Opinion
Case No. 14-10377 Adversary Case No. 14-1030
08-19-2014
In Re RONALD BAKER HOLLY A. BAKER Debtors FRIES BROTHERS INC. Plaintiff v. RONALD BAKER HOLLY A. BAKER Defendants
Chapter 7
MEMORANDUM OF DECISION ON ORDER PARTIALLY GRANTING 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. 8) filed by the Plaintiff, Fries Brothers Inc. ("Fries"). Fries seeks a nondischargeable judgment against the Defendants, Ronald and Holly Baker, in the amount of $143,788.23.
The Bakers owned and operated Baker Produce, LLC ("BPL"), a retail produce business that sold fruits and vegetables to restaurants and walk-in customers. BPL purchased some of its produce from Fries, a business engaged in the sale of perishable agricultural commodities to merchants and dealers. The relationship between BPL and Fries 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. Fries 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)
Section 523(a)(4) excepts from discharge debts for fraud or defalcation in a fiduciary capacity.
PACA imposed a trust, for the benefit of Fries, upon all monies received by BPL from its resale of produce purchased from Fries, until Fries was paid in full. 7 U.S.C. § 499e(c)(2). 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).
Although the debt to Fries 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. Although BPL had other employees, the Bakers alone controlled the daily operations and assets of BPL. Consequently, the Bakers admit that "they owe Fries money." See Doc. 12 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).
The issue presented is whether defalcation occurred. The Supreme Court of the United States recently defined defalcation as: (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).
Fries argues that Bullock does not apply to PACA trusts because Bullock addressed trust duties arising under state common law. Fries makes this argument for good reason. Prior to Bullock, the defendant's state of mind was irrelevant to the determination of defalcation under § 523(a)(4). If the defendant breached a fiduciary duty, the defendant committed defalcation regardless of the defendant's mental state. See e.g., In re Patel, 565 F.3d 963, 968 (6th Cir. 2009)("A debt is non-dischargeable as the result of defalcation when a preponderance of the evidence establishes: (1) a pre-existing fiduciary relationship, (2) a breach of that relationship, and (3) resulting loss.").
This Court is aware of only one PACA decision under § 523(a)(4) subsequent to Bullock. See H. Brooks and Company, LLC v. Yerges (In re Yerges), Adv. No. 13-105, 2014 WL 1803395 (Bankr. W.D. Wis. May 6, 2014). Yerges rejected the same argument, concluding that Bullock applies to PACA trusts.
[T]he Supreme Court's analysis was not concerned with what fiduciary duties were applicable to the trust at issue. Instead, accepting as true the fact of a breach of the relevant fiduciary duties, the Bullock court set out to determine whether the debtor's conduct in violation of those fiduciary duties rose to the level of "defalcation" as that term is used in 11 U.S.C. § 523(a)(4). As such, the focus of the decision was on the character of the debtor's behavior in the course of committing a breach, not on the standard required for the breach itself. Indeed, there is virtually no analysis or description of the fiduciary duties that were breached in Bullock. The entire decision is devoted to the various competing definitions of "defalcation" as that term has been used in the bankruptcy context since the mid-nineteenth century. In other words, the holding in Bullock concerns neither statutory trust principles nor common law trust principles, but rather an interpretation of a term that appears in the Bankruptcy Code.Yerges, 2014 WL 1803395 at *6. This Court agrees. Bullock's definition of defalcation governs the outcome of Fries' § 523(a)(4) claim.
Based on this understanding of the holding in Bullock, it is clear that for purposes of a nondischargeability proceeding, it is irrelevant whether the Defendant's fiduciary duties were created by PACA or by common law trust principles.
Applying Bullock to the record before the Court, summary judgment is inappropriate because the Bakers' state of mind concerning their fiduciary duty is unclear. Specifically, there is no proof of the Bakers' understanding of their fiduciary duties under PACA.
There is proof that every invoice from Fries 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 on every invoice to preserve the benefits of the PACA trust. See 7 U.S.C. § 499e(c)(4). If a defendant reviews and consciously disregards this language, defalcation is established under § 523(a)(4). See H. Brooks and Company, LLC v. Yerges (In re Yerges), 512 B.R. 916 (Bankr. W.D. Wis. 2014)("Yerges II"). The summary judgment record before this Court, however, contains no proof that either of the Bakers reviewed this language. The language is written in fine print. It is not unreasonable to infer that such "boilerplate" language may have been disregarded. Moreover, by affidavit, both of the Bakers asserted that they had "no knowledge that the failure of [BPL] would breach any duty owed to any person or company." See Doc 12 at Exs. A and B. Because 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 is not warranted. See In re Classicstar Mare Lease Litigation, 727 F.3d 473, 484 (6th Cir. 2013)(summary judgment on state of mind issues is appropriate only if no reasonable person could reach a contrary conclusion).
This is not to suggest that this is the only way to establish a defendant's state of mind in a PACA case under § 523(a)(4). The Court raises the issue only because there is no other proof in the record that is relevant to the Bakers' state of mind concerning their fiduciary duties. There is proof that the Bakers were listed as principals on BPL's PACA license, but that does not necessarily mean that they understood their fiduciary duties, or even knew they possessed fiduciary duties, under PACA.
Fries argues that BPL should have deposited all proceeds from the sale of perishable agricultural commodities into an account, separate from BPL's operating account, used to pay PACA creditors only. According to Fries, BPL's failure to do so "shows a clear disregard for their PACA trust responsibilities." See Doc. 13 at 8. Alternatively, it may suggest that the Bakers did not understand their PACA trust responsibilities.
Yerges, which also involved a summary judgment motion, 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 Yerges II, 512 B.R. at 916.
In essence, a PACA creditor cannot prevail on summary judgment under § 523(a)(4) if any reasonable inference can be drawn in favor of the debtor. Because the summary judgment record in this action supports a reasonable inference in favor of the debtor, summary judgment is not warranted under § 523(a)(4).
SECTION 523(A)(2)(A)
A creditor may prevail under § 523(a)(2)(A) by proof of a false representation. A false representation is established if: (1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) its reliance was the proximate cause of loss. In re Rembert, 141 F.3d 277, 280-81 (6th Cir. 1998).
When BPL failed to comply with Fries' credit terms, Fries changed the credit terms from an open account to cash on delivery. Consequently, each day from January 2, 2014, through January 8, 2014, BPL tendered a check to Fries in exchange for produce. All seven checks were returned to Fries for nonsufficient funds ("NSF").
According to Fries, the NSF checks constitute a representation that BPL had sufficient funds on account to cover the checks. Fries relies upon Wegmans Food Market, Inc. v. Smith (In re Smith), 207 B.R. 403, 405 (Bankr. W.D.N.Y. 1997)(debtor's presentation of nine NSF checks over a period of six days, by itself, constituted an implied representation that the account balance was sufficient to pay the checks).
Courts are split on the issue of whether an NFS check constitutes a "representation" under § 523(a)(2)(A). See Tusco Grocers, Inc. v. Coatney (In re Coatney), 185 B.R. 546, 549 (Bankr. N.D. Ohio 1995)(collecting cases). Precedent from this District holds that NSF checks do not, standing alone, constitute a representation. See Buckeye Candy Co. v. Ritzer (In re Ritzer), 105 B.R. 424 (Bankr. S.D. Ohio 1989)(Cole, J.).
The issuance of a check upon insufficient funds is not, standing alone, a fraudulent misrepresentation sufficient to sustain a nondischargeable claim under Sec. 523(a)(2)(A). In fact, the uttering of insufficient funds' checks is, according to the United States Supreme Court, an unremarkable feature of everyday commerce and, thus, is not a false pretense or misrepresentation. See, e.g., Williams v. United States, 458 U.S. 279 (1982). It is simply a promise on the part of the drawer to pay the check in the event it is dishonored by the bank. Thus, in order to establish the initial element ofId. at 427-28 (citations omitted)(emphasis added). This Court finds Ritzer to be more persuasive than Smith, which cited no authority for its conclusion. Ritzer also represents the position adopted by the only Circuit court to address this issue. See In re Scarlata, 979 F.2d 521, 525 (7th Cir. 1993).
fraud, the plaintiff must prove that the debtor made a representation that the check was good.
The record before this Court does not contain any evidence, separate from the NSF checks, of a representation that the checks were good. Therefore, pursuant to Ritzer, Fries is not entitled to summary judgment under § 523(a)(2)(A).
The Motion also fails under the third Rembert element, which requires proof of intent to deceive. By affidavit, the Bakers assert they did not "act with fraud or with intention to wrong [Fries]." See Doc. 12 at Exs. A and B. At the very least, this creates an issue of fact that precludes summary judgment.
The Court also queries, without deciding, whether the Bakers can be held personally liable for the actions of BPL under a § 523(a)(2)(A) analysis, absent a piercing of the corporate veil. Absent veil piercing, the only basis for personal liability is PACA's imputation of personal liability to "control" persons. However, as noted previously, this imputation of liability is derived from common law breach of trust principles. See Six L's Packing Co., 524 Fed. Appx. at 156. Fries' § 523(a)(2)(A) claim has nothing to do with an alleged breach of trust. Can Fries "bootstrap" personal liability arising under its § 523(a)(4) breach of trust claim to create personal liability on its § 523(a)(2)(A) fraud claim?
PARTIAL SUMMARY JUDGMENT
Separate from the issue of dischargeability, Fries argues that it is entitled to a determination that the Bakers are personally liable for the amount claimed. See Doc. 13 at 4. According to Fries, the facts necessary to such a determination are not disputed. The Court agrees.
Summary judgment on part of a claim is permitted by Rule 56(a)("A party may move for summary judgment, identifying . . . the part of each claim . . . on which summary judgment is sought.").
The threshold issue is whether BPL is liable to Fries under PACA. If BPL is not liable to Fries, then no liability is imputed to the Bakers under PACA.
Recovery under a PACA trust requires proof of the following elements: (1) the sale of perishable agricultural commodities; (2) to a commission merchant, dealer or broker; (3) in interstate or foreign commerce; (4) the seller has not received full payment; and (5) the seller preserved its trust rights by providing written notice to the purchaser within the time provided by law. In re Delta Produce, LP, 498 B.R. 731, 738 (W.D. Tex. 2013); Dell's Maraschino Cherries Co., Inc. v. Shoreline Fruit Growers, Inc., 887 F. Supp. 2d 459, 477 (E.D.N.Y. 2012); A&J Produce Corp. v. Chang, 385 F. Supp. 2d 354, 358 (S.D.N.Y. 2005); DiMare Homestead, Inc. v. Dixie Produce & Packaging, L.L.C. (In re Dixie Produce & Packaging, L.L.C.), 368 B.R. 533, 535 (Bankr. E.D. La. 2007).
Fries is entitled to recovery against BPL. Fries sold perishable agricultural commodities to BPL. Doc. 8 at Ex. 1; Doc. 5 at ¶7. BPL was a dealer because BPL bought and sold perishable agricultural commodities as part of a profit-making business. See A&J Produce, 385 F. Supp. 2d at 359. Fries sold the perishable agricultural commodities through the stream of interstate commerce. Doc. 5 at ¶7. Fries has not received full payment from BPL. Doc. 8 at Ex. 1. BPL owes Fries $143,788.23. Doc. 8 at Ex. 1. Lastly, Fries provided BPL with the mandatory PACA notice on every invoice. Doc. 8 at Ex. 1. Therefore, BPL is liable to Fries under PACA for $143,788.23.
The next question is whether PACA imputes BPL's liability to the Bakers. As noted previously, 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, 474 Fed. Appx. at 453. The Bakers concede that they owned and controlled BPL. Therefore, the Bakers are personally liable to Fries for BPL's breach of trust.
CONCLUSION
For the foregoing reasons, the Motion will be GRANTED in part. The Court will enter an order to this effect. Copies to: Charles M. Meyer
cmm@santen-hughes.com
John Paul Rieser
attyecfdesk@riesermarx.com
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.
Dated: August 19, 2014
/s/_________
Jeffery P. Hopkins
United States Bankruptcy Judge