B.C. Produce, Inc. v. KaloyanidesB.C. Produce, Inc. v. Kaloyanides
MEMORANDUM OF DECISION ON CROSS-MOTIONS FOR PARTIAL SUMMARY JUDGMENT
Before me are cross-motions for partial summary judgment on the non-dischargeability of alleged claims for defalcation while acting in a fiduciary capacity within the meaning of
The plaintiffs, B.C. Produce, Inc., Community-Suffolk, Inc., John Cerasuolo Co., Inc., J. Bonafede Co., Inc., Lisitano Produce, Inc., and Boston Tomato & Packaging, LLC (collectively, the “Plaintiffs“), filed a four-count complaint [Dkt. No. 1] (the “Complaint“) against the defendant, Jason K. Kaloyanides (the “Defendant” or “Kaloyanides“), containing the following counts: (a) Count I (determination of the amounts due to each of the Plaintiffs); (b) Count II (violation of
Pursuant to the Plaintiffs’ Cross Motion for Partial Summary Judgment [Dkt. No. 27] and supporting memorandum of law [Dkt. No. 28] (together, the “Plaintiffs’ Motion“), the Plaintiffs seek judgment that the debts owed by Kaloyanides to the Plaintiffs due to the sale of produce subject to a PACA Trust are nondischargeable under
The Parties filed a Joint Request for Stay of Proceedings Regarding the Parties’ Cross Motions for Partial Summary Judgment [Dkt. No. 46] and I stayed determination of the Motions pending the result of a petition for writ of certiorari for a case decided by the United States Court of Appeals for the Eleventh Circuit involving PACA and
For the reasons discussed below, I conclude that PACA does not create a trust that results in a “fiduciary capacity” sufficient to meet the requirements of
I. JURISDICTION
The Court has jurisdiction over this matter pursuant to
II. LEGAL STANDARDS
A. Summary Judgment
Pursuant to
11 U.S.C. § 523(a)(4)
Section 523(a)(4) excepts from an individual debtor‘s discharge any debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”
Courts in the First Circuit have adopted a three-part test to analyze whether debts are nondischargeable under
C. PACA Trusts
Congress enacted PACA in 1930 to regulate the sale of perishable commodities and promote fair trading practices in the produce market. See H.R. Rep. No. 98-543, at 3 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406. Under PACA, it is unlawful for a produce buyer to fail to make prompt payment to a licensed produce seller for a shipment of produce.
Section 499e(c)(2) of PACA provides
[p]erishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents. . . .
A PACA Trust is automatically created as long as the produce buyers receive the produce, but the produce sellers will lose the trust benefits unless they comply with statutory notice requirements, such as including language to provide notice of their intent to preserve the trust in their “ordinary and usual billing or invoice statements.”
A PACA claim can be filed by an unpaid supplier, seller, or agent of perishable agricultural commodities against commission merchants, dealers, or brokers who have not made timely payments on such delivered commodities. The statute defines a “dealer” as “any person engaged in the business of buying or selling in wholesale or jobbing quantities . . . any perishable agricultural commodity in interstate or foreign commerce . . . .”
Section 499e(a) of Title 7 provides that, “if any commission merchant, dealer, or broker violates any provision of section 499b of [Title 7] he shall be liable to the person or persons injured thereby for the full amount of damages . . . sustained in consequence of such violation.”
III. ANALYSIS
A. Whether Fiduciary Relationship Exists
What constitutes “fiduciary capacity” within the meaning of
The substance of a transaction, instead of its form, determines whether the transaction falls within the “strict and narrow” fiduciary relationship for purposes of
Courts are divided as to whether a PACA Trust satisfies the requirements of an express or technical trust and establishes the fiduciary relationship required by
In what the Defendant characterizes as a “waning” majority view, Def.‘s Mot., at 2, some courts have analyzed a PACA Trust under these standards and have held that a PACA Trust meets the requirements for a technical trust under
In In re Bartlett, the bankruptcy court for the District of Massachusetts ruled that the statutory trust under PACA establishes a technical trust that “satisfies the fiduciary requirement of
Recently, the Eleventh Circuit Court of Appeals set out standards for a technical trust under
[f]irst, the [fiduciary] relationship must have (1) a trustee, who holds (2) an identifiable trust res, for the benefit of (3) an identifiable beneficiary or beneficiaries. Second, the fiduciary relationship must define sufficient trust-like duties imposed on the trustee with respect to the trust res and beneficiaries to create a technical trust. Based on our caselaw, the two most important trust-like duties, and the ones that we have held create a technical trust, are the duty to segregate trust assets and the duty to refrain from using trust assets for a non-trust purpose. Third, the debtor must be acting in a fiduciary capacity before the act of fraud or defalcation creating the debt.
Id. at 1241 (internal citation omitted).
The first and third requirements identified by the Eleventh Circuit have been adopted by courts taking both the “majority” and “minority” positions. See e.g., In re Bartlett, 397 B.R. at 620 (adopting majority position); In re Hughes, 609 B.R. at 802 (adopting minority position).
The second requirement concerning “the duty to segregate trust assets and the duty to refrain from using trust assets for a non-trust purpose” has been adopted by courts that have ruled that a PACA Trust does not create a technical trust consistent with the minority position. Compare In re Hughes, 609 B.R. at 797 (finding the “hallmarks of a trust include segregation of funds” (internal quotations omitted)), Coosemans Miami, Inc. v. Arthur (In re Arthur), 589 B.R. 761, 768-69 (Bankr. S.D. Fla. 2018) (recognizing a segregation requirement as “clear indicia of a technical trust relationship” and as “a necessary element“), and Cardile Bros. Mushroom Pkg, Inc. v. McCue (In re McCue), 324 B.R. 389, 392-93 (Bankr. M.D. Fla. 2005) (“Because a PACA res is not a segregated trust res, Plaintiffs cannot prove the existence of an express or technical trust.“), with Quality Food Prods., Inc. v. Bolanos, No. 12 CV 7654, 2013 WL 7507846, at *3 (N.D. Ill. Sept. 16, 2013) (ruling that “segregation of funds is not a mandatory element” for
Generally, the Supreme Court and other courts have consistently employed a “strict and narrow” interpretation of
An individual who is in the position to control the trust assets and who does not preserve them for the beneficiaries has breached a fiduciary duty, and is personally liable for that tortious act. . . .
We recognize at the outset that a PACA trust in effect imposes liability on a trustee, whether a corporation or a controlling person of that corporation, who uses the trust assets for any purpose other than repayment of the supplier. This includes use of the proceeds from the sale of perishables for legitimate business expenditures, such as the payment of rent, payroll, or utilities. Proceeds from the sale of perishables subject to PACA receive special treatment in other respects as well.
Hiller Cranberry, 165 F.3d at 8-9 (quoting Morris Okun, Inc., 814 F. Supp. at 348).
While Hiller Cranberry certainly addresses personal liability as a “fiduciary” under PACA, the First Circuit has not addressed whether that “fiduciary duty” is sufficient to satisfy the “fiduciary capacity” requirement of
In considering the requirements for a technical trust imposed by a statute other than PACA, the First Circuit Bankruptcy Appellate Panel required that the statute “(1) define the trust res, (2) spell out the trustee‘s fiduciary duties, and (3) impose a
B. The Failure to Pay an Obligation Subject to a PACA Trust Is Not a Fraud or Defalcation While Acting in a Fiduciary Capacity Under § 523(a)(4)
I find the reasoning of the Eleventh Circuit persuasive. In the context the historical “strict and narrow” interpretation of
PACA states that “a commission merchant, dealer, or broker” after receiving perishable agricultural commodities must hold such produce “in trust for the benefit of all unpaid suppliers or sellers of such commodities.”
Moreover, the produce buyer has “no obligation to track trust funds in and out,” so that unpaid produce sellers cannot identify or assert particular claims to their original trust assets. See In re McCue, 324 B.R. at 392-93. Where produce sellers’ claims exceed the produce buyer‘s available trust assets, unpaid sellers must share the same priority to the aggregate trust assets on a pro rata basis. See In re Hughes, 609 B.R. at 799-800. Because produce sellers cease to own or have specific claims to the sale proceeds under the nonsegregated PACA “floating” trust, the PACA Trust fails to clearly define and identify the trust res. See id.;
As discussed by the Eleventh Circuit in In re Forrest, taking into account PACA regulations, a PACA Trust does not require produce buyers to segregate trust assets, and the absence of this requirement “implies that trust permits trust assets to be in the same account as non-trust assets” and allows “the commingling of trust assets with non-trust assets.” See 47 F.4th at 1243 (rejecting creditor‘s argument that PACA‘s reference to “[c]ommingling of trust assets” does not encompass non-trust assets). In addition, the Eleventh Circuit found no duty to refrain from using trust assets for a non-trust purpose because a produce buyer can use any produce seller‘s trust assets for any purpose so long as the trust assets in aggregate “are freely available to satisfy outstanding obligations” to all produce sellers. See id. at 1244 (quoting
Because of these attributes, a PACA Trust more closely resembles a constructive or resulting trust and can be viewed as providing a produce seller a mechanism to claim priority over secured creditors and imposing personal liability for individuals who mismanage proceeds of produce. See id. at 1245-46 (concluding that a PACA Trust resembles a constructive or resulting trust); In re Hughes, 609 B.R. at 801 (PACA trust functions “as a collection device” to assure “payment for the goods shipped to and sold by the purchaser.” (internal citation and quotation omitted)).
Courts have recognized the tension between
Allowing PACA debtors to be freed from personal liability for their debts through bankruptcy discharge promotes the overarching goal of the Bankruptcy Code of providing debtors with a fresh start. At the same time, PACA still provides significant benefits to unpaid produce sellers as those creditors are entitled to the highest priority in a Chapter 7 liquidation. Our decision will not erode the protections of PACA and will strike a balance between these two statutes.
In re Forrest, 47 F.4th at 1246.
This is a close call, and cases holding to the contrary are well-reasoned and, in this Circuit, can be supported by broad language used in dicta by the First Circuit. See In re Bartlett, 397 B.R. at 620 (comparing favorably Hiller Cranberry, 165 F.3d at 8-9); In re Baylis, 313 F.3d at 17 n.3 (noting that Supreme Court precedent that the
IV. CONCLUSION
For the reasons above, there exists no disputed issue of fact with respect to whether the Plaintiffs can demonstrate that Kaloyanides committed a “defalcation” while “acting in fiduciary capacity” for the purpose of
Dated: April 15, 2024
By the Court,
Christopher J. Panos
United States Bankruptcy Judge