Produce delivery debts not exempted from bankruptcy discharge - 11th Circuit

(Reuters) - A federal appeals court on Wednesday ruled that bankrupt Florida grocery store owners could discharge debts owed to a produce supplier, resolving a "tug-of-war" between U.S. bankruptcy law and a federal law intended to protect companies delivering perishable foods.

Spring Valley Produce Inc had appealed a bankruptcy court order allowing Central Market of FL Inc. to discharge a $261,504.15 debt for produce that Central Market never paid for. Spring Valley argued that the Perishable Agricultural Commodities Act (PACA) overrules bankruptcy law's normal discharge of debts, because PACA makes it illegal for a buyer to fail to make prompt payment for produce.

PACA automatically creates a "statutory trust" when produce is delivered, and Spring Valley argued that Central Market was a fiduciary of the PACA trust created by its deliveries. Because Central Market was a fiduciary, its owners' debts to Spring Valley were not dischargable under normal bankruptcy rules, Spring Valley argued.

The 11th U.S. Circuit Court of Appeals disagreed, saying that PACA "imposes some trust-like duties," but it did not qualify for the fiduciary exemption in bankruptcy law. Specifically, PACA does not require a produce buyer to keep trust assets segregated from its other assets or prevent the buyer from using the trust assets for other purposes, the 11th Circuit ruled.

The 11th Circuit said that its decision balanced "two statutes with competing interests" without eroding PACA's protections for produce suppliers. Produce suppliers can ask a court to force the disgorgement of payments made in breach of the PACA trust, and they are entitled to the highest priority for repayment in bankruptcy, the 11th Circuit wrote.

"Allowing PACA debtors to be freed from personal liability for their debts through bankruptcy discharge promotes the overarching goal of the Bankruptcy Code of providing debtors with a fresh start," the 11th Circuit wrote. "At the same time, PACA still provides significant benefits to unpaid produce sellers."

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

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

For Spring Valley Produce: Steven De Falco and Lawrence Meuers of Meuers Law Firm.

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

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