Spring Valley Produce, Inc. v. Nathan Aaron ForrestSpring Valley Produce, Inc. v. Nathan Aaron Forrest
[PUBLISH]
Appeal from the United States District Court for the Middle District of Florida
D.C. Docket No. 8:20-bk-03819-RCT
Before WILSON, BRANCH, and LAGOA, Circuit Judges.
In this case of first impression, we determine whether the Bankruptcy Code‘s
In so holding, we adopt the following three-part test for determining whether a debtor is acting in a “fiduciary capacity” under
I. Factual Background and Procedural History
The undisputed facts are as follows. The Forrests are owners and officers of Central Market of FL, Inc. (Central Market), which buys and sells produce. SVP sold $261,504.15 worth of produce to Central Market for which Central Market never paid. During the transactions at issue, SVP and Central Market were licensed under PACA. SVP preserved its right as a PACA trust beneficiary by including the required statutory statement on its invoices to Central Market. Upon receiving and accepting SVP‘s produce shipments, Central Market became a PACA trustee of a trust res consisting of that produce.
On May 15, 2020, the Forrests filed a Chapter 7 bankruptcy petition hoping to discharge their business debts, including the debt owed to SVP. On August 14, 2020, SVP commenced this adversary proceeding, seeking a declaration that the debt is nondischargeable under
The Forrests moved to dismiss SVP‘s amended complaint, arguing that a PACA trustee is not acting in a “fiduciary capacity” as that term is understood in the context of
II. Standard of Review
On direct appeals from the bankruptcy court, we review the bankruptcy court‘s findings of fact for clear error and its conclusions of law de novo. In re Dean, 537 F.3d 1315, 1318 (11th Cir. 2008). A court‘s interpretation of the Bankruptcy Code is a question of law. Pollitzer v. Gebhardt, 860 F.3d 1334, 1338 (11th Cir. 2017).
III. Discussion
The parties dispute the correct test governing the scope and application of
A. The § 523(a)(4) Exception to Discharge
The general rule is that an individual debtor‘s pre-bankruptcy debts are dischargeable in a Chapter 7 bankruptcy case. In re Fernandez-Rocha, 451 F.3d 813, 815–16 (11th Cir. 2006).
The Fiduciary Capacity Exception has existed through various bankruptcy statutes in effect since 1841. Quaif v. Johnson, 4 F.3d 950, 953 (11th Cir. 1993) (per curiam). But these statutes have all used similar language and all versions have referred to “defalcation” and to “fiduciary capacity” or “fiduciary character.” Id. The focus of this case is not the meaning of the term “‘defalcation,’ a word that only lawyers and judges could love.”2 In re Jahrling, 816 F.3d 921, 925 (7th Cir. 2016). Instead, this case focuses on the meaning of the term “fiduciary capacity.”
The scope of the term fiduciary capacity in
1. Principles from Early Supreme Court Cases on the Fiduciary Capacity Exception
The following Supreme Court cases provide us with a few key principles on the Fiduciary Capacity Exception. The first case interpreting the Fiduciary Capacity Exception was Chapman v. Forsyth, 43 U.S. (2 How.) 202 (1844). There, a principal was seeking to have debts incurred by his factor (or agent) excepted from discharge under the Fiduciary Capacity Exception. Id. 206–07. The principal gave cotton to his factor, who was to sell the cotton and remit the proceeds back to the principal. Id. at 206. The creditor in that case, the principal, argued that “[a] factor, with goods and money in his hands belonging to his principal, is in estimation of law, a trustee.” Id. at 204. Thus, the crux of the creditor‘s argument was that the factor‘s failure to remit payment to the principal for the sale of the principal‘s cotton constituted a debt incurred for defalcation while acting in a fiduciary capacity.
The Court rejected this argument. Id. at 208. In doing so, the Court noted that if the Fiduciary Capacity Exception “embrace[d] such a debt, it [would] be difficult to limit its application.” Id. And “[s]uch a construction would have left but few debts on which the law could operate.” Id. The Court did agree that “[i]n almost all the commercial transactions of the country, confidence is reposed in the punctuality and integrity of the debtor, and a violation of these is, in a commercial sense, a disregard of a trust.” Id.
But the Court ultimately held that the Fiduciary Capacity Exception “speaks of technical trusts, and not those which the law implies from the contract” and held that a principal-factor relationship did not fall within the exception. Id. (emphasis added).
Put differently, fiduciary capacity refers to a trust “in its technical sense.” Upshur v. Briscoe, 138 U.S. 365, 375 (1891). In Upshur, the Court focused on the prepositional phrase “while acting in” and concluded that the Fiduciary Capacity Exception “would seem to apply only to a debt created by a person who was already a fiduciary when the debt was created.” Id. at 378. Thus, the Court added a temporal limitation to the Fiduciary Capacity Exception in which the fiduciary obligations must predate the act of defalcation by the debtor.
The last Supreme Court case addressing the meaning of fiduciary capacity and technical trusts was Davis v. Aetna Acceptance Co., 293 U.S. 328 (1934).4 There, the creditor had a chattel mortgage in automobiles sold by the debtor. Id. at 330. The debtor sold one of the cars but failed to remit payment to the creditor. Id. When the debtor filed for bankruptcy, the creditor sought to have the debt on the mortgaged automobile excepted from discharge under the Fiduciary Capacity Exception and sued for conversion of the automobile. Id. at 330-31.
The Court asked whether the debtor, who held mortgaged property, was “a trustee in that strict and narrow sense” of the Fiduciary Capacity Exception. Id. at 333. The Court reaffirmed the principle that the debtor must be acting in
These early Supreme Court cases thus give us the following rules. First, the Fiduciary Capacity Exception does not apply to trusts implied by contract but applies to technical trusts or trusts in the technical sense. Chapman, 43 U.S. at 208. Second, the debtor must be acting in a fiduciary capacity before the act of defalcation creating the debt for the exception to apply. Upshur, 138 U.S. at 378. Third, the substance of the transaction, rather than its form, controls in determining whether a transaction fits the “strict and narrow” definition of a technical trust. Davis, 293 U.S. at 333–34.
2. A Technical Trust Requires A Trustee, an Identifiable Beneficiary, an Identifiable Trust Res, and Sufficient Trust-Like Duties
Although the Supreme Court has not provided a precise definition of technical trusts, we can look to definitions of trusts and general trust principles for clarity. As the Court in Chapman noted, there are two ways to look at the term “trust.” Chapman, 43 U.S. at 208. In a broad sense, the Court reasoned that there is some degree of “trust” imposed in almost all commercial transactions. Id. The Court rightfully chose not to extend the Fiduciary Capacity Exception to this broad definition of trusts because doing so would except an inordinate number of debts from discharge. Instead, the Court limited the exception to technical trusts or trusts in the “technical sense.” Upshur, 138 U.S. at 375.
Legal definitions on trusts provide the following insight on the distinction between trusts in a broad sense and trusts in a technical sense:
In its technical sense, a trust is the right, enforceable solely in equity to the beneficial enjoyment of property, the legal title of which is vested in another and implies separate coexistence of the legal and the equitable titles vested in different persons at the same time; in its more comprehensive sense the term embraces every bailment, every transaction by agent or factor, every deposit, and every matter in which the slightest trust or confidence exists. The word trust, however, is frequently employed to indicate duties, relations, and responsibilities which are not strictly and technically trusts.
Trust, Black‘s Law Dictionary (11th ed. 2019) (citing William C. Dunn, Trusts for Business Purposes 2 (1922)).
This distinction between trusts in the technical sense and trusts in the more comprehensive or broad sense tracks with the Supreme Court‘s reasoning in Chapman. For example, the broad definition of trusts would include the principal-factor relationship at issue in Chapman. But trusts in the technical sense are much
The Restatement (Third) of Trusts provides further insight on the characteristics of this narrower definition of trusts:
In the strict, traditional sense, a trust involves three elements: (1) a trustee, who holds the trust property and is subject to duties to deal with it for the benefit of one or more others; (2) one or more beneficiaries, to whom and for whose benefit the trustee owes the duties with respect to the trust property; and (3) trust property, which is held by the trustee for the beneficiaries.
Restatement (Third) of Trusts § 2 cmt. f (2003).
As the Court noted in Davis, the Fiduciary Capacity Exception speaks of trusts in a “strict and narrow” sense. 293 U.S. at 333. Thus, for the Fiduciary Capacity Exception to apply, the relation between the creditor and the debtor must resemble this narrower definition of trusts, or trusts in the technical sense. Although we have not spelled out these three elements before, our decisions on the Fiduciary Capacity Exception have generally looked to whether the statute requires the debtor to hold trust property for the benefit of the creditor. See Carey Lumber Co. v. Bell, 615 F.2d 370, 374 (5th Cir. 1980) (finding that the debtor was acting in a fiduciary capacity where the statute “clearly define[d] the trust res“); In re Fernandez-Rocha, 451 F.3d at 818 (finding that the debtor was not acting in a fiduciary capacity where statute did not “require a doctor to place funds ‘in trust’ for the benefit of third party patients“).
As the Restatement notes, a trust in the “strict, traditional sense” involves duties imposed on the trustee with respect to the trust res and the beneficiary. And in analyzing whether a statutory trust can meet the narrow definition of a technical trust under the Fiduciary Capacity Exception, we have generally looked to the duties imposed by the statute. Thus, along with having an identifiable trustee, beneficiary, and trust res, a technical trust for purposes of
3. Trust-Like Duties Sufficient to Create a Technical Trust
The core issue here is what type of trust-like duties are sufficient to create a technical trust under the Fiduciary Capacity Exception. While we have never expressly held what trust-like duties would be sufficient, we are not writing on a clean slate. Our precedent has generally emphasized two duties: the duty to segregate trust assets and the duty to refrain from using trust-assets for non-trust purposes. The parties dispute whether either of these duties is a requirement for a technical trust. SVP contends that these duties are not required and that the PACA statutory trust imposes other duties that are sufficient. The Forrests respond that PACA fails to meet the narrow definition of a technical trust under
Given this dispute among the parties, and bankruptcy courts within this Circuit, we review our caselaw, as well as the decisions of our sister circuits, to determine what trust-like duties are sufficient for a statute to create a technical trust. In doing so, we note that state law may provide different definitions or requirements of a trust generally, but the scope of fiduciary capacity under
There are only five published decisions in this Circuit and the former Fifth Circuit discussing the Fiduciary Capacity Exception. Of those five, four dealt with the concept of statutory trusts. Statutory trusts fall somewhere between the traditional categories of a trust created voluntarily between the parties by contract, known as an express trust, and a trust created by operation of law, known as a constructive or resulting trust. Quaif, 4 F.3d at 953. While express trusts might fall under
Starting with cases from the former Fifth Circuit, the first case addressing
Another case, In re Cross, addressed whether a debtor was acting in a fiduciary capacity based on a contract between the parties, not a statute. 666 F.2d 873, 876 (5th Cir. Unit B 1982). The debtor was in construction and entered into a contract with the creditor where the creditor would provide funds to the debtor to build a post office. Id. We found that this contract did not establish a fiduciary duty, noting the contract did not require the debtor “to maintain a segregated account” for the construction funds received from the creditor. Id. at 881. Similarly, in In re Angelle, we doubted “that a statute which merely makes misappropriation of funds a crime without, for example, requiring segregation of accounts would be enough to charge the parties with an intent to create
The first case decided by the Eleventh Circuit on the Fiduciary Capacity Exception was Quaif v. Johnson. There, the statute at issue was a Georgia statute that required insurance agents to hold insurance premium payments from insured parties in a separate account and prohibited insurance agents from commingling the premiums with their personal funds. 4 F.3d at 953. In holding that the Georgia statute created a technical trust and that the Fiduciary Capacity Exception applied, we noted the following:
It is true that some cases have indicated that a separation of the funds is necessary to establish the existence of a technical trust. See Matter of McCraney, 63 B.R. 64, 67 (Bankr. N.D. Ala. 1986); In re Kelley, 84 B.R. 225, 230 (Bankr. M.D. Fla. 1988). However, the court does not believe that a separation of premium funds into distinct bank accounts is an essential requirement of a trust. The Georgia statute requires that the premiums must be separate from other types of funds, but may be kept in a common premium account as long as there were adequate records of the sources of these funds. The court finds that this is sufficient “segregation” to satisfy the requirement that the fiduciary duties be created prior to the act of defalcation.
The parties, and bankruptcy courts in this Circuit, dispute whether this paragraph from Quaif expressly held that the duty to segregate trust assets is a requirement for a technical trust to exist, or whether it is only a factor in the analysis. We do not read Quaif to stand for the proposition that a segregation of funds requirement is always necessary for a technical trust to exist. In fact, we noted that bankruptcy courts have adopted this rule, but we chose not to adopt it. And while the phrase “sufficient ‘segregation‘” could be interpreted as a segregation requirement, when read in context it seems to be more of a reference to the requirement that the Georgia statute imposed sufficient duties pre-defalcation. Further, our holding in Carey Lumber shows that a statute can impose sufficient duties if it requires that the trustee cannot use trust funds for a non-trust purpose even though the statute did not impose a duty to segregate trust assets. However, when one reads Quaif, In re Cross, and In re Angelle together, it is apparent that the duty to segregate trust assets is an important factor in the analysis.6
We also note that our sister circuits have emphasized the duties to segregate trust assets and to refrain from using trust assets
for a non-trust purpose. For example, the Seventh Circuit has held that the hallmarks of an express trust for purposes of the Fiduciary Capacity Exception are ”segregation of funds, management by financial intermediaries, and recognition that the entity in control of the assets has at most ‘bare’ legal title to them.” In re Berman, 629 F.3d 761, 769 (7th Cir. 2011) (alteration adopted and emphasis added). Similarly, in discussing its caselaw on the Fiduciary Capacity Exception, the Fifth Circuit remarked that although it had “not expressly identified the particular ‘trust-like’ duty” sufficient for a technical trust, “one such duty has loomed large—the duty
Further support that the duty to segregate trust assets and the duty not to use trust assets for non-trust purposes are significant duties of a trustee comes from the Restatement (Third) of Trusts. The Restatement lists several duties imposed on trustees, including the duty of loyalty and the duty to segregate and identify trust property. The duty of loyalty provides that “a trustee has a duty to administer the trust solely in the interest of the beneficiaries.” Restatement (Third) of Trusts § 78(1) (2007). In other words, the trustee has a duty not to use trust assets for a non-trust purpose. The Restatement also provides that the trustee has “a duty to keep the trust property separate from the trustee‘s own property and, so far as practical, separate from other property not subject to the trust.” Id. § 84.
In short, our caselaw shows that we have not clearly defined a technical trust in any one decision. But synthesizing all of these cases, we hold that the following test applies in determining whether a debtor is acting in a “fiduciary capacity” under
We also emphasize that our holding today is limited to the narrow meaning of “fiduciary capacity” in the context of
that of a trust, but the scope of fiduciary capacity in the context of
§ 523(a)(4)
With a clear test in place, we now address whether a PACA trustee is acting in a fiduciary capacity in the context of
The sale of perishable agricultural commodities, generally referred to as produce, can be a “real gamble.” H.R. Rep. No. 98-543, at 406 (1983). To mitigate the risks facing small-business produce sellers and promote fair practices among dealers, Congress enacted PACA in 1930.
and sell produce in interstate commerce.
Congress further amended PACA in 1984 to establish a statutory trust between produce buyers and sellers. Frio Ice, S.A. v. Sunfruit, Inc., 918 F.2d 154, 156 (11th Cir. 1990). The PACA trust was created in response to the unfavorable practice of produce buyers granting a security interest in their unpaid produce to lenders, leading to an increase in delinquent payments. Id. The PACA statute provides, in part, that:
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 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.
1. PACA Creates a Trustee, Identifiable Beneficiaries, and an Identifiable Trust Res
Our first step of the analysis under the Fiduciary Capacity Exception looks to whether the statute creates a trustee and identifiable beneficiaries and trust res. Here, the PACA statute, on its face, creates all three. The statute states that “a commission merchant, dealer, or broker” who receives perishable agricultural commodities must hold those items in trust for the benefit of “all unpaid suppliers or sellers of such commodities.”
2. PACA Does Not Impose Sufficient Trust-Like Duties to Create a Technical Trust
Turning to the second requirement, we must determine whether the PACA statute imposes sufficient trust-like duties to create a technical trust. Aside from the duty to hold produce in trust until produce sellers are paid, the statute itself does not provide any specific duties
The PACA regulations state that “[t]rust assets are to be preserved as a nonsegregated ‘floating’ trust.”
We reject SVP‘s argument for three reasons. First, SVP seems to equate a nonsegregated trust and segregated trust where the property for multiple beneficiaries is held in a common account. But these are two different concepts. The duty to segregate relates to the “duty to keep the trust property separate from the trustee‘s own property.” Restatement (Third) of Trusts § 84 (2007). Thus, if a trust is “nonsegregated,” then that implies that trust permits trust assets to be in the same account as non-trust assets.
Second, SVP conflates the terms “commingle” and “mingle.” “Mingle” refers to the interaction of property from different trusts. Id. cmt. c. This is what we were addressing in Quaif where we held that it was sufficient to keep the insurance premiums in a common account. Mingling is permitted when it is “impractical or undesirable” to maintain separate account as long as accurate records are maintained and the funds are not put into the trustee‘s personal account. Id. On the other hand, “commingle” means “to mix personal funds with those of a beneficiary or client, [usually] in an improper or illegal way.” Commingle, Black‘s Law Dictionary (11th ed. 2019). Thus, the phrase “[c]ommingling of trust assets is contemplated” refers to the commingling of trust assets with non-trust assets.
Third, the PACA statute is distinguishable from the statute in Quaif because, there, the statute expressly forbade the insurance agent from commingling insurance premiums with his personal funds. Quaif, 4 F.3d at 953. The PACA statute contains no such provision. On the contrary, the PACA regulations suggest that commingling is permitted. We therefore conclude that PACA does not impose the important trust-like duty to segregate trust assets.
Also lacking from the PACA statute is the duty to refrain from using trust-assets for a non-trust purpose. The Forrests argue that PACA permits a PACA trustee to use trust assets for a non-trust purpose. They cite to the Federal Register discussing the PACA trust which states that:
Trust assets are available for other uses by the buyer or receiver. For example, trust assets may be used to pay other creditors. It is the buyer‘s or receiver‘s responsibility as trustee to insure that it has sufficient assets to assure prompt payment for produce and that any beneficiary under the trust will receive full payment, including sufficient assets to cover the value of disputed shipments.
Regulations Under the Perishable Agricultural Commodities Act; Addition of Provisions
In its reply brief, SVP contends that the PACA trustee cannot use trust assets for non-trust purposes “if doing so results in the trustee having an insufficient amount to pay the outstanding PACA Trust claims.” This is because, SVP argues, the PACA regulations require the PACA trustee “to maintain trust assets in a manner so that the trust assets are freely available to satisfy outstanding obligations to sellers of perishable agricultural commodities.”
We find this argument lacks merit. The PACA statute provides that the trust consists of produce received as well as proceeds from the sale of that produce.
Despite the absence of a requirement to segregate trust assets and to refrain from using trust assets for a non-trust purpose, SVP maintains that PACA imposes other trust-like duties sufficient to create a technical trust. In particular, SVP points to the following duties: the trustee must hold all assets subject to the PACA trust for the benefit of unpaid produce sellers until they receive full payment; the trustee must maintain sufficient trust assets to satisfy outstanding debts to unpaid produce sellers; and the trustee must keep accurate records of all transactions for a period of two years.
Starting with the trustee‘s obligation to hold trust assets for the benefit of unpaid produce sellers until they receive full payment, this is not so much a duty, but rather goes to the first part of our test in determining whether a statute creates a trustee, beneficiary, and trust res. Under the second part of our test, we focus on the duties of the trustee to manage the property being held in trust. And here, PACA does not impose the typical trust-like duty of segregation nor does it prohibit the trustee from using the trust assets for a non-trust purpose. Further, the statute does not expressly say that PACA beneficiaries must be paid from the PACA trust. Instead, the statute provides that the trust assets must be held in trust “until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents.”
Next, we recognize that the PACA regulations do impose a duty on the trustee to maintain sufficient assets to satisfy outstanding debts, but we are not convinced that this duty is “trust-like” in nature.
Lastly, SVP is correct that the duty to keep accurate records is a typical trust-like duty. See Restatement (Third) of Trusts § 83 (2007) (“A trustee has a duty to maintain clear, complete, and accurate books and records regarding the trust property and the administration of the trust.“). However, we find that this trust-like duty alone cannot create a technical trust absent the important trust like duties of segregation and refraining from using trust assets for a non-trust purpose.
SVP also argues that general principles of trust law impose additional duties on PACA trustees, citing our decision in Gargiulo v. G.M. Sales, Inc., 131 F.3d 995 (11th Cir. 1997). There, we reaffirmed the rule that “[g]eneral principles of trust law govern the PACA trust, and under such principles, even if property is transferred in breach of the trust, a ‘bona fide purchaser’ receives the property free of the trust.” Id. at 999. But that case was in the context of a PACA creditor seeking disgorgement of loan payments to banks made with PACA trust funds. Id. at 998. The “[g]eneral principles of trust law” in Gargiulo thus refer to the circumstances under which a PACA creditor could disgorge those payments. Id. at 999. Further, a PACA trustee who misappropriates PACA trust funds might be in “breach of trust,” id., but when analyzing the Fiduciary Capacity Exception, we are determining whether the fiduciary relationship between the debtor and creditor meets the narrower definition of a technical trust. Thus, our holding today that a PACA trustee is not acting in a fiduciary capacity in the context of
In sum, the second step of our analysis under the Fiduciary Capacity Exception requires us to examine the trust-like duties imposed by the statute on the trustee. And here, we find that PACA does not impose sufficient trust-like duties to create a technical trust. Two of the hallmark duties of a technical trust are not imposed by the statute: the duty to segregate trust assets and the duty to refrain from using trust assets for a non-trust purpose. To the contrary, the PACA regulations suggest that commingling and the use of PACA trust assets for non-trust purposes is permitted. PACA does impose other duties on produce buyers, but one of these duties is not necessarily trust-like in nature and the remaining duties are simply not sufficient to meet the narrow definition of a tech-nical trust.
3. A PACA Trust More Closely Resembles A Constructive or Resulting Trust
Based on our decision in Frio Ice, we find that a PACA trust bears closer resemblance to a constructive or resulting trust than a technical trust. As discussed, constructive or resulting trusts do not qualify as technical trusts under
4. SVP‘s Policy Arguments Are Not Persuasive
We now turn to the policy arguments made by SVP. While we are convinced that a PACA trust does not meet the narrow exception to discharge in
SVP contends that our holding is contrary to Congress‘s intent, will negatively impact the produce industry, and will erode the protections afforded by PACA. First, SVP argues that because Congress amended PACA in 1984 and amended
SVP also suggests that Congress could have classified PACA debts as ordinary business debts and imposed other remedies for produce sellers such as liens. But instead, Congress chose to impose a trust relationship between produce buyers and sellers. SVP argues that the purpose of this was to except PACA debts from discharge under
Finally, SVP argues that not excepting PACA-related debts from discharge will leave PACA creditors without recourse. But as we have already noted, there are several avenues of recourse remaining to PACA creditors. They can seek disgorgement of payments made in breach of the PACA trust, and they are entitled to the highest priority in bankruptcy. In addition, PACA beneficiaries can obtain injunctive relief in district court to have trust assets segregated for the benefit of all unpaid produce sellers. Frio Ice, 918 F.2d at 159.
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.
IV. Conclusion
We hold that debts incurred by a produce buyer acting as a PACA trustee are not excepted from discharge under
AFFIRMED.