Fruits and Vegetables: Establishing Fiduciary Capacity Under § 523(a)(4)

First enacted during the Great Depression, the Perishable Agricultural Commodities Act (PACA)[1] in part sought to protect the suppliers of fruits and vegetables who had been left unpaid when purchasers went bankrupt. The PACA was further strengthened in 1984 when it was amended to include statutory trust protections for unpaid suppliers. The new requirements for purchasers of fruits and vegetables included a requirement to hold any proceeds derived from the sale of fruits and vegetables in trust for the benefit of the supplier.

Coosemans Miami Inc. (the plaintiff) is one such produce-supplier that is covered by PACA protections. Describing itself as being “at the forefront of the specialty produce business,” the plaintiff sold its goods to food service customers, wholesalers and retailers.[2]

One such wholesale customer based in Miami, Sunrise International LLC, was owned and operated by Robert and Kalaivani Arthur (collectively, the defendants). In May 2016, Coosemans Miami filed suit against the defendants, alleging various PACA violations. The case was subsequently settled for approximately $300,000.

In June 2017, the defendants filed a chapter 7 petition. Shortly thereafter, the plaintiff filed an adversary proceeding seeking approximately $280,000 that it alleged was still due pursuant to the original settlement agreement. The plaintiff’s position was that the debt should not be discharged, as the defendants had defalcated while acting in a fiduciary capacity.

The defendants countered and sought to have the case dismissed on the grounds that PACA trusts do not qualify as an “express or technical trust” and therefore fail to meet the requirements of § 523(a)(4), which holds:[3]

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—

(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;

The court issued an opinion in August 2018 in which it granted the defendants’ motion to dismiss.

In reaching this decision, the court found that the case hinged on the requirement to segregate PACA trust funds. If there was no clear requirement to segregate PACA trust funds, then § 523(a)(4) would not apply.

Under PACA, the court reasoned, there is no requirement that PACA trust funds be segregated absent an explicit directive to do so. In reaching this conclusion, however, the court acknowledged that it found other cases where PACA trusts have been found to be technical trusts. In these cases, the following three factors were generally cited in support of those decisions: “(i) a PACA trust res is identifiable, (ii) a PACA trustee risks personal liability for failure to maintain in the PACA trust sufficient trust assets to satisfy the claims of PACA trust beneficiaries, and (iii) a PACA trust is created upon receipt of perishable agricultural commodities without regard to malfeasance.”[4]

In diverging from these contradictory rulings, the court argued that in the Eleventh Circuit, one of the hallmarks necessary to establish fiduciary capacity under § 523(a)(4) is the requirement for the segregation of assets.[5] An order requiring that segregation would only be issued if it had been determined that a previous dissipation of assets had occurred.

In concluding its opinion, the court reasoned that “the Defendants were not acting in a fiduciary capacity at the time of their alleged defalcation. The Defendants were not required to segregate trust assets from non-trust assets and could use trust assets for their own purposes. For these reasons, a PACA trust is not a technical trust, and the Defendants’ debt to the Plaintiff cannot be excepted from discharge under § 523(a)(4) of the Bankruptcy Code.”[6]

Given the court’s admitted divergence from other PACA trust cases and the lack of consistency among decisions in other circuits, it will be interesting to see whether this decision is appealed and how such an appeal may shake out. Regardless, it is certainly possible that produce-suppliers will pursue litigation earlier against purchasers, especially if there is a legitimate concern that the purchaser may be struggling financially, in order to establish the segregation requirement necessary to protect PACA trust interests in bankruptcy.