Summary of a Recent
Judicial
Development in
Bankruptcy
Farmer that Failed to Remit
Proceeds Entitled to Discharge
E. John Edwards IIINational AgLaw Center Graduate Fellow
The United States Bankruptcy Court for the Middle District of Georgia has ruled that a debtor who sold a farmer's seeds was entitled to a discharge even though the seeds were subject to a lien held by the Commodity Credit Corporation ("CCC") and the debtor failed to remit the proceeds from a sale of those seeds to either the farmer or the CCC. In re Wright, 282 B.R. 510 (Bankr.M.D.Ga. 2002). The court ruled that the creditor failed to demonstrate that the debtor acted in a fiduciary capacity with respect to the seeds that the creditor delivered to the debtor. See id. at 515-16. The court also ruled that the debtor did not embezzle the creditor's seeds or the proceeds from the sale of those seeds and that the debtor was not guilty of larceny. See id. at 519. Finally, the court ruled that the debtor's actions "did not cause willful and malicious injury because [the creditor] was aware of the actions and continued to do business with [the debtor] without taking any steps to prevent a recurrence of the actions." Id.
The debtor, Matthew Wright ("Wright"), was a co-shareholder and co-operator of a corporation, Wright Seeds, Inc. ("Wright Seeds"). See id. at 513. Wright Seeds was in the business of processing and reselling grain seeds. See id. The creditor objecting to discharge was a farmer, Prentice Bennett, who had sold wheat and oat seeds to Wright Seeds in 1998, 1999, 2000, and for a number of prior years. See id.
Bennett had a "handshake" arrangement with Wright Seeds whereby he would obtain seeds in the year prior to harvest worth about $2,000 from Wright Seeds. See id. Bennett would subsequently "plant the seeds and harvest the crops the following year. In May, June, or July, he would deliver the harvest to Wright Seeds, which would clean, bag, and resell the seeds." Id. The court explained that "[i]n December, Wright Seeds would pay Bennett for the harvest he delivered, offset by the approximately $2,000 Bennett owed Wright Seeds." Id. at 513-14. There was no written contract for this arrangement between the parties for the years in question. See id. at 513.
The 1998 and 2000 wheat and oat crops that Bennett delivered to Wright Seeds were subject to a lien in favor of the CCC as a result of a loan that Bennett received from the Farm Service Agency. See id. at 514. The terms of the loan required that wheat and oat seeds to be tagged and segregated. See id. Wright Seeds complied with these requirements. See id.
As part of the government's periodic inspection of its collateral, a representative from the Farm Service Agency learned in 1998 that all of the wheat and oat seeds that Bennett produced had been sold. See id. The representative communicated to Wright that the 1998 loans had to be paid. See id. Wright was later informed that the 2000 loans had to be paid as well. See id. Wright Seeds made only one payment on one of these loans and "[a]ll remaining outstanding balances were repaid in full by Bennett." Id.
The parties disputed whether Wright Seeds had the right to sell the seeds that Bennett delivered and whether Wright Seeds could sell the seeds without permission from Bennett. See id. The parties also disagreed over who was the actual owner of the seeds after they were delivered to Wright Seeds. See id. Finally, the parties disagreed over the amount of money that Wright Seeds owed to Bennett. See id.
Bennett testified that he usually allowed Wright "to pay him in December so that Wright could establish cash flow." Id. Bennett also testified, however, that "he did not expect Wright to sell his seeds to generate that cash flow, and Wright was not to sell the seeds without Bennett's permission." Id. Wright testified that he believed he could sell the seeds at any time and that when the seeds were collateral for government loans he could sell the seeds as long as the loans were repaid shortly after they were sold." Id. Bennet testified that he kept doing business with Wright Seeds even though Wright had not paid him "because he believed Wright's assurances that he would be paid in full and because Wright had always paid him in the past." Id.
In 1998, 1999, and 2000, instead of paying Bennett or the CCC with the proceeds from the sales of Bennett's seeds, Wright used that money to pay Wright Seed's operating expenses, "including paying other creditors, some of whom may have had their debts personally guaranteed by Wright." Id. In August 2001, Wright filed a Chapter 13 bankruptcy petition. See id. The case was converted to Chapter 7 in September 2001. See id. Bennett brought this adversary proceeding "seeking to have the debt owed him declared nondischargeable under 11 U.S.C. §§ 523(a)(4) and (a)(6)." Id.
Bankruptcy Code § 523(a)(4) provides that "'[a] discharge under section 727 . . . of this title does not discharge an individual debtor from any debt . . . for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. . . .'" Id. at 515. The bankruptcy court explained that for Bennett to establish "fraud or defalcation in a fiduciary capacity, [he] must show the existence of a fiduciary relationship." Id. The court also explained that in a discharge proceeding, "'fiduciary capacity' is narrowly construed to include only technical or express trusts." Id. (citing Quaif v. Johnson, 4 F.3d 950, 953 (11th Cir. 1993) and Farmers & Merchants Bank v. Brinsfield, 78 B.R. 364, 369 (Bankr.M.D. Ga. 1987)).
The court stated that this type of trust may only derive from statute or common law, "but it must have been in existence prior to the alleged wrongdoing and, therefore, does not include constructive or resulting trusts." Id. (citing Smith Drug Co. v. Pharr-Luke, 259 B.R. 426, 431 (Bankr.S.D. Ga. 2000) and Utica Mut. Ins. Co. v. Johnson, 203 B.R. 1017, 1021 (Bankr. S.D. Ga. 1997)). The court also stated that "[c]reditor-debtor relationships do not impose fiduciary duties, particularly on third parties." Id. Finally, the court noted that although courts have established various criteria for determining whether fiduciary capacity exists, "in general they require identification of the fiduciary and fiduciary duties 'specifically set forth so that a trust relationship is expressly and clearly imposed.'" Id. (quoting Eavenson v. Ramey, 243 B.R. 160, 165 (N.D. Ga. 1999)).
Bennett argued that two state statutes, Ga. Code Ann. §§ 11-9-315(a)(1) and 11-7-204(1) created a trust. See id. The court rejected this argument, stating that § 11-9-315(a)(1) "merely states that unless authorized by the secured party, the sale of collateral does not release the security interest on that collateral. The provision sets forth no duties, fiduciary or otherwise." Id. at 516. The court stated that § 11-7-204(1) "merely imposes a standard of care, not affirmative fiduciary duties." Id. The court also rejected Bennett's argument that a common law trust had been created because he did not cite any cases that supported that position. See id.
The court explained that the requirement that the seeds be segregated arose only from a creditor-debtor relationship between the Bennett and the government. See id. The court stated that "[c]reditor-debtor relationships do not impose fiduciary duties, particularly on third parties." Id. (citing Brinsfield, 78 B.R. at 369). The court concluded that "[b]ecause Bennett has cited no statute or case that designates Wright as a fiduciary of Bennett or imposes fiduciary duties on Wright . . . Wright did not act in a fiduciary capacity; therefore Bennett failed to meet his burden as to fiduciary fraud or defalcation." Id.
The court also rejected Bennett's argument that Wright had committed embezzlement and larceny. See id. The court explained that "[e]mbezzlement requires the fraudulent conversion of another's property by one who lawfully in possession of the property. Id. (citing Rentrak Corp. v. Cady, 195 B.R. 960, 964 (Bankr.S.D. Ga. 1996)). The court explained that larceny "requires a felonious taking of property with the intent to convert it or to permanently deprive the owner of it." Id. (citing Southern Concrete Constr. Co. v. Lennard, 245 B.R. 428, 433 (Bankr. M.D. Ga. 1999)). Both crimes require fraudulent intent. See id.
The court ruled that Wright had not committed embezzlement. See id. The court noted that there was no evidence that Wright attempted to conceal his sale of Bennett's seeds, and that Bennett's own testimony revealed that Bennett expected Wright to sell the seeds but did not expect Wright to do so in order to pay him. See id. The court also noted that Wright "could use the proceeds of the sale of Bennett's seeds without restriction and cannot be said to have fraudulently misappropriated the proceeds by using them to pay other creditors." Id. Thus, Wright did not act with the fraudulent intent required to establish the crime of embezzlement. See id.
The court also rejected Bennett's argument that Wright committed the crime of larceny because there was no evidence of fraudulent intent. See id. The court cited the facts that Wright testified that he had at all times intended to repay the debt, that Bennett introduced no evidence to contradict such testimony, and that Bennett testified that he believed Wright intended to repay him. See id.
Bennett's final argument was that the debt was nondischargeable under Bankruptcy Code § 523(a)(6). See id. Section 523(a)(6) provides that "[a] discharge under section 727 . . . of this title does not discharge an individual debtor from any debt . . . for willful and malicious injury by the debtor to another entity or to the property of another entity." Id. at 517-18.
The court explained that "[a]n injury is willful when the debtor had specific intent to inflict the injury or the injury was substantially certain to result." Id. at 518 (citing Ford Motor Credit Co. v. Moody, 277 B.R. 865, 870-71 (Bankr. S.D. Ga. 2001)). For an injury to be considered malicious, "the injury must be 'wrongful and without just cause or excessive even in the absence of personal hatred, spite or ill will.'" Id. (quoting Hope v. Walker, 48 F.3d 1161, 1164 (11th Cir. 1995)).
The court noted that Bennett knew of Wright's business practices and failed to take the steps necessary to protect his property. See id. The court also noted that Bennett "continued to store its seeds at Wright Seeds despite Wright's failure to pay him." Id. The court concluded that "[e]ven assuming there were a conversion for which Wright could be held liable, Bennet's 'failure to take reasonable steps to protect [his property] . . . prevent[s] application of the [willful and malicious injury] exception.'" Id. (quoting Wolfson v. Equine Capital Corp., 56 F.3d 52, 55 (11th Cir. 1995) and Meeker v. McGinnis, 586 F.2d 162, 165 (10th Cir. 1978)).
The case was decided on June 10, 2002; this summary was prepared in November, 2002.