Recent Florida Bankruptcy Court decisions and a pending appeal to the 11th Circuit Court of Appeals highlight an existing split of authority within the 11th Circuit and nationally as to whether violating a trust arising under the Perishable Agricultural Commodities Act, 7 U.S.C. § 499a et seq. (“PACA”) can render a debt non-dischargeable under Bankruptcy Code Section 523(a)(4).
Generally, an individual debtor’s pre-bankruptcy debts are dischargeable in a chapter 7 bankruptcy case. However, Bankruptcy Code Section 523(a)(4) excepts from discharge debts attributable to “fraud or defalcation while acting in a fiduciary capacity.” Whether a debtor is a “fiduciary” for Section 523(a)(4) purposes is a question of federal bankruptcy law, not state or other federal law. Therefore, not all fiduciary relationships qualify for the exception to discharge under Section 523(a)(4).
PACA is a federal statute granting qualifying sellers special trust rights in fruits and vegetables sold (whether fresh, frozen, or packed in ice) and the traceable proceeds from the sales. When a seller perfects its PACA trust rights, the seller becomes a beneficiary of a PACA trust and the buyer, as well as certain controlling agents (typically the buyer’s principals) have fiduciary duties to preserve the trust property until the seller is repaid. When a buyer’s principal files a personal chapter 7 bankruptcy case seeking to discharge personal debts arising under PACA, an unpaid seller may object to the dischargeability under Section 523(a)(4) arguing that the principal breached his or her fiduciary duties by allowing the PACA trust to be depleted without repaying the seller.
In the Section 523(a)(4) context, generally, breach of an express or technical trust may be non-dischargeable, whereas breach of a constructive or resulting trust may not fall within the exception. PACA creates a statutory floating trust that contemplates commingling of the PACA trust property with non-trust property. A PACA trust falls somewhere in between express and constructive trusts.
The majority view in the 11th Circuit (and by bankruptcy and district courts throughout the country that have addressed the issue) is that a breach of statutory trust obligations of PACA may satisfy the exception to discharge under Section 523(a)(4). In Melon Acres, Inc. v. Villa, et al., Case No.: 20-10074-KKS, Adv. Pro. No.: 20-01004-KKS (Bankr. N.D. Fla. Jan. 28, 2021), the United States Bankruptcy Court for the Northern District of Florida, adopting the majority view, held that a statutory PACA trust can give rise to non-dischargeability for “defalcation while acting within a fiduciary capacity” under Section 523(a)(4). The Court provided that the plain language of Section 523(a)(4) does not contain an exception for those performing fiduciary duties pursuant to statutory trusts or require that a trust have a segregated res (trust property), and that PACA trusts meet the requirements of express or technical trusts for Section 523(a)(4) purposes because the PACA trust res is clearly defined, even if not segregated.
On the other hand, in Spring Valley Produce, Inc. v. Forrest (In re Forrest), Case No.: 20-03819-RCT, Adv. Pro. No.: 20-00447-RCT (Bankr. M.D. Fla. April 2, 2021), the United States Bankruptcy Court for the Middle District of Florida, faced with the same legal issue, provided that the critical question is whether segregation of trust funds, or a prohibition of use of such funds, is required to render statutory trust obligations non-dischargeable in bankruptcy under Section 523(a)(4). The Court held that under 11th Circuit precedent, there must be at least some segregation or prohibition on use of funds to establish fiduciary capacity for Section 523(a)(4) purposes. And since PACA does not require segregation and contemplates commingling, violations of PACA trusts do not give rise to non-dischargeability under Section 523(a)(4).
The Forrest Bankruptcy Court characterized this issue as “of great importance” and “worthy of certification for direct appeal.” That appeal is pending before the 11th Circuit Court of Appeals with a focus on what segregation, if any, is required to render a PACA trust the type of trust which qualifies for the exception to discharge under Section 523(a)(4).
The outcome of the Forrest appeal will impact buyers’ principals seeking to discharge certain pre-bankruptcy personal obligations arising under PACA, as well as what recourse, if any, may be available to unpaid sellers when buyers’ principals file for bankruptcy protection within the 11th Circuit and beyond.