Melon Acres, Inc. v. Villa

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF FLORIDA

GAINESVILLE DIVISION

IN RE:

ALMA D. VILLA and CASE NO.: 20-10074-KKS

JAIME NAVARETTE ,

CHAPTER 7

Debtors.

____________________________/

MELON ACRES, INC., ADV. NO.: 20-01004-KKS

Plaintiff,

v.

ALMA D. VILLA and

JAIME NAVARETTE,

Defendants.

/

MEMORANDUM OPINION AND ORDER 1) DENYING

(“MOTION TO DISMISS,” DOC. 8)

AS TO COUNT I, AND 2) GRANTING THE MOTION TO

DISMISS AS TO COUNT II OF COMPLAINT

THIS MATTER is before the Court on

(“Motion to Dismiss,” Doc. 8), Plaintiff’s opposition, and related

pleadings.1 Defendants move to dismiss the Complaint on several

grounds, only two of which the Court will address in this ruling.

Facts and Procedural History

The material facts alleged in the Complaint are undisputed.

Plaintiff is an Indiana corporation which trades in fresh fruit and

vegetable commodities covered under the Perishable Agricultural

Commodities Act, 1930 (“PACA”).2 Defendants were managing members,

officers, directors or shareholders of A&J Produce, Inc. (“A&J”) which

bought and sold produce at wholesale.3 Defendants are listed as

principals of A&J’s PACA license.4

Defendants filed their voluntary Chapter 7 Petition on April 7,

2020.5 Plaintiff commenced the instant adversary proceeding by filing a

two-count Complaint seeking a nondischargeable final judgment against

1 , Doc. 11 (“Opposition”);

[ ] , Doc. 13 (“Reply”);

and [ ]

, Doc. 16 (“Surreply”).

2 [ ] (“Complaint”), Doc. 1

¶¶ 1–4.

3 ¶¶ 6, 8–9.

4 ¶ 6.

5 ¶ 48. On their voluntary Chapter 7 Petition, Defendants listed themselves as having

done business under the name “A&J Produce, Inc.”

, , No. 20-10074-KKS (Bankr. N.D. Fla. Apr. 7, 2020) (“Voluntary

Petition”), Doc. 1. Because A&J Produce, Inc. is a separate legal entity, Defendants’/Debtors’

designation of that entity as a “dba” is incorrect. A&J Produce, Inc. cannot be and has not

legally been included as a debtor in Defendants’ Chapter 7 case.

both Defendants in the amount of $92,506.00.6 It is that Complaint

Defendants seek to dismiss.

DISCUSSION

Motion to Dismiss Standard

In addressing a motion to dismiss, the Court must accept the

factual allegations in the Complaint as true, and take them in the light

most favorable to the claimant.7 To survive a motion to dismiss, a

complaint must contain “a short and plain statement of the claim

showing that the pleader is entitled to relief.”8 This standard “requires

more than labels and conclusions . . . .”9 “Threadbare recitals of the

elements of a cause of action, supported by mere conclusory statements,

do not suffice.”10 To determine whether to grant or deny a motion to

dismiss, the Court should assume the veracity of well-pleaded facts “and

then determine whether they plausibly give rise to an entitlement to

relief.”11 At the motion to dismiss stage, the question before the Court is

6 Complaint, Doc. 1.

7 , 551 U.S. 89 (2007); , 778 F. Supp.

518, 519 (M.D. Fla. 1991) (citing , 416 U.S. 232 (1974)).

8 Fed. R. Civ. P. 8(a)(2), made applicable by Fed. R. Bankr. P. 7008.

9 , 550 U.S. 544, 555 (2007) (citation omitted).

10 , 556 U.S. 662, 679 (2009).

11 Ch. 7 Case No. 18-40628-KKS, Adv. No. 19-04006-KKS,

2019 WL 3282972, at *1 (Bankr. N.D. Fla. June 18, 2019) (quoting , 556 U.S. at 679).

not what Plaintiff could ultimately prove, but “whether [Plaintiff] has

adequately alleged each element of a plausible claim.”12

Applying this analysis, the primary legal issues to be determined

based on the facts alleged are: whether breach of a PACA trust can give

rise to a nondischargeable debt under 11 U.S.C. § 523(a)(4); whether

Defendants may be individually liable for A&J’s breach of the PACA trust

even though they, themselves, were not the “dealer” or “broker;” and if

so, whether Defendants’ conduct amounted to defalcation while acting in

a fiduciary capacity such that the debt to Plaintiff may be

nondischargeable pursuant to 11 U.S.C. § 523 (a)(4).13

Count I – Breach of a PACA trust can give rise to, and Count I states

a viable cause of action for, nondischargeability of debt under 11

U.S.C. § 523(a)(4) .

Plaintiff asserts that Defendants owe the value of the PACA assets

sold to A&J and that this debt is nondischargeable under 11 U.S.C.

§ 523(a)(4) because of Defendants’ defalcation while acting in a fiduciary

12 , Ch. 7 Case No. 15-45404-ess, Adv. No. 1-16-

01015-ess, 2016 WL 3244861, at *22 (Bankr. E.D.N.Y. June 3, 2016); , 556 U.S.

at 679; , Ch. 7 Case No. 19-30103-KKS, Adv. No. 19-

03011-KKS, 2019 WL 9406132, at *2 (Bankr. N.D. Fla. Dec. 31, 2019).

13 In the Complaint, Plaintiff alleges that Defendants’ conduct constitutes “false

representations, false pretenses, and/or actual fraud” and the debt should be

nondischargeable under 11 U.S.C. § 523(a)(2)(A) but does not request a determination of

nondischargeability under that section in its request for relief. Doc. 1, pp. 10–12. For that

reason, the Court does not address § 523(a)(2)(A) in this ruling.

capacity.14 In support, Plaintiff relies on caselaw originating from the

Ninth Circuit Bankruptcy Appellate Panel.15 Defendants contend that

Plaintiff cannot state a claim under § 523(a)(4) because the trust created

under PACA, and any associated fiduciary duties, is not the type of trust

that results in nondischargeability under § 523(a)(4). Defendants rely on

a case from the Bankruptcy Court for the Southern District of Florida.16

The case law is split. Neither party cites controlling precedent on this

issue.

Although the Eleventh Circuit has not yet weighed in on this

specific issue, certain of its rulings provide guidance. In the seminal case

of the Eleventh Circuit observed that the term

“fiduciary” is “not to be construed expansively, but instead is intended to

refer to ‘technical trusts.’”17 The court noted in that courts have

struggled with the concept of “technical trust” since the Supreme Court’s

1934 ruling in 18 The Eleventh Circuit

14 11 U.S.C. § 523(a)(4) (2020).

15 No. CC-90-1366-OVP (BAP 9th Cir. 1991).

16 , 589 B.R. 761 (Bankr. S.D. Fla. 2018).

17 , 4 F.3d 950, 953 (citing , 293 U.S. 328

(1934); , 43 U.S. 202 (1844); , 138 U.S. 365 (1891)).

18 (explaining the historical difference between and “express” and “constructive,” or

resulting trust: “In nineteenth century jurisprudence, the concept of ‘trust’ generally fell into

two categories: (1) a voluntary trust, created by contract, often referred to as an ‘express’

trust, and (2) a trust created by operation of law, such as a constructive trust or resulting

explained that the difficulty in determining whether fiduciary duties

established by statutory trusts are nondischargeable under § 523(a)(4)

arises because statutory trusts exist in a gray area between express and

constructive trusts: they “fit into neither of the traditional categories.”19

In the issue was whether an insurance agent’s debt was

nondischargeable under 11 U.S.C. § 523(a)(4) due to defalcation of

fiduciary duties imposed by a Georgia statute in connection with

insurance premiums.20 The bankruptcy court ruled the debt to be

nondischargeable;21 the Eleventh Circuit affirmed, concluding that the

Georgia statute in question created fiduciary duties “arguably sufficient

to create a ‘technical’ trust.”22 Although the Eleventh Circuit in did

not define “technical trust,” it pointed out the distinction between the

Georgia statute before it, which imposed fiduciary duties

defalcation, and other statutes that impose fiduciary duties only

defalcation.23

trust, which generally served as a remedy for some dereliction of duty in a confidential

relationship, regardless of the intentions of the parties.”) (citing

134 B.R. 646, 650 (Bankr. N.D. Okl. 1991)).

19

20 at 952.

21

22 at 954.

23 119 B.R. 837, 840 (Bankr. M.D. Fla.

1990) (citing 293 U.S. at 328).

PACA imposes fiduciary duties before defalcation. Under PACA,

the buyer is mandated to: hold in trust for the benefit of unpaid sellers

the commodities delivered or the proceeds and products of the

commodities until the unpaid sellers are paid in full; maintain trust

assets so that they are freely available to satisfy obligations to unpaid

sellers; preserve unpaid sellers’ rights to trust benefits; collect and remit

funds to unpaid sellers from the sale of produce; and not dissipate trust

assets.24 The PACA trust is created at the moment the buyer receives the

perishable agricultural commodities from the seller and before any

wrongdoing by the buyer/trustee.25 The PACA trust exists separate from

any act of wrongdoing.

Other statutes impose trust duties only after defalcation. For

example, the Ninth Circuit Court of Appeals held that a California law

requiring partners in a partnership to hold in trust any profits derived

without the consent of other partners imposed trust duties only after

defalcation.26 Courts have found that still other statutes, like the one at

issue in , do not contain trust duties at all.27

24 7 C.F.R. §§ 46.46(c)(2), (d)(1) (2020).

25 , 814 F. Supp. 346, 348 (S.D.N.Y. 1990).

26 , 780 F.2d 794, 796 (9th Cir. 1986).

27 , 451 F.3d 813 (11th Cir. 2006).

In plaintiffs with a $4.2 million medical

malpractice jury verdict appealed the dismissal of their § 523(a)(4)

complaint against the physician-debtor based on the physician’s failure

to maintain an escrow fund, malpractice coverage, or a letter of credit as

required by a Florida statute.28 The Eleventh Circuit upheld the

bankruptcy and district courts, distinguishing the Florida statute at

issue in from the Georgia statute in and holding

that the Florida statute did not “create a fiduciary duty or technical

trust . . . .”29 Describing the Florida statute as “regulatory,” the court in

noted:

[T]he [Florida] statute does not use the term “fiduciary

capacity,” nor does it require a doctor to place funds “in trust”

for the benefit of third party patients. The statute does not

require the physician to hold and account for the funds to

third party patients. The statute does not create any property

right in a doctor’s escrow fund in favor of a patient.30

Because the Florida statute did not create a fiduciary duty in favor of the

plaintiff patient, the court agreed that the defendant-debtor in

had committed no defalcation sufficient to support a

28 at 814.

29 at 818.

30

nondischargeability ruling under 11 U.S.C. § 523(a)(4).31

Courts agree that PACA creates a statutory trust but disagree on

whether violation of the PACA trust equates to a defalcation while acting

in a fiduciary capacity for purposes of § 523(a)(4) nondischargeability.

on which Defendants rely, focused largely on whether the trust

must be segregated or simply defined.32 The distinction between

defined and segregated is crucial because PACA does not require trust

assets to be segregated; it provides that “[t]rust assets are to be preserved

as a nonsegregated ‘floating’ trust. Commingling of [PACA] trust assets

is contemplated.”33

This Court has not required a trust to be segregated rather than

identifiable for purposes of §523(a)(4). In , which involved a

non-statutory trust, this Court held that an express or technical trust

requires a clearly defined trust , and that the bankruptcy definition of

trust “may include statutory trusts if they meet the requirements for an

express or technical trust.”34

31 at 819.

32 , 589 B.R. at 767.

33 7 C.F.R. § 46.46(b) (2020).

34 , 115 B.R. 346, 350 (Bankr. N.D. Fla. 1990) (citing

84 B.R. 225 (Bankr. M.D. Fla. 1988)); , 207 B.R. 731,

735 (Bankr. N.D. Fla. 1997) (citing , 187 B.R. 808

(Bankr. N.D. Ga. 1995); , 4 F.3d at 950; ,

Other Florida bankruptcy courts have held violations of non-PACA

statutory trusts nondischargeable pursuant to § 523(a)(4) without

requiring the trust to be segregated.35 In the

Bankruptcy Court for the Southern District of Florida held that

segregation of funds is not a mandatory element for an express or

technical trust and found that a trust created pursuant to a Florida

statute met the requirements for an express or technical trust under

§ 523(a)(4).36

Courts faced with this issue also focus on whether a statutory trust

like PACA creates an express or technical trust. A minority of bankruptcy

courts, led in Florida by in have held that PACA trusts are

not express or technical trusts because PACA does not require the trust

to be segregated, but rather allows the trustee to use trust assets for

non-trust purposes.37 The court in concluded that because

100 B.R. 861 (Bankr. S.D. Tex. 1989)).

35 , 431 B.R. 245, 262 (Bankr. S.D. Fla. 2010)

(holding that debt for debtor’s failure to fund ERISA plan was nondischargeable);

, 355 B.R. 337, 343–44 (Bankr. M.D. Fla. 2006) (holding that debtor’s

failure to diversify ERISA plan’s investments and using them for his own benefit constituted

“fraud or defalcation” pursuant to § 523(a)(4));

, 209 B.R. 4, 9 (Bankr. M.D. Fla. 1997) (citing 175

B.R. 775, 778 (Bankr. S.D. Fla. 1984)) (holding that statutes may establish express or

technical trust, but not statutes that contain “broad fiduciary responsibilities,” for officers of

corporations).

36 , 107 B.R. 789, 791 (Bankr. S.D. Fla. 1989).

37 , 589 B.R. at 766–68 (citing , 918 F.2d 154, 159

PACA does not require the trust to be segregated, breach of a PACA

trust does not amount to a defalcation sufficient for nondischargeability

of debt under 11 U.S.C. § 523(a)(4).38

A majority of courts hold the opposite: that is, PACA trusts meet

the requirements of express or technical trusts because the trust must

only be clearly defined, not segregated.39 The majority view the existence

(11th Cir. 1990)) (“This Court finds that an identified trust without a segregation

requirement is not enough.”); ,

324 B.R. 389, 392–93 (Bankr. M.D. Fla 2005) (“PACA clearly satisfies requirements 2 and 3

of the definition of an express or technical trust. . . . The remaining issue is whether a PACA

res is a segregated trust res. . . . [T]he Court finds that it is not.”);

, 609 B.R. 789, 801–02 (Bankr. N.D. Ill. 2019) (stating that courts

that find PACA creates a technical trust are wrong because segregation of funds is a

mandatory element).

38 , 589 B.R. at 767. Taking the analysis a step further, Judge Mark in

likened a PACA trust to a constructive trust because PACA does not provide for

“meaningful enforcement” of the fiduciary duties until after proof of dissipation of assets.

39 at 769 (recognizing that a majority of courts find that express or technical trusts require

only a clearly defined trust res, not a segregated trust res);

, No. 12 CV 7654, 2013 WL 7507846, at *3 (N.D. Ill. Sept. 16,

2013) (segregation is not a mandatory element of an express trust and the trust res in a PACA

trust is explicitly defined and identifiable); , 184 B.R. at 475 (holding that PACA

created fiduciary duties and stating that segregation is not a mandatory element of an

express trust); , 503 B.R. 717, 721 (Bankr. W.D.

Wis. 2013); 412 B.R. 99, 105 (Bankr. E.D.N.Y. 2009)

(distinguishing , 324 B.R. at 389,and holding “[t]his court joins the courts finding

that a trust imposed under PACA is a technical trust for purposes of satisfying the fiduciary

capacity requirement under § 523(a)(4)”); , 397

B.R. 610, 619 (Bankr. D. Ma. 2008); , Ch. 7 Case

No. 05-10816-WHD, Adv. No. 05-1118, 2007 Bankr. LEXIS 3727, at *6–8 (Bankr. N.D. Ga.

Sept. 27, 2007) (“Having considered both views in light of the Eleventh Circuit Court of

Appeals’ decision in , this Court concurs with and adopts the majority view

that a debt arising from a defalcation committed while acting as a fiduciary of a trust imposed

by PACA is nondischargeable under section 523(a)(4).”);

, 374 B.R. 184, 190–91 (Bankr. M.D.N.C. 2007);

150 B.R. 416, 418 (Bankr. E.D. Tenn. 1993) (PACA statutory trust satisfies express

or technical requirements of provision of Bankruptcy Code rendering nondischargeable a

debt for fraud or defalcation while acting in fiduciary capacity);

of a segregated trust as a factor that strengthens the argument for an

express or technical trust, but not as a requirement.40 In a case

representative of the majority, the Bankruptcy Court for

the Northern District of Georgia incisively pointed out that the Eleventh

Circuit has never held, in or otherwise, that segregation of a trust

is a element of an express or technical trust.41 The U.S.

District Court for the District of Maryland in held similarly:

that PACA is the kind of trust contemplated by § 523(a)(4), that the

statute need only define the trust , and that segregation of the trust

is not required.42

This Court agrees with the majority view exemplified in and

123 B.R. 412, 414 (Bankr. W.D. Okla. 1990) (debtor’s failure to pay PACA supplier

proceeds from the sale of produce constitutes defalcation in fiduciary capacity that results in

nondischargeable debt); Ch. 7 Case No. 91-40817-COL.,

Adv. Nos. 91-4040-COL, 91-4062-COL, 1992 WL 119143 (M.D. Ga. Apr. 10, 1992) (PACA

trust creates a true trust and fiduciary relationship for purposes of 11 U.S.C. § 523(a)(4));

119 B.R. at 840 (PACA debt might be nondischargeable, provided proof of fiduciary

duty and defalcation, which “need not be intentional.”).

40 , , 2007 WL 1100482, at *4 (“Although a

segregation component may strengthen the argument for an express trust, segregation is not

required so long as the trust res is identifiable.”); , 353 F.3d 537, 540–41 (7th Cir.

2003) (“Segregation of funds, management by financial intermediaries, and recognition that

the entity in control of the assets has at most ‘bare’ legal title to them are hallmarks of a

trust.”); , 403 B.R. 565, 577 (Bankr. N.D. Ill. 2009)

(citing , 353 F.3d at 540–41) (holding that “formal separation and ownership

rules” are components of a relationship amounting to a fiduciary relationship and are

recognizable as hallmarks of a trust).

41 , 2007 WL 1100482, at *4.

42 , 184 B.R. at 475.

. A PACA trust has a clearly defined trust : “all inventories of

food or other products derived from perishable agricultural commodities,

and any receivables or proceeds from the sale of such commodities or

products . . . .”43 PACA imposes affirmative trust duties: dealers must

“maintain trust assets in a manner so that the trust assets are freely

available to satisfy outstanding obligations to sellers of perishable

agricultural commodities.”44 Under PACA, anyone “who has a fiduciary

duty to collect funds resulting from the sale or consignment of produce,

and remit such funds to its principal, also has the duty to preserve its

principal’s rights to trust benefits . . . .”45 PACA names identifiable trust

beneficiaries: unpaid suppliers or sellers of perishable agricultural

commodities.46

PACA is closely related to the Packers and Stockyards Act of 1921

43 7 U.S.C. § 499e(c)(2) (2020). The trust in a PACA trust “is specifically identified and

identifiable as all perishable agricultural commodities and products and proceeds of such

commodities.” , 2007 WL 1100482, at *5.

44 7 C.F.R. § 46.46(d)(1).

45 § 46.46(c)(2).

46 7 U.S.C. § 499e(c)(2) (2020). Defendants’ reliance on dicta from

, 594 B.R. 484 (Bankr. N.D. Fla. 2018) is misplaced. did not involve a

statutory trust or any trust at all. The plaintiffs in sought a ruling that debt arising

out of non-payment of BP Oil Spill proceeds was nondischargeable under § 523(a)(4) due

based on fraud and fraudulent inducement. The plaintiffs in tried to show that the

defendants’ receipt of BP Oil Spill settlement proceeds placed them in a fiduciary

relationship. The court discussed fiduciary relationships in general and held “no affirmative

trust duties were delineated in the Agreement or otherwise, and thus an express or technical

trust does not exist.” at 494.

(“PSA”),47 which Congress amended in 1976 to create a statutory trust

for the benefit of unpaid cash sellers of “livestock products.”48 Courts

have held that debts due to debtors’ use of funds governed by PSA for

general operating expenses may be nondischargeable under 11 U.S.C. §

523(a)(4) because of the fiduciary duties imposed by that statute,

provided proof of defalcation by the debtor.49

Whether a debt arising from failure to comply with PACA’s trust

obligations may be nondischargeable under § 523(a)(4) represents a tug-

of-war between two competing federal statutes—the Bankruptcy Code

and PACA—enacted by the same body. The Bankruptcy Code is based on

equity and is intended to give debtors a fresh start.50 PACA is intended

to protect a specific category of creditor: sellers of agricultural

commodities.51 Congress first enacted PACA in 1930 without the trust

portion.52 Congress enacted 11 U.S.C. § 523(a)(4) in 1978 as part of the

47 7 U.S.C. §§ 181–217a, 221–229 (1994).

48 7 U.S.C. § 196(b) (1994).

49 51 B.R. 486 (Bankr. D.

Kansas 1985); 10 B.R. 652 (Bankr. S.D. Ala. 1981).

50 , 549 U.S. 265, 367 (2007).

51 , 918 F.2d at 159 (“[T]he central purpose of Section 499e(c) is to ensure payment to

trust beneficiaries.”); , 157 F.3d 197, 202 (3d Cir. 1998)

(“PACA . . . was enacted to protect unpaid suppliers of produce and alleviate the burden of

nonpayment on commerce . . . .”).

52 , 67 F.3d 1063, 1066–67 (2d Cir. 1995).

Bankruptcy Code.53 Congress did not write limiting language into

§ 523(a)(4) in 1978. After Congress enacted § 523(a)(4) it amended PACA

to include the “floating trust” provision “[t]o provide further protections

to sellers of perishable commodities,”54 and placing produce sellers, as

trust beneficiaries, ‘‘first in line among creditors for all produce-related

assets if the produce dealer declares bankruptcy.’’55 When Congress re-

drafted the Bankruptcy Code in 2005, it still did not limit § 523(a)(4) to

exclude obligations under PACA trusts. Nothing in § 523(a)(4) contains

an exception for those performing fiduciary duties pursuant to statutory

trusts or requires a trust to have a segregated Had Congress

intended to exclude PACA obligations from § 523(a)(4), it has had years

to do so. It has not. “Congress alone bears the responsibility for revising

the statute.”56

The Eleventh Circuit has recently ruled that where a section of the

Bankruptcy Code is clear, there is no “reason to add gloss to the statute

53 11 U.S.C. § 523(a)(4) became a part of the Bankruptcy Code in 1978 when the Code was

enacted. Pub. L. No. 95-598, § 523(a)(4), 92 Stat. 2549, 2591 (1978).

54 , 340 F.3d 361, 364 (6th Cir. 2003) (“In 1984, Congress

amended PACA to create a statutory trust . . . .”).

55 , 918 F.2d at 156 (holding that as amended, PACA “establish[ed] a nonsegregated

statutory trust under which a produce dealer holds its produce-related assets as a fiduciary

until full payment is made to the seller.”).

56 , 184 B.R. at 475 (citing , 814 F. Supp. at 348–49).

Congress wrote.”57 In , the Eleventh Circuit analyzed

the plain text of § 1329 of the Bankruptcy Code, noting a Circuit split on

whether that section requires a bankruptcy court to find a change of

circumstances before modifying a confirmed Chapter 13 plan.58 In ruling

with the majority that the plain language of 11 U.S.C. § 1329 does not

contain such a requirement, the Court stated:

The requirement appears nowhere on the face of the

statute, and [the majority of] courts have declined to graft

onto it a threshold showing of any change in circumstances.

. . .

We begin—and could well end—our analysis of § 1329

with its plain text. . . . We can discern no reason to speak

where Congress has not . . . .59

As we have often observed, when “Congress knows how

to say something, but chooses not to, its silence is

controlling.”60

To read § 523(a)(4) to contain an exception for fiduciary duties

imposed by statutory trusts, or require a trust to have a segregated

would be to graft onto the statute requirements that are not there The

57 , 972 F.3d 1221, 1224 (11th Cir. 2020).

58 1226.

59 at 1224, 1226 (citing 136 S. Ct. 1938, 1946 (2016)

(“The plain text of the Bankruptcy Code begins and ends our analysis.”); at 1226

(citing 139 S. Ct. 1894, 1900 (2019) (“[I]n any field of statutory

interpretation, it is our duty to respect not only what Congress wrote but, as importantly,

what it didn’t write.”).

60 (quoting , 640 F.3d 1278, 1285 (11th Cir. 2011).

plain language and Congressional intent of § 523(a)(4) of the Bankruptcy

Code and PACA supports finding, as have the majority, that violation of

a PACA trust gives rise to a nondischargeable debt pursuant to

§ 523(a)(4).

Defendants may be individually liable for A&J’s breach of

the PACA trust.

An officer is personally liable for breach of fiduciary duties

committed by the trustee corporation if the officer knowingly causes the

misappropriation of the trust property, even if the corporate officer did

not personally profit from the transaction.61 “An individual who is in the

position to control the trust assets and who does not preserve them for

the beneficiaries has breached a fiduciary duty, and is personally liable

for that tortious act.”62 Numerous courts have held individual officers and

shareholders in a position to control payment out of funds received from

the sale of perishable agricultural commodities to PACA suppliers

61 , 114 B.R. at 205 (citing

, 760 F.2d 121, 125 (6th Cir. 1985); ,

55 B.R. 928, 935 (Bankr. D. Colo. 1985); ,

43 B.R. 104, 107 (Bankr. M.D. Fla. 1984)).

62 , 814 F. Supp. at 348; , 2007 Bankr. LEXIS 3727, at *4;

, 2007 WL 1100482, at *7 (citing , 411 F.3d 415, 421 (3d Cir.

2005)); , 114 B.R. at 204; , 181

F. Supp. 2d 1339, 1344–45 (M.D. Fla. 2002), 48

F. App’x 328 (11th Cir. 2002) (unpublished).

personally liable for the debt.63

Plaintiff has adequately alleged that Defendants (1) were officers,

managers, or shareholders of A&J; (2) had control or were in a position

to control the PACA trust assets; (3) possessed actual or constructive

knowledge of A&J’s insolvency; and (4) failed to voluntarily cease A&J’s

business operations when A&J no longer had the ability to pay its PACA

suppliers. Although Plaintiff imprecisely refers to Defendants, as

opposed to A&J, “as fiduciaries and trustees of the PACA trust,”64

Plaintiff’s allegations are sufficient to put Defendants on notice that they

may be liable for A&J’s breach of fiduciary duties. Whether Plaintiff can

prove its allegations is an issue of fact for proof at trial.

Defendants’ conduct may amount to defalcation while acting in a

fiduciary capacity.

Defalcation under § 523(a)(4) requires “an intentional wrong” when

“the conduct at issue does not involve bad faith, moral turpitude, or other

immoral conduct . . . .”65 This includes conduct the fiduciary knows is

wrong or reckless.66 After summarizing the history of the term

63 , 575 B.R. at 308 (citing numerous cases, including from the 1st, 2nd,

3rd, 5th, 7th and 9th Circuits); 503 B.R. at 717.

64 Doc. 1, ¶¶ 30–32; 34–36; 43–45; 50–53; 56; 61; 63–66; 68; Docs. 11, 16.

65 , 569 U.S. 267, 273–74 (2013).

66

“defalcation” as an exception to bankruptcy discharge since 1867 the

Supreme Court defined defalcation for purposes of § 523(a)(4) as follows:

Where actual knowledge of wrongdoing is lacking, we consider

conduct as equivalent if the fiduciary “consciously disregards”

(or is willfully blind to) “a substantial and unjustifiable risk”

that his conduct will turn out to violate a fiduciary duty. 67

To be excepted from discharge the conduct must occur after the fiduciary

relationship is established.68

It is appropriate to deny a motion to dismiss where a party has

alleged sufficient facts to establish that defalcation occurred after a

fiduciary relationship was created.69 Upon doing so, a court leaves for a

later date the factual issue of whether the defendant’s conduct was

intentional.70 Here, Plaintiff alleges that Defendants’ fiduciary duties

arose before they, with actual and constructive knowledge of A&J’s

insolvency: did not cease A&J’s business operations or cause it to stop

ordering and accepting agricultural commodities; failed to pay Plaintiff

67 at 274.

68 , 594 B.R. 829, 834 (Bankr. S.D. Fla. 2019)

(citing , 4 F.3d at 954).

69 1992 WL 119143, at *4 (affirming bankruptcy court’s denial of motion

to dismiss, stating that the Eleventh “Circuit Court stated ‘Congress has provided the unpaid

sellers of perishable agricultural commodities with the benefits of a statutory trust. Absent

specific instructions to the contrary, Congress must have intended for such a trust to operate

according to the settled principles of trust law.’ ‘Settled principles of trust law’ would dictate

that the PACA trust creates a fiduciary relationship for purposes of Section 523(a)(4).”

(citations omitted) (quoting 952 F.2d at 1316)).

70 , 594 B.R. at 833–34.

promptly and in full for produce delivered, despite Plaintiff’s repeated

demands; failed to preserve sufficient funds to fully satisfy Plaintiff’s

qualified PACA claims; and failed to ensure funds were freely available

to satisfy outstanding obligations to Plaintiff.

PACA is a remedial statute that should be construed liberally in

order to protect creditors.71 Count I of Plaintiff’s Complaint contains

allegations sufficient to survive the Motion to Dismiss.

Count II does not adequately state a cause of action for “Interference

with Receipt of Trust Assets”

Plaintiff reasserts all paragraphs of the Complaint that precede

Count II without making any distinction as to what facts pertain to Count

II and what facts do not. This is a type of shotgun pleading disapproved

by this and other courts in the Eleventh Circuit.72

Improper pleading issues aside, Plaintiff styles Count II as

“Interference with Receipt of Trust Assets.” Despite its heading, Count II

appears to be a mere replication of the defalcation or breach of fiduciary

duty allegations in Count I, albeit reworded. In Count II, Plaintiff alleges

71 1992 WL 119143, at *6, and cases cited therein.

72 , 878 F.3d 1291, 1294–96 (11th Cir. 2018); , 2019

WL 9406132, at *6–9; 2019 WL 3282972, at *3–4;

, Ch. 7 Case No. 17-10190-KKS, Adv. No. 18-01002-KKS, 2018

WL 7575597, at *7–8 (Bankr. N.D. Fla. Dec. 17, 2018).

that Defendants “breached the PACA trust by, transferring

trust assets from [A&J] to non-PACA trust beneficiaries . . . (e.g., the

Debtors themselves and other non-Produce seller creditors) . . . .”73

Plaintiff then alleges that by transferring the PACA trust assets

Defendants damaged them and/or interfered with their delivery to

Plaintiff.74 Plaintiff concludes by repeating the allegations in Count I

that Defendants breached their fiduciary duties by failing to preserve

and maintain the trust assets for the benefit of PACA trust beneficiaries.

Plaintiff makes no distinction in Count II between breach of a

fiduciary duty and “interference with receipt of trust assets.” Further,

Plaintiff provides no citation of authority as grounds for the latter. Count

II does not clearly articulate a separate cause of action for interference

with receipt of trust assets. Defendants’ Motion to Dismiss is due to be

granted as to Count II of the Complaint.

CONCLUSION

The foremost issue raised by the Motion to Dismiss, whether

breach of a statutory PACA trust can give rise to a nondischargeable debt

for defalcation while acting in a fiduciary capacity under

73 Doc. 1, ¶¶ 74–76.

74 at ¶ 77.

11 U.S.C. § 523(a)(4), is an issue of first impression in this Court. After

careful consideration of the parties’ legal arguments, and the majority

and minority views, including decisions of sister bankruptcy courts in

Florida in light of the Eleventh Circuit’s decision in Quaif v. Johnson,

the Court holds in the affirmative: a party can state an actionable cause

of action for breach of a PACA trust under 11 U.S.C. § 523(a)(4).

ORDER

For the reasons stated, it is ORDERED:

1. The Motion to Dismiss is DENIED as to Count I.

2. The Motion to Dismiss is GRANTED as to Count II, without

prejudice. Plaintiff has twenty-one (21) days from the date of this

Order within which to file and serve an amended complaint.

3. Defendants have fourteen (14) days from Plaintiffs service of an

amended complaint within which to file a responsive pleading.

DONE and ORDERED on _ January 28, 2021

SE -

See eS

KAREN K. SPECIE

Chief U.S. Bankruptcy Judge

Attorney for Defendants is directed to serve a copy of this Order on interested parties and file

Proof of Service within three (3) days of entry of this Order.

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