Filing Delivery Debts Not Exempt From Bankruptcy Discharge – 11th Circuit

The fresh produce area is pictured at a grocery store in Pasadena, California, U.S., June 10, 2020. REUTERS/Mario Anzuoni

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  • Debts under Perishable Agricultural Commodities Act do not create ‘fiduciary’ exemption in bankruptcy, court told
  • Fruit and vegetable suppliers still have significant bankruptcy protections

(Reuters) – A federal appeals court ruled on Wednesday that bankrupt Florida grocery store owners can discharge debts owed to a supplier of products, resolving a “standoff” between U.S. bankruptcy law and a federal law to protect businesses delivering perishable goods.

Spring Valley Produce Inc had appealed a bankruptcy court order allowing Central Market of FL Inc. to discharge a debt of $261,504.15 for products that Central Market had never paid for. Spring Valley argued that the Perishable Agricultural Commodities Act (PACA) negates the normal debt discharge of bankruptcy law because PACA prohibits a buyer from not promptly paying for the produce.

PACA automatically creates a “legal trust” when products are delivered, and Spring Valley argued that Central Market was a trustee of the PACA trust created by its deliveries. Because Central Market was a trustee, its owners’ debts to Spring Valley were not dischargeable under normal bankruptcy rules, Spring Valley argued.

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The 11th U.S. Circuit Court of Appeals disagreed, saying the PACA “imposes obligations similar to those of a trust,” but it was not eligible for the exemption fiduciary in bankruptcy law. Specifically, the PACA does not require a purchaser of products to separate the assets of the trust from its other assets or to prevent the purchaser from using the assets of the trust for other purposes, ruled the 11th Circuit.

The 11th Circuit said its decision balances “two statutes with competing interests” without eroding PACA’s protections for product suppliers. Product suppliers can ask a court to force repayment of payments made in violation of the PACA trust, and they are entitled to the highest priority for repayment in the event of bankruptcy, the 11th Circuit wrote.

“Allowing PACA debtors to be released from personal liability for their debts through bankruptcy discharge furthers the overarching goal of the Bankruptcy Code to provide debtors with a fresh start,” the 11th Circuit wrote. “At the same time, PACA still provides significant benefits to unpaid product sellers.”

The notice noted that the dispute was a matter of first impression within the 11th Circuit and that lower courts had reached different conclusions on whether PACA debts were dischargeable in bankruptcy.

The case is Spring Valley Produce Inc. et al v. Nathan Forrest et al, United States Court of Appeals for the 11th Circuit, No. 21-12133.

For Spring Valley Produce: Steven De Falco and Lawrence Meuers of the law firm Meuers.

For Nathan Forrest and Marsha Forrest: Christopher Smith and John Beggan of Christopher D. Smith PA.

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