BANKRUPTCY CORNER
Eleventh Circuit Holds that PACA Trusts Do Not Give Rise to Nondischargeable Debts
JASON S . RIGOLI
In Spring Valley Produce , Inc . v . Forrest ( In re Forrest ), __ F . 4th __, 2022 U . S . App . LEXIS 24627 , 2022 WL 3908803 ( 11th Cir . Aug . 31 , 2022 ), the Eleventh Circuit held that debts incurred by a produce buyer acting as a Perishable Agricultural Commodities Act ( PACA ), 7 U . S . C . § 499a-499t , trustee were not excepted from discharge under 11 U . S . C . § 523 ( a )( 4 ).
PACA Trusts Generally
Congress enacted PACA in 1930 to mitigate the risks facing small-business produce sellers and promote fair practices among dealers . 2022 U . S . App . LEXIS 24627 at * 22 . PACA was subsequently amended several times , eventually establishing a statutory trust between produce buyers and sellers which “ ‘ automatically arises in favor of a produce seller upon delivery of produce [,]’ upon the produce seller providing written notice of intent to preserve its rights . Id . ( citation omitted ). The PACA Trust is a non-segregated floating trust , which contemplates the co-mingling of trust assets . Id . at * 24 .
Fraud or Defalcation in Fiduciary Capacity Exception under 11 U . S . C . § 523 ( a )( 4 )
11 U . S . C . § 523 ( a )( 4 ) excepts from discharge “ any debt - for fraud or defalcation while acting in a fiduciary capacity [.]” For the Eleventh Circuit , the analysis turned on the term “ fiduciary capacity .” Id . at * 5-6 . Fiduciary capacity under § 523 ( a )( 4 ) is determined by federal law . In Forrest the Court went through the history of early Supreme Court cases interpreting the scope of the “ fiduciary capacity ,” which limited the scope to “ a trust in its technical sense .” Id . at * 7 ( quoting Upshur v . Briscoe , 138 U . S . 365 , 375 , 11 S . Ct . 313 , 34 L . Ed . 931 ( 1891 ) ( internal quotation marks omitted )). After going through the history , the Eleventh Circuit adopted the following three-part test for determining whether a debtor was acting a fiduciary capacity under § 523 ( a )( 4 ):
First , the relationship must have ( 1 ) a trustee , who holds ( 2 ) an identifiable trust res , for the benefit of ( 3 ) an
identifiable beneficiary or beneficiaries . Second , the relationship must define sufficient trust-like duties imposed on the trustee with respect to the trust res and beneficiaries to create a " technical " trust , with the strongest indicia of a technical trust being the duty to segregate trust assets and the duty to refrain from using trust assets for a non-trust purpose . Third , the debtor must be acting in a fiduciary capacity before the act of fraud or defalcation creating the debt .
Id . at * 2 .
Application of Three-Part Test to PACA Trusts
The Eleventh Circuit held that the first prong was satisfied . PACA statute on its face creates : ( 1 ) a trustee , the purchaser of the perishable agricultural commodities ; ( 2 ) the perishable agricultural commodities or proceeds received from the sale therefrom are the res ; and ( 3 ) the unpaid sellers or suppliers of the perishable agricultural commodities are the beneficiaries . Id . at * 23-24 .
Notwithstanding , the Eleventh Circuit found that the PACA statute “ does not impose sufficient trust-like duties to fit the narrow definition of a technical trust under § 523 ( a ) ( 4 ). PACA does not impose the duties to segregate trust assets and refrain from using trust assets for a non-trust purpose , which are strong indicia of a technical trust . Instead , a PACA trust more closely resembles a constructive or resulting trust , which do not fall within § 523 ( a )( 4 )’ s exception to discharge .” Id . at * 38 .
This article was submitted by Jason S . Rigoli , Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
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