Royal Garden Produce, LLC v. Sanchez (In re Sanchez)
| Docket Number | 19bk32364,Adv. Proc. 20ap00063 |
| Decision Date | 13 December 2021 |
| Parties | In re: Cesar Sanchez, Debtor. v. Cesar Sanchez, Defendant. Royal Garden Produce, LLC, an Arizona limited liability company, Plaintiff, |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Defendant/Debtor Cesar Sanchez ("Sanchez") owned and operated Sanchez Bros. Produce, LLC t/a Sanchez Bros. Wholesale Corporation (the "Company"). On behalf of the Company, Sanchez purchased and resold produce supplied by plaintiff Royal Garden Produce, LLC ("Royal Garden"). After the Company failed to pay several invoices for produce shipments, Royal Garden sued the Company and its principals (Sanchez and his brother) in federal district court under the Perishable and Agricultural Commodities Act ("PACA"), 7 U.S.C. § 499a-t. Then Sanchez filed this chapter 7 bankruptcy petition. Royal Garden eventually obtained a default judgment against all defendants except Sanchez. Nevertheless, Royal Garden alleges in this adversary proceeding that its liquidated PACA debt is non-dischargeable under 11 U.S.C. §§ 523(a)(4) and 523(a)(2)(A).
Sanchez denied the complaint allegations and subsequently moved for summary judgment on both claims. He contends that legally, no express trust exists to support a fiduciary relationship, and factually, Royal Garden cannot show that Sanchez fraudulently procured produce. Royal Garden opposed the motion substantively and sought additional time to complete discovery on the question of intent. With the parties' consent, the court stayed consideration of the pending motion during discovery. Shortly thereafter Sanchez's counsel was granted leave to withdraw from representing him. However, with the assistance of pro bono counsel, [1] Sanchez has been able to proceed with prosecution of his motion.
The parties now seek a ruling on the legal question of whether a PACA trust establishes fiduciary duties for purposes of the non-dischargeability analysis under section 523(a)(4). Upon consideration of the parties' briefs, the supplemental filings, and the applicable case law, the court concludes that it does not. Because this minority position more closely aligns with Seventh Circuit precedent, Sanchez's motion for partial summary judgment on the section 523(a)(4) claim will be granted.[2]
The facts are drawn from the parties' statements of fact and responses under Local Bankruptcy Rules 7056-1 and 7056-2. No material facts are in dispute. Neither party contends that their dealings were not governed by PACA.
Sanchez served as an officer, director, or shareholder of the Company. As the company's manager and agent, he was listed as a principal on its PACA license. Sanchez and the Company engaged in the business of buying and selling produce in foreign and interstate commerce from their office in Illinois. In carrying out their distribution operations, the Company purchased produce from Royal Garden that included tomatillo, garlic, roma tomatoes, and broccoli.
On several occasions in June and July 2019, Royal Garden submitted invoices totaling over $50, 000 to the Company that were not paid in full. After Royal Garden commenced suit in federal court against the Company and its principals for PACA violations, Sanchez filed for chapter 7 bankruptcy in November 2019. A few months later, Royal Garden timely initiated this non-dischargeability proceeding alleging that Sanchez breached his fiduciary duties under PACA which resulted in defalcation pursuant to section 523(a)(4), and that Sanchez made false representations, acted under false pretenses, and/or engaged in actual fraud in his dealings with Royal Garden pursuant to section 523(a)(2)(A). Pending before the court is Sanchez's summary judgment motion which Royal Garden has opposed. As already explained, only one aspect of the section 523(a)(4) claim is ripe for resolution.
The court has subject matter jurisdiction over this matter under 28 U.S.C. § 1334(b) and the district court's Internal Operating Procedure 15(a). Actions seeking determinations about the dischargeability of particular debts are core proceedings. 28 U.S.C. § 157(b)(2)(I).
Summary judgment is appropriate if there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a), made applicable by Fed.R.Bankr.P. 7056. The parties agree on the material facts. At issue here is whether the statutory trust scheme under PACA satisfies the express trust requirement necessary to impose a fiduciary duty under 11 U.S.C. § 523(a)(4). This question has divided bankruptcy courts within this circuit, with some following the majority ruling that PACA trusts qualify, see Strube Celery & Vegetable Co., Inc. v. Zois (In re Zois), 201 B.R. 501 (Bankr. N.D.Ill. 1996); Michael Farms, Inc. v. Lundgren (In re Lundgren), 503 B.R. 717 (Bankr. W.D. Wis. 2013), and others finding the minority view more persuasive, see CR Adventures, LLC v. Hughes (In re Hughes), 609 B.R. 789 (Bankr. N.D. Ill. 2019); Quality Food Products Inc. v. Bolanos, 475 B.R. 641 (Bankr. N.D.Ill. 2012) ("Bolanos I"), rev'd Quality Food Products, Inc. v. Bolanos, No. 12C7654, 2013 WL 7507846 (N.D. Ill. Sep. 16, 2013) "(Bolanos II"). Whether a PACA trust falls within the narrow parameter of covered fiduciary relationships presents a question of law. See Cooper v. Wal-Mart Stores, Inc., 106 F.3d 1338, 1340 (7th Cir. 1997). Thus, the issue is appropriate for resolution on summary judgment. See Local 1239 v. Allsteel, Inc., 9 F.Supp.2d 901, 902 (N.D. Ill. 1998).
Individual chapter 7 debtors are generally eligible to receive a discharge of their debts at the conclusion of their cases except as limited by section 523 of the Bankruptcy Code. See 11 U.S.C. § 727. Royal Garden contends that the exception to discharge in section 523(a)(4) applies here because a PACA judgment is statutorily deemed a debt for "fraud or defalcation while acting in a fiduciary capacity. . . ." 11 U.S.C. § 523(a)(4). To prevail on that claim, the creditor "must show (1) that the debtor acted as a fiduciary to the creditor at the time the debt was created, and (2) that the debt was caused by fraud or defalcation." Follett Higher Education Group, Inc. v. Berman (In re Berman), 629 F.3d 761, 766 (7th Cir. 2011).
The existence of a fiduciary relationship is a question of federal law, O'Shea v. Frain (In re Frain), 230 F.3d 1014, 1017 (7th Cir. 2000), that is interpreted "strict[ly] and narrow[ly]," Berman, 629 F.3d at 767 (citations omitted). Indeed, the Seventh Circuit has recognized a fiduciary relationship for purposes of section 523(a)(4) in two circumstances only: an express trust and an implied fiduciary relationship. Id. at 768.
An express trust involves "(1) a clear intent to create a trust and (2) the hallmarks of a trust." Id. at 769. Those hallmarks include "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." Id. Accord In re McGee, 353 F.3d 537, 540 (7th Cir. 2003). A covered fiduciary relationship "imposes real duties in advance of the breach." Frain, 230 F.3d at 1017 quoting Matter of Marchiando, 13 F.3d 1111, 1116 (7th Cir. 1994). That key fact distinguishes express trust relationships where fiduciary duties exist prior to the establishment of the debt from normal contractual relationships or other constructive trusts that have no existence before the wrong is committed. Marchiando, 13 F.3d at 1115; Frain, 230 F.3d at 1017.
Alternatively, an "implied fiduciary status" can arise where the relationship "involved a difference in knowledge or power giving one party a position of ascendancy over the another." Marchiando, 13 F.3d at 1116. These "relations of inequity . . . justify the imposition on the fiduciary to treat his principal's affairs with all the solicitude that he would accord to his own affairs." Id. That is because the relationship requires the "principal to repose a special confidence in the fiduciary." Frain, 230 F.3d at 1017.
Determining whether a specific relationship satisfies section 523(a)(4) is further complicated by the use of "trust" in an applicable statute. McGee, 353 F.3d at 540. The phrase itself is not determinative; rather courts typically look for a "trust-like relation" that suffices to establish a fiduciary relationship for purposes of section 523(a)(4). See Marchiando, 13 F.3d at 1116; McGee, 353 F.3d at 540.
For example, in Marchiando, the Seventh Circuit found that an Illinois statute that licensed a convenience store owner to sell lottery tickets and provided that the proceeds of sales of those tickets "shall constitute a trust fund until paid to the Department" did not create an express trust. Marchiando, 13 F.3d 1113-1116. The court concluded that while the statute used language that indicated an interest or intent in creating a trust, the actual content of the law did not do so. Id. at 1116. Specifically, the court acknowledged that while the statute called for a trustee relationship that technically began when the debtor received her license to sell lottery tickets, in reality "the trust did not begin until she failed to remit ticket receipts." Id. "Until then, she was just a ticket agent." Id. And thus, "she had no duties of a fiduciary character toward the Department of Lottery or anything to anyone else." Id.
Significantly the Seventh Circuit explained, the statute appeared to be established for the sole purpose of giving the state a lien on proceeds to secure its...
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