E. Armata, Inc. et al v. Parra

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
-----------------------------------------------------------x
In re: Case No. 08-46854
Jhony A. Parra, Chapter 7
Debtor.
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E. Armata, Inc.
and A&J Produce Corp. Plaintiffs,
Adv. Pro. No. 08-1439
-against-
Jhonny Parra, a/k/a :
Jhony Parra, Johnny Parra and
J&A Produce,
Defendant.
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DECISION
Appearances:
Bruce Levinson, Esq.
Law Offices of Bruce Levinson
747 Third Avenue
New York, NY 10017-2803
Attorney for Plaintiffs
Eugene M. Banta, Esq.
Uvino, Banta & Associates, P.C.
118-21 Queens Blvd.
Forest Hills, NY 11375
Attorney for Defendant
CARLA E. CRAIG
Chief United States Bankruptcy Judge
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This matter comes before the Court on the motion of E. Armata, Inc. (“Armata”) and
A&J Produce Corp. (“A&J”) (collectively, the “Plaintiffs”) for summary judgment on their
complaint against Jhony Parra (the “Defendant” or “Parra”), seeking to have the debts owed to
them by the Defendant declared nondischargeable pursuant to 11 U.S.C § 523(a)(4).
Additionally, the Plaintiffs have moved to strike the Defendant’s opposition to the Plaintiffs’
motion for summary judgment as untimely filed. For the reasons set forth below, the motion for
summary judgment is granted in part and denied in part, and the motion to strike is denied.
Jurisdiction
This Court has jurisdiction of this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(I)
and 1334, and the Eastern District of New York standing order of reference dated August 28,
1986. This decision constitutes the Court's findings of fact and conclusions of law to the extent
required by Federal Rule of Bankruptcy Procedure 7052.
Facts
The following material facts in this case are undisputed.
The Plaintiffs are corporations engaged in the business of buying and selling wholesale
quantities of perishable agricultural commodities (hereinafter, “produce”) in interstate
commerce. The Plaintiffs, at all relevant times, were dealers in produce subject to and licensed
under the Perishable Agricultural Commodities Act of 1930 (“PACA”), as amended in 1984, 7
U.S.C. §499a et seq. The Defendant formerly did business as J&A Produce, which was a dealer
and a commission merchant subject to PACA. The Defendant started his business in 2007.
Between June 17, 2008 and August 7, 2008, Armata sold and delivered to the Defendant,
wholesale amounts of produce worth $39,543.22, which was accepted by the Defendant.
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Between July 22, 2008 and August 18, 2008, A&J sold and delivered to the Defendant,
wholesale amounts of produce worth $48,944.48, which was accepted by the Defendant. The
Plaintiffs preserved their interests under the trust provisions of PACA in accordance with 7
U.S.C. §499e(c)(4) by sending invoices to the Defendant which contained the requisite statutory
language. The Defendant was in a position of control over the PACA trust assets belonging to
the Plaintiffs. On September 8, 2008, Plaintiffs filed a complaint against Jhonny Parra, a/k/a
Jhony Parra, Johnny Parra and J&A Produce in the United States District Court for the Southern
District of New York to enforce their trust rights under PACA. On September 17, 2008, the
District Court entered a Preliminary Injunction Order against the Defendant prohibiting the
Defendant from alienating or dissipating any PACA trust assets belonging to the Plaintiffs. On
October 14, 2008, the Defendant filed for protection under Chapter 7 of the Bankruptcy Code.
The Defendant’s bankruptcy schedules reflect debts owed to A&J in the amount of $49,000.00
and to Armata in the amount of $39,500.00. The Defendant’s schedules also reflect accounts
receivable due and owing to the Defendant, in the approximate amount of $30,000.00. The
Plaintiffs filed their Complaint seeking a determination of nondischargeability under 11 U.S.C.
523(a)(4) on December 16, 2008.
Standard for Summary Judgment
Summary judgment is appropriate when the record shows that "there is no genuine issue
as to any material fact and the moving party is entitled to judgment as a matter of law." Fed. R.
Civ. P. 56(c); Fed. R. Bankr. P. 7056; Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The
court's function is not to resolve disputed issues of fact, but only to determine whether there is a
genuine issue of material fact to be tried. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249
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(1986). A fact is considered material if it "might affect the outcome of the suit under the
governing law." Id. at 248. No genuine issue exists "unless there is sufficient evidence favoring
the nonmoving party for a jury to return a verdict for that party. If the evidence is merely
colorable, or is not significantly probative, summary judgment may be granted." Id. at 249-50
(citation omitted). The nonmoving party “must do more than simply show that there is some
metaphysical doubt as to the material facts.” Matsushita v. Zenith Radio Corp., 475 U.S. 574,
586 (1986). On the other hand, if "there is any evidence in the record from any source from
which a reasonable inference could be drawn in favor of the nonmoving party, summary
judgment is improper." Chambers v. TRM Copy Ctrs. Corp., 43 F.3d 29, 37 (2d Cir. 1994)
(citation omitted).
Discussion
The Bankruptcy Code excepts from discharge debts that are a result of “fraud or
defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. §
523(a)(4). The Plaintiffs contend that the debt owed to them by the Defendant is
nondischargeable because the Defendant’s failure to hold PACA trust assets for their benefit,
pursuant to PACA § 499e(c)(2), constitutes “defalcation” while acting in a fiduciary capacity
within the meaning of 11 U.S.C. § 523(a)(4).
PACA
“Congress enacted PACA in 1930 to regulate the interstate sale and marketing of
perishable agricultural commodities.” Coosemans Specialties, Inc. V. Gargiulo, 485 F.3d 701,
705 (2d Cir. 2007). In 1984, Congress amended PACA to require buyers to maintain a statutory
trust, ‘“to increase the legal protection for unpaid sellers and suppliers of perishable agricultural
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commodities until full payment of sums due have been received by them.”’ “R” Best Produce v.
Shulman-Rabin Mktg., Corp., 467 F.3d 238, 241 (2d. Cir. 2006) (quoting H.R. Rep. No. 98-543,
at 2 (1983), reprinted in 1984 U.S.C.C.A.N. 406). Under PACA, “perishable commodities or
proceeds from the sale of those commodities are held in trust by the buyer for the benefit of the
unpaid seller until full payment is made.” Coosemans Specialties, 485 F.3d at 705. PACA §
499e(c)(2) provides in pertinent part:
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, 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). “‘This trust arises from the moment perishable goods are delivered by the
seller.’” Top Banana, L.L.C. v. Dom’s Wholesale & Retail Ctr., Inc., 2005 U.S. Dist. Lexis
8976, *14 (S.D.N.Y. May 16, 2005) (quoting Morris Okun, Inc. V. Harry Zimmerman, Inc., 814
F. Supp., 814 F. Supp. 346, 348 (S.D.N.Y. 1993)). “While the trust is automatically created
under the statute, the unpaid seller will lose the trust benefits unless he ‘gives written notice of
his intent to preserve the benefits of the trust’” in accordance with PACA. Bronia, Inc. V. Ho,
873 F. Supp. 854, 857 (S.D.N.Y. 1995) (quoting 7 U.S.C. § 499e(c)(4)); A&J Produce Corp. V.
Chang, 385 F. Supp. 2d 354, 361-362 (S.D.N.Y. 2005) (proper notice under the “invoice
method” pursuant to 7 U.S.C. § 499e(c)(4) requires supplier to deliver to the retailer, invoice
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statements that include the requisite statutory language). It is undisputed that the Plaintiffs
satisfied the notice requirement under 7 U.S.C. § 499e(c)(4).
The PACA trust is a “non-segregated floating trust” on perishable commodities and their
derivatives, which “permits the commingling of trust assets without defeating the trust.” Endico
Potatoes v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1067 (2d. Cir. 1995). Therefore, a PACA
trustee may use trust assets to satisfy other creditors, but not to the detriment of the trust
beneficiaries. D.M. Rothman & Co. V. Korea Commer. Bank, 411 F.3d 90, 94 (2d Cir. 2005).
To satisfy obligations under PACA, PACA trustees “are required to maintain trust assets in a
manner that such assets are freely available to satisfy outstanding obligations to sellers of
perishable agricultural commodities. Any act or omission which is inconsistent with this
responsibility, including dissipation of trust assets, is unlawful.” 7 C.F.R. § 46.46(d)(1).
“Dissipation” includes “any act or failure to act which could result in the diversion of trust assets
or which could prejudice or impair the ability of unpaid suppliers, sellers, or agents to recover
money owed in connection with produce transactions.” Id. § 46.46(a)(2). “An individual who
is in a position to control the assets of the PACA trust and fails to preserve them, may be held
personally liable to the trust beneficiaries for breach of fiduciary duty.” Coosemans Specialties,
485 F.3d at 705.
The Defendant contends that he never “dissipated” trust assets because the business never
accumulated any money. (Defendant’s Aff. 4.) The Defendant explains that since its inception1
in 2007, he never profited from the business. (Defendant’s Aff. 7.) He further explains that the
Citations to “Plaintiff’s Aff.” refer to the Defendant’s Affidavit in Opposition to the Plaintiffs’	1
summary judjment motion, filed on May 13, 2009.
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business he transacted was all in cash, and that the money he did collect went directly to pay
suppliers and operating expenses. (Defendant’s Aff. 6.) The Defendant claims that his business
ultimately failed because one store he sold produce to went out of business in May, 2008, before
he could collect $30,000 in unpaid receivables. (Defendant’s Aff. 5.)
Even if these assertions are accepted as true, it is clear that the Defendant breached his
fiduciary duty under PACA. Although the trust assets may be used to pay other creditors, it is
well established that as a PACA trustee, the Defendant’s first obligation was to insure that any
sale proceeds he received from the sale of the perishable goods, were “freely available to satisfy
outstanding obligations to” the Plaintiffs. 7 C.F.R. § 46.46(d)(1); D.M. Rothman, 411 F.3d at 94
(noting that PACA trust assets may be used for other purposes, but trustee must “insure that it
has sufficient assets to assure prompt payment” in full to trust beneficiaries); C.H. Robinson Co.
V. Alanco Corp., 239 F.3d 483, 488 (2d Cir. 2001) (“PACA trust beneficiaries are entitled to full
payment before trustees may lawfully use trust funds to pay other creditors.”).
Moreover, the Defendant is not excused from his fiduciary duties under PACA because
he failed to collect $30,000 in receivables. Bronia, 873 F. Supp. at 861 (holding that failed
attempt to collect money does not satisfy trustee’s duty to pay beneficiary under PACA). To the
contrary, “[r]elinquishing control of the commodities without securing payment is “dissipation
of the trust assets.” Id. (rejecting defendant’s argument that he should not be liable for unpaid
invoice amounts because his failure to pay was due to uncollected receivables); Consumers
Produce Co. V. M&T Chirico, Inc., 2005 US Dist. LEXIS 43114, *9 (W.D.N.Y. Sept. 30, 2005)
(holding that PACA imposes personal liability for dissipation of trust assets “regardless of the
inability to collect proceeds from the resale of the commodities”).
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The Defendant incorrectly asserts that PACA does not apply unless payment for the
PACA merchandise has been received by the PACA trustee. Relying on Strube Celery &
Vegetable Co. V. Zois (In re Zois), 201 B.R. 501 (Bankr. N.D. Ill. 1996), the Defendant
maintains that to the extent the debt owed to the Plaintiffs is found non-dischargeable under §
523(a)(4), any judgment should be reduced by the $30,000 that he failed to collect. Zois does
not support this argument. There, the court denied the plaintiff’s motion for summary judgment
because it was “not established that the goods in question were all resold, thus bringing the sale
proceeds under the PACA trust.” Id. at 510. The court explained that:
[T]o the extent, if any, [the goods] rotted away unsold, then
the trust res disappeared, leaving only the obligation to pay
for those unsold goods as a personal debt outside the PACA
provisions. To the extent, if any, that [d]ebtors’ failure to
pay [p]laintiff was due to [d]ebtors’ inability to market any
perishable goods involved here, they did not breach their
PACA [t]rust obligations . . . . Only to the extent that
[d]ebtors did market the perishable commodities and failed
to remit to [p]laintiff did [d]ebtors breached [sic] their
PACA Trust obligations, and thereby effect a defalcation
under §523(a)(4).
Id. at 509. (Emphasis added). Here, it is undisputed that the Defendant sold the goods and failed
to secure payment.
Thus, the Defendant breached his fiduciary duty under PACA by failing to preserve trust
assets for the benefit of the Plaintiffs until they received payment in full. However, the question
presented in this adversary proceeding is whether the Defendant’s breach constitutes defalcation
while acting in a fiduciary capacity under § 523(a)(4).
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Dischargeability under § 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.” A.J. Rinella & Co. V. Bartlett (In re Bartlett), 397 B.R. 610, 619 (Bankr. D. Mass.
2008); Zohlman v. Zoldan (In re Zoldan), 226 B.R. 767, 772 (S.D.N.Y. 1998). The Plaintiffs
argue that the Defendant was acting in a fiduciary capacity, as a trustee under the PACA trust
for purposes of § 523(a)(4), and that his failure to hold the proceeds from the sale of the produce
in trust, constitutes defalcation while acting in that fiduciary capacity. “The question of whether
a defalcation has occurred is reached only when the threshold determination that the debtor acted
in a fiduciary capacity has been made.” The Andy Warhol Found. for Visual Arts, Inc. v. Hayes,
183 F.3d 162, 170 (2d. Cir 1999).
(A) Fiduciary Capacity
The term “fiduciary capacity” is determined by federal law, and is “narrowly construed.”
Peerless Ins. Co. V. Casey (In re Casey), 181 B.R. 763, 766 (Bankr. S.D.N.Y 1995) (citing Davis
v. Aetna Acceptance Co., 293 U.S. 328, 55 S. Ct. 151, 79 L. Ed. 393 (1934)); Zoldan, 226 B.R.
at 772 (noting that a “broad, general definition of fiduciary, involving confidence, trust and good
faith, is not applicable in dischargeability proceedings under § 523(a)(4)”). “A debtor will be
considered a fiduciary for dischargeability purposes if the debtor is a trustee either under an
express or technical trust.” Bartlett, 397 B.R. at 619. “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.” Id.
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The majority of courts to address this question have held that the trust imposed by
Congress under PACA constitutes a technical trust which gives rise to the requisite fiduciary
capacity for purposes of § 523(a)(4). Bartlett, 397 B.R. at 620; Collins Bros. Corp. v. Perrine (In
re Perrine), 2007 Bankr. LEXIS 3727, *7 (Bankr. N.D. Ga. 2007); KGB Int’l, Inc. V. Watford
(In re Watford), 374 B.R. 184, 190-191 (Bankr. M.D.N.C. 2007); Gen. Produce, Inc. V. Tucker
(In re Tucker), 2007 Bankr. LEXIS 1322, *12 (Bankr. M.D. Ga. Apr. 10, 2007); Consumers
Produce Co. V. Masdea, 307 B.R. 466, 474 (Bankr. W.D. Pa. 2004); In re Fishgold, 206 B.R. 50
(W.D.N.Y. 1997) (noting that relief under 523(A)(4) is available to the beneficiaries of PACA
trusts); Zois, 201 B.R. at 509; Stout, 123 B.R. 412 (Bankr. W.D. Okla. 1990).
The Defendant relies on a single case for the proposition that a PACA trust is not a
technical trust and therefore does not create a fiduciary obligation under § 523(a)(4). In Cardile
Bros. Mushroom Pkg., Inc. v. McCue (In re McCue), 324 B.R. 389 (Bankr. M.D. Fla. 2005), the
court held that a trust created under PACA is not a technical trust because it does not include a
segregated res. Id. at 394. However, “an express trust requires an identifiable res, but not a
segregated res.” Tucker, 2007 Bankr. LEXIS 1322 at *10 (rejecting debtor’s argument, relying
on McCue, that PACA does not create a technical trust for purposes of § 523(a)(4)). “Although
a segregation component may strengthen the argument for an express trust, segregation is not
required so long as the trust res is identifiable.” Id. at *12.
PACA trusts satisfy the requirements for a technical trust. PACA defines both the res of
the PACA trust and the duties of a PACA trustee. 7 U.S.C. § 499e(c)(2). Further, a PACA trust
is created automatically “from the moment perishable goods are delivered by the seller,” Top
Banana, 2005 U.S. Dist. Lexis 8976 at 14 (citation omitted), and therefore is created “prior to
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and without reference to the wrong that created the debt.” Bartlett, 397 B.R. at 619. This court
joins the courts finding that a trust imposed under PACA is a technical trust for purposes of
satisfying the fiduciary capacity requirement under § 523(a)(4). Bartlett, 397 B.R. at 620;
Perrine, 2007 Bankr. LEXIS 3727 at *7; Watford, 374 B.R. at 191; Tucker, 2007 Bankr. LEXIS
1322 at *12.
(B) Defalcation
A creditor has the burden of establishing defalcation by a preponderance of the evidence.
Bartlett, 397 B.R. at 619 (citing Grogan v. Garner, 498 U.S. 279, 286, 11 S. Ct. 654, 112 L. Ed.
2d 755 (1991)). “Defalcation is not defined in the Bankruptcy Code.” Chao v. Duncan (In re
Duncan), 331 B.R. 70, 86 (Bankr. E.D.N.Y. 2005). While other circuits have held that an
innocent mistake may constitute defalcation, the Second Circuit, in Denton v. Hyman (In re
Hyman), 502 F.3d 61, 68 (2d Cir. 2007), aligning itself with the First Circuit, held that
defalcation, for purposes of § 523(a)(4) “require[s] a showing of conscious misbehavior or
extreme recklessness-a showing akin to the showing required for scienter in the securities law
context.” Hyman, 502 F.3d at 68 (citing in Rutanen v. Baylis (In re Baylis), 313 F.3d 9, 20 (1st
Cir. 2002)); Press v. Chem. Inv. Servs. Corp., 166 F.3d 529, 538 (2d Cir. 1999). This standard
comports with the Bankruptcy Code’s “fresh start” policy, Baylis, 313 F.3d at 19, and “ensures
that the term ‘defalcation’ complements but does not dilute the other terms of the provision–
‘fraud’, ‘embezzlement’, and ‘larceny’ – all of which require a showing of wrongful intent.”
Hyman, 502 F.3d at 68. This standard "has the virtue of ease of application since the courts and
litigants have reference to a robust body of securities law examining what these terms mean." Id.
at 69.
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This standard has been summarized by the Second Circuit as follows:
[t]he scienter needed in connection with securities fraud is
intent to deceive, manipulate, or defraud, or knowing
misconduct. As a pleading requirement, a plaintiff must
either (a) allege facts to show that defendants had both
motive and opportunity to commit fraud or (b) allege facts
that constitute strong circumstantial evidence of conscious
misbehavior or recklessness.
Press, 166 F.3d at 538 (citations and internal quotations omitted); Trs. Of the Iron Workers Dist.
Council Pension, Health & Welfare, Annuity, Vacation, & Educ. Funds v. Mayo (In re Mayo),
No, 04-11106, Adv. No. 04-1067, 2007 Bankr. LEXIS 3197, *32 (Bankr. D. Vt. Sept. 17, 2007)
(applying standard of intent from securities law cases to determine defalcation under § 523(a)(4)
pursuant to Hyman). “‘Where motive [to commit fraud] is not apparent, it is still possible to
plead scienter by identifying circumstances indicating conscious behavior by the defendant,
though the strength of the circumstantial allegations must be correspondingly greater.’”
Ackerman v. Arotech Corp., 608 F. Supp. 2d 372, 381 (E.D.N.Y. 2009) (quoting Kalnit v.
Eichler, 264 F.3d 131, 142 (2d Cir. 2001).
In the securities law context, the Second Circuit has defined conscious misbehavior as
“deliberate illegal behavior, such as securities trading by insiders privy to undisclosed and
material information, or knowing sale of a company’s stock at an unwarranted discount.” Novak
v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000). “In order to plead conscious misbehavior or
recklessness, plaintiffs must ‘specifically allege[] defendants’ knowledge of facts or access to
information contradicting their public statements.’” In re eSpeed, Inc. Sec. Litig., 457 F. Supp.
2d 266, 292 (S.D.N.Y. 2006) (quoting Novak, 216 F.3d at 308). Plaintiffs have “the burden of
alleging that defendants had knowledge of specific facts or documents that they disregarded. In
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re Rhodia S.A. Sec. Litig., 531 F. Supp. 2d 527, 549-550 (S.D.N.Y. 2007) (granting the
defendants’ motion to dismiss where the plaintiffs did not allege that the defendants were
involved in the negotiation of a particular amendment in an agreement, which contained the
alleged obligations that the defendants failed to perform).
Similarly, in the bankruptcy context, a plaintiff must demonstrate that the defendant had
actual knowledge of the fiduciary duty that was breached in order to establish that the resulting
debt is non-dischargeable under § 523(a)(4). “A debtor who knowingly and intentionally
violated her fiduciary duties under PACA may be liable for defalcation.” Tucker, 2007 Bankr.
LEXIS 1322 at *19 (holding that the Defendant’s failure to preserve PACA assets constitutes
defalcation where the Defendant’s awareness of her duties under PACA is an undisputed fact);
Bartlett, 397 B.R. at 619 (finding defalcation where every invoice received, which “contained
specific language regarding the statutory trust”, was signed by a company representative, and the
PACA license held by the Defendant “makes specific reference to the statute”).
Two cases decided within the Second Circuit since Hyman find that defalcation, as set
forth in Hyman, may be satisfied by establishing that the defendant had actual knowledge of his
duty to preserve trust assets, and failed to do so. In Bank of Castille v. Kjoller (In re Kjoller),
395 B.R. 845 (Bankr. W.D.N.Y. 2008), the court held that the debtor’s use of cash collateral may
constitute a defalcation under § 523(a)(4), but found that it could not be determined on the
record before the court whether defalcation had occurred, because it was unclear whether the
Chapter 13 debtor was in fact aware of her fiduciary duties under §§ 1304 and 363(c)(2) and (4).
In Mayo, 2007 Bankr. LEXIS 3197, the court granted summary judgment to the plaintiffs on a
non-dischargeability claim under § 523(a)(4), holding that the defendant’s use of funds for
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business and personal expenses constituted defalcation because he had actual knowledge of his
fiduciary duty under a collective bargaining agreement (“CBA”) to distribute the funds withheld
from employee wages into pension and welfare funds for his union employees, as evidenced by
the fact that he had initialed the pertinent provisions of the CBA.
It is undisputed that the Plaintiffs properly preserved their rights under PACA by
including the required PACA statutory language on their invoices:
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. 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.
7 U.S.C. § 499e(c)(4).
The Plaintiffs’ Statement of Material Facts states that the invoices were sent to the
Defendant, which the Defendant does not dispute. However, unlike the plaintiffs in Mayo, the
Plaintiffs have not presented any evidence or made any assertions that the Defendant actually
received the invoices, or had any other notice or actual knowledge of his duties as a PACA
trustee. Nor does the Plaintiff’s Statement of Material Facts contain such an allegation. The
record before the Mayo Court, by contrast, clearly established that the Defendant read and
acknowledged his duties under the CBA:
Because the [d]efendant signed the CBA and initialed
Proposal 3, he is charged with the actual knowledge that he
had a duty to pay certain amounts into various [f]unds. In
this [c]ourt’s view, the [d]efendant’s failure to make the
requisite payments represents a material and knowing breach
of his fiduciary duty and constitutes the kind of “knowing
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misconduct” contemplated by the Second Circuit’s new
defalcation standard.
Mayo, 2007 Bankr. LEXIS 3197 at *35.
Nor does the record contain any evidence of the type relied on in Bartlett to find that the
defendant had the requisite knowledge if his fiduciary duties under PACA. There, the record
included invoices referring to the defendant’s statutory duty, which had been signed, as well as
the defendant’s PACA license, which specifically referred to his obligations under PACA.
Bartlett, 397 B.R. at 619.
“By requiring the courts to make appropriate findings of conscious misbehavior..., the
standard [for defalcation]...insures that the harsh sanction of non-dischargeability is reserved for
those who exhibit ‘some portion of misconduct.’” Hyman, 502 F.3d at 68-69 (quoting Cent.
Hanover Bank & Trust Co. V. Herbst, 93 F.2d 510, 512 (2d Cir. 1937)). Absent evidence in the
record of the Defendant’s actual knowledge of his duties under PACA, and construing the facts
in a manner that resolves all reasonable inferences in the Defendant’s favor, the Court finds that
a material issue of fact exists, preventing this court from concluding on summary judgment that
the Defendant’s failure to hold sale proceeds in trust for the Plaintiffs, constitutes defalcation as
defined by the Second Circuit.
Motion to Strike
Plaintiffs argue that pursuant to Local Civil Rule 6.1(b) , the Defendant’s opposition2
should have been served within ten business days after service of the moving papers. However,
Local Civil Rule 6.1(b) provides in relevant part: “(b) On all motions, petitions, applications,	2
and exceptions other than those described in Rule 6.1(a). . . (2) any opposing affidavits and
answering memoranda shall be served within ten business days after service of the moving
papers.”
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the Local Bankruptcy Rules for the Eastern District of New York, require that opposition be
served “so as to be received not later than 3 [b]usiness [d]ays before the hearing.” E.D.N.Y. LBR
9006-1(a)(ii). The Defendant filed his opposition on May 13, 2009. The Plaintiffs set the
hearing date for April 16, 2009. On April 6, 2009, the Court adjourned the hearing date to May
21, 2009. The Defendant did not file proof of service of his opposition on the Plaintiffs.
However, the Plaintiffs filed a reply five days later, on May 18, 2009, which indicates that the
Defendant’s opposition was received in a timely manner. Accordingly, the Plaintiffs’ motion to
strike the Defendant’s opposition as untimely is denied.
Conclusion
For the foregoing reasons, the Plaintiffs’ motion for summary judgment is granted in
part, to the extent that the Court finds that the Defendant acted in a fiduciary capacity under §
523(a)(4), and denied in part, to the extent that an issue of material fact exists whether the
Defendant committed a defalcation. A separate order shall issue herewith.
Dated: Brooklyn, New York
September 11, 2009
/s/Carla E. Craig
CARLA E. CRAIG
Chief United States Bankruptcy Judge
Case 1-08-01439-cec Doc 9 Filed 09/11/09 Entered 09/11/09 16:33:32