Perishable Agricultural Commodities Act (“PACA”) creates a trust to protect produce suppliers.

In a recent S.D. of Florida Bankruptcy Case, the issue before the Court was whether a PACA trust is the type of trust that gives rise to actionable fiduciary capacity under Section 523(a)(4) – the exception to discharge of debt “for fraud or defalcation while acting in a fiduciary capacity”.

Although the Court admitted that the decision was “a close one,” it concluded that a PACA trust does not satisfy the requirements for finding “fiduciary capacity” under Section 523(a)(4).  The Court found that a PACA trust falls short because (1) it does not require segregation of assets unless and until a court orders segregation after a showing of dissipation; and (2) the trust assets may be used for non-trust purposes.

The Court reasoned that language of § 523(a)(4) is clear that only debts incurred while acting in a fiduciary capacity are nondischargeable.  Accordingly,  the hallmarks of a technical trust relationship must exist prior to any alleged defalcation for a trust to be considered a technical trust.  Applying that standard, the Court concluded that a PACA trust is not a technical trust until a court imposes additional duties and restrictions after a prior showing of malfeasance by produce dealers.   As a result, the Defendant produce dealers’ debt to the Plaintiff produce suppliers could not be excepted from discharge under § 523(a)(4) of the Bankruptcy Code.

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