Persuaded by an opinion from the Eleventh Circuit in August 2022, Bankruptcy Judge Christopher J. Panos of Boston held that a claim against an individual arising from violation of a trust under the Perishable Agricultural Commodities Act, or PACA, 7 U.S.C. § 499a et seq., is not nondischargeable under Section 523(a)(4) “for fraud . . . while acting in a fiduciary capacity . . . .”

Judge Panos concluded “that Congress primarily intended to protect produce sellers from the liens of secured creditors and provide personal liability for responsible parties when PACA debts were not paid.”

A PACA Trust

The individual chapter 7 debtor was a person allegedly in control of a wholesaler of perishable commodities. Not having been paid, sellers of perishable commodities filed an adversary proceeding asking Judge Panos to rule that their debts were not dischargeable under Section 524(a)(4), because they arose from the sale of produce subject to a PACA trust and the debtor violated fiduciary responsibilities imposed by PACA.

The sellers and the debtor filed cross motions for summary judgment. Judge Panos withheld ruling on the motions while a petition for certiorari was pending from the Fourth Circuit’s decision in Spring Valley Produce v. Forrest (In re Forrest), 47 F.4th 1229, 1247 (4th Cir. Aug. 31, 2022), where the Richmond, Va.-based appeals court held that “a PACA trust . . . does not impose sufficient trust-like duties to fit the narrow definition of a technical trust under § 523(a)(4).” To read ABI’s report, click here.

The Supreme Court denied certiorari last year (see Spring Valley Produce Inc. v. Forrest, 143 S. Ct. 2579 (2023)), opening the door for Judge Panos to hand down his decision on April 15.

Judge Panos explained that PACA, originally adopted in 1930, was amended several times and now creates a statutory, floating trust on the inventory and proceeds of a purchaser of perishable commodities. For beneficiaries of the PACA trust, the floating trust gives rights in a debtor’s inventory and accounts receivable ahead of secured creditors. Consequently, produce suppliers have priority over secured lenders in the event of a purchaser’s bankruptcy.

Significantly, PACA does not require segregation. Rather, it permits comingling of trust assets and allows wholesalers to use trust assets for purposes other than paying obligations owing to beneficiaries. However, PACA says that someone in control of trust assets who does not preserve them for beneficiaries has breached a fiduciary duty and is personally liable for a tortious act.

A Trust in Name Only

On the merits, Judge Panos said that the meaning of “fiduciary duty” is a question of federal law looking to the substance of a transaction rather than the form. He then said “that ‘fiduciary capacity’ in the context of § 523(a)(4) only applies to a fiduciary relationship arising out of an express or technical trust, and not to trusts implied by contract or imposed as a remedy for wrongdoing.”

Furthermore, Judge Panos said that the “fiduciary relationship must predate and exist apart from the debtor’s defalcation that created the debt.” Applying the law to the facts, he then analyzed whether the debtor was acting in a “fiduciary capacity” and cited courts that are “divided” as to whether a PACA trust is an express or technical trust that gives rise to nondischargeability.

Judge Panos cited Forrest and said, “the Eleventh Circuit Court of Appeals set out standards for a technical trust under § 523(a)(4)” and identified two trust-like duties that determine the outcome: administration of the trust only for the beneficiaries, and keeping trust property separate.

Saying he found Forrest persuasive, Judge Panos said that “PACA does not sufficiently define or identify the trust res or adequately impose trust-like duties on a trustee to establish a technical trust for purposes of § 523(a)(4) because PACA permits commingling of proceeds and use of proceeds for any purpose.”

More to the point in showing that a PACA trust falls short of being an express or technical trust, Judge Panos cited PACA’s regulations and said, “PACA also provides that ‘[t]rust assets are to be preserved as a nonsegregated “floating” trust,’ and ‘[c]ommingling of trust assets is contemplated.’ 7 C.F.R. § 46.46(b).” Furthermore, he said, “unpaid produce sellers cannot identify or assert particular claims to their original trust assets . . . . 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.”

“Because of these attributes,” Judge Panos concluded:

[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.

Although it was a “close call,” Judge Panos found no disputed issues of fact and granted the debtor’s motion for summary judgment dismissing the dischargeability complaint. Rather than seeing PACA as creating a fiduciary duty, he believes that “Congress primarily intended to protect produce sellers from the liens of secured creditors” by giving sellers “‘the highest priority in bankruptcy proceedings,’” quoting Forrest.