Bankruptcy Discharge Trumps PACA, But Does It Really?
Stites & Harbison Client Alert, September 7, 2022
by Stites & Harbison, PLLC
In a case of first impression, the 11th Circuit Court of Appeals ruled in Spring Valley Produce, Inc. et al. vs. Forrest, ____ F.3d____(11th Cir. Case Number 21-12133) on August 31, 2022, that the right to a discharge in bankruptcy trumps the longstanding language of the Perishable Agricultural Commodities Act (“PACA”)(7 U.S.C. §499a-499t) which purports to bar bankruptcy relief under theories of fiduciary duties owed to certain sellers of agricultural products. PACA was first enacted by Congress in 1934 and then revised in 1984 to create a fiduciary duty due from buyers of perishable farm products to growers such that a trust obligation is owed to growers in the proceeds of goods sold by the intermediate purchaser which is generally a wholesaler or food broker. In a lengthy opinion, the Court examined the tension between the imposition of a statutory PACA trust and the bar to discharge of debtors who are alleged to have committed an act of fraud or defalcation while acting in a fiduciary capacity under 11 U.S.C. §523(a)(4).
The facts of Forrest were simple and undisputed. The Debtors owned a company known as Central Market of Florida, Inc. (“Central Market”) that purchased over $260,000.00 in produce from Spring Valley Produce, Inc. (“SVP”) for which payment was never made. Instead, the sales proceeds were used in the business operations of Central Market. Central Market thereafter went out of business and the Debtors filed for bankruptcy relief under Chapter 7 in order to receive a discharge of their business-related debts. SVP appeared in the bankruptcy case asserting that it had met all of the statutory prerequisites to trigger a PACA trust. SVP went on to oppose a discharge on the basis that by failing to pay the proceeds of sale from the sold farm goods, the Debtors violated their duty of trust to SVP under §523(a)(4) which precludes a discharge of debts related to fraud or defalcation while acting in a fiduciary capacity. The bankruptcy court below dismissed the claims made by SVP on the basis that a technical trust did not exist under PACA and upon a direct certification on appeal, the 11th Circuit affirmed.
Conventional wisdom in many circles has long been that the imposition of a PACA trust creates a non-dischargeable debt in bankruptcy. In Forrest, however, the Court drilled down on the nature of a PACA trust versus the traditional notions of a trust of the sort covered by §523(a)(4). In particular, the Court focused on (1) the lack of any trust like duties imposed on the “trustee” of a PACA trust, (2) the lack of any pre-existing trust obligations before the triggering of the “trust” for non-payment under PACA, and finally, (3) the lack of any obligation on the part of the “trustee” to segregate the sales proceeds covered by PACA into any identifiable account such that the proceeds are commingled with other funds generated by the business subject to the trust. On these three bases, the Court found that PACA creates a “resulting trust” upon non-payment, but does not create a technical trust as required by §523(a)(4).
Seemingly, the ruling in Forrest indicates that PACA related debts are now subject to discharge in bankruptcy. The analysis, however, does not end with a reading of §523(a)(4) in that acts taken by a debtor which create a resulting trust based upon conversion or failure to remit proceeds that are subject to a lien held by a secured creditor may be subject to §523(a)(6) which bars a discharge for “willful and malicious conduct.” See, Matter of Jimenez, 608 B.R. 322 (Bankr. M.D. Ga. 2019) (dismissing a discharge action by a secured creditor seeking recovery for breach of fiduciary duties in the conversion of collateral under §523(a)(4) but sustaining the action for recovery under §523(a)(6) for willful and malicious acts). Going forward, attention to this additional ground for the bar of a discharge may become the norm in PACA related cases.