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Does a PACA Trust Give Rise to an Actionable Fiduciary Capacity Claim Under § 523(A)(4) of the Bankruptcy Code?

Section 523(a)(4) of the Bankruptcy Code exempts from discharge a debt “for fraud or defalcation while acting in a fiduciary capacity.”  While the Code does not specifically define the term “fiduciary capacity” courts have coalesced around an interpretation that acting in a fiduciary capacity means something more than merely having a fiduciary duty.  Produce dealers under the Perishable Agricultural Commodities Act (“PACA”), 7 U.S.C §§ 499e(c), have a fiduciary duty to protect produce suppliers.  Congress adopted PACA in 1930 to protect farmers and suppliers by imposing a floating trust on the inventory and proceeds of a purchaser.  Court’s have expanded the company trust obligation to include persons who are owners of a business and in a position to affect and manage the business’ financial operations.

 In Coosemans Miami Inc. v. Arthur (In re Arthur), No. 17-1378 (Bankr. S.D. Fla. Aug, 6, 2018), the debtor was the owner and operator of a fresh produce wholesaler that was subject to PACA.  Prior to bankruptcy, the debtor was sued under PACA by produce suppliers; this suit ended with the debtor, a person responsible for the business and financial affairs of the company, having joint and several liability for almost $300,000 in produce debt.  When the debtor/officer declared bankruptcy the produce suppliers sued claiming that under Section 523(a)(4) the debt was non-dischargeable.

 The Court considered the question of whether the “PACA trust give[s] rise to an actionable fiduciary capacity under § 523(a)(4)?”  The decision to allow discharge turned on the interpretation that only a technical trust falls under Section 523(a)(4) and, until the Court imposes additional duties no technical trust exists, as to individuals, under PACA.  In support, the Court cited two points.  First, since PACA dealers can comingle trust assets with other assets, a PACA trust is not a technical trust until additional restrictions are imposed by the court. Second, the right to use trust assets for non-trust purposes is fatal to finding a technical trust exists. See Texas Lottery Commission v. Tran (In re Tran), 151 F.3d 339, 343-44 (5th Cir. 1988).

Judge Mark does cite cases which held that segregation of trust funds is not required to be a technical trust, but he found these unpersuasive. Additionally, the Court notes that most courts have held that a PACA trust is a technical, albeit statutory, trust.  While this Court has found these decisions unpersuasive it does note the split amongst courts and certified the question to the Circuit Court for clarity.

Authored by: Robert Loughran, Law Clerk (Texas A&M University School of Law)

Melissa Ditto