October 12, 2022
Generally, in individual bankruptcy cases (Ch. 7, 11, 12 and 13), a debtor will be granted a discharge of its debts. A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts, meaning, the debtor is no longer legally required to pay any debts that are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. However, Section 523(a) of the Code specifically excepts various categories of debts from the discharge granted to individual debtors, meaning that the Debtor must still repay those debts after bankruptcy.
One exception for discharge is for a discharge of debts for fraud or defalcation while acting in fiduciary capacity, embezzlement or larceny (11 U.S.C. Section 523(a)(4)). Recently, the Eleventh Circuit resolved a split among the lower courts defining a technical trust where a “defalcation” by the trustee would result in nondischargeability under Section 523(a)(4). In holding that a claim against an individual arising from violation of a trust under the Perishable Agricultural Commodities Act (“PACA”) is not dischargeable under Section 523(a)(4) the Court held that an exception to discharge does not apply simply because the parties or a statute label the relationship as a trust.
Thus, in a case of first impression the Eleventh Circuit held that the exception to discharge in 523(a)(4) does not apply to debts incurred by a produce buyer who is acting as a trustee under PACA in In re Nathan Aaron Forrest, Marsha Weidman Forrest (Spring Valley Produce, Inc., Produce Exchange Co., Inc., Fresh Direct, Inc., S. Roza & Company, Inc., v. Nathan Aaron Forrest, Marsha Weidman Forrest) USCA11 Case 21-12133. In this case, the debtors, the Forrests (as owners and officers of Central Market of FL, Inc. “Central Marked”) owed a pre-petition debt for produce to Spring Valley Produce, Inc. (“SVP”) which the Court determined was dischargeable. During the transactions at issue, SVP and Central Market were licensed under PACA and SVP preserved its rights as a PACA trust beneficiary by including the required statutory statement on its invoices to Central Market. Upon receiving and accepting SVP’s produce shipments, Central Market became a PACA trustee of a trust res consisting of the produce.
The Debtors argued that the nondischarge exception in 523(a)(4) did not apply because a PACA trustee is not acting in a fiduciary capacity as that term is understood in the section’s context and moreover, PACA does not require segregation of trust assets nor prohibit use of trust assets for non-trust purpose and thus 523(a)(4) does not apply to PACA-related debts. In holding the exception to dischargeability does not apply, the Court addressed the core issue as being what type of trust-like duties are sufficient to create a technical trust under the Fiduciary Capacity Exception and thus adopted a three-part test for determining whether a debtor is acting in fiduciary capacity under 523(a)(4) in relation to a creditor sufficient to create the necessary relationship for non-dischargeability: first, the relationship must have 1) a trustee who holds (2) an identifiable trust res, for the benefit of (3) an identifiable beneficiary or beneficiaries. Second, the relationship must define sufficient trust like duties imposed on the trustee with respect to the trust res and beneficiaries to create a technical trust, with the strongest indicia of a technical trust being the duty to segregate trust assets and the duty to refrain from using trust assets for a non-trust purpose. Third, the debtor must be acting in a fiduciary capacity before the act of fraud or defalcation creating the debt.
Thus, at least in the Eleventh Circuit, a claim against an individual arising from violation of a trust under PACA is not dischargeable under Section 523(a)(4). However, the Court emphasized that their holding is limited to the narrow meaning of “fiduciary capacity” in the context of § 523(a)(4)’s exception to discharge and does not address whether a fiduciary relationship creates a trust in other contexts.