In re Zois
| Decision Date | 21 October 1996 |
| Docket Number | 95 A 01494.,Bankruptcy No. 95 B 20495 |
| Citation | 201 BR 501 |
| Parties | In re George ZOIS, Debtor. STRUBE CELERY & VEGETABLE CO., INC., Plaintiff, v. George ZOIS, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Stephen P. McCarron and Louis W. Diess, III, Washington, DC, Steve Cohen, Chicago, IL, for plaintiff.
George Zois, pro se.
AMENDED MEMORANDUM OPINION ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
This Adversary case and two other related Adversaries relate to the bankruptcy proceedings filed by Perry Zois, George Zois, and John Zois ("Zoises" or "Debtors") under Chapter 11 of the Bankruptcy Code 11 U.S.C. § 101 et seq., on September 29, 1995. The Debtors' reorganization plans failed to be confirmed, and the three cases were each subsequently converted to a Chapter 7 proceeding. Although each debtor filed individual bankruptcy petitions, all issues pertinent herein are common to all three cases and therefore one memorandum opinion is issued.
On December 1, 1995, Plaintiff Strube Celery & Vegetable Co., Inc. ("Strube") filed three identical, three-count Adversary Complaints against each of the Debtors, under 11 U.S.C. § 523(a)(4), each a seeking declaration that Strube holds a non-dischargeable claim against each of the Zoises for $48,048.06. Strube alleges that the Zoises each incurred this debt for unpaid produce that Strube delivered to Five Star Food Distributors ("Five Star"). The Zoises assertedly were Five Star's officers and agents at the time.
Plaintiff Strube now seeks summary judgment on all counts of each of the three Adversary Complaints, claiming that there are no issues of fact as to the non- dischargeability of the $48,048.06 debt, assertedly due from each of the debtor-defendants.
The following facts emerge from filings of the parties as to which there is no material dispute:
1. Plaintiff Strube is a corporation engaged in the business of buying and selling wholesale quantities of perishable agricultural commodities in interstate commerce.
2. Five Star was an Illinois corporation and was at all times pertinent herein a dealer and commission merchant of produce and therefore subject to provisions of the Perishable Agricultural Commodities Act of 1930 as amended, 7 U.S.C.A. § 499a et seq. (hereinafter "PACA") including the trust provision in that Act.
3. The three Zoises defending here were all officers of Five Star and were also each dealers and commission merchants subject to provisions of PACA.
4. At the request of Five Star and the Zoises, Plaintiff sold to them in interstate commerce various wholesale lots of produce worth $82,661.76. Five Star and the Debtors accepted such produce without paying for delivery.
5. On February 17, 1995, prior to the bankruptcy filing of these defendants, the United States District Court for the Northern District of Illinois entered judgment in favor of Plaintiff and against each of the Debtors and Five Star, jointly and severally, in the amount of $82,661.76 by reason of the delivery and receipt of said produce (the "Judgment"). The District Judge also declared that amount to be non-dischargeable in bankruptcy. No execution was to issue upon the judgment so long as the Defendants therein would pay Plaintiff the remaining outstanding balance in separate equal weekly installments.
6. Debtors have failed to satisfy the Judgments fully, but have paid approximately $42,000.00 pursuant thereto. Five Star and the Debtors each presently owe the Plaintiff $44,938.16 on the Judgment.
7. On September 29, 1995, George Zois, John Zois, and Perry Zois individually filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code, and subsequently converted to Chapter 7.
8. Plaintiff filed three Adversary Complaints against the Zoises, each seeking to have the remaining $44,938.16 excepted from discharge in each of the Zois bankruptcies pursuant to 11 U.S.C. § 523(a)(4) of the Bankruptcy Code.
It was neither alleged nor established for purposes of the summary judgment motion that this Defendant or his company resold or were paid for all the produce purchased from Plaintiff, or if they were paid for resale thereof, how much that amounted to. Defendants each pleaded as an affirmative defense that "products were perishable and Defendant could not market spoiled products." Plaintiff has not offered any materials to contradict that assertion. Moreover, Plaintiff did not demonstrate service of notice required to preserve the PACA trust under 7 U.S.C.A. § 499e(c)(3).
Subject matter jurisdiction lies under 28 U.S.C. § 1334. This matter is before the Court pursuant to 28 U.S.C. § 157 and Local General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. Venue lies properly under 28 U.S.C. § 1409. This matter constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(I).
Summary judgment motions are governed by Fed.R.Civ.P. 56(c) and made applicable to bankruptcy proceedings under Fed. R.Bankr.P. 7056. Summary judgment is granted to avoid unnecessary trials when there are no genuine issues of material fact in dispute. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-86, 106 S.Ct. 1348, 1355, 89 L.Ed.2d 538 (1986). The moving party in a motion for summary judgment has the initial burden of demonstrating that there are no genuine issues of material fact and that judgment in its favor should be granted as a matter of law. Celotex Corp v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). An issue of material fact will prevent summary judgment if the issue is outcome determinative under applicable law. Anderson, 477 U.S. at 248, 106 S.Ct. at 2510.
Count I of each Adversary Complaint requests that the debt balance be found nondischargeable under provisions of 11 U.S.C. § 523(a)(4), which provides that there shall be no discharge from any debt "for fraud or defalcation while acting in a fiduciary capacity...." Plaintiff Strube alleges that a fiduciary relationship existed under PACA, an act that expressly creates a fiduciary relationship between produce suppliers and purchasers.
Count II requests a declaration of nondischargeability because of the Order and Judgment entered by the District Judge declaring that the debt of $82,661.76 due from the Zoises to Strube was non-dischargeable in bankruptcy.
Count III requests a declaration that the Debtors, acting as officers and employees of Five Star, failed to hold in trust the produce and any receivables from the sale of produce purchased from Plaintiff as required by the PACA trust provision. Plaintiff therefore asserts that, because the Debtors each individually failed to abide by the PACA trust provision, they breached their fiduciary duty and committed a defalcation sufficient under 11 U.S.C. § 523(a)(4) to make their debt to Strube non-dischargeable in their individual bankruptcy cases.
The Debtors plead by way of defense that they did comply with all the trust provisions under PACA.
Count I — § 523(a)(4)
As stated, Count I of each of the Adversary Complaints requests declaration that the $44,398.16 debt is non-dischargeable in bankruptcy under § 523(a)(4) of the Bankruptcy Code. 11 U.S.C. § 523(a)(4) excepts from discharge any debt "for fraud or defalcation while acting in a fiduciary capacity."
Defalcation within the context of § 523(a)(4) is defined as "the misappropriation of trust funds held in any fiduciary capacity, and the failure to properly account for such funds." Nuchief Sales, Inc. v. Harper (In re Harper), 150 B.R. 416, 419 (Bankr. E.D.Tenn.1993). An objective standard is used to determine a defalcation, and intent or bad faith is not a requirement. See Green v. Pawlinski (In re Pawlinski), 170 B.R. 380, 389 (Bankr.N.D.Ill.1994) (Schmetterer, J.); Blackhawk B.M.X., Inc. v. Anderson (In re Anderson), 64 B.R. 331, 334 (Bankr.N.D.Ill. 1986); In re Owens, 54 B.R. 162, 165 (Bankr. D.S.C.1984). "Defalcation can be a mere deficit resulting from the debtor's misconduct, even though he derived no personal gain, and may be through negligence or ignorance rather than misconduct." See Pawlinski, 170 B.R. at 389, citing Purcell v. Janikowski (In re Janikowski), 60 B.R. 784, 789 (Bankr.N.D.Ill.1986).
Here the Zoises each had a fiduciary duty to hold the produce received from Plaintiff Strube and any accounts receivable or proceeds derived from their sale in trust for Strube. This trust arose by operation of federal law under 7 U.S.C.A. § 499a et seq. Under this statute, a trust is automatically created upon delivery and receipt of the produce. In order for the purchaser to maintain the trust, they must hold the produce and any related inventory, accounts receivable, and collections thereon in trust for the benefit of all the buyer's unpaid sellers. Continental Fruit Co. v. Thomas J. Gatziolis & Co., Inc., 774 F.Supp. 449, 450 (N.D.Ill.1991). The PACA trust provision imposes liability upon a purchaser, "whether a corporation or controlling person of that corporation, who uses that trust asset for any purpose other than repayment of the supplier." Morris Okun, Inc. v. Harry Zimmerman, Inc., 814 F.Supp. 346, 348 (S.D.N.Y.1993). It has been held that the PACA trust statute creates a fiduciary capacity for purposes of nondischargeability under § 523(a)(4). See Deoudes, Inc. v. Snyder (In re Snyder), 184 B.R. 473 (D.Md.1995).
Bankruptcy judges have therefore frequently recognized where a debt is incurred in breach of the fiduciary duty imposed by PACA (if the merchant purchasing the produce fails to maintain this trust), the debt becomes non-dischargeable in bankruptcy. S...
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