Coosemans Miami, Inc. v. Arthur (In re Arthur)

• Decision Date: 07 August 2018
• Docket Number: Case No. 17-17829-BKC-RAM,Adv. No. 17-01378-BKC-RAM-A
• Citation: 589 B.R. 761
• Parties: IN RE: Robert Anthony ARTHUR and Kalaivani Arthur, Debtors. Coosemans Miami, Inc., Plaintiff, v. Robert Anthony Arthur and Kalaivani Arthur, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Florida

589 B.R. 761

IN RE: Robert Anthony ARTHUR and Kalaivani Arthur, Debtors.Coosemans Miami, Inc., Plaintiff,

v.Robert Anthony Arthur and Kalaivani Arthur, Defendants.

Case No. 17-17829-BKC-RAM

Adv. No. 17-01378-BKC-RAM-A

United States Bankruptcy Court, S.D. Florida.

Signed August 7, 2018

Peter D Spindel, Peter Spindel, Esq., PA, Humberto Rubio, Jr., Miami, FL, for Plaintiff

Robert F. Reynolds, Slatkin & Reynolds, P.A., Fort Lauderdale, FL, for Defendant

AMENDED¹ MEMORANDUM OPINION AND ORDER GRANTING MOTION TO DISMISS

Robert A. Mark, Judge United States Bankruptcy Court

Section 523(a)(4) of the Bankruptcy Code excepts from discharge a debt "for fraud or defalcation while acting in a fiduciary capacity." The Code does not define fiduciary capacity, and the only clear consensus among courts interpreting § 523(a)(4) is that acting in a fiduciary capacity means something more than simply having fiduciary duties.

The Defendants are produce dealers with fiduciary duties under the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. §§ 499a, et seq. PACA creates a trust to protect produce suppliers like the Plaintiff. The issue before the Court is whether a PACA trust is the type of trust that gives rise to actionable fiduciary capacity under § 523(a)(4). Courts agree that only "technical trusts" fit the bill, but there is no consensus regarding what constitutes a "technical trust."

This is a close one. A PACA trust consists of identifiable assets, namely the agricultural commodities and proceeds from that sale. Moreover, the statute imposes duties on the dealer, including maintaining sufficient trust assets to satisfy the claims of the trust beneficiaries. Nevertheless, the Court concludes that a PACA trust does not satisfy the requirements for finding "fiduciary capacity" under § 523(a)(4).

After review of Eleventh Circuit authority and persuasive authority from other Circuit Courts of Appeals, the Court finds that a PACA trust falls short because (1) it does not require segregation of assets unless and until a court orders segregation after a showing of dissipation; and (2) the trust assets may be used for non-trust purposes. Therefore, the Defendants' motion to dismiss the Plaintiff's § 523(a)(4) complaint will be granted.

Factual Background

The Defendants in this proceeding, Robert Anthony Arthur and Kalaivani Arthur (the "Defendants"), owned and operated a limited liability company, Sunrise International, LLC ("Sunrise"), that purchased and sold wholesale produce under the trade name Sunrise Fresh Produce. For purposes of ruling on the Defendants' Motion to Dismiss [DE # 12], the Court accepts as true the Plaintiff's allegation that Sunrise "was at all times pertinent ... a dealer subject to and licensed under the provisions of the PACA."

Prior to the filing of the Defendants' chapter 7 case, the Plaintiff sued Sunrise and the Defendants in district court alleging violations under PACA. The parties entered into a Stipulation of Settlement and Order [DE# 1, pp. 40-46] in which Sunrise and the Defendants agreed to be jointly and severally liable to the Plaintiff in the amount of $298,048.27. Plaintiff alleges that the unpaid balance is $280,581.02 plus attorney's fees and costs [DE# 1, ¶ 14]. At issue in this adversary proceeding is the dischargeability of that debt.

The Plaintiff argues that, as trustees of a PACA trust, the Defendants defalcated while acting in a fiduciary capacity by causing Sunrise to default on payments due to the Plaintiff for the purchase of produce. More specifically, the Plaintiff argues its produce was the statutorily-protected corpus of a PACA trust. Once sold, the proceeds of that sale also became the corpus of a PACA trust, and under PACA, the Defendants had a duty to ensure that sufficient proceeds remained in the trust to satisfy in full the Plaintiff's invoices. Breach of this fiduciary duty, argues the Plaintiff, excepts the resulting debt from discharge under § 523(a)(4).

Procedural History

The Defendants filed their chapter 7 petition on June 22, 2017. The Plaintiff filed its Complaint [DE # 1] initiating this adversary proceeding on September 26, 2017. On November 16, 2017, the Defendants filed their Motion to Dismiss Complaint as Time Barred and for Failure to State a Claim Upon Which Relief Can Be Granted [DE # 12] (the "Motion to Dismiss").

The Motion to Dismiss argues first that the Complaint filed on September 26, 2017, was untimely because September 25, 2017 was the deadline for filing complaints seeking to except debts from discharge [DE# 2 in Case No. 17-17829]. However, because of the wide-spread power outages in South Florida after Hurricane Irma, this Bankruptcy Court entered General Order 2017-02, a copy of which is attached to the Plaintiff's Response [DE# 14-1], extending the otherwise applicable deadline to file the Complaint in this proceeding such that the Complaint was timely filed. The Court conducted a hearing on January 18, 2018 to examine the balance of the Defendants' arguments for dismissal.

Analysis

Statutory fiduciary duties are not per se equivalent to fiduciary capacity under bankruptcy law. The meaning of "fiduciary capacity" in § 523(a)(4) is a question of federal law. In re Talmo , 175 B.R. 775 (Bankr. S.D. Fla. 1994). The term is narrower than the general term fiduciary duty, and is not to be construed expansively, but instead, only in reference to technical trusts. Quaif v. Johnson , 4 F.3d 950, 953 (11th Cir. 1993). So, the question of whether a PACA trust gives rise to actionable fiduciary capacity under § 523(a)(4) depends on whether a PACA trust is a technical trust.

The Eleventh Circuit has not defined technical trusts.

The Eleventh Circuit identifies and distinguishes different types of trusts in Quaif v. Johnson , the Circuit's seminal decision on the issue of fiduciary capacity under § 523(a)(4).² Although the opinion acknowledges, and "[t]he Supreme Court has consistently held,"³ that only debts subject of a technical trust are nondischargeable, the Eleventh Circuit does not define a technical trust in Quaif .

The Eleventh Circuit does, however, provide examples of trusts or statutory obligations that are not technical trusts. A technical trust is not a trust created involuntarily, by operation of law, to right a wrong, like resulting or constructive trusts. Quaif at 953. The former redress unintended consequences of a transfer, and the latter arise from wrongdoing (i.e. ex maleficio ). Trust , Black's Law Dictio nary (10th ed. 2014). Instead, a "technical" trust is more akin to a trust created by voluntary agreement, i.e. an "express" trust. Quaif at 953.

Statutory trusts fall in the middle. They are not per se technical trusts. To determine whether a statutory trust is more analogous to an express trust than it is to a resulting or a constructive trust, the obligations imposed by the statute must be analyzed. General Produce Inc. v. Tucker(In re Tucker) , 2007 WL 1100482 at *2 (Bankr. M.D. Ga. April 10, 2007) (compare Quaif , 4 F.3d at 954, finding that a Georgia insurance statute created a technical trust, with Guerra v. Fernandez-Rocha(In re Fernandez-Rocha), 451 F.3d 813 (11th Cir. 2006), finding that the Florida statute requiring doctors to maintain assets sufficient to pay medical malpractice claims did not create a technical trust).

Like Eleventh Circuit precedent, the plain language of section 523(a)(4) mandates a finding that sufficient fiduciary duties must be imposed prior to, and independent of, any defalcation.

The language of § 523(a)(4) is clear – only debts incurred while acting in a fiduciary capacity are nondischargeable. It logically follows that the hallmarks of a technical trust relationship must exist prior to any alleged defalcation for a trust to be considered a technical trust.

Applying this standard, the Court concludes that a PACA trust is not a technical trust until a court imposes additional duties and restrictions after a prior showing of malfeasance. This view is strongly supported by the Eleventh Circuit's decision in Frio Ice, S.A. v. Sunfruit, Inc., 918 F.2d 154 (11th Cir. 1990).

In Frio Ice , the Eleventh Circuit examined the plain language of PACA and its legislative history, and established a rule indicating that a PACA trust is a trust ex maleficio . The rule is as follows:

Upon a showing that the trust is being dissipated or threatened with dissipation, a district court should require the PACA debtor to escrow its proceeds from produce sales, identify its receivables, and inventory its assets. It should then require the PACA debtor to separate and maintain these produce-related assets as the PACA trust for the benefit of all unpaid sellers having a bona fide claim. Each beneficiary would then be entitled to its pro rata share.

Frio Ice at 159, (internal citation omitted).

As discussed earlier, Quaif found that resulting and constructive trusts are not "technical" trusts. The opinion described the category of resulting and constructive trusts as trusts that are "created ex post as a remedial measure to right a wrong." Quaif at 954. The Eleventh Circuit's Frio Ice ruling fits squarely within that framework.

At the inception of a PACA trust, a PACA dealer does owe trust beneficiaries a number of fiduciary duties that exist pre-defalcation. A PACA dealer must keep organized books and records, 7 U.S.C. § 499(i), 7 C.F.R. §§ 46.9(g), 46.15, and must be licensed, 7 C.F.R. § 46.3. Most importantly, a PACA dealer must maintain sufficient trust assets to satisfy the claims of trust beneficiaries, 7 C.F.R. § 46.46(d)(1). However, this last and most critical obligation is meaningless without mandated segregation.

In Frio Ice , the Eleventh Circuit explained that "[s]egregation often may be the only means by which a federal court can prevent dissipation." Frio Ice at 159 (emphasis added). However, the Eleventh Circuit also recognized that Congress allowed for PACA trusts to be nonsegregated, floating trusts because ...