On an issue where the lower courts are split, a bankruptcy judge in Miami decided that officers of a produce wholesaler are not saddled with nondischargeable debts if suppliers of perishable agricultural commodities are unpaid.
Deciding a question he called “a close one,” Bankruptcy Judge Robert A. Mark concluded that a trust created under the Perishable Agricultural Commodities Act (7 U.S.C. § 499a, et seq.), or PACA, does not give rise to a “technical trust” and therefore does not result in a nondischargeable debt under Section 523(a)(4) for committing fraud “while acting in a fiduciary capacity.” Although the Eleventh Circuit has not ruled on the precise issue, Judge Mark interpreted authority from the Atlanta-based appeals court as mandating the outcome.
PACA and the Case at Hand
To protect farmers and suppliers who were usually unpaid when a fresh produce wholesaler declared bankruptcy, Congress originally adopted PACA in 1930 by imposing a floating trust on a purchaser’s inventory and proceeds. Among other things, PACA creates a statutory trust protecting growers and suppliers by putting them ahead of accounts receivable lenders.
The chapter 7 debtors owned and operated a fresh produce wholesaler that was subject to PACA. Before bankruptcy, the officers had been sued under PACA by produce suppliers. The suit ended in a stipulation of settlement where the company and the officers took on joint and several liability for almost $300,000. When the officers later filed bankruptcy, little had been paid.
The produce suppliers sued in bankruptcy court to declare that the debt was nondischargeable under Section 523(a)(4). They contended that their produce, once sold, became the corpus of a PACA trust and that the debtors had fiduciary duties to ensure that enough proceeds remained to pay their invoices in full.
The debtors filed a motion to dismiss, which Judge Mark granted in his August 6 opinion.
Judge Mark’s Ratio Decidendi
Judge Mark said the Bankruptcy Code does not define “fiduciary capacity.” The “only clear consensus,” he said, is that “acting in a fiduciary capacity means something more than simply having fiduciary duties.” Citing Quaif v. Johnson, 4 F.3d 950, 953 (11th Cir. 1993), only a technical trust falls under Section 523(a)(4). Although courts agree there must be a technical trust, Judge Mark said there is no “consensus” about “what constitutes a ‘technical trust.’”
In the Eleventh Circuit, Judge Mark said, a technical trust is not created involuntarily, like a resulting or constructive trust. Rather, a technical trust arises voluntarily, like an express trust.
Because Section 523(a)(4) pertains only to debts incurred “while acting” in a fiduciary capacity, Judge Mark said that a technical trust must exist before the alleged defalcation.
There is no technical trust under PACA, Judge Mark said, “until a court imposes additional duties . . . after a prior showing of malfeasance.”
Critically, the Eleventh Circuit has held that PACA does not require segregation, allows comingling, and permits the use of trust assets for other purposes “prior to a showing of dissipation,” Judge Mark said. The ability of a PACA dealer “to comingle trust assets with other assets precludes a finding that a PACA trust is a technical trust,” the judge ruled. As additional support, he cited the Fifth Circuit for holding that the ability to use trust assets for another purpose “is fatal to finding that a technical trust exists.”
Demonstrating the division of authority, Judge Mark cited the Sixth Circuit and the Ninth Circuit Bankruptcy Appellate Panel, which held in non-PACA cases that segregation is not required. He also conceded that “a majority of [lower] courts” have held that PACA trusts are technical trusts. He took issue with those decisions because, in his view, “an identified trust res without a segregation requirement is not enough.”
As further support for his conclusion, Judge Mark cited the Fifth and Seventh Circuits, which both held that failure to pay proceeds of lottery ticket sales did not involve a technical trust.
Judge Mark ended his opinion by saying he would certify the question for direct appeal to the Eleventh Circuit.