Folson Farm Corporation et al v. Casey

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
SHANNON PATRICK CASEY AND
SHAWNA CASEY,
Debtors. 	N0. 7-10-10492-SA
FOLSON FARM CORPORATION,
POTANDON PRODUCE, L.L.C.,
MART PRODUCE CORPORATION, AND
BILLINGSLEY PRODUCE SALES, INC.,
Plaintiffs,
v. 	Adv. No. 10-1068-S
SHANNON PATRICK CASEY,
Defendant/3 rd Party Plaintiff,
v.
JULIE ANDERSON and
GERALD ANDERSON,
3 rd Party Defendants.
MEMORANDUM OPINION ON DEFENDANT’S
MOTION TO DISMISS ADVERSARY PROCEEDING
Folson Farm Corporation, Potandon Produce, L.L.C., Mart
Produce Corporation, and Billingsley Produce Sales, Inc.
(“Plaintiffs”) filed this adversary proceeding to determine
dischargeability of debt under 11 U.S.C. § 523(a)(4).
Plaintiffs’ claims are based upon an alleged dissipation of
assets in an express statutory trust established by the
Perishable Agricultural Commodities Act, 1930, § 5(c)(4), as
amended, 7 U.S.C.A. § 499e(c)(4) (“PACA”). 	The second amended
complaint (doc 6) alleges that Defendant was an officer and
shareholder of Tan-O-On, a Colorado corporation, that was a
dealer and commission merchant subject to the provisions of PACA.
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1 The Court has subject matter and personal jurisdiction
pursuant to 28 U.S.C. §§1334 and 157(b); this is a core
proceeding pursuant to 28 U.S.C. §157(b)(2)(I); and these
are findings of fact and conclusions of law as may be required by
Rule 7052 F.R.B.P.
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It also alleges that between September 23, 2009 and December 28,
2009, Plaintiffs sold $310,963.25 of produce to Tan-O-On for
which they have never been paid, despite the fact that all of
their invoices contained the statutory language required by PACA
to enforce their rights as beneficiaries. 	Plaintiffs also claim
that PACA shifts the liability for payment to Defendant by
placing him in a fiduciary capacity to ensure payment of Tan-O-
On’s debts and that Defendant breached his fiduciary duties.
Defendant filed the instant Motion to Dismiss (doc 31),
claiming that PACA does not impose the stricter fiduciary duties
required by the Bankruptcy Code and the Tenth Circuit Court of
Appeals’ interpretation of Section 523(a)(4). 	Plaintiffs filed a
response. 	(Doc 34). 	For the reasons set forth below, the Court
will deny the Motion to Dismiss. 1
STANDARD FOR DISMISSAL
Fed.R.Civ.P. 12(b)(6) allows a defendant to request
dismissal for failure to state a claim. 	This rule is applicable
to adversary proceedings under Fed.R.Bank.P. 7012(b). 	When a
court is reviewing a complaint for failure to state a claim, it
looks at the plausibility of relief. 	Christy Sports, LLC v. Deer
Valley Resort Co., Ltd., 555 F.3d 1188, 1191 (10th Cir. 2009)
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(citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)).
Factual allegations must be enough to raise a right to relief
above the speculative level. 	Id. 	The concept of “plausibility”
at the dismissal stage refers not to whether the allegations are
likely to be true; the court must assume them to be true. 	Id. at
1191-92. 	“The question is whether, if the allegations are true,
it is plausible and not merely possible that the plaintiff is
entitled to relief under the relevant law.” 	Id. at 1192 (citing
Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008)).
SECTION 523(a)(4)
Bankruptcy Code Section 523(a)(4) provides:
A discharge under section 727, ... of this title does
not discharge an individual debtor from any debt—
...
(4) for fraud or defalcation while acting in a
fiduciary capacity ...
In 2008, this Court discussed the prevailing law in the
Tenth Circuit regarding fiduciary capacity and section 523(a)(4).
Bonita Land & Livestock, Inc. v. Green (In re Green), 386 B.R.
865, 868-69 (Bankr. D. N.M. 2008):
Accordingly, a finding of nondischargeability
under section 523(a)(4) requires a showing of (1) the
existence of a fiduciary relationship between the
debtor and the objecting party, and (2) a defalcation
committed by the debtor in the course of that fiduciary
relationship. 	Antlers Roof–Truss & Builders Supply v.
Storie (In re Storie), 216 B.R. 283, 286 (10th Cir. BAP
1997) (citing Fowler Bros. v. Young (In re Young), 91
F.3d 1367, 1371 (10th Cir. 1996)).
...
The existence of a fiduciary duty for section
523(a)(4) is a question of federal law, not a “fact”
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that can be pled. 	Van De Water v. Van De Water (In re
Van De Water), 180 B.R. 283, 289 (Bankr. D. N.M. 1995)
(fiduciary capacity is a question of federal law; the
general definition of fiduciary is too broad in the
dischargeability context.); Young, 91 F.3d at 1371
(“The existence of a fiduciary relationship under §
523(a)(4) is determined under federal law.”) In
Employers Workers' Compensation Assoc. v. Kelley (In re
Kelley), 215 B.R. 468, 471–72 (10th Cir. BAP 1997), the
Tenth Circuit Bankruptcy Appellate Panel discussed
fiduciary duty:
Section 523(a)(4) of the Bankruptcy Code
excepts from discharge any debt “for fraud or
defalcation while acting in a fiduciary capacity.”
The Tenth Circuit recently explained the meaning
of “fiduciary capacity” in this provision.
The existence of a fiduciary
relationship under § 523(a)(4) is determined
under federal law. 	However, state law is
relevant to this inquiry. 	Under this
circuit's federal bankruptcy case law, to
find that a fiduciary relationship existed
under § 523(a)(4), the court must find that
the money or property on which the debt at
issue was based was entrusted to the debtor.
Thus, an express or technical trust must be
present for a fiduciary relationship to exist
under § 523(a)(4). 	Neither a general
fiduciary duty of confidence, trust, loyalty,
and good faith, nor an inequality between the
parties' knowledge or bargaining power, is
sufficient to establish a fiduciary
relationship for purposes of
dischargeability. 	“Further, the fiduciary
relationship must be shown to exist prior to
the creation of the debt in controversy.” [
Allen v. Romero (In re Romero)], 535 F.2d
[618,] 621 [(10th Cir. 1976)].
Fowler Bros. v. Young (In re Young), 91 F.3d 1367,
1371–72 (10th Cir. 1996) (additional citations
omitted). 	We are, of course, obliged to apply this
narrow view of the fiduciaries who are covered by §
523(a)(4).
The Kelley court also noted that state statutes
often, but not always, impose trusts on persons held to
be fiduciaries as a matter of law based on their
relationships. 	Kelley 215 B.R. at 473. 	See also Van
De Water, 180 B.R. at 289 (“The trust requirement is
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2See also Davis v. Aetna Acceptance Co., 293 U.S. 328, 333
(1934): “It is not enough that, by the very act of wrongdoing out
of which the contested debt arose, the bankrupt has become
chargeable as a trustee ex maleficio. He must have been a trustee
before the wrong and without reference thereto.”
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not limited to trusts arising out of a formal
agreement, but includes relationships in which
trust-type obligations are imposed pursuant to statute
or common law.”) (Citation omitted.) 	A statute must
meet three requirements to trigger section 523(a)(4)'s
fiduciary status: (1) the trust res must be defined by
the statute, (2) the statute must spell out the
fiduciary duty, and (3) the statute must impose a trust
on funds prior to the act creating the debt. 	Kelley,
215 B.R. at 473. 2
(Footnote in original).
PACA
PACA is codified in Title 7, Chapter 20A of the U.S. Code.
The relevant section is § 499e(c), which provides:
Trust on commodities and sales proceeds for benefit of
unpaid suppliers, sellers, or agents; preservation of
trust; jurisdiction of courts.
...
(2) Perishable agricultural commodities received by a
commission merchant, dealer, or broker in all
transactions, and all inventories of food or other
products derived from perishable agricultural
commodities, and any receivables or proceeds from the
sale of such commodities or products, shall be held by
such commission merchant, dealer, or broker in trust
for the benefit of all unpaid suppliers or sellers of
such commodities or agents involved in the transaction,
until full payment of the sums owing in connection with
such transactions has been received by such unpaid
suppliers, sellers, or agents.
The Department of Agriculture has further promulgated regulations
to implement PACA. 	7 C.F.R. § 46.46. 	These regulations define
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the trust assets:
Trust assets. 	The trust is made up of perishable
agricultural commodities received in all transactions,
all inventories of food or other products derived from
such perishable agricultural commodities, and all
receivables or proceeds from the sale of such
commodities and food or products derived therefrom.
Trust assets are to be preserved as a nonsegregated
“floating” trust. 	Commingling of trust assets is
contemplated.
Id. §§ (b). 	Other subsections impose various duties on the
parties to a PACA transaction. 	Agents must preserve their
principal’s PACA rights by filing required documents. 	Id. §§
(c)(2), (d)(2). 	Merchants, dealers and brokers are required to
maintain the trust assets in a manner that such assets are freely
available to satisfy outstanding obligations. 	Id. §§ (d)(1).
“Any act or omission which is inconsistent with this
responsibility, including dissipation of trust assets, is
unlawful and in violation of Section 2 of the Act.” 	Id.
Payments must be prompt. 	Id. §§ (e)(1)-(2). 	Merchants, dealers
and brokers are also required to keep detailed records that fully
and correctly disclose all transactions involved in the business,
including the ownership interests in the business, and they must
produce them to the Secretary of Agriculture or his or her agent
if requested. 	7 U.S.C. §§ 499i, 499m. 	Finally,
Trust assets are available for other uses by the buyer
or receiver. 	For example, trust assets may be used to
pay other creditors. 	It is the buyer's or receiver's
responsibility as a trustee to insure that it has
sufficient assets to assure prompt payment for produce
and that any beneficiary under the trust will receive
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full payment. 	To satisfy its obligations under PACA, a
produce buyer must simply “maintain trust assets in a
manner that such assets are freely available to satisfy
outstanding obligations to sellers of perishable
agricultural commodities.” 7 C.F.R. § 46.46(d)(1).
C.H. Robinson Co. v. Alanco Corp., 239 F.3d 483, 488 (2 nd Cir.
2001)(quoting Department of Agriculture Explanation of the
Regulations Under PACA, 49 F.R. 45735, 45738.)(Some internal
punctuation omitted.)
APPLICATION OF KELLEY’S THREE PART TEST
(1) The trust res must be defined by the statute.
7 U.S.C. § 499e(c)(2) clearly defines the trust res. 	See
also 7 C.F.R. § 46.46(b); In re Atlantic Tropical Market Corp.,
118 B.R. 139, 142 (Bankr. S.D. Fla. 1990)(The “floating trust”
also includes assets purchased with trust assets, such as, in
that case, a Mack truck.)
(2) The statute must spell out the fiduciary duty.
7 C.F.R. § 46.46 lists the fiduciary duties described above.
The Court finds that these are sufficiently material duties to
qualify the trust as an express statutory trust. 	Compare Kelley,
215 B.R. at 473 (“Simply restricting commingling of funds does
not sufficiently define the fiduciary duty imposed here to bring
the statute within § 523(a)(4).” (construing 36 Okl.St.Ann. §
1465(E)) with Kelley, 215 B.R. at 474:
[36 Okl.St.Ann. § 1445] identifies as a trust res all
the insurance charges or premiums that an administrator
collects for an insurer, and spells out the
administrator's fiduciary duty by specifying the few
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permissible uses of the premiums he collects. 	While a
trustee is ordinarily not permitted to mingle property
held in trust with property not subject to the same
trust, we believe a trustee can be permitted to mingle
the property of one trust with the property of another
trust when permission to do so is given at the creation
of each trust, as this statute does, and the trustee
keeps an accurate record of the contributions of each
trust, as the statute requires. 	See Restatement
(Second) of Trusts § 179 (1959). 	Finally, if § 1445
applies to Kelley and his collections from his
customers, we believe the provision imposed a trust on
the collections from the moment his customers paid him,
so he would have held them in the kind of fiduciary
capacity that is covered by § 523(a)(4).
(Emphasis added.)
(3) The statute must impose a trust on funds prior to the act
creating the debt.
Under 7 U.S.C. § 499(e)(c)(2) the trust automatically arises
upon receipt of perishable agricultural commodities. 	The trust
arises whether or not there is a defalcation or dissipation of
assets by the buyer, receiver or agent. 	7 C.F.R. § 46.46(a)(1)
(defining “receipt”).
The Court finds that the PACA trust satisfies the three part
test adopted in Kelley.
LACK OF SEGREGATION OF FUNDS
Defendant argues that because the trust funds are commingled
with general revenues and can be used to pay other creditors
there can be no trust and no resulting fiduciary duties for the
purposes of section 523(a)(4). 	This was the ruling in Cardile
Bros. Mushroom Pkg., Inc. v. McCue (In re McCue), 324 B.R. 389,
393 (Bankr. M.D. Fla. 2005):
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Because a PACA res is not a segregated trust res,
Plaintiffs cannot prove the existence of an express or
technical trust. 	Because Plaintiffs cannot prove the
existence of an express or technical trust, McCue's
debt to Plaintiffs resulting from his breach of the
PACA trust is not a debt for defalcation while acting
in a fiduciary capacity pursuant to 11 U.S.C. §
523(a)(4).
(Footnote omitted.) 	This Court disagrees.
First, the Restatement (Third) of Trusts § 84 (2007) notes
that, normally, there is a duty to keep trust property separate.
The trustee has a duty to see that trust property is
designated or identifiable as property of the trust,
and also a duty to keep the trust property separate
from the trustee's own property and, so far as
practical, separate from other property not subject to
the trust.
However, comments (d), (d)(2) and (e) list exceptions. 	Comment
(d) states that ordinarily a trustee has a duty to have trust
property designated or made identifiable as trust property.
Comment (d)(2) allows for an exception to the general rule when
earmarking is not feasible as long as the trustee keeps adequate
records. 	Comment (e) allows for an exception when the terms of
the trust allow trust property to be commingled or jointly held
with the trustee’s own property.
The Court finds that the exceptions in both comments (d)(2)
and (e) are relevant. 	Earmarking in this case would not be
feasible nor would it be cost effective to account for every
single transaction in produce from farm to market. 	See Foothill
Capital Corp. v. Clare’s Food Market, Inc. (In re Coupon Clearing
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Service, Inc.), 113 F.3d 1091, 1100-01 (9th Cir. 1997):
Regardless of the existence of an agency
relationship, the ShopRite Retailers contend that the
coupon proceeds were held in trust for the ShopRite
Retailers by CCS. 	Although CCS was not required to
segregate the coupon proceeds, the ShopRite Retailers
argue that CCS lacked the authority to commingle the
coupon proceeds with its general operating funds or
pledge them as security. 	Furthermore, the ShopRite
Retailers claim that the fact that CCS placed the
coupon proceeds of different retailers in one lockbox
account is not determinative where the proceeds are
separately identifiable and traceable, especially where
the amounts received by the agent are small or where
there is a series of transactions. 	See, e.g., In re
Penn Cent. Transp. Co., 486 F.2d 519, 525 (3d Cir.
1973) (trust imposed despite commingling since
segregation of funds could be impractical due to their
magnitude and number of entities involved). In Penn
Central Transportation Co., the debtor Penn Central
collected money for interline railroads and deposited
the proceeds in its general account, commingling the
proceeds of different carriers with its own funds. 	Id.
The court in Penn Central Transportation Co. found that
because the collected funds were traceable and no
provision for interest payments by the carriers
existed, Penn Central held the funds in trust for the
carriers. 	See id. at 526. 	The court noted that,
“[w]hile generally commingling indicates a
debtor-creditor relationship and not a trust, it is
only one indicium and it too is not necessarily
conclusive.” 	Id. at 524.
Second, other courts have found that PACA creates an express
trust despite the lack of segregation. 	See JSG Trading Corp. v.
Tray-Wrap, Inc., 917 F.2d 75, 78 (2nd Cir. 1990):
The trust impressed by [PACA] is a nonsegregated
“floating trust” made up of all a firm's commodity
related liquid assets, under which there may be a
commingling of trust assets. 	Under this provision
there is no necessity to specifically identify all of
the trust assets through each step of the assets
accrual and disposal process. 	Since commingling is
contemplated, all trust assets would be subject to the
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claims of unpaid seller-suppliers and agents to the
extent of the amount owed them.
(quoting H.R. Rep. No. 543, 98th Cong., 2d Sess. 5 reprinted in
1984 U.S. Code Cong. & Admin. News at 409.); N.P. Deoudes, Inc.
v. Snyder (In re Snyder), 184 B.R. 473, 475 (D. Md. 1995)
(Segregation of PACA trust assets is not required. 	However,
segregation of funds is not a mandatory element of an express
trust.)(Citations omitted.)
Third, segregation of PACA assets is a remedy that can be
awarded. 	7 U.S.C. §§ 499e(c)(3) and (c)(5).
Upon a showing that the trust is being dissipated or
threatened with dissipation, a district court should
require the PACA debtor to escrow its proceeds from
produce sales, identify its receivables, and inventory
its assets. 	It should then require the PACA debtor to
separate and maintain these produce-related assets as
the PACA trust for the benefit of all unpaid sellers
having a bona fide claim. 	7 U.S.C.A. § 499e(c)(3).
Each beneficiary would then be entitled to its pro rata
share.
Frio Ice, S.A. v. Sunfruit, Inc., 918 F.2d 154, 159 (11th Cir.
1990). 	If this relief is listed as a remedy in the event of
dissipation, it does not seem likely that segregation would be
the normal state of affairs absent dissipation.
CONCLUSION
Because the Court finds that a PACA trust satisfies the
requirements of an express trust, and that Defendant failed to
pay Plaintiffs as required, the Second Amended Complaint states a
claim for relief. 	The Court will enter an Order Denying
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Defendant’s Motion to Dismiss and will schedule a pretrial
conference.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	August 26, 2011
Copies to:
Katy Koestner Esquivel
Meuers Law Firm, PL
Attorney for Plaintiffs
5395 Park Central
Naples, FL 34102
David T Thuma
Thuma & Walker, P.C.
Attorney for Defendant
500 Marquette Ave NW Ste 650
Albuquerque, NM 87102-5309
Stephanie L Schaeffer
Thuma & Walker, P.C.
Attorney for Defendant
500 Marquette NW Suite 650
Albuquerque, NM 87102
Shannon Robinson
Attorney for Third Party Defendants
800 Lomas N.W., Suite 101
Albuquerque, NM 87102
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