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An Examination of PACA and Other Statutorily Created Trusts
Over the years, both state and the federal governments have created technical or statutory trusts to protect creditors in numerous situations, including the federal Perishable Agricultural Commodities Act (PACA), state builders' trust acts and other statutes protecting intended recipients from nonpayment.1 Creditors rely on these statutorily imposed trusts, assuming that the failure to pay creates a trust claim that would be elevated above other creditors, including those holding security interests in inventory, accounts receivable or proceeds. Once a statutory trust intersects with the Bankruptcy Code, this reliance can be disturbed by courts determining that the relationship, even though called a "trust," does not amount to a fiduciary relationship or that the failure to pay is not defalcation. As a result, the claim is dischargeable in spite of the language contained in § 523(a)(4) of the Code.
Section 523(a)(4) provides an exception to discharge for debts "for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny." Property interests, such as trusts, are created and defined by state law, and unless some federal interest requires a different result, the U.S. Supreme Court has stated that "there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a state serves to reduce uncertainty, to discourage forum-shopping and to prevent a party from receiving 'a windfall merely by reason of the happenstance of bankruptcy.'"2
The Code does not define "defalcation," so whether the failure to pay the "beneficiary" of a statutorily imposed trust amounts to defalcation varies significantly among the circuit courts of appeals and many bankruptcy courts. The courts' split over whether there is a fiduciary relationship and over what is considered defalcation creates uncertainty among creditors who believe that their claim is protected from discharge under § 523(a)(4).
This article will discuss the line of decisions emanating from courts in the Seventh Circuit that have opened the door to additional questioning as to the Code when an individual buyer of perishable commodities or other statutorily established trustee files for bankruptcy protection and seeks to discharge the statutorily imposed trust debts....