Chief Judge Roger L. Efremsky • Clerk of Court Edward Emmons

Memorandum Decision re PACA Liability Nondischargeable

Wednesday, March 3, 1999


In re
No. 97-35024DM
A.P. No. 98-3106DM



A hearing was held on February 12, 1999, on Plaintiffs Linden Associated Growers, Inc., Brewster Heights Packing, Inc., Felix Costa & Sons, and Emerald International Trade Ltd. ("Plaintiffs") Motion for Summary Judgment ("the Motion") against debtor and defendant, Robert Patrick Early ("Debtor"), on their claims under the Perishable Agricultural Commodities Act ("PACA")(1), and 11 U.S.C. § 523(a)(4).(2) Marion I. Quesenbery, Esq. appeared on behalf on Plaintiffs; Drew Henwood, Esq. appeared on behalf of Debtor. Having considered the Motion, Debtor's opposition to the Motion, Plaintiffs' reply in support of the Motion, all other papers filed herein in support and in opposition to the Motion, and the arguments of counsel, for the reasons that follow, the MOTION is GRANTED. I. FACTS

Debtor was a one of three shareholders, a director, the treasurer, and the chief financial officer of Golden Phoenix Trading, Inc. ("GPT"). The agricultural division of GPT was in the business of buying and selling fresh fruits and vegetables; as a United States Department of Agriculture licensed dealer of perishable agricultural commodities, GPT was subject to PACA. In May and June 1997, Plaintiffs sold, delivered and invoiced to GPT over one million dollars worth of fresh fruits and vegetables. Immediately upon delivery of these commodities, Plaintiffs became the beneficiaries of a statutory trust under PACA, the res of which consisted of the commodities, and any products and proceeds stemming from the commodities. 7 U.S.C. § 499e(c)(2)(3); In re Richmond Produce Co., Inc., 112 B.R. 364, 368 (Bankr. N.D. Cal. 1990). As required by PACA, Plaintiffs took all actions necessary to perfect their rights to the PACA trust assets.(4) GPT has not paid for commodities delivered under these invoices and GPT has since ceased operations. The corporation is now in a Chapter 7 bankruptcy case in the Western District of Washington. The Debtor is not licensed under PACA. However, he oversaw GPT's agricultural division. In this capacity his responsibilities included managing the cash flow, making decisions regarding what bills were to be paid, instructing the cash disbursement clerk to prepare checks, and signing those checks. On October 31, 1997, Debtor filed a petition for relief in this court under Title 11, Chapter 11. Thereafter the case was converted to a Chapter 7 case. Plaintiffs' complaint for nondischargeability followed.

II. ISSUES The questions presented are (1) whether Debtor is individually liable under PACA; and (2) if so, whether this liability is nondischargeable as a debt for " . . . defalcation while acting in a fiduciary capacity . . ." under section 523(a)(4).

III. SUMMARY JUDGMENT STANDARD A party is entitled to summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Fed.R.Bankr.P. 7056; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2509-2510 (1986).

IV. DISCUSSION A. Individuals Can Be Held Liable Under PACA Individual liability under PACA is controlled by the decision of the Ninth Circuit Court of Appeals in Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 283 (9th Cir. 1997), where the court held that "individual shareholders, officers, or directors of a corporation who are in a position to control PACA trust assets, and breach their fiduciary duty to preserve those assets, may be held liable under PACA." This liability is secondary to that of the corporation. Id. The court considered the following factors in determining individual liability under PACA: the closely-held nature of the corporation, the individual's active management role, and any evidence of the individual's acting for the corporation. Id.

B. Debtor Was In A Position To Control PACA Trust Assets The court agrees with Plaintiffs that Debtor was in a position to control the PACA trust assets. As one-third owner, chief financial officer and a GPT director, Debtor had overall responsibility for the financial affairs of GPT, including its agricultural division, the division to which the commodities in this case were delivered. He also managed GPT's accounts payable and receivable, and he decided what creditors were to be paid. Debtor does not dispute these facts. Instead he argues that because he was in Europe when some of Plaintiffs' commodities were delivered to GPT, he was not in a position to control the PACA trust assets.(5) This argument is unpersuasive. First, while Debtor was in Europe, Mr. Ron Preston acted as chief financial officer of GPT. Debtor was in frequent contact with Mr. Preston regarding the financial issues facing GPT, including decisions about which creditors to pay. He did not direct Mr. Preston to pay Plaintiffs' invoices. Second, Debtor did not resign as an officer of GPT until shortly after he returned from a trip to Peru in mid-July 1997. The commodity deliveries in this case took place in May of that year. Thus, Debtor was GPT's chief financial officer when Plaintiffs' commodities were shipped and invoiced, and when those invoices became due.

Debtor does not deny that he was in a position to control the PACA trust assets while he was away on these trips. He does, however state in a declaration that he did not communicate with any GPT employees while he was out of the country regarding financial issues facing the company. For the reasons discussed below, the court is disregarding this declaration. In any event, Debtor offers no explanation as to how the trip to Europe removed him from a position to control the PACA trust assets. He does not argue that he was in a remote area where he did not have access to any of the modern technology currently used to conduct business. Additionally, the court will disregard this statement because it directly contradicts statements Debtor made during a prior deposition in connection with a PACA action in the United States District Court, Western District of Washington. In that deposition Debtor testified that while his was on the same trip to Europe he communicated with Mr. Preston about GPT's cash flow problems, and with his son, James Early, a GPT employee, about people who had not been paid. "The general rule in the Ninth Circuit is that a party cannot create an issue of fact by affidavit contradicting his prior deposition testimony." Kennedy v. Allied Mutual Ins. Co., 952 F.2d 262, 266 (9th Cir. 1991). Before applying this rule, however, the court must make a factual determination that the contradiction was actually a "sham". Id. The court finds that the contradiction created by Debtor's declaration meets the "sham" standard. Debtor's financial interest in GPT, the company's financial condition at the time he was in Europe and Peru, and his status as chief financial officer and head of the agricultural division convince the court that Debtor cannot rely on his declaration to create a genuine issue of material fact. In accordance with the foregoing, the court finds that Debtor was in a position to control the PACA trust assets.

C. Defendant Breached His Fiduciary Duty To Preserve the PACA Trust Assets

Upon delivery to GPT the Plaintiffs' commodities, and any proceeds and products stemming from them, were impressed with a statutory trust for Plaintiffs' benefit. 7 U.S.C. § 499e(c)(2). Under the Sunkist decision, Defendant owed Plaintiffs a fiduciary duty to preserve the trust assets. Defendant engaged in several affirmative acts and omissions which resulted in a breach of this fiduciary duty. Before Defendant departed for Europe he was fully aware that GPT was experiencing a financial crisis. The company had a negative bank balance of approximately $100,000. At the same time GPT received hundreds of thousands of dollars from the sale of Plaintiffs' commodities. All of this money was gone by the time Defendant left for Europe, and none of it was used to pay Plaintiffs' invoices. Additionally, while he was in Europe, Debtor was informed by both Mr. Preston and his son, James Early, that GPT was experiencing severe cash flow problems and that as a result creditors were not being paid. Despite this knowledge Defendant chose to stay in Europe instead of returning home to try and salvage the business. Finally, upon returning from overseas Debtor was aware that GPT had depleted substantially all of its cash flow. What little money was left went to pay individuals and other companies in which Debtor has a financial interest.(6) Because the invoices evidencing Plaintiffs' delivery of the commodities to GPT remain unpaid and the PACA trust assets have are unaccounted for, Debtor is liable under PACA.

D. Defendant's PACA Liability Is Nondischargeable Under Section 523(a)(4) Pursuant to section 523(a)(4), a debt for defalcation while acting in a fiduciary capacity is nondischargeable. The fiduciary capacity contemplated by this section exists only in relation to express or statutory trusts, which exist independent of any wrongdoing by the debtor. In re Moore, 186 B.R. 962, 974 (Bankr. N.D.Cal. 1995). Constructive, implied and resulting trusts will not support the requisite fiduciary relationship under section 523(a)(4). Id. The statutory trust established by PACA is valid and enforceable in bankruptcy proceedings. In re Milton Poulos, Inc., 94 B.R. 648, 650 (Bankr. C.D. Cal. 1988), aff'd, 107 B.R. 715 (9th Cir. BAP 1989), aff'd in part, rev'd in part 947 F.2d 1351 (9th Cir. 1991). Defalcation under section 523(a)(4) consists of the misappropriation of trust funds or money held in any fiduciary capacity as well as the failure to account for such funds. In re Lewis, 97 F.3d 1182, 1186 (9th Cir. 1996). It includes innocent defaults by a fiduciary who fails to account fully for money received and does not require the intent to defraud. Id. Plaintiffs have established that over one million dollars of perishable commodities were delivered and received by GPT. Neither the commdoities, GPT's accounts receivable, nor any proceeds from these commodities are available to satisfy Plaintiffs' claims. Consequently, the PACA trust assets are unaccounted for. Debtor was in a position to control those assets. Thus, Debtor is liable for defalcation while acting in a fiduciary capacity under section 523(a)(4) and this liability is nondischargeable. V. CONCLUSION

In accordance with the foregoing, Plaintiffs' Motion for Summary Judgment on their PACA and section 523(a)(4) claims is granted. Within twenty days of service of this Memorandum Decision counsel for Plaintiffs should prepare an order and judgment consistent with this disposition and should comply with B.L.R. 9021-1 and B.L.R. 9022-1.

Dated: March 2, 1999
Dennis Montali
United States Bankruptcy Judge

1.  7 U.S.C. § 499a-499q.

2. Unless otherwise indicated, all section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330.

3. This section states, in relevant part, that "Perishable agricultural commodities received by a . . . dealer, . . .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 . . .dealer . . . in trust for the benefit of all unpaid suppliers or sellers of such commodities . . ., until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, . . ."

4. The beneficiaries of a PACA trust are required to take certain steps to perfect their trust rights. 7 U.S.C. § 499e(c)(3). Defendant has not argued that Plaintiffs failed to take the required steps.

5. The European trip was a business trip as well as a vacation.

6. In late June there was a $300,000 check written to a company named Norwood. This is a company in which Defendant has an ownership interest.