Spring Valley Produce, Inc. v. Forrest (In re Forrest)
| Decision Date | 02 April 2021 |
| Docket Number | Adv. No. 8:20-ap-00447-RCT,Case No. 8:20-bk-03819-RCT |
| Parties | In re: Nathan Aaron Forrest and Marsha Weidman Forrest, Debtors. Spring Valley Produce, Inc., et al., Plaintiffs. v. Nathan Aaron Forrest and Marsha Weidman Forrest, Defendants. |
| Court | United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Florida |
Before the Court is Defendants' Amended Motion to Dismiss Amended Adversary Complaint (the "Motion") (Doc. 13) and Plaintiffs' opposition to the Motion (Doc. 15). Considered with the Motion is a nearly identical motion filed by Defendants in a nearly identical adversary proceeding brought by G.W. Palmer & Co., Inc. (the "Related Adversary").1 The Court refers to the plaintiffs in these adversaries, collectively, as the "Produce Suppliers."
In both proceedings, the Produce Suppliers seek, among related relief, a declaration that certain debts owed to them and arising under the trust provisions of the Perishable Agricultural Commodities Act ("PACA")2 are not dischargeable pursuant to § 523(a)(4) of the Bankruptcy Code.3 The issue presented in both proceedings is whether the trust obligations set forth in PACA satisfy the "fiduciary capacity" requirement to render a PACA-related debt non-dischargeable under § 523(a)(4).
Defendants Marsha and Nathan Forrest ("Debtors") are individuals who were officers of and together owned 50% of the shares of Central Market of FL, Inc. ("Central Market").4 Central Market is licensed under PACA to buy and sell produce. Produce Suppliers are growers who sold produce to Central Market and have unpaid invoices. For purposes of these rulings, the Court assumes that Defendants are personally liable for Central Market's obligations to the Produce Suppliers under PACA.5
Seeking to discharge their personal liability, Defendants filed a joint chapter 7 bankruptcy and have submitted their non-exempt assets to the chapter 7 trustee for liquidation. Produce Suppliers filed a timely complaint seeking a declaration that Debtors' liability for unpaid invoices cannot be discharged because Defendants held the produce sold to Central Market (and the proceeds thereof) in trust for the Produce Suppliers. ProduceSuppliers argue that a breach of the statutory trust obligations in PACA satisfies the exception to discharge in § 523(a)(4) for debts for "fraud or defalcation" by a fiduciary. There is ample support for Produce Suppliers' position; indeed, it is a well-reasoned majority view.6 Defendants disagree and have moved to dismiss the complaints with prejudice. Defendants rely on an equally well-reasoned minority approach.7 Bankruptcy Courts in the Eleventh Circuit are divided on whether PACA-related debt is dischargeable in bankruptcy.8
This and the Related Adversary raise an issue of great importance that is worthy of certification for direct appeal to the Eleventh Circuit. For that matter, it is an issue of statutory interpretation of § 523(a)(4) of the Bankruptcy Code that goes beyond the application here to PACA. The critical question is whether some segregation of trust funds or a prohibition on the use of such funds is required to render statutory trust obligations non-dischargeable in bankruptcy.11 U.S.C. § 523(a)(4)
"An individual debtor's prepetition debts . . . are generally dischargeable in a Chapter 7 case, and exceptions to the discharge are construed narrowly."9 This is in line with the Bankruptcy Code's goal of preserving a fresh start for the "honest but unfortunate" debtor.10
Section 523(a)(4) excepts from the discharge debts attributable to "fraud or defalcation while acting in a fiduciary capacity."11 Whether a debtor is a "fiduciary" under § 523(a)(4) is a question of federal bankruptcy law, not underlying substantive state or federal law.12 Consequently, not all fiduciary relationships will qualify for the exception to discharge under the Bankruptcy Code, and the Supreme Court has long held that the fiduciary exception to discharge is "strict and narrow."13
As explained by the Eleventh Circuit in Guerra:
Although § 523(a)(4) establishes an exception to dischargeability for debts for "defalcation while acting in a fiduciary capacity," this exception is a narrow one. "The Supreme Court has consistently held that the term 'fiduciary' is not to be construed expansively, but instead is intended to refer to 'technical' trusts." Quaif v. Johnson, 4 F.3d 950, 953 (11th Cir. 1993) (); see Commonwealth Land TitleCo. v. Blaszak (In re Blaszak), 397 F.3d 386, 391 (6th Cir. 2005) ()[.]14
While a breach of an express or technical trust is potentially non-dischargeable under § 523(a)(4), breaches of constructive or resulting trusts do not fall within this particular discharge exception. Again, as explained in Guerra:
In Quaif, this Court further noted that the 1934 Davis decision is the last Supreme Court case to speak to the issue and that the Supreme Court has left "the lower courts to struggle with the concept of 'technical' trusts." Quaif, 4 F.3d at 953. Quaif also discussed the trends in judicial interpretation of the § 523(a)(4) exception and noted that courts seemed to include the voluntary, express trust created by contract within the scope of "fiduciary capacity" as used in § 523(a)(4). Id. In contrast, courts have excluded the involuntary resulting or constructive trust, created by operation of law, from the scope of the exception. Id. Additionally, Quaif noted that cases have "also articulated a requirement that the trust relationship have existed prior to the act which created the debt in order to fall within the statutory [fiduciary capacity] exception." Id. (citing Matter of Angelle, 610 F.2d 1335 (5th Cir. 1980)). Accordingly, "constructive" or "resulting" trusts, which generally serve as a remedy for some dereliction of duty in a confidential relationship, do not fall within the § 523(a)(4) exception "because the act which created the debt simultaneously created the trust relationship." Id. (emphasis added).15
Statutory trusts like a PACA trust fall somewhere between an express trust and a constructive trust. Again, the Eleventh Circuit explains: "[S]tatutorily created trusts 'fit into neither of the traditional categories' of express trust or resulting or constructive trust and [] courts ha[ve] struggled with reconciling this new type of trust."16
The key appellate decisions in this Circuit17 on the dischargeability of a statutory trust obligation are Quaif v. Johnson,18 Guerra v. Fernandez-Rocha (In re Fernandez-Rocha),19Angelle v. Reed (In re Angelle),20 and Murphy & Robinson Inv. Co. v. Cross (In re Cross).21 Of these, only Quaif found a statutory trust to be a technical trust sufficient to render a debt non-dischargeable for "fraud or defalcation" under § 523(a)(4).
In Quaif, the Eleventh Circuit highlighted the segregation of trust assets. The statutory trust in question was a Georgia statute creating a trust on the receipts of insurance agents for the benefit of insurers.22 The Eleventh Circuit concluded that the insurance agent in Quaif was acting in a fiduciary capacity because the Georgia statute (i) required the agent "to promptly account for and remit payments of funds to the insurer" and (ii) forbid the agent "from commingling the funds with his operating or personal accounts."23
The Quaif court rejected the debtor's argument that an insurance agent is not acting in a fiduciary capacity because under the statute, the agent does not have to maintain separate, segregated accounts for each insurer to whom the agent owes premiums. In finding that the agent was acting in a fiduciary capacity pre-defalcation, the court focused on the duty of the agent to segregate trust assets, namely the insurance premiums, from non-trust assets. The court explained as follows:
The Georgia statute requires that the premiums must be separate from other types of funds, but may be kept in a common premium account as long as there were adequate records of the sources of these funds. The court finds that this is sufficient "segregation" to satisfy the requirement that the fiduciary duties be created prior to the act of defalcation.24
The statute at issue in Quaif clearly required an insurance agent to segregate trust funds into a separate account and not to commingle trust funds with the agent's personal funds. This is structure familiar to an attorney's handling of client trust funds.25 All "trust funds" are segregated in a single trust account. A separate fund for each beneficiary is not required. But it is indisputably clear to the "fiduciary" what funds are available for general business operations and what funds are not.
Both Cross26 and Angelle27 involved alleged defalcations by general contractors who misappropriated funds advanced by contracting parties. In Cross, the contractor's debts were dischargeable because the debtor was "under no obligation to maintain a segregated account" and owed no fiduciary duty "prior to and independent of . . . alleged misconduct."28 In Angelle, a builder owed no fiduciary duty because the relevant statute did not create a trust relationship prior to the alleged misappropriation.29 Though the Angelle court did not hold expressly that segregation was required, the court expressed "doubts . . . that a statute which merely makes misappropriation of funds a crime without, for example, requiring segregation of accounts would be enough to charge the parties with an intent to create a trust."30
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