuits conclude a transfer
of the primary or direct risk of non-payment on the accounts
stands as the hallmark of a true sale. Nickey Gregory,
597 F.3d at 601–03; Reaves Brokerage, 336 F.3d at 417;
Endico Potatoes, 67 F.3d at 1068–69. In addition, these
courts (as well as the regulations under PACA) focus upon
trust asset encumbrance and dissipation in relation to what the
terms of a factoring agreement could permit rather than how
the parties actually performed under a factoring agreement.
See, e.g., 7 C.F.R. § 46.46(a)(2) (“‘Dissipation’ means 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
suppliers, sellers, or agents to recover money owed in
connection with produce transactions.” (emphasis added)).
This focus is important because, although a factoring agent
might pay to a distributor/PACA trustee sums adequate for
the trustee to pay the beneficiaries, and although those
amounts might represent a commercially reasonable discount
from the accounts’ face values, the payment of such amounts
        G.W. PALMER & CO. V. AGRICAP FINANCIAL                  23

should be immaterial if (1) the trustee does not pay the
beneficiaries in full; and (2) the accounts receivable and their
proceeds remain trust assets.

    In assessing whether a true sale occurred, the Fourth
Circuit adopted the transfer-of-risk test as set forth and
explained by the Second Circuit in Endico Potatoes. Nickey
Gregory, 597 F.3d at 600–03. There, the Second Circuit
distinguished between direct risk, on the one hand, and
secondary or derivative risk, on the other. Endico Potatoes,
67 F.3d at 1068–69. The Second Circuit stated it was
appropriate to examine several factors such as “[1] the right
of the creditor to recover from the debtor any deficiency if the
assets assigned are not sufficient to satisfy the debt, [2] the
effect on the creditor’s right to the assets assigned if the
debtor were to pay the debt from independent funds,
[3] whether the debtor has a right to any funds recovered
from the sale of assets above that necessary to satisfy the
debt, and [4] whether the assignment itself reduces the debt.”
Endico Potatoes, 67 F.3d at 1068. The court concluded, “The
root of all of these factors is the transfer of risk.” Id. at 1069.
Finally, the court summarized:

        Where 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 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
24      G.W. PALMER & CO. V. AGRICAP FINANCIAL

       the lender only bears the risk that the account
       debtor’s non-payment will leave the borrower
       unable to satisfy the loan.

Id.

     We conclude this transfer-of-risk test must apply to avoid
reliance on self-serving labels inserted into factoring
agreements to defeat clear congressional intent. We also
conclude it follows quite naturally that it is not even possible
to assess the commercial reasonableness of a factoring
agreement without first understanding the true nature of the
transferred risks and transferred rights. A factoring agent
who accepts risk of non-payment on the transferred accounts
is the owner of the accounts, for better or worse. See Nickey
Gregory, 597 F.3d at 601 (“The purchaser assumes the risk of
collection, betting that its success in collecting on the
accounts receivable will yield a return exceeding the
discounted price it paid for the asset.”); id. at 598
(“Obviously, under this scenario, [the factoring agent] would
own the accounts receivable and would be able to do with
them what it wished.”). That risk will be reflected in the
price. A factoring agent who functionally serves only as a
lender and collection firm, however, accepts accounts for
collection but enjoys the right to force the distributor to
repurchase non-performing accounts. Such a factoring agent
faces much less risk—risk measured only by the limitations
on the repurchase provisions and by the distributor’s solvency
and ability to perform under the agreement. Common sense
dictates that the price paid for the accounts with and without
recourse will differ. Common sense also dictates that
commercial reasonableness cannot be assessed without first
examining the substance of the transaction.
        G.W. PALMER & CO. V. AGRICAP FINANCIAL               25

     Agricap nevertheless argues adoption of the transfer-of-
risk test would lead to absurd results in which a factoring
agent remains liable to growers even though the factoring
agent’s payments to a distributor were sufficient, in theory,
for the distributor to pay growers. Agricap overstates its case
in characterizing such a scenario as absurd. It is merely the
result of a clear policy choice set forth by Congress. In fact,
such a result is not even uncommon.

    To see an everyday example where a similar scenario
plays out, it is only necessary to look to the relationship
between general contractors, subcontractors, and property
owners in the context of mechanics’ liens. It is well
established beyond the need for citations that a property
owner who makes final payment to a general contractor
without first securing a release of subcontractors’ mechanics’
liens holds the property subject to those liens and faces direct
exposure to the subcontractors’ claims. This is true
regardless of whether the amount the property owner paid to
the general contractor was sufficient to pay the
subcontractors. If the subcontractors are not paid, their
interests prevail over the property owner (who may seek
recourse against the general contractor, but who still faces
direct liability to the subcontractors). State legislatures made
the policy choice to put the interests of subcontractors ahead
of those of property owners. Property owners, of course, may
guard against this risk by performing due diligence and
ensuring subcontractors’ liens are released before making
final payment to a general contractor.

    Similarly, by putting the burden of due diligence on
lenders rather than growers, Congress was well aware of the
effect it was imposing on the lending industry. Congress
concluded, however, that lenders could adapt. The House
26      G.W. PALMER & CO. V. AGRICAP FINANCIAL

Committee expressly noted that anticipated improvements to
commerce would offset the lenders’ anticipated burdens.
H.R. Rep. No. 98-543, at 4 (“[T]he statutory trust
requirements . . . 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 monitoring system provided for
under [PACA] will protect the interests of the borrower, the
money lender, and the fruit and vegetable industry.”).

    The propriety of comparing the PACA situation to
mechanics’ liens is shown by examining the longstanding
regulations promulgated under PACA. These regulations do
not ask whether a factoring arrangement in fact resulted in a
transfer of funds sufficient to pay growers throughout the
course of performance under a factoring agreement. Rather,
the regulations ask whether such an arrangement “could”
impair trust assets. 7 C.F.R. § 46.46(a)(2). Just as a property
owner must conduct due diligence to avoid liability to a
subcontractor before making final payment to a general, a
factoring agent with knowledge of PACA must act with
diligence. It does not matter that a factoring agent paid a
distributor sufficient funds to pay growers any more than it
matters that a property owner paid a general contractor
sufficient funds to pay subcontractors. In light of these
protections, it cannot be the case that a distributor and
factoring agent may defeat trust beneficiaries’ rights merely
by invoking the labels “sale” or “factoring agreement.”

IV.    Transfer of Risk in the Factoring Agreement and in
       Boulder Fruit

    Turning to the actual factoring agreements in the present
case and in Boulder Fruit, it is helpful to describe the
        G.W. PALMER & CO. V. AGRICAP FINANCIAL              27

relationship between Tanimura and Agricap and how the
parties came to enter into the Factoring Agreement.

    In late 2007, Tanimura found itself facing cash flow
difficulties and reached out to Agricap in an effort to
“improve [Tanimura’s] working capital situation and
[Tanimura’s] ability to pay vendors.” In December 2007,
Tanimura completed an application for a “factoring line”
from Agricap. In response, Agricap asked for a fee to
conduct due diligence and referenced the possibility of
“entering into certain arrangements to provide a factoring
facility.” In a “term sheet” attached to this response, Agricap
referred to itself as the “lender,” referred to Tanimura as the
“seller,” and referred to the “factoring facility” as a “credit
facility.” It also stated Agricap would provide to Tanimura
“collection services.” From inception, then, it seems clear
Agricap viewed itself as a lender providing collection
services to Tanimura rather than a true purchaser of accounts
collecting for itself on the accounts it would truly own.
Nevertheless, Agricap also indicated “Seller would sell to
Agricap, and Agricap would purchase from Seller, all of
Seller’s accounts receivable.” Agricap then investigated
Tanimura’s finances and completed a “Client Credit
Approval Form” dated January 8, 2008.

    On February 4, 2008, Tanimura and Agricap entered into
the “Agricap Financial Corporation Factoring and Security
Agreement.” The Factoring Agreement provided that
Agricap would “purchase” Tanimura’s accounts receivable
for 80% of the face value and would hold the remaining 20%
in a reserve account. Agricap would then collect on the
accounts from Tanimura’s customers, pay itself a financing
fee as a percentage of the face value of the accounts, and also
pay itself an interest fee based upon the length of time the
28      G.W. PALMER & CO. V. AGRICAP FINANCIAL

accounts had remained outstanding. After retaining its fees
and maintaining a reserve account, Agricap would pay to
Tanimura the balance of the collected amounts.

    The Factoring Agreement, however, transferred to
Agricap very little in the way of primary or direct risk of non-
payment. The Factoring Agreement granted Agricap the
unilateral ability to increase the reserve account (i.e.,
withhold payments to Tanimura of funds collected from
accounts) by “such additional reserves as are deemed
necessary and appropriate in [Agricap’s] sole discretion.” It
also granted Agricap the ability to force Tanimura to
purchase back certain accounts based upon the occurrence of
certain events. For example, if a dispute arose between
Tanimura and a customer, Agricap could force Tanimura to
repurchase the customer’s account.

    Importantly, Tanimura agreed to repurchase any accounts
that remained uncollected after 90 days. And, in the event of
Tanimura’s insolvency, the repurchase amount could be
deducted from the reserve account. Agricap’s only practical
risk, therefore, was possible insolvency by Tanimura at a time
when the reserve account was insufficient to fund the unpaid
accounts. In other words, assuming Tanimura’s continued
solvency, Agricap could obtain full recourse against
Tanimura for 90-day-old unpaid accounts, and Agricap’s risk
of non-payment by Tanimura’s customers was cabined to 90-
day windows (during which Agricap received a financing fee
and interest).

    The parties also executed ancillary documents when
entering into the Factoring Agreement. Tanimura’s principal
executed a personal guarantee. Agricap took a priority
interest in all of Tanimura’s assets other than inventory, filing
       G.W. PALMER & CO. V. AGRICAP FINANCIAL              29

a UCC financing statement to this effect. Also, Tanimura
itself and Tanimura’s other primary lender agreed to
subordinate their debt to Agricap.

    The parties disagree as to the actual amounts of money
that changed hands between Tanimura and Agricap, but it
appears undisputed that the transferred accounts exceeded
$20 million and Agricap ultimately paid to Tanimura an
amount in excess of 90% of the face value of those accounts.

    The factoring agreement at issue in Boulder Fruit was
substantially similar to the Factoring Agreement in the
present case. The factoring agent in Boulder Fruit, however,
was not subject to the same express limitations on the timing
or reasons for forcing the PACA trustee to repurchase
accounts. Rather, the factoring agreement in Boulder Fruit
permitted the factoring agent to force the PACA trustee to
repurchase any account the factoring agent determined, “in its
sole and absolute discretion . . . is or may not be fully
collectible.”

     Reviewing these provisions, we conclude that neither the
present Factoring Agreement nor the agreement in Boulder
Fruit transferred primary or direct risk of non-payment to the
factoring agents. In the absence of controlling precedent,
therefore, we would hold neither agreement effected a true
sale of trust assets. Rather, both were mere secured financing
arrangements, as further indicated by Agricap’s descriptions
of itself as “lender” and the Factoring Agreement as a “credit
facility.”

   In summary, Congress created a system to protect
growers of fruits, vegetables, and other perishable
commodities. The growers in this Circuit have effectively
30     G.W. PALMER & CO. V. AGRICAP FINANCIAL

lost that protection due to lenders merely labeling true
security agreements as factoring agreements. This is not an
isolated issue in a cottage industry. Perishable agricultural
commodities are a multi-billion dollar enterprise in this
Circuit as well as nationwide. We would encourage an en
banc court to consider bringing the Ninth Circuit into line
with the other circuits that have considered this issue.
