Melon Acres, Inc. v. Villa (In re Villa)

• Decision Date: 28 January 2021
• Docket Number: Adv. No.: 20-01004-KKS,Case No.: 20-10074-KKS
• Parties: IN RE: Alma D. VILLA and Jaime Navarette, Debtors. Melon Acres, Inc., Plaintiff, v. Alma D. Villa and Jaime Navarette, Defendants.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Florida

625 B.R. 111

IN RE: Alma D. VILLA and Jaime Navarette, Debtors.

Melon Acres, Inc., Plaintiff,

v.Alma D. Villa and Jaime Navarette, Defendants.

Case No.: 20-10074-KKS

Adv. No.: 20-01004-KKS

United States Bankruptcy Court, N.D. Florida.

DONE and ORDERED on January 28, 2021.

Thomas Adam, Adam Law Group, Jacksonville, FL, for Debtors.

MEMORANDUM OPINION AND ORDER 1) DENYING DEFENDANTS-DEBTORS' MOTION TO DISMISS ADVERSARY COMPLAINT AND INCORPORATED MEMORANDUM OF LAW ("MOTION TO DISMISS," DOC. 8) AS TO COUNT I, AND 2) GRANTING THE MOTION TO DISMISS AS TO COUNT II OF COMPLAINT

KAREN K. SPECIE, Chief U.S. Bankruptcy Judge

THIS MATTER is before the Court on Defendants-Debtors' Motion to Dismiss Adversary Complaint and Incorporated Memorandum of Law ("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 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 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 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 Quaif v. Johnson 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 Quaif that courts have struggled with the concept of "technical trust" since the Supreme Court's 1934 ruling in Davis v. Aetna Acceptance Co.¹⁸ The Eleventh Circuit 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 Quaif, 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 Quaif did not define "technical trust," it pointed out the distinction between the Georgia statute before it, which imposed fiduciary duties before defalcation, and other statutes that impose fiduciary duties only after defalcation.²³

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 Guerra v. Fernandez-Rocha , do not contain trust duties at all.²⁷

In Fernandez-Rocha, 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 Fernandez-Rocha from the Georgia statute in Quaif 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 Fernandez-Rocha 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 Fernandez-Rocha had committed no defalcation sufficient to support a 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. In re Arthur, on which Defendants rely, focused largely on whether the trust res 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 res to be segregated rather than identifiable for purposes of § 523(a)(4). In In re Davis , which involved a non-statutory trust, this Court held that an express or technical trust requires a clearly defined trust res , and that the bankruptcy definition of trust "may include statutory trusts if they meet the requirements for an express or technical trust."³⁴

Other Florida bankruptcy courts have held violations of non-PACA statutory trusts nondischargeable pursuant to § 523(a)(4) without requiring the trust res to be segregated.³⁵ In In re Menendez 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 In re Arthur, have held that PACA trusts are not express or technical trusts because PACA does not require the trust res to be segregated, but rather allows the trustee to use trust assets for non-trust purposes.³⁷ The court in In re Arthur concluded that because PACA does not require the trust res to be segregated, breach of a PACA trust does not amount to...