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In Case of First Impression 11th Circuit Holds Debt of PACA Trustee Not Excepted From Discharge Pursuant to 11 U.S.C. §523(a)(4).

By Scott Riddle on September 9, 2022
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In a case of first impression in the Eleventh Circuit, the Circuit Panel addressed the dischargeability of debts incurred by a produce buyer who is acting as a trustee under the Perishable Agricultural Commodities Act (“PACA”).  In re Forrest, 2022 WL 3908803 (11th Cir. August 31, 2022)(click here for .pdf).   The court concluded that debts incurred by a produce buyer acting as a PACA trustee are not excepted from discharge pursuant to 11 U.S.C. §523(a)(4), which excepts debts “for fraud or defalcation while acting in a fiduciary capacity…”

The basic, undisputed facts are:

The Forrests [Debtors] are owners and officers of Central Market of FL, Inc. (Central Market), which buys and sells produce. [Spring Valley Produce, Inc. (“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 § 523(a)(4). That statute excepts from discharge debts “for fraud or defalcation  while acting in a fiduciary capacity[.]”

The Panel noted that the “Fiduciary Capacity Exception” had existed since 1841, and reviewed U.S. Supreme Court cases on the Exception.

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 v. Forsyth, 43 U.S. (2 How.) 202, 208, 11 L.Ed. 236 (1844)]. Second, the debtor must be acting in a fiduciary capacity before the act of defalcation creating the debt for the exception to apply. [Upshur v. Briscoe, 138 U.S. 365, 378, 375, 11 S.Ct. 313, 34 L.Ed. 931 (1891)]. 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 v. Aetna Acceptance Co., 293 U.S. 328, 333-34, 55 S.Ct. 151, 79 L.Ed. 393 (1934)].

The Panel next addressed the core issue of “what type of trust-like duties are sufficient to create a technical trust under the Fiduciary Capacity Exception,” stating that “[o]ur 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.”  After reviewing case law, the court created the following test:

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 § 523(a)(4). First, 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. This tracks the traditional and narrow definition of trusts in early Supreme Court cases as well as our own approach and the approach taken by bankruptcy courts in this Circuit. 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.

(emphasis added). Getting to the facts of this case, the Panel held that PACA creates a trustee, identifiable beneficiaries and an identifiable trust res, and thus the first requirement is met.  However, PACA does not meet the second requirement of imposing “trust like duties.”  There is no requirement the trust assets be segregated, or not used for non-trust purposes.  There is a requirement of keeping accurate records, but while a “typical “trust like duty” that alone is insufficient to create a technical trust.  A PACA Trust is closer to a “constructive” or “resulting” trust.

The Panel, therefore, concluded that debts incurred by a produce buyer acting as a PACA trustee are not excepted from discharge pursuant to 11 U.S.C. §523(a)(4).

Image: SBR (Market in Barcelona, Spain).

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Bankruptcy cases for almost 30 years.  You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com.  For more information, click here.

 

 

Photo of Scott Riddle Scott Riddle

Scott Riddle has over twenty years’ experience in Bankruptcy and business and real estate litigation and has represented individuals and businesses throughout Georgia and several other states. Scott graduated from The University of North Carolina at Chapel Hill with a BSBA in 1987…

Scott Riddle has over twenty years’ experience in Bankruptcy and business and real estate litigation and has represented individuals and businesses throughout Georgia and several other states. Scott graduated from The University of North Carolina at Chapel Hill with a BSBA in 1987 and received his JD, with honors, in 1991 from the UNC School of Law. After graduation from law school, Scott served as a judicial law clerk for Judge W. Homer Drake, Jr., United States Bankruptcy Judge for the Northern District of Georgia. He then spent several years in the Bankruptcy and litigation sections of a large international law firm based in Atlanta prior to starting his own firm.

Scott is admitted to practice before the Supreme Court of Georgia, Georgia Court of Appeals, Eleventh Circuit Court of Appeals, and U.S. District and Bankruptcy Courts for the Northern, Middle and Southern Districts of Georgia. He has also been admitted to practice pro hac vice in the courts of several other states.

Scott has spoken at several continuing education seminars, and in the community, has been a member of the Kiwanis Club, Buckhead Business Association, Rotary Club and North Point Community Church. He has been cited in several publications, including the Wall Street Journal Online, Atlanta Journal-Constitution, Atlanta Business Chronicle, Fulton County Daily Report, and CNN.com. Scott is a member of the State Bar of Georgia (Bankruptcy and Litigation Sections), served several terms on the Board of Directors of the Bankruptcy Section of the Atlanta Bar Association, and is a member of the Georgia Chapter of the Turnaround Management Association and the American Bankruptcy Institute.

Away from the office, Scott is very active in his community. In addition to volunteering with local charities, Scott has participated and led mission and relief trips to orphanages in Russia and Romania, conducted English camps in Romania and Poland, participated in earthquake relief projects in Haiti, and participated in, and helped organize, an earthquake relief trip to Chile. He also supports Lighthouse Family Retreats, and participates in weekend retreats for children suffering from cancer and their families.

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  • Posted in:
    Bankruptcy
  • Blog:
    Georgia Bankruptcy Blog
  • Organization:
    The Law Office of Scott B. Riddle
  • Article: View Original Source

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