On a question where the lower courts are split, Bankruptcy Judge Roberta A. Colton of Tampa, Fla., sided with the minority and held that violating a PACA trust does not make a debt nondischargeable under Section 523(a)(4) for defalcation while acting in a fiduciary capacity.
With no controlling precedent from the Eleventh Circuit and a split among courts in Florida, Judge Colton certified a direct appeal to the court of appeals.
The facts were typical for a case involving the Perishable Agricultural Commodities Act, known as PACA, 7 U.S.C. § 499a et seq. A company that purchased and resold produce was unable to pay its suppliers. A couple owned and controlled the business and therefore had personal liability to the sellers under PACA.
To dispense with their personal liability, the couple filed chapter 7 petitions. The suppliers responded with a complaint to declare that the debts owing to them were incurred by “fraud or defalcation while acting in a fiduciary capacity” and thus were not dischargeable under Section 523(a)(4).
The Genesis of PACA
To protect farmers and dealers of fresh produce, Congress originally adopted PACA in 1930. The statute was later amended to impose a floating trust on a purchaser’s inventory and proceeds. The floating trust gives rights in a debtor’s inventory and accounts receivable to beneficiaries of the PACA trust ahead of secured creditors. In other words, produce suppliers have priority over secured lenders.
For individuals who have personal liability under PACA, violation of the statutory trust raises the specter of having their debts declared nondischargeable.
The details about the floating trust were critical for Judge Colton, because the statute does not require segregation. Section 499e(c) of PACA provides that “a buyer’s produce, products derived from that produce, and the proceeds gained therefrom are held in a non-segregated, floating trust for the benefit of unpaid suppliers who have met the applicable statutory requirements.”
On the question of dischargeability, Judge Colton said in her April 2 opinion that the “well-reasoned majority view” will not allow individuals to escape debt to suppliers. She cited the “equally well-reasoned minority approach” coming down in favor of dischargeability. Bankruptcy Courts in Florida have opinions on both sides.
Lack of Segregation Is Dispositive
Regarding Section 523(a)(4), Judge Colton began with fundamental principles, starting with Supreme Court authority from 1934 saying that the fiduciary exception is “strict and narrow.” Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, (1934). Moving to the Eleventh Circuit, she said that “a breach of an express or technical trust is potentially non-dischargeable.” Guerra v. Fernandez-Rocha (In re Fernandez-Rocha), 451 F.3d 813, 816 (11th Cir. 2006).
Judge Colton went on to paraphrase Guerra by saying that breaches of constructive or resulting trusts do not fall within the Section 523(a)(4) discharge exception. She said that a PACA trust “falls somewhere between an express trust and a constructive trust.”
Again citing binding precedent, Judge Colton noted that the Eleventh Circuit found a debt to be nondischargeable when the state statute required segregation of insurance premiums paid to a broker. Quaif v. Johnson, 4 F.3d 950, 953-954 (11th Cir. 1993).
Synthesizing authorities, Judge Colson said that “a statutory trust [like PACA] will only meet the definition [of ‘fiduciary capacity’] if it effectively creates a technical trust.”
Significantly, PACA permits and contemplates comingling and “fails to create the same type of a relationship characteristic of the conventional fiduciaries,” Judge Colton said. She cited the Fifth Circuit for finding that a debt was dischargeable because state lottery law did not require segregation. Texas Lottery Comm’n v. Tran (In re Tran), 151 F.3d 339 (5th Cir. 1998).
For Judge Colton, the lack of segregation was outcome-determinative. She interpreted the Eleventh Circuit as steering “the lower courts toward narrowing the scope of Section 523(a)(4) and [pointing] toward the need to have, at a minimum, ‘some’ segregation.”
Although she said that “reasonable minds can and do differ,” Judge Colton came down on the side of the debtors by dismissing the dischargeability complaint. In view of “the importance of this issue and the split of authority within this circuit,” she certified a direct appeal to the Eleventh Circuit on May 5.
On a question where the lower courts are split, Bankruptcy Judge Roberta A. Colton of Tampa, Fla., sided with the minority and held that violating a PACA trust does not make a debt nondischargeable under Section 523(a)(4) for defalcation while acting in a fiduciary capacity.
With no controlling precedent from the Eleventh Circuit and a split among courts in Florida, Judge Colton certified a direct appeal to the court of appeals.
The facts were typical for a case involving the Perishable Agricultural Commodities Act, known as PACA, 7 U.S.C. § 499a et seq. A company that purchased and resold produce was unable to pay its suppliers. A couple owned and controlled the business and therefore had personal liability to the sellers under PACA.
To dispense with their personal liability, the couple filed chapter 7 petitions. The suppliers responded with a complaint to declare that the debts owing to them were incurred by “fraud or defalcation while acting in a fiduciary capacity” and thus were not dischargeable under Section 523(a)(4).
The Genesis of PACA
To protect farmers and dealers of fresh produce, Congress originally adopted PACA in 1930. The statute was later amended to impose a floating trust on a purchaser’s inventory and proceeds. The floating trust gives rights in a debtor’s inventory and accounts receivable to beneficiaries of the PACA trust ahead of secured creditors. In other words, produce suppliers have priority over secured lenders.
For individuals who have personal liability under PACA, violation of the statutory trust raises the specter of having their debts declared nondischargeable.