B.C. Prod., Inc. v. Kaloyanides (In re Kaloyanides)

661 B.R. 481

IN RE: Jason K. KALOYANIDES, Debtor.

B.C. Produce, Inc., Community-Suffolk, Inc., John Cerasuolo, Inc., Lisitano Produce, Inc., J. Bonafede Co., Inc., and Boston Tomato & Packaging, LLC, Plaintiffs, v. Jason K. Kaloyanides, Defendant.

Case No. 21-10644-CJP

AP No. 21-01085-CJP

United States Bankruptcy Court, D. Massachusetts

Signed April 15, 2024

Louis James Caccavaro, Jr., Louis J. Caccavaro, Jr., Norwood, MA, Andrew M. Osborne, Osborne & Fonte, Norwood, MA, for Plaintiffs.

Kate E. Nicholson, Nicholson Devine LLC, Cambridge, MA, for Defendant.

MEMORANDUM OF DECISION ON CROSS-MOTIONS FOR PARTIAL SUMMARY JUDGMENT

Christopher J. Panos, United States Bankruptcy Judge.

Before me are cross-motions for partial summary judgment on the non-dischargeability of alleged claims for defalcation while acting in a fiduciary capacity within the meaning of 11 U.S.C. § 523(a)(4)¹ that require me to examine the intersection of trusts created under the Perishable Agricultural Commodities Act, 7 U.S.C. § 499a, et seq. ("PACA") and whether such trusts satisfy the "fiduciary capacity" requirement under § 523(a)(4).

The plaintiffs, B.C. Produce, Inc., Community-Suffolk, Inc., John Cerasuolo Co., Inc., J. Bonafede Co., Inc., Lisitano Produce, Inc., and Boston Tomato & Packaging, LLC (collectively, the "Plaintiffs"), filed a four-count complaint [Dkt. No. 1] (the "Complaint") against the defendant, Jason K. Kaloyanides (the "Defendant" or "Kaloyanides"), containing the following counts: (a) Count I (determination of the amounts due to each of the Plaintiffs); (b) Count II (violation of Mass. Gen. Laws ch. 93A, §§ 2 and 11); (c) Count III (nondischargeability under § 523(a)(2)); and (d) Count IV (nondischargeability under § 523(a)(4)). The parties stayed discovery while they pursued cross-motions for partial summary judgment on certain discrete legal questions related to Count IV of the Complaint as to whether a trust arising under PACA pursuant to 7 U.S.C. § 499e(c) (a "PACA Trust") creates the kind of fiduciary relationship that can give rise to a nondischargeable debt under § 523(a)(4) and, if so, whether such debts subject to a PACA Trust are per se non-dischargeable under § 523(a)(4).

Pursuant to the Plaintiffs' Cross Motion for Partial Summary Judgment [Dkt. No. 27] and supporting memorandum of law [Dkt. No. 28] (together, the "Plaintiffs' Motion"), the Plaintiffs seek judgment that the debts owed by Kaloyanides to the Plaintiffs due to the sale of produce subject to a PACA Trust are nondischargeable under § 523(a)(4). The Defendant conversely seeks judgment in his favor that debts subject to a PACA Trust are not excepted from discharge under § 523(a)(4) per his Cross-Motion for Partial Summary Judgment [Dkt. No. 31] and supporting memorandum of law [Dkt. No. 32] (the "Defendant's Motion," together with the Plaintiffs' Motion, the "Motions"). The Plaintiffs contend partial summary judgment is appropriate because their sales and deliveries of wholesale quantities of produce to Atlas Produce and Provisions LLC, an entity which they assert Kaloyanides controlled, were subject to a PACA Trust arising pursuant to 7 U.S.C. § 499e(c), and that such PACA Trust satisfies the requirements for the fiduciary relationship under § 523(a)(4). Pls.' Mot., at 2-3. The Plaintiffs assert that Kaloyanides committed a defalcation while acting in a fiduciary capacity for the purposes of § 523(a)(4) by failing to pay amounts owed to Plaintiffs as to which a PACA Trust was established. See id. In response, Kaloyanides seeks partial summary judgment that the PACA debts are dischargeable because PACA does not create a trust that results in a "fiduciary capacity" sufficient to meet the requirements of § 523(a)(4) and that, even if a PACA Trust did create a sufficient fiduciary relationship, the mere nonpayment under a PACA Trust does not constitute a "defalcation" within the meaning of § 523(a)(4). Def.'s Mot., at 2. For purposes of the Motions, the Defendant assumes, but does not otherwise admit, that the Plaintiffs hold valid claims that are entitled to the protections of PACA and that he could be held personally liable for these claims as the managing member of the company that contracted with the Plaintiffs. Id. at 3.

The Parties filed a Joint Request for Stay of Proceedings Regarding the Parties' Cross Motions for Partial Summary Judgment [Dkt. No. 46] and I stayed determination of the Motions pending the result of a petition for writ of certiorari for a case decided by the United States Court of Appeals for the Eleventh Circuit involving PACA and § 523(a)(4), Spring Valley Produce, Inc. v. Forrest (In re Forrest), 47 F.4th 1229 (11th Cir. 2022). The United States Supreme Court denied the petition, cert. denied sub nom., Spring Valley Produce, Inc. v. Forrest, ___ U.S. ___, 143 S. Ct. 2579, 216 L.Ed.2d 1192 (2023), and the Motions are ripe for determination.

For the reasons discussed below, I conclude that PACA does not create a trust that results in a "fiduciary capacity" sufficient to meet the requirements of § 523(a)(4), and I will enter partial summary judgment in favor of Kaloyanides on Count IV of the Complaint.

I. JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C §§ 157(a) and (b)(1) and 1334(b) and Local Rule 201 of the United States District Court for the District of Massachusetts. A determination of the dischargeability of a debt under § 523(a)(4) is a core proceeding. See 28 U.S.C. § 157(b)(2)(I).

II. LEGAL STANDARDS

A. Summary Judgment

Pursuant to Federal Rule of Civil Procedure 56(a), made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7056, summary judgment requires the movant to show 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); see also Fed. R. Bankr. P. 7056. In determining cross-motions for summary judgment, courts "must resolve all genuine factual disputes in favor of the party opposing each such motion and draw all reasonable inferences derived from the facts in that party's favor," Atlantic Fish Spotters Ass'n v. Evans, 321 F.3d 220, 223 (1st Cir. 2003), by evaluating "each motion separately, drawing inferences against each movant in turn," E.E.O.C. v. Steamship Clerks Union, Loc. 1066, 48 F.3d 594, 603 n.8 (1st Cir. 1995). In this case, for purposes of the Motions only, the parties agree that no facts are disputed that are material to the narrow questions presented. Def.'s Mot, at 3-4.

B. 11 U.S.C. § 523(a)(4)

Section 523(a)(4) excepts from an individual debtor's discharge any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. § 523(a)(4). The creditor seeking to have its debt excepted from discharge bears the burden of proof by a preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Rutanen v. Baylis (In re Baylis), 313 F.3d 9, 17 (1st Cir. 2002). An exception to discharge under § 523 should be strictly and "narrowly construed in furtherance of the Bankruptcy Code's fresh start policy." In re Baylis, 313 F.3d at 17 (citations and internal quotations omitted); see also Stowe v. Bologna (In re Bologna), 206 B.R. 628, 635 (Bankr. D. Mass. 1997) (recognizing that exceptions to discharge should be construed narrowly to offer a fresh start to honest debtors).

Courts in the First Circuit have adopted a three-part test to analyze whether debts are nondischargeable under § 523(a)(4). See, e.g., Raso v. Fahey (In re Fahey), 482 B.R. 678, 687 (B.A.P. 1st Cir. 2012). Courts must determine whether "(1) the debt results from a fiduciary's ... defalcation under [their fiduciary relationship]; (2) the debtor acted in a fiduciary capacity with respect to that [relationship]; and (3) the debt was caused by a ... defalcation within the meaning of bankruptcy law." Stallworth v. McBride (In re McBride), 512 B.R. 103, 113 (Bankr. D. Mass. 2014) (citing In re Fahey, 482 B.R. at 687); see also Jones v. Dyer (In re Dyer), No. 16-40063-CJP, 2018 WL 812993, at *4 (Bankr. D. Mass. 2018); A.J. Rinella & Co., Inc v. Bartlett (In re Bartlett), 397 B.R. 610, 619 (Bankr. D. Mass. 2008).

C. PACA Trusts

Congress enacted PACA in 1930 to regulate the sale of perishable commodities and promote fair trading practices in the produce market. See H.R. Rep. No. 98-543, at 3 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406. Under PACA, it is unlawful for a produce buyer to fail to make prompt payment to a licensed produce seller for a shipment of produce. 7 U.S.C. § 499b(4). To address produce buyers granting a security interest in their unpaid produce to other creditors, Congress added § 499e(c) to Title 7 in 1984, which creates a statutory trust in favor of produce sellers on the inventories of commodities sold to a buyer, the products derived therefrom, and the proceeds of sales from such commodities and products. H.R. Rep. No. 98-543, at 4, reprinted in 1984 U.S.C.C.A.N. at 407.

Section 499e(c)(2) of PACA provides

[p]erishable agricultural commodities received by a commission merchant, dealer, or broker 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 commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents....

7 U.S.C. § 499e(c)(2).

A PACA Trust is automatically created as long as the produce buyers receive the produce, but the produce sellers will lose the trust benefits unless they comply with statutory notice requirements, such as including language to provide notice of their intent to...