1 2 3 4 5 6 UNITED STATES DISTRICT COURT 7 FOR THE EASTERN DISTRICT OF CALIFORNIA 8 9 GREENGATE FRESH, LLLP, et al., Case No. 2:18-cv-03161-JAM-JDP 10 Plaintiffs, FINDINGS AND RECOMMENDATIONS

THAT INTERVENOR’S MOTION FOR

11 v. DEFAULT JUDGMENT BE GRANTED 12 TRINITY FRESH PROCUREMENT, OBJECTIONS DUE IN 14 DAYS LLC, et al., 13 ECF No. 17 Defendants. 14 15 Consolidated plaintiffs are creditors and beneficiaries under the trust provisions of the 16 Perishable Agriculture Commodities Act (“PACA”), 7 U.S.C. § 499e(c)(2). See ECF No. 1. On 17 February 28, 2019, the court issued a preliminary injunction to preserve PACA trust assets and 18 allow plaintiffs to collect payment. See ECF No. 47. Plaintiffs then served intervenor Produce 19 Pay, Inc., with a demand for payment and discovery requests. See ECF No. 76 at 10. On April 20 22, 2019, intervenor filed a Complaint in Intervention for Declaratory Judgment under 28 U.S.C. 21 § 2201(a), seeking to clarify the rights and legal relations between intervenor and the three 22 defendants: Trinity Fresh Procurement, LLC; Trinity Fresh Management, LLC; and Trinity Fresh 23 Distribution, LLC. Id. at 2-3. In particular, intervenor seeks to establish that the accounts 24 receivable purchased by intervenor do not qualify as PACA trust res. See id. at 5-6. 25 On October 27, 2019, defendants’ authorized agent was served with a copy of the 26 summons and intervenor complaint by a process server, and defendants were mailed copies. ECF 27 Nos. 144, 145, 146. Defendants did not timely answer the intervenor complaint. On March 3, 28 2020, the clerk of the court entered defendants’ default. ECF No. 151. On March 1, 2021, 1 intervenor moved for default judgment against defendants, seeking entry of a declaratory 2 judgment. ECF No. 159 at 2. The motion was scheduled for a hearing on April 1, 2020. 3 Defendants did not appear.1 4 I recommend that the court grant intervenor’s motion for default judgment, ECF No. 159, 5 and enter a declaratory judgment establishing that: (1) the factoring agreement between 6 intervenor and defendants constituted a true sale of specified produce-related accounts receivable, 7 (2) intervenor’s payment of the agreed-upon purchase price to defendants extinguished any and 8 all PACA trust rights or obligations that may have been impressed on the produce-related 9 accounts receivable, and (3) the agreed-upon purchase price for each produce-related account 10 receivable was commercially reasonable. 11 I. DISCUSSION 12 “When a party against whom a judgment for affirmative relief is sought has failed to plead 13 or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the 14 party’s default.” Fed. R. Civ. P. 55(a). Federal Rule of Civil Procedure 55(b)(2) allows a court to 15 enter judgment against a party that has defaulted. The decision to do so is “discretionary,” 16 Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980), but guided by several factors. As a 17 preliminary matter, courts must assess the adequacy of service on the party against whom the 18 default judgment would be entered. See Cranick v. Niagara Credit Recovery, Inc., No. 1:13-CV- 19 671-LJO-GSA, 2014 WL 325321, at *1 (E.D. Cal. Jan. 28, 2014); see also Omni Capital Int’l., 20 Ltd. v. Rudolf Wolff & Co., 484 U.S. 97, 104 (1987) (“[B]efore a federal court may exercise 21 personal jurisdiction over a defendant, the procedural requirement of service of summons must be 22 satisfied.”). 23 Service on defendants was appropriate, and the clerk properly entered their default on 24 March 3, 2020. See ECF No. 151. Federal Rule of Civil Procedure 4(h) allows service on a 25 corporation to occur by “by delivering a copy of the summons and of the complaint to an officer, 26 a managing or general agent, or any other agent authorized by appointment or by law to receive 27 1 Plaintiffs’ counsel appeared on April 1, 2020, in order to inform the magistrate court that 28 plaintiffs do not object to the court granting intervenor’s motion for default judgment. 1 service of process and—if the agent is one authorized by statute and the statute so requires—by 2 also mailing a copy of each to the defendant.” Here, the summons and complaint were served 3 personally on an authorized agent and mailed to defendants on October 27, 2019. ECF Nos. 144, 4 145, 146. Since being served, defendants have filed no pleadings and have not otherwise shown 5 an intent to contest intervenor’s claims. Therefore, when defendants failed to respond, they 6 defaulted. 7 Defendants’ default does not by itself entitle intervenor to a court-ordered judgment. I 8 must consider discretionary factors before rendering a decision, including: (1) possible prejudice 9 to the intervenor, (2) the merits of intervenor’s claim, (3) the sufficiency of the complaint, (4) the 10 sum of money at stake, (5) the possibility of a factual dispute, (6) whether the default was 11 potentially due to excusable neglect, and (7) the general policy that cases be decided on the 12 merits.2 See Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1986). In considering these 13 factors, “the factual allegations of the complaint, except those relating to the amount of damages, 14 will be taken as true.” Geddes v. United Fin. Group, 559 F.2d 557, 560 (9th Cir. 1977). I 15 consider the Eitel factors in turn: 16 a. Prejudice 17 Intervenor seeks declaratory relief to clarify legal rights and obligations between the 18 parties, but defendants have not filed any responsive pleadings. As argued by intervenor, if 19 questions about the parties’ rights and obligations were to remain unresolved, it could cause 20 “uncertainty in factoring transactions with future potential produce dealers who wish to factor 21 their produce-related accounts receivable, which could needlessly deter produce dealers from 22 doing business with [intervenor] in the future.” ECF No. 159 at 15. Entry of default judgment 23 would prevent this possible prejudice to intervenor. See Eitel, 782 F.2d at 1471-72. 24 b. Merits and Sufficiency of Allegations 25 As for factors two and three, intervenor sufficiently pled factual allegations that— 26 2 The court’s analysis of the Eitel factors is not impacted by the fact that intervenor seeks 27 declaratory relief. See, e.g., Maxum Indem. Co. v. Kaur, No. 1:17-CV-01467-LJO-JLT, 2019 WL 7605677, at *1-2 (E.D. Cal. Jan. 9, 2019); JPMorgan Chase Bank, N.A. v. Yamassee Tribal 28 Nation, No. 1:17-CV-00759-LJO-EPG, 2018 WL 3629940, at *4 (E.D. Cal. July 30, 2018). 1 accepted as true—entitle intervenor to the declaratory judgment sought. “[I]n a case of actual 2 controversy within its jurisdiction,” a court may “declare the rights . . . of any interested party 3 seeking such declaration.” 28 U.S.C. § 2201(a); see also McGraw-Edison Co. v. Preformed Line 4 Prod. Co., 362 F.2d 339, 342 (9th Cir. 1966) (“The purpose of the Declaratory Judgment Act is to 5 afford an added remedy to one who is uncertain of his rights and who desires an early 6 adjudication thereof without having to wait until his adversary should decide to bring suit, and to 7 act at his peril in the interim.”). A “case of actual controversy” exists when there is a “substantial 8 controversy, between parties having adverse legal interests, of sufficient immediacy and reality to 9 warrant the issuance of a declaratory judgment,” and the controversy relates to a claim upon 10 which relief can be granted. MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007). The 11 case or controversy requirement is satisfied when a plaintiff has “a real and reasonable 12 apprehension that he will be subject to liability.” Societe de Conditionement en Aluminum v. 13 Hunter Eng’g Co., 655 F.2d 938, 944 (9th Cir. 1981). 14 Intervenor requests a declaratory judgment that would clarify PACA rights and 15 obligations. ECF No. 76 at 6-10. PACA “creates a statutory trust for unpaid sellers [or suppliers] 16 of perishable agricultural commodities and provides that all such commodities, as well as 17 accounts receivable from the sale of such commodities, ‘shall be held by . . . [the produce dealer] 18 in trust for the benefit of all unpaid suppliers or sellers of such commodities . . . until full payment 19 . . . has been received.’” Gargiulo v. G. M. Sales, 131 F.3d 995, 999 (11th Cir. 1997) (quoting 7 20 U.S.C. § 499e(c)(2)). The trust thereby grants produce suppliers priority in the assets of accounts 21 receivable over an insolvent produce dealer’s other creditors. Due to the ongoing obligation 22 owed to trust beneficiaries, a trustee of a PACA trust must not act in a way that would impair the 23 ability of produce suppliers to recover owed money. See 7 C.F.R. § 46.46. A commercially 24 reasonable sale of accounts receivable does not impair the ability of produce suppliers to recover 25 owed money, but rather converts the assets into cash that is more readily available to suppliers. 26 See S & H Packing & Sales Co. v. Tanimura Distrib., Inc., 883 F.3d 797, 803 (9th Cir. 27 2018). Hence, when a factoring agreement effects a commercially reasonable sale, the agreement 28 removes the accounts receivable from the PACA trust. Id. at 813. In determining commercial 1 reasonability, courts must first conduct a threshold true sale inquiry that distinguishes between 2 sales and other arrangements. Id. at 801. The primary factor in determining whether a true sale 3 has occurred is transfer of risk. Id. at 813. 4 Intervenor’s factual assertions sufficiently establish the basis for granting a declaratory 5 judgment. On October 17, 2018, intervenor entered into a factoring agreement with defendants 6 for certain produce-related accounts receivable. ECF No. 76 at 6. As part of the agreement, 7 defendants fully transferred all rights, titles, and interests in these accounts. Id. at 7. The sale of 8 each account receivable was memorialized through a bill of sale. Id. The factoring agreement 9 required no collateralization or securitization—as might be expected in an arrangement other than 10 a sale, such as a loan. Id. at 9. Intervenor assumed all risk of non-payment. Id. at 6-8. Since the 11 primary factor in determining whether a true sale has occurred is risk factor, the factoring 12 agreement was a true sale. See S & H Packing, 883 F.3d at 813. As for whether the agreed-upon 13 purchase price was commercially reasonable, I consider the discount received by intervenor— 14 which, in this case, was a 20% reduction from the accounts’ face value. ECF No. 76 at 7. 15 Although every case is different, “a factoring discount of 20% was never shown to be 16 commercially unreasonable.” Boulder Fruit Exp. & Heger Organic Farm Sales v. Transportation 17 Factoring, Inc., 251 F.3d 1268, 1272 (9th Cir. 2001), overruled on other grounds by S & H 18 Packing, 883 F.3d at 801-02. I find the discount to have been reasonable in this case, considering 19 the effort and time that intervenor was expected to invest in collecting on the accounts. 20 I therefore find that the factoring agreement formalized a commercially reasonable, true 21 sale, and that the PACA trustee did not breach its duties in entering into the agreement. See S & 22 H Packing, 883 F.3d at 803. The factoring agreement thus removed the accounts receivable from 23 the trust. See id. at 813. 24 c. Remaining Eitel Factors 25 Based on intervenor’s well-pleaded complaint, defendants’ failure to appear and contest 26 the allegations contained therein, and the absence of any objection from plaintiffs, the possibility 27 of a factual dispute is remote. See Televideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917-18 (9th 28 Cir. 1992). Additionally, given the length of time since service of the summons and complaint, 1 there is no evidence that defendants’ failure to appear resulted from excusable neglect. Cf. 2 Shanghai Automation Instrument Co. v. Kuei, 194 F. Supp. 2d 995, 1005 (N.D. Cal. 2001). 3 As for the final Eitel factor, while there is a strong preference in favor of judgment on the 4 merits, default judgment is appropriate where a failure to appear renders judgment on the merits 5 impracticable. See Craigslist, Inc., v. Naturemarket, Inc., 694 F. Supp. 2d 1039, 1061 (C.D. Cal. 6 2010). Notwithstanding proper service, defendants have failed to appear in these proceedings. 7 Therefore, entry of default judgment is appropriate. 8 II. FINDINGS AND RECOMMENDATIONS 9 Since defendants have failed to appear and judgment on the merits would be 10 impracticable, intervenor has sufficiently pled allegations entitling it to declaratory relief, and 11 plaintiffs have not objected to such relief, I recommend that intervenor’s motion for default 12 judgment, ECF No. 159, be granted. I recommend that the court enter a declaratory judgment 13 that: (1) the factoring agreement between Produce Pay, Inc., and Trinity Fresh Procurement, LLC, 14 Trinity Fresh Management, LLC, and Trinity Fresh Distribution, LLC, constituted a true sale of 15 specified produce-related accounts receivable; (2) Produce Pay, Inc.’s payment of the agreed- 16 upon purchase price to Trinity Fresh Procurement, LLC, Trinity Fresh Management, LLC, and 17 Trinity Fresh Distribution, LLC, extinguished any and all PACA trust rights or obligations that 18 may have been impressed on the produce-related accounts receivable; and (3) the agreed-upon 19 purchase price for each produce-related account receivable in the factoring agreement was 20 commercially reasonable. 21 These recommendations will be submitted to the U.S. district judge presiding over the 22 case under 28 U.S.C. § 636(b)(1)(B) and Local Rule 304. Within 14 days of the service of the 23 findings and recommendations, the parties may file written objections to the findings and 24 recommendations with the court and serve a copy on all parties. That document must be 25 captioned “Objections to Magistrate Judge’s Findings and Recommendations.” The presiding 26 district judge will then review the findings and recommendations under 28 U.S.C. § 636(b)(1)(C).

27 28 1 | 1718 SO ORDERED. 3 ( — Dated: _ May 4, 2021 Jess (aoe 4 JEREMY D. PETERSON

UNITED STATES MAGISTRATE JUDGE

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