E. Armata, Inc. v. ParraE. Armata, Inc. v. Parra
DECISION
This matter comes before the Court on the motion of E. Armata, Inc. (“Armata”) and A & J Produce Corp. (“A & J”) (collectively, the “Plaintiffs”) for summary judgment on their complaint against Jhony Parra (the “Defendant” or “Parra”), seeking to have the debts owed to them by the Defendant declared nondischargeable pursuant to 11 U.S.C § 523(a)(4). Additionally, the Plaintiffs have moved to strike the Defendant’s opposition to the Plaintiffs’ motion for summary judgment as untimely filed. For the reasons set forth below, the motion for summary judgment is granted in part and denied in part, and the motion to strike is denied.
Jurisdiction
This Court has jurisdiction of this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(I) and 1334, and the Eastern District of New York standing order of reference dated August 28, 1986. This decision constitutes the Court’s findings of fact and conclusions of law to the extent required by Federal Rule of Bankruptcy Procedure 7052.
The following material facts in this case are undisputed.
The Plaintiffs are corporations engaged in the business of buying and selling wholesale quantities of perishable agricultural commodities (hereinafter, “produce”) in interstate commerce. The Plaintiffs, at all relevant times, were dealers in produce subject to and licensed under the Perishable Agricultural Commodities Act of 1930 (“PACA”), as amended in 1984, 7 U.S.C. § 499a et seq. The Defendant formerly did business as J & A Produce, which was a dealer and a commission merchant subject to PACA. The Defendant started his business in 2007. Between June 17, 2008 and August 7, 2008, Armata sold and delivered to the Defendant, wholesale amounts of produce worth $39,543.22, which was accepted by the Defendant. Between July 22, 2008 and August 18, 2008, A & J sold and delivered to the Defendant, wholesale amounts of produce worth $48,944.48, which was accepted by the Defendant. The Plaintiffs preserved their interests under the trust provisions of PACA in accordance with 7 U.S.C. § 499e(c)(4) by sending invoices to the Defendant which contained the requisite statutory language. The Defendant was in a position of control over the PACA trust assets belonging to the Plaintiffs. On September 8, 2008, Plaintiffs filed a complaint against Jhonny Parra, a/k/a Jhony Parra, Johnny Parra and J & A Produce in the United States District Court for the Southern District of New York to enforce their trust rights under PACA. On September 17, 2008, the District Court entered a Preliminary Injunction Order against the Defendant prohibiting the Defendant from alienating or dissipating any PACA trust assets belonging to the Plaintiffs. On October 14, 2008, the Defendant filed for protection under Chapter 7 of the Bankruptcy Code. The Defendant’s bankruptcy schedules reflect debts owed to A & J in the amount of $49,000.00 and to Armata in the amount of $39,500.00. The Defendant’s schedules also reflect accounts receivable due and owing to the Defendant, in the approximate amount of $30,000.00. The Plaintiffs filed their Complaint seeking a determination of nondischargeability under 11 U.S.C. 523(a)(4) on December 16, 2008.
Standard for Summary Judgment
Summary judgment is appropriate when the record shows that “there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c); Fed. R. Bankr.P. 7056;
Celotex Corp. v. Catrett,
Discussion
The Bankruptcy Code excepts from discharge debts that are a result of “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. § 523(a)(4). The Plaintiffs contend that the debt owed to them by the Defendant is nondischargeable because the Defendant’s failure to hold PACA trust assets for their benefit, pursuant to PACA § 499e(c)(2), constitutes “defalcation” while acting in a fiduciary capacity within the meaning of 11 U.S.C. § 523(a)(4). PACA
“Congress enacted PACA in 1930 to regulate the interstate sale and marketing of perishable agricultural commodities.”
Coosemans Specialties, Inc. v. Gargiulo,
Perishable 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, 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.
7 U.S.C. § 499e(c)(2). “ ‘This trust arises from the moment perishable goods are delivered by the seller.’”
Top Banana, L.L.C. v. Dom’s Wholesale & Retail Ctr., Inc.,
The PACA trust is a “non-segregated floating trust” on perishable commodities and their derivatives, which “permits the commingling of trust assets without defeating the trust.”
Endico Potatoes v. CIT Group/Factoring, Inc.,
The Defendant contends that he never “dissipated” trust assets because the business never accumulated any money. (Defendant’s Aff. 1 4.) The Defendant explains that since its inception in 2007, he never profited from the business. (Defendant’s Aff. 7.) He further explains that the business he transacted was all in cash, and that the money he did collect went directly to pay suppliers and operating expenses. (Defendant’s Aff. 6.) The Defendant claims that his business ultimately failed because one store he sold produce to went out of business in May, 2008, before he could collect $30,000 in unpaid receivables. (Defendant’s Aff. 5.)
Even if these assertions are accepted as true, it is clear that the Defendant breached his fiduciary duty under PACA. Although the trust assets may be used to pay other creditors, it is well established that as a PACA trustee, the Defendant’s first obligation was to insure that any sale proceeds he received from the sale of the perishable goods, were “freely available to satisfy outstanding obligations to” the Plaintiffs. 7 C.F.R. § 46.46(d)(1);
DM. Rothman,
Moreover, the Defendant is not excused from his fiduciary duties under PACA because he failed to collect $30,000 in receivables.
Bronia,
The Defendant incorrectly asserts that PACA does not apply unless payment for the PACA merchandise has been received by the PACA trustee. Relying on
Strube Celery & Vegetable Co. v. Zois (In re Zois),
[T]o the extent, if any, [the goods] rotted away unsold, then the trust res disappeared, leaving only the obligation to pay for those unsold goods as a personal debt outside the PACA provisions. To the extent, if any, that [debtors’ failure to pay [p]laintiff was due to [djebtors’ inability to market any perishable goods involved here, they did not breach their PACA [t]rust obligations.... Only to the extent that [djebtors did market the perishable commodities and failed to remit to [pjlaintiff did [djebtors breached [sic] their PACA Trust obligations, and thereby effect a defalcation under § 528(a) (If).
Id. at 509. (Emphasis added). Here, it is undisputed that the Defendant sold the goods and failed to secure payment.
Thus, the Defendant breached his fiduciary duty under PACA by failing to preserve trust assets for the benefit of the Plaintiffs until they received payment in full. However, the question presented in this adversary proceeding is whether the Defendant’s breach constitutes defalcation while acting in a fiduciary capacity under § 523(a)(4).
Dischargeability under § 523(a) (f)
“To prevail under § 523(a)(4), the challenging creditor must show that (1) the debtor acted in a fiduciary capacity; and (2) the debtor committed defalcation while acting in that capacity.”
A.J. Rinella & Co. v. Bartlett (In re Bartlett),
(A) Fiduciary Capacity
The term “fiduciary capacity” is determined by federal law, and is “narrowly construed.”
Peerless Ins. Co. v. Casey (In re Casey),
The majority of courts to address this question have held that the trust imposed by Congress under PACA constitutes a technical trust which gives rise to the requisite fiduciary capacity for purposes of § 523(a)(4).
Bartlett,
The Defendant relies on a single case for the proposition that a PACA trust is not a technical trust and therefore does not create a fiduciary obligation under § 523(a)(4). In
Cardile Bros. Mushroom Pkg., Inc. v. McCue (In re McCue),
PACA trusts satisfy the requirements for a technical trust. PACA defines both the res of the PACA trust and the duties of a PACA trustee. 7 U.S.C. § 499e(c)(2). Further, a PACA trust is created automatically “from the moment perishable goods are delivered by the seller,”
Top Banana,
(B) Defalcation
A creditor has the burden of establishing defalcation by a preponderance of the evidence.
Bartlett,
This standard has been summarized by the Second Circuit as follows:
[t]he scienter needed in connection with securities fraud is intent to deceive, manipulate, or defraud, or knowing misconduct. As a pleading requirement, a plaintiff must either (a) allege facts to show that defendants had both motive and opportunity to commit fraud or (b) allege facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.
Press,
In the securities law context, the Second Circuit has defined conscious misbehavior as “deliberate illegal behavior, such as securities trading by insiders privy to undisclosed and material information, or knowing sale of a company’s stock at an unwarranted discount.”
Novak v. Kasaks,
Similarly, in the bankruptcy context, a plaintiff must demonstrate that the defendant had actual knowledge of the fiduciary duty that was breached in order to establish that the resulting debt is nondischargeable under § 523(a)(4). “A debt- or who knowingly and intentionally violated her fiduciary duties under PACA may be liable for defalcation.”
Tucker,
Two cases decided within the Second Circuit since
Hyman
find that defalcation, as set forth in
Hyman, may
be satisfied by establishing that the defendant had actual knowledge of his duty to preserve trust assets, and failed to do so. In
Bank of Castile v. Kjoller (In re Kjoller),
It is undisputed that the Plaintiffs properly preserved their rights under PACA by including the required PACA statutory language on their invoices:
The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930. The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.
7 U.S.C. § 499e(e)(4).
The Plaintiffs’ Statement of Material Facts states that the invoices were sent to the Defendant, which the Defendant does not dispute. However, unlike the plaintiffs in Mayo, the Plaintiffs have not presented any evidence or made any assertions that the Defendant actually received the invoices, or had any other notice or actual knowledge of his duties as a PACA trustee. Nor does the Plaintiffs Statement of Material Facts contain such an allegation. The record before the Mayo Court, by contrast, clearly established that the Defendant read and acknowledged his duties under the CBA:
Because the [defendant signed the CBA and initialed Proposal 3, he is charged with the actual knowledge that he had a duty to pay certain amounts into various [f]unds. In this [cjourt’s view, the [d]efendant’s failure to make the requisite payments represents a material and knowing breach of his fiduciary duty and constitutes the kind of “knowing misconduct” contemplated by the Second Circuit’s new defalcation standard.
Mayo,
Nor does the record contain any evidence of the type relied on in
Bartlett
to find that the defendant had the requisite knowledge if his fiduciary duties under PACA. There, the record included invoices referring to the defendant’s statutory duty, which had been signed, as well as the defendant’s PACA license, which specifically referred to his obligations under PACA.
Bartlett,
“By requiring the courts to make appropriate findings of conscious misbehavior ..., the standard [for defalcation] ... insures that the harsh sanction of nondischargeability is reserved for those who exhibit ‘some portion of misconduct.’ ”
Hyman,
Motion to Strike
Plaintiffs argue that pursuant to Local Civil Rule 6.1(b) 2 , the Defendant’s opposition should have been served within ten business days after service of the moving papers. However, the Local Bankruptcy Rules for the Eastern District of New York, require that opposition be served “so as to be received not later than 3 [bjusiness [d]ays before the hearing.” E.D.N.Y. LBR 9006-l(a)(ii). The Defendant filed his opposition on May 13, 2009. The Plaintiffs set the hearing date for April 16, 2009. On April 6, 2009, the Court adjourned the hearing date to May 21, 2009. The Defendant did not file proof of service of his opposition on the Plaintiffs. However, the Plaintiffs filed a reply five days later, on May 18, 2009, which indicates that the Defendant’s opposition was received in a timely manner. Accordingly, the Plaintiffs’ motion to strike the Defendant’s opposition as untimely is denied.
Conclusion
For the foregoing reasons, the Plaintiffs’ motion for summary judgment is granted in part, to the extent that the Court finds that the Defendant acted in a fiduciary capacity under § 523(a)(4), and denied in part, to the extent that an issue of material fact exists whether the Defendant committed a defalcation. A separate order shall issue herewith.
Notes
. Citations to "Plaintiff’s Aff.” refer to the Defendant's Affidavit in Opposition to the Plaintiffs’ summary judgment motion, filed on May 13, 2009.
. Local Civil Rule 6.1(b) provides in relevant part: "(b) On all motions, petitions, applications, and exceptions other than those described in Rule 6.1(a) ... (2) any opposing affidavits and answering memoranda shall be served within ten business days after service of the moving papers.”