503 B.R. 717
Bankr. W.D. Wis.2013Background
- Michael Farms, Inc. (Plaintiff) sold $123,596 of produce to Spud City Sales, LLC (buyer) between Jan. 4 and Oct. 8, 2012; invoices contained PACA trust language and remain unpaid.
- Spud City was a dealer/commission merchant subject to PACA; PACA creates a statutory trust for unpaid suppliers on receipt of perishable commodities.
- Thomas J. Lundgren (Defendant) was alleged to be Spud City's sole officer, director, shareholder, and person in control. Plaintiff seeks nondischargeability under 11 U.S.C. § 523(a)(4) for breach of fiduciary duty/defalcation.
- Defendant moved to dismiss, arguing PACA does not create a fiduciary capacity under § 523(a)(4) and Plaintiff failed to plead defalcation adequately. Defendant did not contest nonpayment for purposes of the motion.
- The bankruptcy court denied the motion to dismiss, holding PACA creates an express/statutory trust meeting § 523(a)(4) trust requirements and that the complaint plausibly alleges breach/defalcation by the controlling officer.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether PACA creates a fiduciary (trust) for § 523(a)(4) purposes | PACA creates an express statutory trust with fiduciary duties that can render debts nondischargeable | PACA does not create a fiduciary capacity meeting § 523(a)(4) (relying on In re Bolanos) | Court: PACA trust meets express/statutory trust hallmarks and creates fiduciary capacity for § 523(a)(4) |
| Whether plaintiff pleaded defalcation/fraud under § 523(a)(4) | Failure to preserve/pay trust assets supports defalcation/breach of fiduciary duty | Pleading insufficient to show defalcation as required under Code | Court: Allegations (trust created, nonpayment, defendant control) are sufficient at pleading stage to state plausible defalcation claim |
| Personal liability of controlling officer for PACA trust violations | Officer in control can be personally liable for failure to preserve/trust dissipation | Defendant disputed that PACA imposes such fiduciary duties on him for nondischargeability | Court: As sole person in control, Lundgren may be held personally liable; complaint supports claim |
| Sufficiency of complaint to survive Rule 12(b)(6) | Allegations state plausible claim and give adequate notice (per Iqbal/Twombly standard) | Allegations are conclusory/insufficient under pleading standards | Court: Complaint alleges sufficient factual matter to be plausible; motion to dismiss denied |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (establishes plausibility pleading standard)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (Rule 12(b)(6) requires non‑speculative, plausible claims)
- In re Marchiando, 13 F.3d 1111 (7th Cir.) (hallmarks for statutory trust/fiduciary status under § 523(a)(4))
- In re Berman, 629 F.3d 761 (7th Cir.) (statutory trusts may equate to express trusts for nondischargeability)
- In re McGee, 353 F.3d 537 (7th Cir.) (statutory trust can satisfy § 523(a)(4) fiduciary requirement)
- Patterson Frozen Foods v. Crown Foods Int’l, 307 F.3d 666 (7th Cir.) (personal liability of corporate officers for PACA trust shortfalls)
- JSG Trading Corp. v. Tray‑Wrap, Inc., 917 F.2d 75 (2d Cir.) (PACA trust characterization and protections)