A.J. Rinella & Co., Inc. v. Bartlett et al

1
United States Bankruptcy Court
District of Massachusetts
Western Division
_________________________________
)
In re: 	) 	Chapter 7
) 	Case No. 05-45130-HJB
TIMOTHY BARTLETT and 	)
NANCY A. BARTLETT, 	)
)
Debtors. 	)
)
_________________________________ )
)
)
A.J. RINELLA & CO., INC., 	) 	Adversary Proceeding
) 	No. 06-04045
Plaintiff, 	)
)
v. 	)
)
)
TIMOTHY BARTLETT and 	)
NANCY A. BARTLETT, 	)
)
Defendants. 	)
________________________________ )
MEMORANDUM OF DECISION
Before the Court again, this time for final disposition, is a “Complaint to Determine
Dischargeability of Debt Pursuant to 11 U.S.C. § 523(a)(4)” filed by A.J. Rinella & Co., Inc.
(“Rinella”) against Timothy Bartlett and Nancy A. Bartlett (together, the “Bartletts”). This
Court earlier determined on the Bartletts’ motion for summary judgment that Rinella had
properly perfected and preserved its trust benefits under the Perishable Agricultural and
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1 Rinella subsequently sought summary judgment on the remaining issues. At a hearing
held on February 6, 2008, this Court ruled that the failure to pay a PACA claim does not, by itself,
consitute defalcation under § 523(a)(4) and that the reasoning of the First Circuit in the case of In
re Baylis, 313 F.3d 9 (1st Cir. 2002), further discussed below, controlled instead. Accordingly, the
motion for summary judgment was denied inasmuch as the Court could not, without the benefit of
trial, determine either whether the Bartletts’ failure to pay the PACA claim constituted defalcation
under § 523(a)(4) or the amount, if any, which was nondischargeable as the consequence of their
defalcation, if any.
2 Timothy Bartlett did not testify at trial.
2
Commodities Act, 7 U.S.C. § 499a et seq. (“PACA”). See A.J. Rinella & Co., Inc. v. Bartlett
(In re Bartlett), 367 B.R. 21 (Bankr. D. Mass. 2007) (“Bartlett I”). Left for determination was
whether the Bartletts were “responsibly connected to Ferris [their company and the buyer
of the goods] and, if so, whether their actions with respect to the trust assets constituted
‘defalcation’” under § 523(a)(4). 	Id. at 33 n.14 (citing 7 U.S.C. § 499a(9); 7 C.F.R. §
46.2(ff); and Rutanen v. Baylis (In re Baylis), 313 F.3d 9, 17-21 (1st Cir. 2002)). Now with
the benefit of an evidentiary hearing on these two remaining issues, this Court addresses
both. 1
I. 	FACTS AND TRAVEL OF THE CASE
Two witnesses testified at trial - Anthony Rinella, the vice president, treasurer and
secretary of Rinella, and Nancy A. Bartlett, co-owner of M. Ferris & Sons (“Ferris”) and co-
debtor. 2 The following constitute the Court’s findings of fact and conclusions of law,
pursuant to Fed. R. Bankr. P. 7052, based on Mr. Rinella’s and Ms. Bartlett’s testimony
during their respective direct and cross-examination, the facts to which the parties
stipulated and the exhibits admitted into the record.
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3 The language of the “Personal Guarantee” was as follows:
“I/We, the undersigned, request the sale and delivery of products to the
customer as stated in this application and further certify that the statements
made on this application are true and correct. 	I/We agree that (1) all
invoices will be paid according to your stated terms. (2) In the event that
thereis [sic] a delinquency in payment, I/We will pay a late payment finance
charge which is computed by a “periodic” rate of 1 ½ % per month which is
an ANNUAL PERCENTAGE RATE OF 18 %. (3) In the event of default,
I/We will pay all collection costs and attorney’s fee of one third of the amount
due. 	(4) I/We will notify you immediately of any change in ownership or
operations .Notice to be in writing and to be delivered by certified mail to our
office.
I/We personally guarantee payment in full including all finance charges,
collection costs and attorney’s fees incurred as specified above, and waive
any presentment, demand, protest and any other notice regarding this
guarantee of payment.”
3
The Bartletts were, during all relevant periods, the owners and operators of Ferris,
a 	third 	generation 	family 	wholesale 	produce 	business, 	located 	in 	North 	Adams,
Massachusetts. In December of 2000, Ferris began purchasing produce from Rinella, a
wholesale distributor located in Albany, New York. Both Ferris and Rinella were licensed
under PACA. The Bartletts, as owners of Ferris, completed a credit application (the “Credit
Application”) to which was attached a cover letter setting forth the terms of the proposed
credit arrangement with Rinella. The second page of the Credit Application contained a
“Personal Guarantee” to be signed by “an officer of the corporation or all partners or
owner.” 	That document was signed on December 13, 2000 by Nancy Bartlett alone. 3
However, at trial, Ms. Bartlett testified that Ferris operated as a general partnership and
that she intended to sign the Credit Application and “Personal Guarantee” on behalf of both
herself individually and Ferris.
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4 Section 499(e)(c)(4) of the PACA statute provides:
In addition to the method of preserving the benefits of the trust specified in
paragraph (3), a licensee may use ordinary and usual billing or invoice
statements to provide notice of the licensee’s intent to preserve the trust.
The bill or invoice statement must include the information required by the
last sentence of paragraph (3) and contain on the face of the statement the
following: “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”.
5 In addition to her Ferris recordkeeping and payroll responsibilities, Ms. Bartlett was
employed as an office manager at Berkshire Group Services, Inc.. Her duties as an office manager
included medical billing, accounts receivable, accounts payable and payroll. Timothy Bartlett also
on occasion deposited and cashed Ferris business checks. See Plaintiff’s Exhibit 8 (May 7, 2005
deposit ticket and Ferris check no. 19636, cashed in the amount of $750.00) .
4
Over the next five years, Ferris purchased produce from Rinella on open account.
Timothy Bartlett would call in an order to Rinella and either he or another Ferris employee
would drive to Albany to pick up the produce and sign the associated invoice. The bottom
of each invoice contained specific language designed to preserve PACA trust benefits as
set forth under PACA § 499(e)(c)(4). 4 The produce was transported back to North Adams
and resold to Ferris’ customers. Monies received from those sales would then be used to
pay Rinella and other suppliers, as well as the Ferris operating expenses such as fuel,
insurance and electricity. 	Nancy Bartlett, with assistance from an accountant, was
responsible for maintaining Ferris’ recordkeeping and payroll. 5
Ms. Bartlett testified that she deposited monies received from the sale of produce
into the Ferris checking account (the “Ferris Bank Account”). On a weekly basis, however,
she would cash a check written on that account and store the cash in a strongbox at the
Bartletts’ residence. Those monies would be used to pay company employee salaries in
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6 Ms. Bartlett testified that $200.00 was removed from the strongbox at the beginning of
each month to pay for drivers’ breakfasts and that she would personally pay drivers cash for that
purpose. Receipts for the meals were not collected. The same amount ($200.00) was removed
at the beginning of each month to compensate neighbors and friends who assisted in unloading the
trucks.
7 Defendant’s Exhibit 1 shows that Ferris made eleven (11) payments to Rinella in varying
amounts between February 16, 2005 and June 6, 2005:
February 16, 2005 	$1,955.75
February 23, 2005 	$3,871.35
March 2, 2005 	$4,456.10
March 9, 2005 	$3,756.10
March 23, 2005 	$4,526.25
April 1, 2005 	$3,724.05
April 8, 2005 	$3,391.00
May 3, 2005 	$750.00
May 12, 2005 	$750.00
June 6, 2005 	$300.00
5
cash, provide a cash allowance for meals purchased by drivers making the trips to Albany
to pick up produce and compensate individuals who helped unload the truck once it arrived
in North Adams. 6 The cash from the strongbox was also used to pay wages to Timothy
Bartlett in the approximate amount of $500.00 each week (recorded as a quarterly
adjustment on the Ferris General Ledger) which amount Ms. Bartlett would then transfer
to their personal savings account. Those withdrawals were recorded on a subsidiary ledger
(the “Cash On Hand Account”).
Between December 2004 and April 13, 2005, Ferris purchased produce from Rinella
totalling the sum of $63,936.60. 	From February 16, 2005 to June 6, 2005, Ferris paid
$30,249.60 toward the outstanding balance, leaving $33,687.00 unpaid. 7 In an April 16,
2005 letter, the Bartletts informed Rinella that Ferris “was forced to close its doors” and that
they would contact Rinella again in a few weeks to work out a payment schedule. After
Ferris’ closing, the Bartletts did indeed make three payments in the amounts of $750.00,
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8 Section 499(e) of PACA states in part::
(c)(2) Perishable 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. Payment shall not be considered to have been
made if the supplier, seller, or agent receives a payment instrument which
is dishonored. ...
(c)(3) The unpaid supplier, seller, or agent shall lose the benefits of such
trust unless such person has given written notice of intent to preserve the
benefits of the trust to the commission merchant, dealer, or broker within
thirty calendar days (i) after expiration of the time prescribed by which
payment must be made, as set forth in regulations issued by the Secretary,
(ii) after expiration of such other time by which payment must be made, as
the parties have expressly agreed to in writing before entering into the
transaction, or (iii) after the time the supplier, seller, or agent has received
notice that the payment instrument promptly presented for payment has
been dishonored.
...
7 U.S.C. §§ 499(e)(c)(2) & (3).
6
$750.00, and $300.00, respectively, to help satisfy their outstanding debt with Rinella. And
the Bartletts did contact Rinella before filing their bankruptcy case hoping to work out an
acceptable payment plan.
However, Rinella was determined to preserve its trust benefits under PACA for the
unpaid produce sold to Ferris between February 14, 2005 and April 13, 2005 and, on April
18, 2005, sent Ferris a “Notice of Intent to Preserve Trust Benefits to Ferris.”8 Rinella
subsequently filed a complaint against the Bartletts in the United States District Court for
the Northern District of New York to recover the unpaid account balance. 	The Bartletts
were served with the summons and the complaint on June 2, 2005, and, on August 1,
2005, they filed for relief in this Court under Chapter 7 of the United States Bankruptcy
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9 Section 523 of the Bankruptcy Code states, in relevant part:
a) A discharge under section 727 ... of this title does not discharge an
individual debtor from any debt –
(4) for fraud or defalcation while acting in a fiduciary capacity,
embezzlement, or larceny; ...
11 U.S.C. § 523(a)(4).
7
Code, 11 U.S.C. § 101 et seq., (the “Bankruptcy Code”). Rinella responded with the instant
adversary proceeding seeking a determination that the debt owed to Rinella was
nondischargeable pursuant to § 523(a)(4). 9
At trial of the adversary proceeding, Plaintiff’s counsel questioned Ms. Bartlett
extensively on transactions contained within Ferris’ General Ledger and payments made
from Ferris business funds. 	Ms. Bartlett had difficulty, however, explaining numerous
entries, including, but not limited to:
1) two write-downs from the Cash on Hand Account on June 30, 2005 in the
amounts of $8,542.00 and $2,026.37, leaving the account with a zero balance;
2) an April 20, 2005 check drawn on the Ferris bank account (four days after Ferris
ceased operations) made payable to cash in the amount of $300.00;
3) three cash receipts from two customers, Christina’s Restaurant ($179.25 and
$102.60, respectively) and Village Pizza ($450.20), recorded in the Cash On Hand
Account on April 28, 2005, rather than first deposited in the Ferris Bank Account as
had been standard business practice prior to closing;
4) a March 31, 2005 General Ledger entry showing an apparent $834.75 computer
purchase made approximately two weeks prior to Ferris’ closing;
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5) a June 1, 2005 General Ledger entry showing a $565.13 payment to North
Adams Hoosac Savings to pay March withholding taxes calculated at $211.40 - an
apparent overpayment of $353.73;
6) various payments made before and after the Ferris closing on account of the
mortgage on the Bartletts’ residence;
7) various payments made before and after the Ferris closing on a Citibank Visa
personal account held in Nancy Bartlett’s name; and
8) various payments made before and after the Ferris closing on an automobile loan
with Greylock Federal Credit Union on a 2000 Chevrolet van, allegedly Timothy
Bartlett’s personal vehicle, but certainly unnecessary for business purposes after
the Ferris closing.
Many times during her testimony Ms. Bartlett stated she was confused by the figures
presented and unable to explain payments made, cash transferred to the strongbox, or
accounting practices used. She was also questioned extensively regarding deposits made
into the Bartletts’ personal checking account at Hoosac Savings Bank. Ms. Bartlett testified
that her and Timothy Bartlett’s income came from multiple sources: Mr. Bartlett’s
employment with Ferris (approximately $500.00 per week), Ms. Bartlett’s employment with
Berkshire Group Services, Inc. (approximately $380.00 - 400.00 per week for three weeks
a month and an increased amount during the fourth week), and rental income from Ferris
($400.00 per month) and from a residential tenant ($465.00 per month). She was unable,
however, to explain the specific source of numerous deposits made into the Bartlett
personal checking account between January and June, 2005. 	The deposit confusion
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9
included, but was not limited to, eleven (11) deposits totaling $5,430.92, made on or after
the date which Ferris ceased operations, and the following deposits: a January 3, 2005
ATM cash deposit of $1,270.00, a January 28, 2005 cash deposit of $1,035.00 of which
$865.00 was attributed to “Ferris,” and a March 28, 2005 deposit of $1,615.00 of which
$750.00 was a check from “Ferris.”
Ms. Bartlett specifically admitted during trial to using Ferris business income to pay
personal and other business financial obligations that could have been used to satisfy
Rinella’s PACA claim. As she explained during questioning by Plaintiff’s counsel:
A. 	Well, the thing is is that I had lent this business almost $27,000 out of my
personal line of credit towards my house, and I was hoping to raise back
some of this money, not because the business closed, but because of the
fact that the business closed. They still owed me $27,000, almost as much
as your client. And I used my home as that line of equity.
Q. So you chose to pay yourself before paying my client.
A. If you want to look at it that way, I guess so, sir. If that’s the way you want to
interpret it.
(Trial Tr. at 101). 	...
Q. Now, Ms. Bartlett, you’ve already testified a couple of times that when you made
some of these payments here, indeed all these payments, you had
outstanding invoices to my client.
A. Correct.
Q. 	But yet you chose to take the funds that you received from the sale of fresh
produce to your customers and instead of paying my client in full, you paid
all these other expenses, right?
A. 	Yeah, but I believe that most of them were legitimate expenses. 	But that’s
arguable.
Q. 	Understood. 	Some of them obviously were personal, right? 	The mortgage
payment.
A. But there was - - there was reasonings behind all those.
Q. And I think you told us earlier the reason you did that is because the business
owed you money - -
A. Correct.
Q. - - because you had infused cash in the business.
A. Correct.
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(Trial Tr. at 129-130).
At the conclusion of trial, Rinella requested the Court to enter a monetary judgment
against the Bartletts and to rule that obligation is non-dischargeable under § 523(a)(4).
II. 	POSITIONS OF THE PARTIES
Rinella maintains that the Bartletts were fiduciaries of its PACA trust assets and that
both Nancy and Timothy Bartlett are liable for the Rinella debt as general partners of Ferris.
Rinella argues that the Bartletts’ failure to hold the proceeds from the sale of purchased
produce in trust for Rinella constitutes “defalcation” while acting in a fiduciary capacity
under § 523(a)(4). 	Rinella bases its position on its contention that the Bartletts used
significant business funds to pay other debts, compensate themselves, and pre-pay
business and personal obligations instead of paying Rinella as statutorily required under
PACA. Rinella accuses the Bartletts with self-dealing and removing thousands of dollars
from the Ferris Bank Account and Cash on Hand Account - money which could have been
used to pay Rinella - and prioritizing debt repayments in such a way to pay personal
obligations first.
Rinella further contends that Timothy Bartlett was not a nominal partner of Ferris and
that both Timothy and Nancy Bartlett actively participated in Ferris’ operations - making
them both responsible for Rinella’s loss. 	Additionally, Rinella asserts that the Bartletts
actually owe $68,999.00, jointly and severally under Massachusetts partnership law, as Ms.
Bartlett signed the “Personal Guarantee” on behalf of both herself and Ferris as a general
partnership - making Timothy Bartlett also liable for not only the cost of the PACA assets,
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10 Rinella calculates the amount of attorneys fees and interest due in their motion for
summary judgment. The principal balance owed was $33,687.00. Interest on the principal amount
was calculated at $16,130.55 ($6,063.66 per annum x 2.6602 years between April 13, 2005 and
December 10, 2007 = $16,130.55). Attorney’s fees were calculated as the contractually allowed
amount of one-third the principal plus interest balance ($16,605.85). Costs associated with filing
the adversary proceeding and the District Court action totaled $700.00. 	Rinella’s motion for
summary judgement asked for a judgement against both Defendants in the amount of $67,123.40.
At trial, Plaintiff’s counsel requested judgment in the amount of $68,999.00 [principal balance plus
interest ($18,058.00) plus attorneys fees ($17,250.00) plus costs ($700.00)]. (Trial Tr. at 150).
11
but also 18% accrued interest and attorney’s fees. 10 In the interest of judicial economy,
Rinella requests this Court not only to find the obligations to Ferris nondischargeable, but
to enter a monetary judgment against the Bartletts in the full amount requested.
Not surprisingly, the Bartletts disagree with the facts alleged and the conclusions
reached by Rinella. 	First, they maintain that Timothy and Nancy Bartlett had separate
responsibilities and obligations to Ferris. They aver that Mr. Bartlett was not a “responsible
party” under the PACA statute and was, at most, a nominal partner inasmuch as it was
Nancy Bartlett who made the financial decisions. They claim that Timothy Bartlett had no
familiarity with the Ferris financial recordkeeping and accounting. In a similar vein, they
argue that Nancy Bartlett’s signature on the Rinella “Personal Guarantee” did not bind both
her and Mr. Bartlett to the terms contained within - it bound her alone.
Second, while the Bartletts do not contest the Ferris obligation to Rinella and while
Ms. Bartlett admitted to using Ferris business funds to pay for personal and business
expenses which could have been used to satisfy Rinella’s PACA claim, Ms. Bartlett
contends that she was unaware of Ferris’ PACA statutory obligations - she only knew that
the PACA license was needed to operate the business. The Bartletts insist that there was
no intention to avoid repayment. 	For all of the foregoing reasons, they deduce that the
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12
facts presented do not reach the defalcation standard set forth in Baylis, and are not
precluded from discharging Rinella’s debt under § 523(a)(4).
III. 	DISCUSSION
A. 	Defalcation under § 523(a)(4) and PACA
Under the Bankruptcy Code, an individual debtor may not be discharged of any debt
acquired “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or
larceny.” 	11 U.S.C. § 523(a)(4). 	To prevail under § 523(a)(4), the challenging creditor
must show that (1) the debtor acted in a fiduciary capacity; and (2) the debtor committed
defalcation while acting in that capacity. In re Watford, 374 B.R. 184, 189 (Bankr. M.D.N.C.
2007); Baylis, 313 F.3d at 17 (one of the rules of § 523(a)(4) is that it applies to fiduciaries
only while they are acting in a fiduciary capacity). 	The burden of proof rests with the
creditor to establish defalcation by a preponderance of the evidence. Grogan v. Garner,
498 U.S. 279, 286 (1991).
Federal law generally controls who is considered a fiduciary for purposes of §
523(a)(4), though state law is relevant to determining whether a trust relationship exists.
Kwiat v. Doucette, 81 B.R. 184, 188 (D. Mass. 1987). 	A debtor will be considered a
fiduciary for dischargeability purposes if the debtor is a trustee either under an express or
technical trust. Id. A technical trust is one imposed by statutory or common law and will
exist where the statute (1) defines the trust res, (2) identifies the trustee’s fiduciary duties,
and (3) imposes a trust prior to and without reference to the wrong that created the debt.
Stowe v. Bologna (In re Bologna), 206 B.R. 628, 632 (Bankr. D. Mass. 1997).
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As this Court explained in Bartlett I, the Perishable Agricultural Commodities Act of
1930 was originally passed by Congress to promote fair trading practices in the produce
industry by requiring buyers of perishable agricultural products to make “prompt payment”
to produce sellers. 367 B.R. at 28 (quoting Idahoan Fresh v. Advantage Produce, Inc., 157
F.3d 197, 199 (3rd Cir. 1998))(footnotes omitted). 	In an effort to establish further
protections for sellers, PACA was amended in 1984 to create a statutory trust in which a
buyer’s produce, products derived from that produce and the proceeds received therefrom,
are held in a non-segregated floating trust to benefit unpaid suppliers who comply with
statutory requirements. Idahoan Fresh, 157 F.3d at 199. The goal of the amendment was
to protect against situations whereby a purchaser would grant other creditors a security
interest in inventory and accounts receivable, leaving the supplier with nothing in the event
of the buyer’s bankruptcy. In re Masdea, 307 B.R. 466, 473 (Bankr. W.D.Pa. 2004)(citing
Idahoan Fresh, 157 F.3d at 199).
Under PACA, a buyer’s failure to make full payment promptly for received perishable
agricultural commodities is unlawful. 	7 U.S.C. § 499b(4). 	And upon timely notice of a
seller’s intent to preserve PACA trust benefits, “all produce-related assets are held in trust
for the benefit of the unpaid seller until full payment has been received.” In re Ozcelik, 267
B.R. 485, 489-490 (Bankr. D. Mass. 2001)(citations omitted). The perishable agricultural
commodities “shall be held by such commission merchant, dealer or broker 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, or agents.” 	7 U.S.C. § 499e(c)(2). 	Many courts have held that the
statutory trust under PACA satisfies all the requirements to establish a technical trust under
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§ 523(a)(4). See Watford, 374 B.R. at 190; Masdea, 307 B.R. at 474; In re Zois, 201 B.R.
501, 506-507 (Bankr. N.D.Ill. 1996); In re Snyder, 184 B.R. 473, 475 (Bankr. D. Md. 1995);
In re Harper, 150 B.R. 416, 418-419 (Bankr. E.D.Tenn. 1993); In re Nix, 1992 WL 119143
(M.D. Ga. April 10, 1992); In re Stout, 123 B.R. 412, 415 (Bankr. W.D.Okla. 1990); but see
In re McCue, 324 B.R. 389, 392-93 (Bankr. M.D.Fla. 2005)(holding that PACA fails to
satisfy the first requirement as a PACA trust is a “floating trust” allowing for the
commingling of trust and non-trust assets and PACA res is not segregated trust res). This
Court is in accord with the aforementioned courts which have held that the PACA statutory
trust is one which satisfies the fiduciary requirement of § 523(a)(4). As was explained by
the First Circuit in the context of PACA, albeit not in the context of a determination under
§523(a)(4):
An individual who is in the position to control the trust assets and who does
not preserve them for the beneficiaries has breached a fiduciary duty, and is
personally liable for that tortious act. ... we find persuasive the reasoning
holding a fiduciary liable for breach of trust under PACA ...a PACA trust in
effect imposes liability on a trustee, whether a corporation or a controlling
person of that corporation, who uses the trust assets for any purpose other
than repayment of the supplier. This includes use of the proceeds from the
sale of perishables for legitimate business expenditures, such as the
payment of rent, payroll, or utilities.
Hiller Cranberry Products, Inc. v. Koplovsky, 165 F.3d 1, 8-9 (1st Cir. 1999)(emphasis
supplied).
The definition of the term “defalcation” and whether or not it occurred under any
particular set of circumstances is a much murkier question. Defalcation is not the result of
every breach of fiduciary duty and it is to be measured objectively. Baylis, 313 F.3d at 17-
18. 	Defalcation requires “some degree of fault, closer to fraud, without the necessity of
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11 This standard is not the law set forth in other Circuits. As summarized in Baylis, there
are primarily three interpretive camps which have been established regarding the definition of and
standard for measuring defalcation. The first is that which allows for even an innocent mistake to
constitute defalcation. The second requires a showing of nothing more than fiduciary negligence.
The third requires at least fiduciary recklessness. See Id. at 18 (citations omitted). Thus, the Baylis
decision pitches a fourth interpretive camp.
15
meeting a strict specific intent requirement.” Id. at 18-19. 11 The First Circuit has provided
significant guidance in explaining this interpretation:
“We believe that defalcation lessens the threshold required from one of
criminal or civil fraud to something less. To show defalcation, a creditor need
not prove that a debtor acted knowingly or willfully, in the sense of specific
intent. ... a creditor must be able to show that a debtor’s actions were so
egregious that they come close to the level that would be required to prove
fraud, embezzlement, or larceny.
A debtor fiduciary may not escape the exclusion from discharge of his
debt out of defalcation by saying he had no specific intent. As in other areas
of the law, circumstances will provide the level of wrongdoing needed to
constitute defalcation. ... The mental state required for defalcation is akin to
the level of recklessness required for scienter. 	It is more than the mere
conscious 	taking 	of 	risk 	associated 	with 	the 	usual 	torts 	standard 	of
recklessness. 	See Black’s Law Dictionary, supra, at 1276-77. 	Instead,
defalcation requires something close to a showing of extreme recklessness.
In evaluating whether there is a defalcation of a fiduciary duty, there
must be a reference to the duty involved. Of the various duties, the duty of
loyalty is “[t]he most fundamental duty owed...the duty of a trustee to
administer the trust solely in the interest of the beneficiaries. 	2A A. Scott,
The Law of Trusts § 170 (W.F. Fratcher ed., 4th ed. 2001).
Defalcation may be presumed from breach of the duty of loyalty, the
duty not to act in the fiduciary’s own interest when that interest comes or may
come into conflict with the beneficiaries’ interest:
A trustee occupies a position in which the courts have fixed a
very high and very strict standard for his conduct whenever his
personal interest comes or may come into conflict with his duty
to his beneficiaries. 	As long as he is not acting in his own
interest the standard fixed for his behavior is only that of a
reasonable degree of care, skill, and caution. 	But when the
trustee 	acts 	in 	his 	own 	interest 	in 	connection 	with 	the
performance of his duties as trustee, the standard of behavior
becomes more rigorous. In such a case his interest must yield
to that of the beneficiaries. 2A id. § 170.25.
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16
As with the other fault-based exceptions, fault may be presumed from the
circumstances, here a violation of the duty of loyalty.”
Id. at 20-21.
Violations of the PACA statute subject buyers to civil liability and revocation of their
PACA license. 	7 U.S.C. §§ 499e-499h. 	Personal liability, however, requires only that
PACA trust assets are used for some purpose other than repayment to the seller.
Individuals in the position to control trust assets and who do not preserve them for the
beneficiaries are personally liable. Koplovsky, 165 F.3d at 8-9. Further, under PACA, the
Secretary of Agriculture has the power to prohibit employment within the perishable
agricultural commodities industry for individuals who are “responsibly connected” with
violators of PACA. 7 U.S.C. § 499h(b). “Responsibly connected” under PACA is defined
as:
affiliated or connected with a commission merchant, dealer, or broker as (A)
partner in a partnership, or (B) officer, director, or holder of more than 10 per
centum of the outstanding stock of a corporation or association. A person
shall not be deemed to be responsibly connected if the person demonstrates
by a preponderance of the evidence that the person was not actively involved
in the activities resulting in a violation of this chapter and that the person
either was only nominally a partner, officer, director, or shareholder of a
violating licensee or entity subject to license or was not an owner of a
violating licensee or entity subject to license which was the alter ego of its
owners.
7 U.S.C. § 499a(9); 7 C.F.R. § 46.2(ff).
Employing the foregoing PACA definition, this Court finds that both Nancy and
Timothy Bartlett were “responsibly connected” to Ferris and had control of its trust assets.
As Ms. Bartlett testified, Ferris was a general partnership run by herself and Timothy
Bartlett. Federal taxes were filed on Ferris’ behalf as a general partnership. Ms. Bartlett
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12 The Court takes pains to emphasize that its ruling here is that Timothy Bartlett’s liability
to Rinella arises from his actual connection to the control of Ferris and the PACA trust assets - not
any notion of “imputed liability” under § 523(a)(4), a theory whose viability the Court need not reach
here.
17
testified that the accountant made specific calculations and adjustments based upon Ferris’
partnership status. 	The Credit Application also identifies Ferris as a partnership, lists
Nancy and Timothy Bartlett as the owners, and “Tim Bartlett” is specifically identified as the
“contact person” on behalf of Ferris. 	The Court also takes note that the Bartletts’
bankruptcy Schedule F lists the Rinella debt as a “joint” unsecured claim. 	The Bartletts
provided no evidence on which this Court could base a finding that Timothy Bartlett was
only nominally a partner and played no active role in the complained of PACA violation. As
explained by Ms. Bartlett, Timothy Bartlett placed the orders to Rinella. He often picked
up the produce from Rinella. His name or signature appears on both a deposit slip and
check made out to “cash” from Ferris in the amount of $750.00. Ferris business monies
were used to make payments on Mr. Bartlett’s personal vehicle and the mortgage on his
home. 	There is simply no support for the Bartletts’ counsel’s statements at trial that
Timothy Bartlett “had no access...to the books, no responsibility for the transactions that
went on.” 12 Civil liability under PACA for each of the Bartletts is beyond question.
But fiduciary status and civil liability alone are not enough. 	The inquiry now
becomes: was there defalcation under § 523(a)(4), within the guidelines provided by
Baylis? 	Nancy and Timothy Bartlett were licensed under PACA as partners of Ferris,
subjecting them to specific statutory requirements. Nancy Bartlett’s insistence that she was
unaware of the PACA obligations is of no import. Ignorance is not a defense to this claim.
It may show no specific intent on Ms. Bartlett’s part to violate the statute, but the Baylis
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18
defalcation test does not require that level of intention. 	Nor is Ms. Bartlett’s blanket
assertion that she and Mr. Bartlett intended to pay back Rinella’s debt of special
significance.
Ferris was licensed under PACA. 	The license makes specific reference to the
statute. Each invoice, signed by a representative of Ferris, contained specific language
regarding the statutory trust and provided the PACA statutory citation. The Bartletts chose
to operate and maintain a business which involved significant cash payments - in and out.
They did not always obtain receipts for documentation or carefully label deposits. They
were, at all times in 2005, behind on payments to Rinella and, according to this Court’s
analysis of the General Ledger, never maintained enough money in the Ferris Bank
Account to fully cover their Rinella PACA obligations. This was likely due to the decision
to pay numerous other debts out of the business account, particularly their non-business
obligations. 	And there remains the question of the disposition of thousands of dollars
withdrawn 	from 	the 	Cash 	On 	Hand 	Account 	on 	June 	30, 	2005. 	The 	apparent
disappearance of these funds with virtually little explanation from Ms. Bartlett is particularly
troubling.
The Bartletts were trustees of PACA assets. 	They were fiduciaries and had a
specific duty to preserve the PACA trust. 	The manner in which the Bartletts chose to
operate their business goes beyond simple “confusion,” “bad management” or “bad
accounting” as characterized by the Bartletts’ counsel. 	The Bartletts chose to manage
Ferris’ business account in a manner that failed to either safeguard sufficient funds for
Rinella or permit a reasonable tracing of the proceeds of the sale of the Rinella proceeds -
and used the available business funds to meet their personal obligations even after the
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13 Rinella’s request for a money judgment issued by this Court is denied. See Cambio v.
Mattera (In re Cambio), 353 B.R. 30, 30-36 (1st Cir. B.A.P. 2004).
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closing of the Ferris business, notwithstanding their fiduciary duty to Rinella. That behavior,
viewed in its totality, satisfies the extreme recklessness standard suggested by Baylis for
a finding of defalcation within the meaning of § 523(a)(4).
IV. 	CONCLUSION
For the foregoing reasons, the Court finds and rules that the obligations of Nancy
and Timothy Bartlett to Rinella, in the amount of $33,687.00, together with interest and
attorneys fees, are non-dischargeable, pursuant to § 523(a)(4).13
By the Court,
___________________
Dated: December 1, 2008 	Henry J. Boroff
United States Bankruptcy Judge
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