On a question where the lower courts are split, Bankruptcy Judge A. Benjamin Goldgar of Chicago took sides with the minority by holding that violating a PACA trust does not give rise to denial of discharge under Section 523(a)(4) for defalcation while acting in a fiduciary capacity.
The facts were typical for a case involving the Perishable Agricultural Commodities Act, known as PACA, 7 U.S.C. § 499a et seq. To protect farmers and dealers of fresh produce, Congress originally adopted PACA in 1930 to impose a floating trust on a purchaser’s inventory and proceeds. The rights of beneficiaries in a PACA trust in a debtor’s inventory and accounts receivable even come ahead of secured creditors.
A corporate produce wholesaler did not pay a supplier some $425,000 for perishable farm products. The wholesaler went out of business, and the owner filed a chapter 7 petition. The owner had controlled every aspect of the wholesaler’s business.
In the owner’s bankruptcy, the produce supplier filed a complaint to declare the $425,000 nondischargeable under Section 523(a)(4) as “a defalcation while acting in a fiduciary capacity.” Although the debtor-owner did not owe the debt directly, caselaw allows a supplier to recover from both the buyer and those in control, like the owner.
The debtor and the supplier filed cross motions for summary judgment. In his December 18 opinion, Judge Goldgar awarded victory to the debtor on the Section 523(a)(4) claim.
Judge Goldgar noted that federal bankruptcy law, not state or general federal law, defines a “fiduciary” for the purpose of Section 523(a)(4). In the Seventh Circuit, he said a fiduciary relationship arises only if there was an express trust or an implied fiduciary relationship. The supplier relied on the existence of an express trust arising from PACA.
Judge Goldgar therefore surveyed the PACA statute and caselaw to illuminate the constituent parts of a PACA trust.
Granted, PACA imposes a statutory trust on both the produce and proceeds and declares that the wholesaler is a trustee. However, a PACA trust is a so-called floating trust where the buyer is required to segregate neither the produce nor the proceeds and is permitted to commingle. A seller has no claim to specific assets, and sellers share pro rata if assets are insufficient to pay them in full. Indeed, the buyer is allowed to use proceeds for any purpose, so long as the buyer maintains sufficient assets to pay the seller.
In sum, PACA’s chief purpose is to give the seller a superpriority claim even ahead of secured creditors with liens on inventory and proceeds, Judge Goldgar said.
Judge Goldgar concluded that the relationship did not have the “hallmarks” of a trust. Instead, he said that PACA created a “purely commercial . . . . buyer-seller” relationship. Unlike a trust, there was no res and no obligation to segregate. To the contrary, he said that commingling “is expressly permitted.”
In substance, Judge Goldgar characterized PACA as a “collection device” that puts produce suppliers “at the front of the line.”
Judge Goldgar conceded that the majority of courts reached the opposite conclusion, but he said “they are unconvincing.”
Judge Goldgar granted summary judgment in favor of the debtor dismissing the supplier’s Section 523(a)(4) claim.
The supplier had also moved for summary judgment under Section 523(a)(2)(A), contending that the debtor obtained property by actual fraud.
Judge Goldgar denied the supplier’s summary judgment motion, because the supplier only relied on a PACA violation. The undisputed facts, he said, contained no evidence indicating that the debtor acted with fraudulent intent. The evidence on summary judgment only made out a claim for breach of contract, the judge said.
On a question where the lower courts are split, Bankruptcy Judge A. Benjamin Goldgar of Chicago took sides with the minority by holding that violating a PACA trust does not give rise to denial of discharge under Section 523(a)(4) for defalcation while acting in a fiduciary capacity.
The facts were typical for a case involving the Perishable Agricultural Commodities Act, known as PACA, 7 U.S.C. § 499a et seq. To protect farmers and dealers of fresh produce, Congress originally adopted PACA in 1930 to impose a floating trust on a purchaser’s inventory and proceeds. The rights of beneficiaries in a PACA trust in a debtor’s inventory and accounts receivable even come ahead of secured creditors.
A corporate produce wholesaler did not pay a supplier some $425,000 for perishable farm products. The wholesaler went out of business, and the owner filed a chapter 7 petition. The owner had controlled every aspect of the wholesaler’s business.
In the owner’s bankruptcy, the produce supplier filed a complaint to declare the $425,000 nondischargeable under Section 523(a)(4) as “a defalcation while acting in a fiduciary capacity.” Although the debtor-owner did not owe the debt directly, caselaw allows a supplier to recover from both the buyer and those in control, like the owner.
The debtor and the supplier filed cross motions for summary judgment. In his December 18 opinion, Judge Goldgar awarded victory to the debtor on the Section 523(a)(4) claim.