Produce Pay, Inc. v. Izguerra Produce, Inc.

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

PRODUCE PAY, INC., No. 20-56181

Plaintiff-Appellant,

D.C. No.

v. 2:19-cv-10165-

CBM-GJS

IZGUERRA PRODUCE, INC.; SERGIO B.

FIERRO; CARLOS F. FIERRO; MARIA

T. FIERRO; DOES, 1 through 10, OPINION

inclusive,

Defendants-Appellees.

Appeal from the United States District Court

for the Central District of California

Consuelo B. Marshall, District Judge, Presiding

Argued and Submitted December 7, 2021

Pasadena, California

Filed July 8, 2022

Before: Paul J. Kelly, Jr., * Milan D. Smith, Jr., and

Danielle J. Forrest, Circuit Judges.

Opinion by Judge Kelly;

Dissent by Judge Milan D. Smith, Jr.

*

The Honorable Paul J. Kelly, Jr., United States Circuit Judge for

the U.S. Court of Appeals for the Tenth Circuit, sitting by designation.

2 PRODUCE PAY V. IZGUERRA PRODUCE

SUMMARY **

Perishable Agricultural Commodities Act

The panel reversed the district court’s Fed. R. Civ. P.

12(b)(6) dismissal of an action brought by Produce Pay, Inc.,

against Izguerra Produce, Inc., under the Perishable

Agricultural Commodities Act and remanded for further

proceedings.

Produce Pay holds a PACA license issued by the United

States Department of Agriculture. Produce Pay and Izguerra

agreed that Izguerra, through Produce Pay’s online platform,

would receive and accept produce from a grower and sell the

produce to retailers on Produce Pay's behalf. Izguerra

bought 1,600 cartons of avocados from Produce Pay through

its online platform and, pursuant to the parties’ agreement,

received the avocados directly from the Mexican grower.

Produce Pay issued Izguerra an invoice representing the net

proceeds from the avocados, but Izguerra did not fully pay.

The district court dismissed Produce Pay’s PACA claims on

the ground that, as a matter of law, Produce Pay was not a

seller of wholesale produce, and thus not entitled to PACA

protections, because the transaction between Produce Pay

and Izguerra was a secured loan rather than a true sale.

The panel held that Produce Pay alleged the five

preliminary elements of a PACA claim by alleging that the

avocados were perishable, Izguerra was a dealer of

avocados, the transaction occurred in contemplation of

interstate or foreign commerce, Produce Pay did not receive

**

This summary constitutes no part of the opinion of the court. It

has been prepared by court staff for the convenience of the reader.

PRODUCE PAY V. IZGUERRA PRODUCE 3

full payment, and the invoice for the avocados stated that

they were sold subject to a PACA statutory trust. Further,

Produce Pay plausibly alleged that it was a seller or supplier

under PACA, rather than only a lender, because Produce Pay

alleged facts that resembled a consignment transaction

between it and Izguerra and suggested that Produce Pay

functioned as a seller. The panel distinguished S&H Packing

& Sales Co. v. Tanimura Distributing, Inc., 883 F.3d 797

(9th Cir. 2018) (en banc), which applied a transfer-of-risk

test to an accounts receivable factoring arrangement at the

summary judgment stage, as well as an unpublished decision

of the Sixth Circuit.

Dissenting, Judge M. Smith wrote that the pleadings as a

whole, including exhibits attached to the complaint and

incorporated by reference, were far more consistent with a

financing arrangement whereby Produce Pay advanced

credit to a wholesaler and used the avocados and their

proceeds as collateral, than with the conclusion that Produce

Pay was an unpaid seller or supplier within the meaning of

PACA. Consequently, Produce Pay was not entitled to

PACA’s protections. Judge M. Smith wrote that, in

concluding otherwise, the majority glossed over the terms of

the parties’ contract, ignored PACA’s statutory purpose, and

downplayed the importance of the en banc decision in

Tanimura.

4 PRODUCE PAY V. IZGUERRA PRODUCE

COUNSEL

Robert M. Brochin (argued) and Clay M. Carlton, Morgan

Lewis & Bockius LLP, Miami, Florida; Thomas M.

Peterson, Morgan Lewis & Bockius LLP, San Francisco,

California; for Plaintiff-Appellant.

Maurice Wainer (argued), Snipper Wainer & Markoff,

Beverly Hills, California, for Defendants-Appellees.

Rebecca K. O’Brien and Jonathan M. Saffer, Rusing Lopez

& Lizardi PLLC, Tucson, Arizona; Robert M. Warzel,

Rusing Lopez & Lizardi PLLC, Scottsdale, Arizona; for

Amici Curiae Delta Fresh Sales LLC and Chucho Produce

LLC.

OPINION

KELLY, Circuit Judge:

Plaintiff-Appellant Produce Pay, Inc. (Produce Pay)

appeals from the district court’s dismissal of its federal

claims with prejudice pursuant to Federal Rule of Civil

Procedure 12(b)(6). In its complaint, Produce Pay alleged

that Defendant-Appellee Izguerra Produce, Inc. (Izguerra)

violated several provisions of the Perishable Agricultural

Commodities Act (PACA), and it also brought several state-

law claims. After dismissing Produce Pay’s PACA claims,

the district court declined to exercise supplemental

jurisdiction over the state law claims. We have jurisdiction

pursuant to 28 U.S.C. § 1291, and we reverse and remand

for further proceedings.

PRODUCE PAY V. IZGUERRA PRODUCE 5

FACTUAL AND PROCEDURAL HISTORY

As alleged in its complaint, Produce Pay is a Delaware

corporation that buys and sells wholesale produce

internationally through its online platform. It also offers

loans and advances to growers to fund the planting,

cultivating, shipping, and marketing of crops. Produce Pay

holds a PACA license issued by the United States

Department of Agriculture (USDA).

Relevant here, growers, often in Mexico, post to the

online platform when they have produce to sell and

distributors, such as Izguerra, can arrange for the produce to

be shipped to them. The distributor then distributes the

produce to various retail outlets. Produce Pay obtains title

to the produce, but because of the perishable nature of

produce, the produce is shipped directly from the grower to

the distributor in the United States. Upon receipt of the

produce, the distributor then informs Produce Pay how much

of the produce is marketable, and Produce Pay pays the

grower. The distributor is then responsible for reselling the

produce on consignment and must remit the gross proceeds

to Produce Pay less the distributor’s commission and any

permissible expenses or deductions. In addition, Produce

Pay charges the distributor a “marketplacing commission”

when the distributor connects with new growers through

Produce Pay’s online platform. This system, which amici

contend is typical for the industry, “facilitates the movement

of produce from farm to market,” in an international industry

where “there is often little time to draft and sign formal

contracts” because of the perishable and unpredictable

nature of the products. Amici Curiae (Delta Fresh Sales,

L.L.C. and Chucho Produce, L.L.C.) Br. at 7 (quoting John

F. Munger, Importation of Mexican Produce into the United

6 PRODUCE PAY V. IZGUERRA PRODUCE

States: Procedures, Documentation, and Dispute

Resolution, 30 Ariz. J. Int’l & Comp. L. 605, 607 (2013)). 1

In January 2019, Produce Pay and Izguerra agreed that

Izguerra, through Produce Pay’s online platform, would

receive and accept produce from a grower and subsequently

sell the produce to retailers on Produce Pay’s behalf. While

the parties’ agreement—titled the Distribution Agreement—

stated that Produce Pay would retain title to the produce

before it was sold on consignment by Izguerra, Produce Pay

limited its risk in the event that Izguerra failed to sell any of

the marketable produce. For example, if Izguerra could not

sell the produce at an expected price, Izguerra was still

responsible for a “marketplacing commission” and Produce

Pay reserved the right to recover its commission from other

produce shipments accepted by Izguerra. In addition, the

parties’ agreement provided that Izguerra bore any default

risk regarding purchasers of the produce.

In April 2019, Izguerra bought 1,600 25-pound cartons

of avocados from Produce Pay through its online platform.

Pursuant to the parties’ agreement, Izguerra received the

avocados directly from the grower. Izguerra then confirmed

its receipt and approval of the shipment on Produce Pay’s

online platform. Produce Pay subsequently issued Izguerra

an invoice for the avocados for $70,560.00. This amount

represented the net proceeds from the avocados. Produce

1

The dissent challenges our reliance on amici and a law review

article. See Dissent at 33. While noting that the dissent relies upon such

secondary sources as a legal dictionary and treatises, indeed even

Produce Pay’s website, we recognize that such sources are hardly

binding. The challenged sources help illustrate how a sophisticated

industry has adapted to the unremarkable fact that avocados are highly

perishable and have a short shelf life.

PRODUCE PAY V. IZGUERRA PRODUCE 7

Pay’s invoice reiterated that the avocados were sold “subject

to the [PACA] statutory trust.”

Izguerra never fully paid Produce Pay and had an

outstanding balance of $63,786.56 by November 2019.

Consequently, Produce Pay filed suit and alleged several

claims under PACA. The district court granted Izguerra’s

motion to dismiss with prejudice concluding that as a matter

of law Produce Pay was not a seller of wholesale produce

and thus not entitled to PACA protections. Specifically, the

district court applied the transfer-of-risk test articulated by

this court in S&H Packing & Sales Co. v. Tanimura

Distributing, Inc., 883 F.3d 797, 813 (9th Cir. 2018) (en

banc), and found that the transaction between Produce Pay

and Izguerra was a secured loan rather than a true sale. The

district court recharacterized the transaction as a secured

loan because Izguerra bore all the risk if one of its purchasers

defaulted, Izguerra was liable for damages for a variety of

adverse contingencies that might result in non-payment, and

Produce Pay reserved the right to collect deficits from its

other transactions with Izguerra.

On appeal, Produce Pay argues that the district court

erred by not crediting Produce Pay’s well-pled factual

allegations which it maintains state a plausible PACA claim.

Produce Pay also objects to the district court’s

recharacterization of the transaction from a sale to a secured

loan. Finally, it maintains that dismissal without leave to

amend was improper given the liberal policy favoring

amendment.

8 PRODUCE PAY V. IZGUERRA PRODUCE

DISCUSSION

A. Standard of Review

This court reviews the dismissal of a complaint under

Rule 12(b)(6) de novo. Applied Underwriters, Inc. v.

Lichtenegger, 913 F.3d 884, 890 (9th Cir. 2019). “In so

doing, we accept all well-pleaded factual allegations in the

complaint as true and construe the pleadings in the light most

favorable to the plaintiff.” Walker v. Fred Meyer, Inc.,

953 F.3d 1082, 1086 (9th Cir. 2020). However, “we ‘need

not . . . accept as true allegations that contradict matters

properly subject to judicial notice or by exhibit.’” Gonzalez

v. Planned Parenthood of L.A., 759 F.3d 1112, 1115 (9th

Cir. 2014) (quoting Sprewell v. Golden State Warriors,

266 F.3d 979, 988 (9th Cir. 2001)). Dismissal is improper

where the complaint alleges “enough facts to state a claim to

relief that is plausible on its face.” Bell Atl. Corp. v.

Twombly, 550 U.S. 544, 570 (2007).

B. Produce Pay plausibly alleged that it was a seller

or supplier under PACA.

PACA was enacted in 1930 to prevent unfair business

practices and create stability and financial responsibility in

the fresh produce industry. Perfectly Fresh Farms, Inc. v.

U.S. Dep’t of Agric., 692 F.3d 960, 963 (9th Cir. 2012).

PACA prevents dealers or commission merchants, like

Izguerra, from failing to pay in full promptly for any produce

they receive in interstate commerce. 7 U.S.C. § 499b(4).

Additionally, PACA requires produce held by a commission

merchant or dealer to be held “in trust for the benefit of all

unpaid suppliers or sellers of such commodities or agents

involved in the transaction.” 7 U.S.C. § 499e(c)(2). Thus,

as a preliminary matter, Produce Pay must allege the

following to state a PACA claim:

PRODUCE PAY V. IZGUERRA PRODUCE 9

(1) the commodities sold were perishable

agricultural commodities, (2) the purchaser

was a commission merchant, dealer, or

broker, (3) the transaction occurred in

contemplation of interstate or foreign

commerce, (4) the seller has not received full

payment on the transaction, and (5) the seller

preserved its trust rights by including

statutory language referencing the trust on its

invoices.

Sun Hong Foods, Inc. v. Outstanding Foods, Inc., No.

CV19-10121, 2020 WL 2527048, at *3 (C.D. Cal. Mar. 26,

2020) (quoting Tom Ver LLC v. Organic All., Inc., No. 13-

CV-03506, 2015 WL 6957483, at *8 (N.D. Cal. Nov. 11,

2015)). See generally Sunkist Growers, Inc. v. Fisher, 104

F.3d 280, 282–83 (9th Cir. 1997).

Here, Produce Pay has alleged these five preliminary

elements. The avocados are perishable. Izguerra is a dealer

of avocados. The transaction involved a grower in Mexico;

a California dealer; and Produce Pay, which is a Delaware

corporation, and therefore occurred in contemplation of

interstate or foreign commerce. Produce Pay has alleged an

outstanding balance of $63,786.56. And finally, the initial

invoice for the avocados states that the avocados were sold

“subject to the [PACA] statutory trust.” The point of

contention is whether Produce Pay was an “unpaid supplier[]

or seller[]” under PACA. 2 7 U.S.C. § 499e(c)(2). While

2

While the district court focused on whether Produce Pay was an

unpaid seller, Produce Pay alleged in its complaint (and argues on

appeal) that it was both an “unpaid supplier” and an “unpaid seller.”

However, it did not distinguish between these two categories in its

10 PRODUCE PAY V. IZGUERRA PRODUCE

PACA protects the interests of suppliers and sellers of

produce, it does not protect the interests of parties who are

only lenders. See Tanimura, 883 F.3d at 802–03. Izguerra

contends that Produce Pay was not a seller because the

avocados were sold to Izguerra directly by the grower. 3

We conclude that Izguerra’s characterization of the

transaction is at odds with Produce Pay’s allegations and

incorporated exhibits, which we must construe in Produce

Pay’s favor. See Walker, 953 F.3d at 1086. Produce Pay

alleges facts that resemble a consignment transaction

between Produce Pay and Izguerra and suggest Produce Pay

functioned as a seller. Produce Pay alleges that it sold

approximately 20 tons of avocados to Izguerra through its

online platform for Izguerra “to sell on consignment.”

Produce Pay also alleges that it bought the avocados from

the grower and retained title to the avocados, even though

they were shipped directly to Izguerra from the grower.

Produce Pay attached exhibits to its complaint that

support its allegations. The Distribution Agreement

between Produce Pay and Izguerra provides that Produce

Pay is “a bona fide purchaser acting in good faith,” and that

“title to the produce will remain with [Produce Pay]” until

sold to a retailer “on a consignment basis.” The agreement

also outlines the structure of a consignment transaction.

Izguerra receives a commission from the sale, but it was

arguments. Therefore, for simplicity we refer only to “unpaid seller” in

analyzing this issue.

3

This court declines to address Izguerra’s alternative argument that

Produce Pay waived its PACA claims as Izguerra failed to adequately

address the issue on appeal or make a similar argument before the district

court. See J. K. J. v. City of San Diego, 17 F.4th 1247, 1261–62 (9th Cir.

2021).

PRODUCE PAY V. IZGUERRA PRODUCE 11

required to remit other proceeds to Produce Pay. In finding

that PACA did not apply, the district court pointed out the

ways in which Produce Pay limited its risk in the distribution

agreement. However, the allegations and exhibits must be

construed holistically in favor of Produce Pay, and Produce

Pay plausibly alleges a consignment transaction.

Additionally, it is not enough for Izguerra to point out

that Produce Pay never physically possessed the avocados.

An avocado can go from perfectly ripe to blackened, bruised,

and inedible with remarkable speed. Thus, in the perishable

produce industry, physical possession alone is a poor

indicator of who has title. See Munger, 30 Ariz. J. Int’l &

Comp. L. at 606–07, 617. While Izguerra may have second

thoughts regarding the deal it struck, at this point we cannot

conclude that the transaction did not afford Produce Pay

protection under PACA. Produce Pay has plausibly alleged

that it is a seller entitled to PACA’s protections and that the

parties’ transaction was a consignment deal rather than a

secured loan.

The district court applied the transfer-of-risk test

articulated by this court in Tanimura, 883 F.3d at 805–09, to

determine that PACA does not apply. Tanimura involved

growers who sold produce on credit to a distributor

(Tanimura). Tanimura in turn sold to retailers on credit and

then transferred the resulting accounts receivable to AgriCap

Financial. AgriCap described it as a sale of the accounts

pursuant to a factoring arrangement, but the transaction also

resembled secured lending because AgriCap took a security

interest in the accounts, filed financing statements, and had

recourse against Tanimura if the receivables were

uncollectible. Id. at 799. Tanimura became insolvent

without paying the growers, and the growers sued AgriCap.

Id. at 799–800. The court adopted a transfer-of-risk test to

12 PRODUCE PAY V. IZGUERRA PRODUCE

determine whether the transfer of receivables was part of a

secured loan or a sale. Id. at 813. A secured loan meant that

the receivables were part of PACA trust and therefore gave

the growers priority. Id. at 804. A commercially reasonable

sale would have removed the proceeds from the PACA trust.

Id.

The Tanimura court adopted a two-step inquiry. Id.

at 801. First, a court must determine whether the transaction

is a true sale by primarily looking at whether the transaction

transferred the risk of nonpayment of the receivables to the

buyer as opposed to merely providing a security interest. Id.

at 801–02. Absent a true sale, the assets remain part of the

PACA trust. Id. Second, if it is a true sale, a court must

assess whether the sale is commercially reasonable. Id.

at 802. If it is, the assets are not part of the PACA trust. Id.

The court articulated “a number of factors” that may be

used to assess where the risk was allocated in a factoring

agreement. Id. at 805–06. In particular, it was concerned

with whether the sale of the accounts receivable breached the

PACA trust previously created by the transaction between

the grower and the distributor. Id. at 804–05. The court

noted that this test was proper on a motion for summary

judgment where it “is not perfectly clear,” and “when the

true nature of the transaction is ambiguous.” Id. at 804.

Unlike Tanimura, this case does not involve an accounts

receivable factoring arrangement. It does not appear that

Produce Pay “loaned” the avocados to Izguerra, took a

security interest in Izguerra’s receivables, or filed a

financing statement. Produce Pay alleged that Izguerra

failed to pay for produce that Izguerra itself received from

Produce Pay, while in Tanimura, growers protected by a

PACA trust were suing a third-party for violating the trust.

In other words, Tanimura analyzed whether a sale occurred

PRODUCE PAY V. IZGUERRA PRODUCE 13

to determine whether a PACA trust was violated. But here,

the question is whether Produce Pay is an “unpaid supplier[]

or seller[]” entitled to the protections of a PACA trust in the

first place. 7 U.S.C. § 499e(c)(2).

Furthermore, the Tanimura court found that applying the

transfer-of-risk test was appropriate at the summary

judgment stage, 883 F.3d at 801, while this case arises on a

motion to dismiss. The Tanimura court noted that the

district court, when applying the transfer-of-risk test on

remand, should “use all the tools at its disposal, consistent

with what we have said in this opinion, including the taking

of testimony and making findings of fact, to determine

whether the agreement was in substance a true sale or in

substance a lending agreement.” Id. at 813. Here, no

testimony has been taken nor any discovery conducted as to

the relationship between the growers, Produce Pay, and

Izguerra. A substantive, fact-intensive inquiry into “the

rights and risks transferred between the parties,” is more

suitable after discovery, at summary judgment, especially to

consider the relationship and priority implications between

all parties. Tanimura, 883 F.3d at 805.

Izguerra also argues that we should follow In re Spiech

Farms, LLC (Spiech), where the Sixth Circuit found that

Produce Pay was “ineligible for relief through its PACA

claim.” 840 F. App’x 861, 863 (6th Cir. 2021). 4 Spiech

involved a bankruptcy proceeding where Produce Pay

claimed priority under PACA to Spiech’s assets. Id. There,

Produce Pay gave the grower short-term loans as a partial

advance on later payments the grower was supposed to

4

Both the district court and Izguerra discussed the Western District

of Michigan’s opinion in that case. However, the Sixth Circuit has since

affirmed the district court’s decision, and we review that opinion.

14 PRODUCE PAY V. IZGUERRA PRODUCE

receive from its existing customers (rather than from new

distributors it had identified through Produce Pay’s online

platform). Id. at 864. The grower was then required to repay

the loan plus a commission, which in effect was interest. Id.

After an evidentiary hearing, the bankruptcy court found that

Produce Pay was not a seller in this transaction and,

therefore, not covered by PACA. Id. at 865. The Sixth

Circuit, in an unpublished opinion, applied our Tanimura

transfer-of-risk test and found that Produce Pay was not

protected by PACA. Id. at 867–68.

Much like Tanimura, Spiech applied the transfer-of-risk

test to different facts at a different point in the litigation to

answer a different question than that posed here. Unlike

here, Spiech involved an agreement between the grower and

Produce Pay, rather than the distributor and Produce Pay. Id.

at 863. Additionally, in Spiech, Produce Pay was

functioning as a lender so that the grower could “increase its

cash flow,” rather than as a purchaser of perishable goods.

Id. at 864. In contrast, here Produce Pay does not assert, and

the Distribution Agreement does not appear to create a right

to additional payments over time that could be construed as

interest, rather than as a late payment penalty. Produce Pay

alleges in the instant complaint that it both “buys and sells

wholesale quantities of perishable agricultural

commodities,” and is “engaged in the business of providing

cash flow and alternative financing solutions to fresh

Produce sellers or growers.” Produce Pay is a company that

offers various products and services in the perishable

produce industry, and the transactions alleged here and

considered in Spiech are clearly different.

Finally, Spiech involved a procedural posture much

more analogous to Tanimura than the instant case. The Sixth

Circuit applied the transfer-of-risk test after the bankruptcy

PRODUCE PAY V. IZGUERRA PRODUCE 15

court had already conducted an evidentiary hearing. Id.

at 865. Thus, it made the determination on a record that was

much more developed than what we have in this case.

Spiech does not demonstrate that the fact-intensive transfer-

of-risk test is appropriate at the pleading stage when neither

party has had an opportunity to present evidence or conduct

discovery.

The dissent essentially recognizes that the complaint

adequately pleads that Produce Pay is an unpaid seller or

supplier and that consignment sales are protected

transactions under PACA. Dissent at 26–27. According to

the dissent, the exhibits attached to the complaint

conclusively establish that Produce Pay is not an unpaid

seller, but rather a lender. Dissent at 31–32. This is so

because Produce Pay transferred some of the risk of the

transaction to the consignee, and while it had title to the

avocados, Produce Pay never took possession. The dissent

maintains that the correct analogy is a home mortgage in a

title theory state. The dissent notes that Produce Pay should

be satisfied with other remedies against Izguerra, including

breach-of-contract and tort claims.

The dissent contends that we have not afforded

Tanimura sufficient weight and have been deceived by

Produce Pay’s pleadings. However, Tanimura must be read

against its facts, which varied considerably from this case,

and did not include anything resembling a consignment

transaction. Additionally, the Tanimura court restricted its

holding to factoring agreements, or sales of accounts

receivable to a third party who was not involved in the

transfer of produce. See 883 F.3d at 802, 809, 813. There

simply was no such transaction here. To analogize this case

to that one is to pound a square peg into a round hole.

16 PRODUCE PAY V. IZGUERRA PRODUCE

Beyond the factual differences, Tanimura applied the

“transfer-of-risk” test with the precise and limited purpose

of determining whether the assets were part of a PACA trust.

It did not establish a test for determining who is an unpaid

seller and thus a beneficiary of a PACA trust. Indeed, in

Tanimura, no one disputed who the trust beneficiary was—

we summarily found that the arrangement there “made [the

distributor] a trustee over a PACA trust holding the

perishable products and any resulting proceeds for [the

growers] as PACA-trust beneficiaries.” Id. at 799.

This question of status that was assumed in Tanimura is

what we must squarely answer here. And nothing in PACA

or Tanimura prevents a business from buying produce from

a grower outright, and then supplying that produce to a

distributor in a way such that the business receives PACA

priority. Unlike in Tanimura, Produce Pay is not an external

lender attempting to leapfrog an unpaid grower by enforcing

a security interest it took in Izguerra’s assets. Produce Pay

alleges that it is the supplier or seller of avocadoes, and thus

an internal party to the transaction.

Furthermore, the Tanimura court made clear that the

transfer-of-risk test is appropriate where “the true nature of

the transaction is ambiguous.” Id. at 804. However, this

court must “accept[] as true” the plaintiff’s factual pleadings.

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The dissent

ignores the well-pleaded facts, which on a motion to dismiss

must be taken as true. Instead, while recognizing ambiguity

exists, the dissent focuses on various documentary items

which could cover several different types of transactions,

depending on a particular situation, to determine which

“features predominate.” Dissent at 33. As “it is improper to

[accept the truth of matters asserted in incorporated

documents] only to resolve factual disputes against the

PRODUCE PAY V. IZGUERRA PRODUCE 17

plaintiff’s well-pled allegations in the complaint,” the

dissent errs. Khoja v. Orexigen Therapeutics, Inc., 899 F.3d

988, 1014 (9th Cir. 2018). Produce Pay must simply state a

plausible claim, rather than one that is likely to succeed.

Ashcroft, 556 U.S. at 679; Twombly, 550 U.S. at 555–56.

Furthermore, the dissent relies on Sprewell v. Golden

State Warriors, 266 F.3d 979, 989 (9th Cir. 2001), for the

proposition that the exhibits fatally undermine Produce

Pay’s claims. Dissent at 27 n.3. In that case, however, this

court affirmed the dismissal of race discrimination claims

where the attached arbitration decision (by a neutral

arbitrator after a full hearing and briefing) directly

contradicted the complaint. Sprewell, 266 F.3d at 984, 988–

89. Here, while the dissent may identify certain provisions

it finds compelling, the attached exhibits in this case do not

uniformly or directly contradict Produce Pay’s allegations.

Finally, this court notes that the dissent treats

Tanimura’s transfer-of-risk test as the sole focus of its

inquiry. See Dissent at 30–32. However, Tanimura simply

requires “a threshold true sale test of which the transfer-of-

risk [test] is a key, but not the sole, factor.” 883 F.3d at 801.

The Tanimura court does not appear to suggest that courts

must set aside traditional principles of contract interpretation

when considering PACA claims.

As we find that Produce Pay plausibly alleges a PACA

claim, it is unnecessary to decide whether it was appropriate

for the district court to dismiss the complaint without leave

to amend. We express no opinion on the merits of Produce

Pay’s PACA claims, instead concluding only that,

construing the pleadings in favor of Produce Pay, Tanimura

does not bar Produce Pay from qualifying as an unpaid seller

under PACA as a matter of law.

18 PRODUCE PAY V. IZGUERRA PRODUCE

Accordingly, we REVERSE and REMAND for further

proceedings consistent with this opinion.

M. SMITH, Circuit Judge, dissenting:

PACA protects only “unpaid seller[s] or supplier[s] of

produce,” not financiers who made a bad investment.

7 U.S.C. § 499e(c)(2). With respect, I fear that my

colleagues have been led astray by Produce Pay’s artful

attempts to plead that it was an unpaid seller or supplier

within the meaning of PACA. Although some conclusory

allegations in the complaint may suggest otherwise, plaintiff

Produce Pay was not acting as a simple avocado seller here.

The pleadings as a whole—including especially the exhibits

attached to the complaint and incorporated by reference—

are far more consistent with an alternative financing

arrangement, whereby Produce Pay advanced credit to a

wholesaler and used the avocados and their proceeds as

collateral. Consequently, though it can sue to recover its

investment in contract or tort, it is not entitled to PACA’s

protections. In concluding otherwise, the panel glosses over

the terms of the parties’ contract, ignores PACA’s statutory

purpose, and downplays the importance of our court’s en

banc decision in S & H. Packing & Sales Co. v. Tanimura

Distributing, Inc., 883 F.3d 797 (9th Cir. 2018) (Tanimura).

I therefore respectfully dissent.

I.

Before addressing the specific transaction at issue here,

I begin by addressing what I believe to be the majority’s

most serious error: its treatment of Tanimura. The majority

underreads that decision in concluding that it does not reach

PRODUCE PAY V. IZGUERRA PRODUCE 19

beyond its facts, but then overreads it to conclude it created

a rule that is inapplicable at the pleadings stage.

A.

PACA provides that any produce or proceeds from

produce transactions “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.” 7 U.S.C. § 499e(c)(2).

Congress created this trust remedy for the express purpose

of reducing the “burden on commerce in perishable

agricultural commodities [that] is caused by financing

arrangements” pursuant to which dealers in agricultural

commodities “who have not made payment” for the produce

they have purchased use that same produce as collateral for

lending arrangements. Id. § 499e(c)(1).

Tanimura is our court’s seminal decision on how to

interpret and apply PACA. In Tanimura, we recognized that

PACA was intended to “shield agricultural growers” from

the “risk” of non-payment that occurs when the buyer

defaults, and “banks and other lenders” recover anything

they can on their investments from these buyers. 883 F.3d

at 802–03. Elaborating on this purpose, we explained that:

[Produce sellers ordinarily] operate 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 [pre-existing] law, sellers of fresh

fruits and vegetables [were] unsecured

creditors and receive[d] little protection in

any suit for recovery of damages where a

buyer [had] failed to make payment as

20 PRODUCE PAY V. IZGUERRA PRODUCE

required by contract. . . . Due to a large

number of defaults . . . 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.

883 F.3d at 802–03 (first quoting H.R. Rep. No. 98-543 at *3

(1984), as reprinted in 1984 U.S.C.C.A.N. 405, 407, and

then Endico Potatoes, Inc. v. CIT Grp./Factoring, Inc.,

67 F.3d 1063, 1067 (2d Cir. 1995)).

In light of PACA’s text, history, and purpose, Tanimura

laid out “the proper analysis to apply when the true nature of

[a] transaction is ambiguous—i.e. when it resembles a sale

in some respects and yet looks like a secured transaction in

others.” Id. at 804. As the majority explains, Tanimura

involved a so-called “factoring” transaction. Defendant

Tanimura purchased produce from the grower plaintiffs for

re-sale to third-party buyers, and then sold the accounts

receivable from the sale to defendant AgriCap for quick cash

at a slight discount. See id. at 799–800 & n.2. While this

transaction was “described as a sale of accounts,” the

growers argued that it was effectively a secured loan, noting

among other facts that AgriCap could force a “repurchase”

of the receivables from Tanimura in the event of non-

payment by the buyers. Id. at 799–800. On this theory, the

receivables remained in the PACA trust because they had

been pledged as collateral for cash rather than exchanged for

other assets. See id. at 800. 1

1

This mattered in Tanimura because a PACA trustee has a fiduciary

obligation “to ensure all trust beneficiaries are paid before the lender

collects.” Id. at 812. If AgriCap had indeed made a loan to Tanimura

PRODUCE PAY V. IZGUERRA PRODUCE 21

Tanimura held that, consistent with authority from other

circuits, courts must look beyond the “labels” used by the

parties to determine whether a “true sale” or a loan had

occurred. Id. at 813. That distinction is drawn by looking at

the substance of the transaction, especially how the parties

allocated the risk of loss. See id.

B.

Perhaps recognizing that Tanimura’s focus on substance

over form does not bode well for its analysis, the majority

attempts to cabin Tanimura to its facts, suggesting that (1) it

applies only to factoring agreements and (2) that whether

Produce Pay was conducting a “sale” within the meaning of

PACA does not impact whether Produce Pay was a “seller”

protected by PACA. The second of these arguments is

illogical on its face, and one wonders why Tanimura’s broad

declarations about the need to focus on substance over form

to effectuate PACA’s purpose would apply to only some

parts of the statute, but not others. Framed either as a

question about whether a party has engaged in a sale or as a

question about whether that party was a seller, the point of

the transfer-of-risk test is to determine “the substance of the

relationship” between the parties. Id. at 807 (quoting Reaves

Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336 F.3d

410, 414 (5th Cir. 2003)). When applying the transfer-of-

risk test, if “the relationship between [the parties is] that of a

secured lender and debtor, not a seller and buyer,” it makes

and then enforced that loan by demanding a cash “repurchase” of the

receivables, the result would have been that AgriCap—a mere lender—

would have received payment before the produce growers, resulting in a

breach of the PACA trust. See id.

22 PRODUCE PAY V. IZGUERRA PRODUCE

no sense to conclude that one of the parties is nonetheless a

“seller” protected by PACA. Reaves, 336 F.3d at 414.

As for the majority’s first claim, Tanimura did, of

course, involve a factoring transaction, so it is unsurprising

that some of its language reflects this fact. See, e.g., id. at

809 (“We conclude that this transfer-of-risk test should be

applied to avoid reliance on labels in factoring agreements

that would defeat the purposes of PACA.” (emphasis

added)). However, Tanimura’s overall language is much

broader. Our opinion extensively discussed PACA’s

legislative history and express Congressional purpose,

concluding that PACA is intended to protect agricultural

growers against the interests of lenders. See id. at 802–03.

We were unequivocal that, “[g]iven this history, it is evident

that our focus should be upon the true nature of the

transactions at issue and the true nature of the parties’

roles—that of seller and buyer or that of secured lender and

borrower.” Id. at 803. “[C]ourts must focus on the true

substance of PACA-related transactions and not on artificial

indicators or labels,” because “[i]t runs counter to PACA and

its history to allow the simple use of the words ‘sale,’

‘purchase,’ or ‘factoring agreement’ to be central for

purposes of assessing the relative rights of lenders and

produce growers.” Id. at 808.

None of this language is limited to factoring transactions.

To the contrary, we disapproved of relying “on labels” over

substance, holding that a focus on form over economic

substance would “defeat the purposes of PACA.” Id. at 809.

PACA’s text provides no indication that factoring

agreements are somehow special (nor does the majority

provide any principled reason why this should be the case),

suggesting instead that Congress drew a broader distinction

between financiers and those playing a more direct role in

PRODUCE PAY V. IZGUERRA PRODUCE 23

the agricultural supply chain. See 7 U.S.C. § 499e(c)(1)&(2)

(distinguishing “unpaid sellers and suppliers” from

“lenders” and others involved in “financing arrangements”).

C.

In another attempt to distinguish Tanimura, the majority

latches onto the fact that our decision in Tanimura occurred

at the summary-judgment stage, and the fact that we

remanded the case to the district court with instructions to

apply the transfer-of-risk test in the first instance, to divine a

new rule that the transfer-of-risk test is inapplicable at the

pleadings stage. Tanimura held no such thing, nor has the

majority been able to identify any other decision in support

of its new rule. In general, we have declined to create

categorical rules that an issue cannot be resolved at the

pleadings stage, even if the issue is fact-sensitive and often

benefits from further development of the record. See, e.g.,

PLS.Com, LLC v. Nat’l Ass’n of Realtors, 32 F.4th 824, 2022

WL 1218792, at *10 (9th Cir. 2022) (rejecting the argument

that defining the relevant market and determining whether a

practice is anticompetitive for an antitrust claim are “fact-

bound issues not susceptible to resolution on a motion to

dismiss”); Wong v. United States, 373 F.3d 952, 957 (9th

Cir. 2004) (explaining that a qualified immunity defense

may be raised at the pleadings stage in civil rights cases

despite the difficulties of “decid[ing] far-reaching

constitutional questions on a nonexistent factual record”);

Saved Magazine v. Spokane Police Dep’t, 19 F.4th 1193 (9th

Cir. 2021) (upholding dismissal of complaint based on

qualified immunity); Weisbuch v. Cnty. of Los Angeles,

119 F.3d 778, 783 & n.1 (9th Cir. 1997) (recognizing that

“factual development” is sometimes necessary to apply

First-Amendment balancing test, but rejecting as “illogical”

24 PRODUCE PAY V. IZGUERRA PRODUCE

the argument that this test cannot be applied at the pleadings

stage).

To the contrary, we have recognized that “[w]hether [a]

case can be dismissed on the pleadings depends on what the

pleadings say. [A] plaintiff may plead herself out of court.

If the pleadings establish facts compelling a decision one

way, that is as good as if depositions and other expensively

obtained evidence on summary judgment establishes the

identical facts.” Weisbuch, 119 F.3d at 783 n.1 (cleaned up);

accord Cline v. Indus. Maint. Eng’g & Contracting Co.,

200 F.3d 1223, 1232 (9th Cir. 2000) (a plaintiff can “plead[]

himself out of court” by alleging facts that show he has “no

claim” (quoting Thomas v. Farley, 31 F.3d 557, 558–59 (7th

Cir. 1994))).

As an illustration, it is hard to imagine that we could

characterize a bank as a seller protected by PACA if it filed

a complaint alleging that it lent money to a produce

purchaser: in that case, it would be apparent from the face of

the complaint that the bank had no PACA claim. That claim

would become no more plausible if the bank’s pleadings

contained essentially the same facts evincing a loan

transaction, but added conclusory legal allegations that the

transaction was a “sale” and that the bank was a “seller”

within the meaning of PACA. See, e.g., Whitaker v. Tesla

Motors, Inc., 985 F.3d 1173, 1176 (9th Cir. 2021) (“well-

pleaded facts,” not “legal conclusions,” are necessary to

survive a Rule 12(b)(6) motion (citing Ashcroft v. Iqbal,

556 U.S. 662, 679 (2009); Bell Atlantic Corp. v. Twombly,

550 U.S. 544, 570 (2007))); see also Tanimura, 883 F.3d

at 808–09 (the labels the parties place on their transaction do

not control over the substance of the transaction).

Additionally, contrary to the majority’s assertion,

Tanimura did not instruct the district court that it “should”

PRODUCE PAY V. IZGUERRA PRODUCE 25

engage in further factfinding; it said that “the district court

may use all the tools at its disposal . . . including the taking

of testimony and making findings of fact.” 883 F.3d at 813

(emphasis added). This was permission, not a command.

See also id. at 813 n.13 (giving the district court “discretion

to determine the appropriate procedure for conducting” the

transfer-of-risk inquiry).

In fact, on remand, there was ultimately “no suggestion

by the parties” that any additional fact-finding procedures

were necessary. S & H Packing & Sales Co. v. Tanimura

Distrib., Inc., No. 08-cv-5250, 2018 WL 6011546, at *7

(C.D. Cal. Sept. 17, 2018) (noting that all relevant evidence

was presented the parties’ summary judgment briefs). The

district court did not find the case to be “a ‘difficult’ one,”

and concluded that the transaction was a loan. Id. Its

analysis focused on the structure of the parties’ agreement,

with special attention to the financial terms, emphasizing

that what “matters” is “the structure of the agreement, [i.e.]

the rights that are afforded to the buyer/lender” rather than

more fact-sensitive matters such as the parties’ course of

dealing. Id. This conclusion is fully consistent with our

court’s opinion, which focused on transfer of legal risk (i.e.,

by contractual formality) rather than a blow-by-blow

account of how the transaction unfolded.

As I explain in more detail below, Produce Pay’s and

defendant Izguerra’s agreement, along with other attached

documents and factual allegations in the complaint, supply

enough information to conduct that analysis here. 2 The facts

2

Produce Pay’s appellate briefing further betrays that this case is

appropriate for resolution at the pleadings stage without further

discovery. See Whitaker, 985 F.3d at 1177 (“[C]omplaints must

plausibly suggest an entitlement to relief, such that it is not unfair to

26 PRODUCE PAY V. IZGUERRA PRODUCE

that may be drawn from the pleadings as a whole evince a

loan transaction rather than sale, despite Produce Pay’s

conclusory allegations that it was the seller in a consignment

sale. See Iqbal, 556 U.S. at 679; Twombly, 550 U.S. at 570;

Cooper v. Pickett, 137 F.3d 616, 622 (9th Cir. 1997)

(“[M]aterial which is properly submitted as part of the

complaint may be considered on a motion to dismiss.”).

II.

Turning to the specifics of this case, I do agree with the

majority on two points. First, “While PACA protects the

interests of suppliers and sellers of produce, it does not

protect the interests of lenders.” Second, as a consequence,

the relevant question in this appeal “is whether Produce Pay

was an ‘unpaid supplier[] or seller[]’ under PACA” for

purposes of this transaction. See 7 U.S.C. § 499e(c)(2).

Unfortunately, I cannot agree with how the majority answers

this question.

A.

If the court’s task were to consider the complaint in

isolation, without looking to any of the attached exhibits, a

case could be made that Produce Pay adequately pleaded it

was an unpaid seller. The complaint describes Produce Pay

not as a provider of financing solutions, but as a Los

Angeles-based wholesaler of avocados and other produce. It

alleges that Produce Pay entered into an agreement with

require the opposing party to be subjected to the expense of discovery

and continued litigation.” (cleaned up)). It offers no additional facts that,

if properly pleaded, could show this was a sale rather than a loan. For

that same reason, I would affirm the district court’s decision to dismiss

this case without leave to amend. See Leadsinger, Inc. v. BMG Music

Pub., 512 F.3d 522, 532 (9th Cir. 2008).

PRODUCE PAY V. IZGUERRA PRODUCE 27

defendant-appellee Izguerra Produce, Inc. to sell avocados

to third parties. Throughout the complaint and the attached

contract, the arrangement between Produce Pay and Izguerra

is described as a “consignment” transaction, meaning “[a]

sale of an owner’s property . . . by a third party entrusted to

make the sale,” Sale, Black’s Law Dictionary (11th ed. 2019)

(citing UCC § 9-102(a)(20)). It is undisputed that PACA

and its implementing regulations treat consignment sales as

protected transactions. See, e.g., 7 U.S.C. § 499b(2), (4);

7 C.F.R. § 46.2(aa)(1), (2).

However, Produce Pay’ complaint references several

attached exhibits—including its contract with Izguerra and

invoices sent during the parties’ transaction—that contradict

its claim that it was an unpaid seller rather than a financier.

Even at the pleadings stage, we may—and should—consider

these documents (as well as any matters properly subject to

judicial notice) to the extent they contradict the allegations

in the complaint. See, e.g., Gonzalez v. Planned Parenthood

of Los Angeles, 759 F.3d 1112, 1115 (9th Cir. 2014)

(“Although we normally treat all of a plaintiff’s factual

allegations in a complaint as true, we ‘need not . . . accept as

true allegations that contradict matters properly subject to

judicial notice or by exhibit.’” (quoting Sprewell v. Golden

State Warriors, 266 F.3d 979, 988 (9th Cir. 2001), and

collecting cases)). 3

3

The majority quotes Khoja v. Orexigen Therapeutics, Inc., for the

proposition that “it is improper” to rely on incorporation by reference

“only to resolve factual disputes against the plaintiff’s well-pled

allegations in the complaint.” 899 F.3d 988, 1014 (9th Cir. 2018). Khoja

did not disturb our line of cases that discuss “contradictions” between

pleadings and documents attached to these pleadings, such as Gonzalez

and Sprewell. Moreover, reading our statement from Khoja in context,

it is clear we were concerned with situations where a defendant cherry-

28 PRODUCE PAY V. IZGUERRA PRODUCE

Specifically, the complaint alleges that Produce Pay

bought “approximately 40,000 pounds” of avocados from

sellers in Mexico, and then “entrusted” them to Izguerra to

sell to buyers located in California, among other places.

Both the complaint and the contract indicate that the

avocados were shipped directly from the growers to

Izguerra, without Produce Pay ever physically possessing

them. The contract indicates that the avocados were shipped

to Izguerra at the very beginning of the transaction. If

Izguerra accepted the shipment, it was supposed to indicate

that by uploading shipping documents on Produce Pay’s

online platform. Only then would Produce Pay “take title”

to the avocados and, at “its sole discretion,” “remit a first

payment” to the growers. Produce Pay also had the right to

send Izguerra an invoice at this point in the transaction.

picks between numerous incorporated documents from which competing

inferences can be drawn to dispute a plaintiff’s otherwise well-pleaded

factual assertions. See, e.g., id. at 1002 (“The district court’s reasoning

here again demonstrates the danger in incorporating documents en masse

into complaints. Once documents are incorporated into a complaint, a

district court faces competing, often inconsistent versions of the facts.

Although plaintiffs are ordinarily afforded the benefit of every favorable

inference, the incorporation-by-reference doctrine can allow defendants

to exploit that benefit for themselves.”).

Khoja did not involve a situation such as this where the attached

documents provide additional facts omitted from the complaint that

“fatally undermine[]” the plaintiff’s claims. Sprewell, 266 F.3d at 988

(holding district court properly considered attached arbitration award at

the pleadings stage); see also Khoja, 899 F.3d at 1002 (explaining that

the incorporation-by-reference doctrine is supposed to “prevent[]

plaintiffs from selecting only portions of documents that support their

claims, while omitting portions of those very documents that weaken—

or doom—their claims”); id. at 1003 (noting that this doctrine “is

designed to prevent artful pleading”).

PRODUCE PAY V. IZGUERRA PRODUCE 29

Produce Pay retained title to the avocados until Izguerra sold

them.

However, the contract attached to the complaint provides

details about the business terms of the parties’ agreement

that contradict the complaint’s conclusory allegations. On

top of a “Marketplacing Commission” earned for

introducing Izguerra to its approved suppliers, Produce Pay

was entitled to all proceeds from the eventual sale of the

avocados, minus a “Distributor’s Commission” pocketed by

Izguerra and deductions for certain expenses. If Izguerra

sold the avocados for less than the amount it owed Produce

Pay for them, it had to forfeit as much of its profits as

necessary to make up the deficit. The parties’ contract also

shifted “all default risk” to Izguerra, meaning that Izguerra

was required to “compensate” Produce Pay if the third-party

buyers failed to make payment after taking possession of the

avocados.

Consistent with these terms, Produce Pay sent a

$70,5600 invoice to Izguerra after it confirmed receipt of the

avocados. Izugerra sold the avocados but ultimately

remitted only $15,000 to Produce Pay, resulting in an

outstanding invoice for $63,786.56 including interest and

attorneys’ fees.

The district court correctly concluded that this

transaction is more aptly categorized as a secured financing

arrangement rather than a sale. Tanimura held that courts

must “apply a threshold true sale test for which the transfer-

of-risk is a primary factor” in order to determine whether a

given transaction is a sale or a loan. Id. at 813. Factors

relevant to assessing the parties’ transfer of risk include (but

are not necessarily limited to) “[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

30 PRODUCE PAY V. IZGUERRA PRODUCE

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.” Tanimura, 883 F.3d

at 808 (quoting Endico Potatoes, 67 F.3d at 1068) (brackets

in original).

“Transfer of risk” simply refers to the different ways risk

is allocated in a sale versus a loan. See Tanimura, 883 F.3d

at 808–09. Put simply, a true sale involves a direct

assumption of risk by one of the parties, while a lender’s risk

is only indirect. To use an example discussed in Tanimura,

in a simple sale of receivables, the seller would end up with

cash and the buyer would end up with the right to collect

payment from a third party. Id. In this example, the entire

risk of a default by that third party would be borne by the

buyer. Id. In a cash loan secured by receivables, however,

the borrower would still be liable to the lender in the event

of a default. See id.

In a consignment sale, the consignor entrusts goods to a

consignee to sell goods to a third party. See, e.g., Sale,

Black’s Law Dictionary (11th ed. 2019) (citing UCC § 9-

102(a)(20)). This does not create an ordinary security

interest in the goods. See, e.g., UCC § 9-102(a)(20)(D)

(consignment “does not create a security interest that secures

an obligation”). Instead, a consignment arrangement is best

described as a bailment: unless the consignee is able to sell

the goods to a third party, it is not obligated to pay the

consignor, who retains legal title to the goods even as the

consignee takes possession of them. See, e.g., In re Pettit

Oil Co., 917 F.3d 1130, 1133–34 (9th Cir. 2019) (citing

5 Collier on Bankruptcy ¶ 541.05[1][b] (16th ed.) (2018))

(but holding that consignee is treated as owner of consigned

PRODUCE PAY V. IZGUERRA PRODUCE 31

goods when determining creditors’ rights in bankruptcy).

So, the consignor bears a direct risk of a default by the buyer

after the consignment agent conveys the goods.

By contrast, the contract here expressly shifted “all

default risk of any purchaser” to Izguerra, the alleged

consignee. As discussed, the contract required Izguerra to

pay the full purchase price for the avocados to Izguerra even

if the third-party buyer defaulted or ended up paying much

less for the goods. Izguerra had to make up any deficits by

reducing its own commission from the eventual sale and, if

even that was not enough, reduce its profits from future

sales. Produce Pay also had the right to demand payment

from Izguerra for any outstanding deficits.

Moreover, unlike an ordinary seller of goods, Produce

Pay never seems to have had any direct risk for the avocados

in the first place. Both the complaint itself and the contract

show that Izguerra took possession of the avocados directly

from the growers. The contract indicates that Produce Pay

did not even take legal ownership of the avocados until after

Izguerra had already accepted them for resale. The

complaint itself admits that the growers sent an invoice

directly Izguerra to establish the value of the avocados

before Produce Pay sent its own invoice for the same

amount.

This arrangement bears striking similarities to a typical

home mortgage, which is a classic secured loan. In a

mortgage, banks typically take only a security interest in the

home, which may be in the form of a bare legal title

depending on the jurisdiction, rather than taking the riskier

route of buying a home outright and then attempting to resell

it. See, e.g., 59 C.J.S. Mortgages § 241 (West 2021).

Likewise, Produce Pay never had more than a bare legal title

to the avocados. Instead, Produce Pay mainly played a

32 PRODUCE PAY V. IZGUERRA PRODUCE

financing role here. The arrangement allows Produce Pay to

make immediate payments to the growers while Izguerra

was charged interest for any delays in repayment. That is

consistent with solving a common problem in the

agricultural supply chain, namely that growers may have

difficulty trusting the credit of their buyers. As Tanimura

recognized, growers frequently sell their wares on credit.

See 883 F.3d at 802–03. If their buyers fail to resell the

produce at a profit, there may be no funds available to pay

back the growers. As a result, unless buyers seeking to re-

sell agricultural commodities can assure the growers that

they are going to get paid, the growers may be unwilling to

strike a deal.

The business terms supplied by Produce Pay provide a

financing solution to this dilemma, effectively providing

Izguerra with credit to purchase avocados for resale by

simultaneously promising the growers an advance on the

sale proceeds. As explained, however, Produce Pay assumes

no legal risk in the event that the proceeds are insufficient,

shifting all of this risk to Izguerra. The only risk it faces is

one that is familiar to lenders everywhere: the risk that the

debtor (here, Izguerra) will default on its payment

obligations. Though Produce Pay is free to seek other

remedies for Izguerra’s default—including pursuing its the

breach-of-contract and tort claims asserted in its

complaint—PACA is not the correct instrument to recover

its investment.

B.

The majority resists the conclusion that the transaction

here was a loan rather than a sale in three ways, none of

which is persuasive. First, the majority contends that

Tanimura’s transfer-of-risk test is inapplicable. As

PRODUCE PAY V. IZGUERRA PRODUCE 33

previously explained, that is not accurate. See Parts I.B &

I.C, supra.

Second, the majority says that the complaint “alleges

facts that resemble a consignment transaction.” (Emphasis

added.) In addition to discussing the parties’ payment terms,

the majority notes that Produce Pay “alleges that it sold

approximately 20 tons of avocados to Izguerra through its

online platform for Izguerra ‘to sell on consignment.’” At

the threshold, we acknowledged in Tanimura that the

transaction before us there had “features both of a sale and

of a loan,” remanding to the district court to apply the

transfer-of-risk test in the first instance and decide which

characterization made more sense. 883 F.3d at 813.

Consequently, the question is not whether the transaction

here “resemble[s]” a consignment sale in some respects, but

rather whether its sale-like features or its loan-like features

predominate. Tanimura specifically instructs that the

“labels” the parties put on a transaction are not

determinative. 4 Id. As a result, the fact that the parties’

agreement calls the transaction a consignment sale, and the

fact that Produce Pay is referred to as “a bona fide

purchaser,” are of no moment.

Finally, relying on facts taken from a law review article

and un-pleaded assertions by amici, the majority says that it

is important to move agricultural commodities quickly due

to the perishable nature of the goods, and concludes that the

fact that Produce Pay never had physical possession of the

avocados is of minimal relevance. What the majority leaves

4

But to the extent that labels do matter, it is worth noting that even

though Produce Pay calls the overall transaction a consignment sale, the

parties’ contract also twice describes Produce Pay’s services as

“alternative financing.”

34 PRODUCE PAY V. IZGUERRA PRODUCE

unexplained is how Produce Pay could be a “seller” of goods

that it never possessed at any point in the transaction and

only took legal title to after possession had passed to the

purported buyer, Izguerra.

The Sixth Circuit’s unpublished decision in In re Spiech

Farms, LLC, 840 F. App’x 861 (6th Cir. 2021), which

involved another loan by Produce Pay that was structured to

look like a sale, is instructive on this point. Contrary to the

majority’s assertions, the transaction in Speich was

remarkably similar to the transaction here.

In Spiech—which was a bankruptcy case—the debtor

listed produce for “sale” on Produce Pay’s online platform,

after which Produce Pay could “buy” the produce for half its

value and assume legal ownership of it. Id. at 864. In reality,

this was a short-term loan rather than a purchase, as the

debtor had already delivered the produce to its customers by

the time it notified Produce Pay that the produce was “for

sale.” Id. The “expectation” was that the debtor would repay

Produce Pay after it received payments from its customers,

but, as in this case, the debtor had to repay Produce Pay

regardless, reducing its own profits as necessary. Id.

The Sixth Circuit held that this arrangement was a loan

because Produce Pay had in effect shifted all the risk of the

transaction to the debtor, see id. at 866–87, and because

Produce Pay could not have sold something that it never

really owned, see id. at 866. As in this case, Produce Pay

never took possession of the produce and only learned which

goods had been sold after the buyer—i.e., the debtor’s

customers in Spiech, and Izguerra here—notified Produce

Pay of a delivery in the online platform. See id.

Consequently, Produce Pay could not have been the true

seller or supplier of the produce. Id. (citing Uniform

Commercial Code § 204-1(1), (3)). So, too, here: “the

PRODUCE PAY V. IZGUERRA PRODUCE 35

Agreement did not explicitly identify what produce would

be sold, and Produce Pay only learned what produce was ‘for

sale’ after it was registered on its platform;” “by the time

Produce Pay ‘bought’ the produce [to ‘sell’ to Izguerra], it

was already delivered to [Izguerra];” and “Produce Pay did

not receive a document of title until it was too late—after

[Izguerra] possessed the produce.” Id. In both cases,

Produce Pay never bore any real risk for the produce, either

before or after it changed hands.

The majority’s efforts to distinguish Speich factually are

unpersuasive. For example, the majority avers that, unlike

in the Speich transaction, there is nothing here that “could be

construed as interest, rather than as a late payment penalty.”

To start, this creates a false dichotomy: interest often

functions as a late-payment penalty for a loan (interest on

credit-card debt is a classic example). More to the point,

Produce Pay’s complaint expressly alleges that Izguerra was

on the hook for “interest . . . at the rate of 1.5% per month

(18% per annum), or the maximum rate allowable under

applicable law, until such time as full payment is received”

on any “past-due” amounts. This portion of the complaint

cites to an attached invoice that states this same interest rate,

lists Izguerra as the “[d]ebtor,” and calculates “[a]ccrued

[i]nterest” as of the [p]ast [d]ue” date. The majority’s other

purported points of distinction fail because they rely on

irrelevant differences (for example, that this case involves an

agreement with a grower rather than a distributor) and

question-begging statements (asserting in a conclusory

fashion that Produce Pay was functioning as a lender in

Speich, but not here, and that the transactions are “clearly

different”).

One final observation about Speich is in order. Whatever

else can be said about the transaction at issue in that case, it

36 PRODUCE PAY V. IZGUERRA PRODUCE

was not a factoring transaction, and the majority does not

claim that it was. And while the majority accuses me of

trying to “pound a square peg into a round hole” by applying

Tanimura’s transfer-of-risk test to a non-factoring

transaction, the Sixth Circuit did precisely that in Speich.

See 840 Fed. App’x at 867 (citing, inter alia, Tanimura,

883 F.3d at 808). In fact, it expressly rejected a similar

argument to narrow the scope of Tanimura and similar

decisions by our sister circuits, observing that in all these

cases, the ultimate purpose of the transfer-of-risk test was

“to resolve the parties’ contentions regarding their

contractual relationship.” Id. at 867 n.2. As in Speich,

“Produce Pay does not convincingly explain why [we]

should abstain from engaging in such analysis” here. Id.

III.

Before concluding, I briefly address Produce Pay’s and

amici’s policy argument that a ruling in Izguerra’s favor

would effectively remove all consignment sales from

PACA’s protections, defeating the purpose of PACA and

disrupting global supply chains. That is pure hyperbole. For

one, Produce Pay remains perfectly free to pursue its breach-

of-contract and tort claims against Izguerra in state court,

even if it can no longer make a federal case out of Izguerra’s

outstanding invoices. 5 Additionally, neither the approach

taken in my dissent nor the district court’s approach treat

consignment sales as falling outside PACA’s protections;

the foregoing analysis properly focuses on the risk-shifting

provisions of the parties’ agreement in this specific

5

Produce Pay’s complaint invokes federal question jurisdiction.

The apparent amount in controversy ($63,786.56) is below the $75,000

threshold for diversity jurisdiction. See 28 U.S.C. § 1332(a).

PRODUCE PAY V. IZGUERRA PRODUCE 37

transaction, and ensures that true consignment sales are

protected by PACA.

More importantly, PACA’s basic purpose would not be

undermined by holding that Produce Pay is outside the

statute’s protections here. There is no dispute that the

original growers here are sellers of produce, and therefore

beneficiaries of a PACA trust. Consequently, the primary

result of holding that Produce Pay is not a seller or supplier

would be that the original growers would have a superior

claim to proceeds from the avocados in the event that

Izguerra files for bankruptcy. That is fully consistent with

Congress’s intent to protect produce growers from claims by

lenders. See 7 U.S.C. § 499e(c)(1) & (2).

IV.

In sum, the district court properly looked beyond the

labels the parties assigned to their transaction and concluded

that Produce Pay has failed to plead that it was an “unpaid

supplier[] or seller[]” of produce protected by PACA.

7 U.S.C. § 499e(c)(2). That conclusion should be

unsurprising. Produce Pay advertises itself as “the fastest-

growing provider of capital, market insights, and trade

protection for growers of fresh produce.” 6 It says that it

provides alternative financing “solutions” to produce

growers—including “financing . . . for consignment

sales”—that do away with the “need to pledge land as

6

About Us, Produce Pay, https://producepay.com/about-us/. The

existence of statements made on Produce Pay’s website is a proper

subject of judicial notice. See, e.g., Arroyo v. AJU Hotel Silicon Valley

LLC, No. 20-CV-08218-JSW, 2021 WL 2350813, at *2 (N.D. Cal. Mar.

16, 2021).

38 PRODUCE PAY V. IZGUERRA PRODUCE

collateral.” 7 For example, Produce Pay offers “[p]re-harvest

grower financing without using land as collateral, with

funding in under 2 weeks.” 8 “Unlike a traditional bank

loan,” Produce Pay says on its website, “our pre-harvest

financing is specifically designed for fresh produce

growers.” 9 Produce Pay also offers so-called “Quick-Pay

Financing [f]or perishable fruits and vegetables” whereby

produce growers received “up to 96% of their shipment’s

value 24 HOURS after their buyer confirms” receipt of any

produce sold. 10 This is said to allow growers to “[f]ocus on

selling, not financing[:] We pay the grower, you pay us once

the product sells.” 11

It is apparent from the complaint and attached exhibits

that Produce Pay was playing a financing role here. Because

the majority’s contrary conclusion results only from its

refusal to properly apply Tanimura and scrutinize the terms

of the parties’ business dealings, I would affirm the district

court. I respectfully dissent.

7

Financing, Produce Pay, https://producepay.com/financing/.

Pre-Season Financing, Produce Pay, https://producepay.com/pre-

8

season-financing/.

9

Id.

Quick-Pay Financing, Produce Pay, https://producepay.com/

10

quick-pay-financing/.

11

Id.