Judge Hopkins
Chapter 7
ORDER DENYING SUMMARY JUDGMENT MOTION
This is an action to determine the dischargeability of debt pursuant to 11 U.S.C. § 523(a)(2)(A) and (4). Presently before the Court is a summary judgment motion ("Motion")(Doc. 25) filed by the Plaintiff, Castellini Company, LLC ("Castellini"). Castellini seeks a nondischargeable judgment against the Defendants, Ronald and Holly Baker, in the amount of $48,150.90.
The Bakers owned and operated Baker Produce, LLC ("BPL"), a retail produce business. BPL purchased some of its produce from Castellini, a business engaged in the sale of perishable agricultural commodities through interstate commerce. The relationship between BPL and Castellini was subject to the Perishable Agricultural Commodities Act ("PACA"). See 7 U.S.C. §§ 499a-499t. BPL closed in January of 2014 when it ran out of working capital. Castellini has not been paid for some of its sales to BPL.
SUMMARY JUDGMENT STANDARD
"The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a).
SECTION 523(A)(4)
The Motion requests summary judgment under § 523(a)(4) only. Section 523(a)(4) excepts from discharge debts for fraud or defalcation in a fiduciary capacity.
PACA imposed a trust, for the benefit of Castellini, upon all monies received by BPL from its resale of produce purchased from Castellini, until Castellini was paid in full. 7 U.S.C. § 499e(c)(2). Castellini's invoices to BPL contained the following language:
The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930 (
7 U.S.C. 499e (c)). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.
PACA requires this language ("PACA language") on every invoice to preserve the benefits of the PACA trust.
See 7 U.S.C. § 499e(c)(4). BPL also included this language on its own invoices when it sold perishable agricultural commodities to others.
Although the debt to Castellini is owed by BPL, corporate shareholders and officers may be personally liable for PACA obligations if they had control over the trust assets and failed to preserve them. See Arava USA, Inc. v. Karni Family Farm, LLC, 474 Fed. Appx. 452, 453 (6th Cir. 2012). The Bakers were the sole owners of BPL. The Bakers alone controlled the daily operations and assets of BPL. Consequently, the Bakers admit that "they owe Castellini money." See Doc. 26 at 3.
Personal liability is premised upon common law breach of trust principles, not PACA itself. Six L's Packing Co., Inc. v. Beale, 524 Fed. Appx. 148,156 (6th Cir. 2013).
PACA trusts satisfy the "fiduciary capacity" requirement under § 523(a)(4). Michael Farms, Inc. v. Lundgren (In re Lundgren), 503 B.R. 717, 721 (Bankr. W.D. Wis. 2013)(collecting cases); E. Armata, Inc. v. Parra (In re Parra), 412 B.R. 99, 105 (Bankr. E.D.N.Y. 2009)(collecting cases); A.J. Rinella & Co., Inc. v. Bartlett (In re Bartlett), 397 B.R. 610, 620 (Bankr. D. Mass. 2008)(collecting cases).
The issue presented is whether defalcation occurred. Defalcation is: (1) a knowing violation of a fiduciary duty; or (2) a conscious disregard of, or a willful blindness to, a substantial and unjustifiable risk that conduct will violate a fiduciary duty. Bullock v. BankChampaign, N.A., 133 S.Ct. 1754, 1759 (2013).
The Motion does not argue that fraud occurred under § 523(a)(4).
1. Knowledge of Fiduciary Duty
According to the Bakers' affidavits, the Bakers did not know that they owed a fiduciary duty to Castellini under PACA. See Doc. 26. Castellini argues that knowledge of the fiduciary duty is irrelevant. According to Castellini, the issue is whether the debtor "knowingly engaged in conduct which violated a fiduciary duty" regardless of the debtor's awareness of the duty. See Doc. 27 at 2.
Bullock focuses on "conduct that the fiduciary knows is improper." Bullock, 133 S. Ct. at 1759. How does a fiduciary know that conduct is improper if the fiduciary does not know about the fiduciary duty? Therefore, under both prongs of Bullock the debtor must have known about the fiduciary duty. See Caitlin Energy, Inc. V. Rachel (In re Rachel), 527 B.R. 529, 543 (Bankr. N.D. Ga. 2015)("debtor must have been subjectively aware he had a fiduciary duty"); Chitester v. Watterson (In re Watterson), 524 B.R. 445, 452 (Bankr. E.D.N.Y. 2015)("Debtor must have actual knowledge of his fiduciary duties-constructive knowledge will not suffice."); MacArthur Co. v. Cupit (In re Cupit), 514 B.R. 42, 51 (Bank. D. Colo. 2014)("A debtor cannot consciously disregard a risk of violating a fiduciary duty if he or she is wholly unaware of that duty. There must be some evidence that the debtor was aware of the fiduciary duty[.]"). If the debtor knew about the fiduciary duty, then Bullock asks whether the debtor: (1) engaged in conduct that the debtor knew would violate the known fiduciary duty; or (2) consciously disregarded a substantial and unjustifiable risk that the debtor's conduct would violate the known fiduciary duty. Again, by affidavit, the Bakers state that they did not know they owed a fiduciary duty to Castellini.
Castellini argues that actual knowledge of the fiduciary duty is irrelevant to the second prong of Bullock even if it is relevant to the first prong. The case law cited herein provides otherwise. --------
2. BPL Invoices
Castellini contends that a debtor cannot avoid liability by claiming ignorance of a fiduciary duty. The Court agrees. A debtor's knowledge of a fiduciary duty may be inferred from the evidence. Cupit, 514 B.R. at 51.
Because BPL included the PACA language on its own invoices, Castellini argues that the Bullock standard is satisfied. For purposes of summary judgment, the Court disagrees. All inferences must be drawn in favor of the non-moving party on summary judgment. See G.C. v. Owensboro Public Schools, 711 F.3d 623, 629 (6th Cir. 2013). Summary judgment on state of mind issues is appropriate only if no reasonable person could reach a contrary conclusion. See In re Classicstar Mare Lease Litigation, 727 F.3d 473, 484 (6th Cir. 2013).
Although BPL included PACA language on its invoices, this does not conclusively establish, at this stage of the proceedings, that the Bakers knew about their fiduciary duty. By affidavit, the Bakers state that they never acted recklessly or with knowledge of their fiduciary duty. See Doc. 26. The Bakers state that BPL included this language on its invoices simply because the Bakers noticed the inclusion of this language on invoices received from BPL suppliers. See Doc. 26. This creates a factual dispute that is better left for trial, where the Court can weigh the credibility of the evidence. See Watterson, 524 B.R. at 452 ("In determining whether the Debtor had the requisite state of mind to meet the defalcation standard, the Court looks at the witness's credibility[.]").
H. Brooks and Company, LLC v. Yerges (In re Yerges), Adv. No. 13-105, 2014 WL 1803395 (Bankr. W.D. Wis. May 6, 2014), a PACA decision under § 523(a)(4), is illustrative. Yerges denied summary judgment, concluding that it was "not possible" to determine the defendant's state of mind at that point. Yerges, 2014 WL 1803395 at *7. However, following a trial, where the plaintiff established that the defendant received and reviewed invoices containing the mandatory PACA language, the court entered judgment for the plaintiff. See H. Brooks and Company, LLC v. Yerges (In re Yerges), 512 B.R. 916 (Bankr. W.D. Wis. 2014)("Yerges II"). Like Yerges II, the Bakers reviewed the PACA language enough to include it on BPL invoices. However, unlike Yerges II, this fact comes before the Court on summary judgment where the Bakers state that they never acted recklessly or with knowledge of their fiduciary duty. To the contrary, they suggest that they placed the PACA language on BPL invoices to conform with industry practice without realizing that it created a fiduciary duty. If this matter reaches trial, the Court might conclude otherwise after considering the credibility of the Bakers and the totality of the evidence. But for purposes of summary judgment, drawing all inferences in favor of the Bakers, the Court cannot say that no reasonable person could enter judgment for the Bakers.
C ONCLUSION
For the foregoing reasons, the Motion is DENIED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Jeffery P. Hopkins
United States Bankruptcy Judge Dated: May 22, 2015 Copies to: Ryan M. Gembala
rgembala@martynlawfirm.com John Paul Rieser
attyecfdesk@riesermarx.com
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