In the most thorough analysis so far on both sides of the issue, Bankruptcy Judge LaShonda A. Hunt of Chicago took sides with the minority by holding that the violation of a PACA trust does not make a debt nondischargeable under Section 523(a)(4) for defalcation while acting in a fiduciary capacity.
In her opinion on December 13, Judge Hunt concluded that the “minority position is more consistent with current Seventh Circuit precedent.”
The facts were typical. The debtor was an individual who was an officer, director and owner of a corporation that purchased and resold fresh produce. Everyone agreed that the company and its owner were subject to the Perishable Agricultural Commodities Act, known as PACA, 7 U.S.C. § 499a et seq.
The company did not pay a supplier about $50,000 for produce. The supplier sued in federal court under PACA and obtained a default judgment against the company but not against the owner, because he had filed a chapter 7 petition.
The supplier filed a complaint seeking a declaration that the debt was a nondischargeable debt owing by the owner-debtor under Section 523(a)(4). The debtor filed a motion for summary judgment on the claim under Section 523(a)(4), which provides that a debt owing by an individual is not dischargeable if it was a debt “for fraud or defalcation while acting in a fiduciary capacity.”
Judge Hunt granted the debtor’s motion, holding that PACA does not create a trust making the owner a “fiduciary.”
In Chicago, the bankruptcy judges are split on whether a PACA violation results in a nondischargeable debt for an individual debtor. Most recently, Bankruptcy Judge A. Benjamin Goldgar discharged a PACA debt. See CR Adventures LLC v. Hughes (In re Hughes), 609 B.R. 789 (Bankr. N.D. Ill. Dec. 18, 2019). To read ABI’s report, click here.
However, a Chicago district judge had previously held that a PACA debt was nondischargeable. Still, a majority of Chicago bankruptcy judges believe that PACA debts do not arise in a fiduciary capacity and the resulting debts are dischargeable.
This year, 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. See Spring Valley Produce v. Forrest (In re Forrest),
Spring Valley was appealed directly to the Eleventh Circuit. The last brief was filed this month.
Because her court of appeals has not opined on the question, Judge Hunt focused on relevant Seventh Circuit authority.
The Seventh Circuit has said that the existence of a fiduciary relationship must be strictly and narrowly construed. For Section 523(a)(4), the Chicago-based appeals court said that a fiduciary relationship exists only if there is an express trust or an implied fiduciary relationship. In the case before Judge Hunt, the creditor did not claim there was an implied fiduciary relationship.
For someone to be a fiduciary in the Seventh Circuit, there must be a segregation of funds, and the erstwhile trustee must have only bare legal title. The statute’s use of the word “trust” is not determinative, the appeals court has said.
Judge Hunt explained why a PACA trust falls short.
Congress designed PACA to give sellers an interest in the produce merchant’s assets coming ahead of secured creditors, but the statute creates a so-called floating trust that is not segregated. The debtor is entitled to commingle proceeds, and segregation does not arise until there has been a showing in court of a dissipation of funds.
Judge Hunt deduced that “the trust does not actually come into existence until after a wrong is committed.” [Emphasis in original.] She said that a PACA trust functions “more like a constructive trust than an express trust.”
Although Congress gave creditors “a bevy of tools” in PACA, Judge Hunt said that the statute “serves more as a collection device” rather than a “traditional trust relationship.”
Judge Hunt found the logic of the majority of courts to be “unconvincing,” in part because they “relied on a different standard than the one mandated by this circuit.”
Judge Hunt granted the debtor’s motion for summary judgment dismissing the claim under Section 523(a)(4), because a PACA trust does not fit within the definition of an express trust required in the Seventh Circuit.
Alleging that the owner ordered goods while knowing that the company was insolvent, the creditor also argued that the debt was nondischargeable under Section 523(a)(2)(A). Judge Hunt found disputed facts precluding summary judgment on the Section 523(a)(2)(A) claim.
In the most thorough analysis so far on both sides of the issue, Bankruptcy Judge LaShonda A. Hunt of Chicago took sides with the minority by holding that the violation of a PACA trust does not make a debt nondischargeable under Section 523(a)(4) for defalcation while acting in a fiduciary capacity.
In her opinion on December 13, Judge Hunt concluded that the “minority position is more consistent with current Seventh Circuit precedent.”
The facts were typical. The debtor was an individual who was an officer, director and owner of a corporation that purchased and resold fresh produce. Everyone agreed that the company and its owner were subject to the Perishable Agricultural Commodities Act, known as PACA, 7 U.S.C. § 499a et seq.
The company did not pay a supplier about $50,000 for produce. The supplier sued in federal court under PACA and obtained a default judgment against the company but not against the owner, because he had filed a chapter 7 petition.
The supplier filed a complaint seeking a declaration that the debt was a nondischargeable debt owing by the owner-debtor under Section 523(a)(4). The debtor filed a motion for summary judgment on the claim under Section 523(a)(4), which provides that a debt owing by an individual is not dischargeable if it was a debt “for fraud or defalcation while acting in a fiduciary capacity.”
Judge Hunt granted the debtor’s motion, holding that PACA does not create a trust making the owner a “fiduciary.”