609 B.R. 789
Bankr. N.D. Ill.2019Background:
- CR Farms sold and shipped potatoes and onions to National Produce from 2012–2017; invoices referenced PACA and asserted a PACA trust.
- National Produce accumulated unpaid invoices totaling roughly $426,713 (plus fees); CR Farms continued shipping after assurances from Hughes.
- Hughes worked at National Produce, became sole shareholder and controlled payments after September 2017; he authorized payments to other vendors and operating expenses while invoices remained unpaid.
- Hughes issued some checks that bounced; CR Farms repeatedly demanded payment and sent receivables reports and calls/emails.
- Hughes filed Chapter 7; CR Farms sued to except the debt from discharge under 11 U.S.C. § 523(a)(4) (fiduciary/defalcation) and § 523(a)(2)(A) (fraud).
Issues:
| Issue | Plaintiff's Argument (CR Farms) | Defendant's Argument (Hughes) | Held |
|---|---|---|---|
| Whether National Produce (and thus Hughes as controlling person) was a "fiduciary" under §523(a)(4) | PACA creates a statutory trust making buyers trustees with fiduciary duties; debt nondischargeable for defalcation | PACA's "trust" is floating, permits commingling, lacks segregation/res and other trust hallmarks required by Seventh Circuit | Court held PACA trust does not create a §523(a)(4) fiduciary; CR Farms' MSJ denied; Hughes' cross-MSJ granted on §523(a)(4) |
| Whether Hughes committed defalcation or other fiduciary breach making the debt nondischargeable under §523(a)(4) | Payments to other creditors and use of trust assets amounted to defalcation/embezzlement | No fiduciary duty existed; conduct is commercial (breach of contract) not defalcation | Court did not reach defalcation element because fiduciary element failed; Hughes entitled to judgment on §523(a)(4) |
| Whether the debt is nondischargeable under §523(a)(2)(A) for actual fraud | Hughes intentionally diverted PACA-related funds and made representations/assurances to induce continued shipments | No evidence of subjective intent to deceive; ordinary business/payment choices by a struggling company | Court denied CR Farms' MSJ on §523(a)(2)(A) for lack of evidence showing Hughes' fraudulent intent |
Key Cases Cited
- Celotex Corp. v. Catrett, 477 U.S. 317 (U.S. 1986) (summary judgment burdens)
- Follett Higher Educ. Grp., Inc. v. Berman, 629 F.3d 761 (7th Cir. 2011) (narrow, strict definition of "fiduciary" for §523(a)(4))
- In re McGee, 353 F.3d 537 (7th Cir. 2003) (statutory trust must show segregation/formal rules to be an express trust under §523(a)(4))
- In re Marchiando, 13 F.3d 1111 (7th Cir. 1994) (statutory trust may be nominal; lack of fiduciary duties pre-wrong )
- Patterson Frozen Foods, Inc. v. Crown Foods Int'l, Inc., 307 F.3d 666 (7th Cir. 2002) (describing PACA and its trust mechanics)
- Frio Ice, S.A. v. Sunfruit, Inc., 918 F.2d 154 (11th Cir. 1990) (PACA trust gives unpaid sellers priority)
- Husky Int'l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (U.S. 2016) (actual fraud requires wrongful intent; scope of §523(a)(2)(A) fraud)