This Week at the Ninth: Unpaid Sellers and Waived Trial Rights

This week, the Ninth Circuit determines whether an online produce wholesaler can file suit under the Perishable Agricultural Commodities Act, and answers a novel question about whether a party that contractually waived its jury trial rights can object to an opponent's withdrawal of a jury demand.

PRODUCE PAY v. IZGUERRA PRODUCE

The Court holds that the district court erred in dismissing an online platform company's claims under the Perishable Agricultural Commodities Act ("PACA") for failure to state a claim because the company had plausibly alleged that it was an unpaid supplier or seller of produce.

Panel: Judges Kelly, Jr. (CA10), M. Smith, Jr., and Forrest, with Judge Kelly writing the opinion, and Judge M. Smith dissenting.

Key Highlight: "[N]othing in PACA or [S&H Packsing & Sales Co. v.] Tanimura [Distributing, Inc., 883 F.3d 797, 813 (9th Cir. 2018) (en banc)] 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."

Background: In April 2019, Izguerra Produce, a produce dealer, purchased 1,600 25-pound cartons of avocados from Produce Pay, a company that buys and sells wholesale produce internationally through an online platform where growers can post their produce for sale. After Izguerra failed to pay Produce Pay the full amount owed for the avocados, Produce Pay sued Izguerra under PACA. Under PACA, sellers and suppliers of produce receive certain special protections against non-payment. The district court dismissed Produce Pay's PACA claims for failure to state a claim, concluding that Produce Pay was not a supplier or seller of produce because it had limited its risk in the event that Izguerra failed to sell any of the marketable produce in a number of respects.

Result: The Ninth Circuit reversed and remanded. To state a PACA claim, the court explained, a plaintiff must allege (1) the commodities sold were perishable agricultural commodities, (2) the purchaser was a commission merchant, dealer, or broker, (4) 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 referring the trust on its invoices. These elements were satisfied, the court held, because the avocados were perishable, Izguerra is a dealer of avocadoes, the transactions occurred in contemplation of interstate or foreign commerce, Produce Pay alleged an outstanding balance, and the initial invoice for the avocadoes stated that they were sold subject to the PACA statutory trust. The sole issue, the court continued, was whether Produce Pay was an unpaid supplier or seller, since PACA protects the interests of suppliers and sellers of produce, but does not protect the interests of parties who are only lenders. The Court rejected Izguerra's argument that Produce Pay was not a seller because the avocados were sold to Izguerra directly by the grower as contrary to Izguerra's allegations and the transaction documents attached to its complaint, which showed that Produce Pay had title to the avocados. It did not matter that Produce Pay never physically possessed the avocados since in the perishable produce industry, physical possession alone is a poor indicator of who has title. The district court was wrong to apply the transfer-of-risk test described in Tanimura because Tanimura (unlike this case) involved an accounts receivable factoring arrangement, was deciding whether certain assets were part of a PACA trust (not whether a plaintiff was a supplier or seller), and was decided at summary judgment (not on a motion to dismiss).

Judge M. Smith dissented. He would have held that Produce Pay was not an unpaid seller or supplier of produce because the pleadings as a whole, including the exhibits attached to the complaint and incorporated by reference, showed an alternative financing arrangement, whereby Produce Pay advanced credit to a wholesale and used the avocados and their proceeds as collateral. Consequently, Judge M. Smith would have held that while Produce Pay could sue to recover its investment in contract or tort, it was not entitled to PACA's protections.

ROSS DRESS FOR LESS, INC. V. MAKARIOS-OREGON, LLC

In an issue of first impression, the Court holds that Federal Rules of Civil Procedure 38 and 39 do not entitle a litigant to rely on an opposing party's jury trial waiver when the party asserting reliance has contractually waived its jury trial rights.

Panel: Judges Tallman, Christen, and Block (E.D.N.Y.), with Judge Christen writing the opinion.

Key Highlight: "Rule 39(a)'s consent requirement generally serves to protect the [jury trial] rights of a party who did not make the initial jury demand, but Rule 39 does not grant that party 'any new or independent right to a jury trial; it simply protects rights to a jury trial that the [nonrequesting party] may have been granted elsewhere.'"

Background: From 1996 to 2016, Ross Dress for Less, Inc. leased the Richmond Building, a five-story property in Portland Oregon Building, and its 12-story neighbor, the historic Failing Building. Three of the buildings' floors were connected by concrete slabs. Upon expiration, the Richmond Building lease required Ross to surrender the property "in good order, condition, and repair, except for reasonable wear and tear," and to "make such alterations to the building then erected on the demised premises as . . . necessary to constitute such building an entirely independent and self-sufficient structure." The lease also provided that "[t]he Tenant waives all right to trial by jury in any summary or other judicial proceedings hereafter instituted by the Landlord against the Tenant in respect to the demised premises."

In 2014, Ross sued Makarios-Oregon, landlord of the Richmond Building, and Walker Place, then-owner of the Failing Building. Ross sought declaratory relief that it was obligated only to physically separate the Richmond and Failing Buildings, and not perform other work when its lease expired. Defendants counterclaimed for breach of contract and sought their own declaratory relief about Ross's work obligations. Both Ross and Makarios demanded a jury trial.

The litigation was bifurcated into two phases, one addressing declaratory relief and a second on other claims and damages. The parties waived any jury trial rights as to the first phase and, after a bench trial, the district court ruled that Ross's proposed work plan was insufficient under the lease, but that it was not obligated to perform the full extent of work proposed by the landlords. The parties filed renewed jury trial demands for the second phase of litigation. But when Makarios moved to withdraw its jury trial demand, Ross opposed, arguing that it was entitled to rely on Makarios' demand under Federal Rules of Civil Procedure 38 and 39. The court nonetheless granted Makarios's withdrawal, reasoning that the lease's jury trial waiver foreclosed Ross's objection. After a second bench trial, the district court awarded Makarios nearly $3 million and the parties cross-appealed.

Result: The Ninth Circuit affirmed the district court's grant of Makarios's motion to withdraw its jury trial demand. (Other issues were decided in a separate memorandum decision).

The Court first held that Ross had waived its jury trial rights, and that the scope of the lease's waiver provision included these proceedings. While Ross had originally filed suit, the Court interpreted the phrase "judicial proceedings . . . instituted by the Landlord" to encompass Makarios' counterclaims. Because the lease's meaning was unambiguous, and the parties did not dispute whether the waiver was knowing and voluntary, the Court held that Ross contractually waived its jury trial right as to Makarios's counterclaims.

Next, in an issue of first impression in the Ninth Circuit, the Court held that Federal Rules of Civil Procedure 38 and 39 did not entitle Ross to rely on Makarios's jury trial waiver when Ross had already contractually waived its jury trial rights. Rule 38(d) provides that a proper jury trial demand "may be withdrawn only if the parties consent." Rule 39(a) requires trial by jury "on all issues so demanded" unless the parties stipulate otherwise, or where "the court, on motion or on its own, finds that on some or all of those issues there is no federal right to a jury trial." Read together, those two rules typically prevent a party from unilaterally withdrawing its jury trial demand. But that principle is not without limits. Relying on a Fifth Circuit decision, the Court here reasoned that even though the rules generally protect the jury trial rights of the party who did not make the initial demand, Rule 39 does not grant that party "any new or independent right to a jury trial; it simply protects rights to a jury trial that the [nonrequesting party] may have been granted elsewhere." Because Ross had waived its jury trial rights, it could not object to Makarios's withdrawal.

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