“Fiduciary Capacity” Discharge Exception—At U.S. Supreme Court (Spring Valley v. Forrest)

Fiduciary capacity? (Photo by Marilyn Swanson)

By: Donald L Swanson

A bankruptcy discharge “does not discharge an individual debtor from any debt– . . . for fraud or defalcation while acting in a fiduciary capacity.”  11 U.S.C. § 523(a)(4).

The effect of this “fiduciary capacity” statute is newly before the U.S. Supreme Court on a petition for certiorari in Spring Valley Produce, Inc. v. Forrest, Case No. 22-502.

The question presented in Spring Valley is this:

  • “May a debtor in bankruptcy discharge liability for unlawfully violating a nonsegregated statutory trust” under the Perishable Agricultural Commodities Act (“PACA”)?

PACA Trust

To understand requirements of PACA, think of a distributor that:

  • buys fruits and vegetables from farmers;
  • co-mingles all the produce it acquires;
  • distributes that produce to grocery stores and restaurants; and
  • runs all its receipts and disbursements through a single bank account.

In such circumstances, PACA imposes a trust upon the distributor’s produce and proceeds to assure payment of each farmer’s purchase money claim.

Circuit Split

According to the Spring Valley Petition for certiorari, a circuit split on the question presented is this:

  • Four circuits (Sixth, Seventh, Ninth and Tenth) hold that a non-segregated statutory trust (like PACA) may be non-dischargeable for “fraud or defalcation while acting in a fiduciary capacity”; while
  • Three Circuits (Fifth, Eighth and Eleventh) hold otherwise—that a non-segregated trust (like PACA) does not meet the requirements of “fiduciary capacity.”

Eleventh Circuit Opinion—Spring Valley

The Eleventh Circuit opinion, from which the Spring Valley Petition is filed, is linked here.  Here is a summary of that opinion, followed by a summary of contrary opinions in the circuit split.

–Litigation and Legal Standards

The Chapter 7 Debtors owe a pre-petition PACA debt of $261,504.15 for acquiring produce from Spring Valley Produce, Inc. 

Spring Valley files a nondischargeability Complaint against Debtors under § 523(a)(4)—for fraud or defalcation while acting in a fiduciary capacity.

Debtors files a motion to dismiss Spring Valley’s Complaint for failure to state a cause of action.  The Bankruptcy Court grants Debtors motion, declaring that § 523(a)(4) does not apply to PACA debts.

The Eleventh Circuit Court of Appeals affirms, (i) declaring that § 523 exceptions to discharge are to be narrowly construed, and (ii) adopting this three-part test on whether a debtor is “acting in a fiduciary capacity” under § 523(a)(4):

  1. the relationship must have a trustee, who holds an identifiable trust res, for the benefit of an identifiable beneficiary;
  2. the relationship must define sufficient trust-like duties to create a “technical” trust, with the strongest indicia thereof being the duties to (i) segregate trust assets, and (ii) refrain from using trust assets for non-trust purposes; and
  3. the debtor must be acting in a fiduciary capacity before the act of fraud or defalcation occurs.


Debtors buy PACA produce from Spring Valley but fail to pay.  Upon receiving and accepting Spring Valley’s produce, Debtors become PACA trustees of a trust res consisting of that produce and its proceeds.

Debtors file Chapter 7, hoping to discharge their debt to Spring Valley.

–Successful Argument

Debtors argue that they did not act in a “fiduciary capacity,” under the meaning of § 523(a)(4), because PACA does not require segregation of trust assets or prohibit use of trust assets for non-trust purposes.

Both the Bankruptcy Court and the Eleventh Circuit agree with Debtors’ argument because, (i) although PACA imposes trust-like duties, a PACA trust lacks the crucial elements of a segregated trust res and exclusive use of that res for trust purposes, and (ii) exceptions to discharge are to be construed narrowly.


The fiduciary capacity exception to a bankruptcy discharge has existed through various bankruptcy statutes since 1841. Such statutes have all used similar language, and all versions have referred to “defalcation” and to “fiduciary capacity” or “fiduciary character.”

Early Supreme Court cases interpreting this exception declare that “fiduciary capacity” as an exception to discharge:

  1. should be construed narrowly;
  2. is limited to the “strict and narrow” definition of a “technical” trust; and
  3. applies only when the debtor acts in a fiduciary capacity before the defalcation creating the debt.

These three Supreme Court cases provide key principles for the fiduciary capacity exception.

Chapman v. Forsyth, 43 U.S. (2 How.) 202, 11 L.Ed. 236 (1844).  In this case a creditor seeks to have debts incurred by his factor (or agent) excepted from discharge under the fiduciary capacity exception. The creditor gave cotton to his factor, who was to sell the cotton and return the proceeds to the creditor. The creditor argued that “a factor, with goods and money in his hands belonging to his principal, is in estimation of law, a trustee.” The Court rejects this argument because:

  • if the fiduciary capacity exception “embraced such a debt, it would be difficult to limit its application”;
  • “such a construction would have left but few debts on which the law could operate”;
  • “in almost all the commercial transactions of the country, confidence is reposed in the punctuality and integrity of the debtor, and a violation of these is, in a commercial sense, a disregard of a trust”; but
  • the fiduciary capacity exception “speaks of technical trusts, and not those which the law implies from the contract,” and a creditor-factor relationship does not fall within the exception.

Upshur v. Briscoe, 138 U.S. 365, 375, 11 S.Ct. 313, 34 L.Ed. 931 (1891). In this case, the Supreme Court holds that, for an exception to discharge, “fiduciary capacity” refers to a trust only “in its technical sense.”  The Court also focuses on the prepositional phrase “while acting in” to conclude that the fiduciary capacity exception to discharge “would seem to apply only to a debt created by a person who was already a fiduciary when the debt was created.” 

Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934). In this case, Creditor had a lien on cars sold by debtor. Debtor sold one of the cars but failed to pay Creditor. When Debtor filed bankruptcy, Creditor sued to deny Debtor’s discharge of the unpaid car debt, under the fiduciary capacity exception. The Supreme Court:

  • asks whether Debtor was “a trustee in that strict and narrow sense” for purposes of the fiduciary capacity exception;
  • reaffirms that Debtor must be acting in a fiduciary capacity before incurring the debt, finding “it is not enough that, by the very act of wrongdoing out of which the contested debt arose, the bankrupt has become chargeable as a trustee ex maleficio”; and
  • declares:
    • “the substance of the transaction was this, and nothing more, that the mortgagor, a debtor, has bound himself by covenant not to sell the mortgaged chattel without the mortgagee’s approval”;
    • “the resulting obligation is not turned into one arising from a trust because the parties to one of the documents have chosen to speak of it as a trust”; and
    • the fiduciary capacity exception to discharge does not apply to this type of transaction.

–Technical Trusts

Although the Supreme Court has not provided a precise definition of technical trusts, it has provided the following indication in its Chapman opinion:

  • in a broad sense, there is some degree of “trust” imposed in almost all commercial transactions, and applying this broad sense to the fiduciary capacity exception would except an inordinate number of debts from discharge; and
  • in a limited sense, the fiduciary capacity exception applies only to technical trusts or trusts in the “technical sense.” 

–Eleventh Circuit’s Conclusion

The core issue is this: what type of trust-like duties are sufficient to create a technical trust under the fiduciary capacity exception.  In this regard, precedent has emphasized two duties:

  1. the duty to segregate trust assets; and
  2. the duty to refrain from using trust-assets for non-trust purposes.

Under PACA regulations:

  • “trust assets are to be preserved as a nonsegregated ‘floating’ trust”;
  • “commingling of trust assets is contemplated”; and
  • trust assets may be used for non-trust purposes.

Therefore, the Eleventh Circuit concludes, PACA debts are not excepted from discharge under § 523(a)(4).

Conflicting Circuit Opinions

The Petition for certiorari describes other circuit opinions that conflict with the Eleventh Circuit’s opinion.

Four circuits, the Petition says, have expressly determined that nonsegregated statutory trusts may satisfy the “fiduciary capacity” requirement under § 523(a)(4):

  • Stoughton Lumber Co. v. Sveum, 787 F.3d 1174, 1176 (7th Cir. 2015) (under Wisconsin’s “Theft by Contractors” statute, debtor was “free to commingle the funds with other moneys” but “had to preserve intact the assets of the trust fund for Stoughton”);
  • Carlisle Cashway, Inc. v. Johnson (In re Johnson), 691 F.2d 249, 251-53 (6th Cir. 1982) (under Michigan’s Building Contract Fund Act, the fact that “the statute does not mandate any particular form or procedures in handling trust funds” does not “undercut the validity of the trust” or “defeat the trust under” the predecessor to § 523(a)(4));
  • Woodworking Enterprises, Inc. v. Baird (In re Baird), 114 B.R. 198, 204 (9th Cir. BAP 1990) (same under Arizona’s materialmen’s lien statute);
  • In re Kelley, 215 B.R. 468, 474 (10th Cir. BAP 1997) (same for insurance premiums held under Oklahoma’s Third-Party Administrator Act).

While such decisions deal with statutes that create nonsegregated trusts other than PACA, lower courts in such circuits follow those decisions to hold that a PACA trust qualifies as “fiduciary capacity” under § 523(a)(4).


In Spring Valley Produce, Inc. v. Forrest the U.S. Supreme Court has an opportunity to address the extent of the bankruptcy discharge available to individual debtors under § 523(a)—this time under the “fiduciary capacity” exception of § 523(a)(4).

It will be interesting to see, (i) whether the U.S. Supreme Court grants the Spring Valley Petition, and (ii) if it does, whether the Supreme Court will follow its own precedents, from the 1800s and early 1900s, when those precedents are generous toward the discharge—or whether it will find a way to distinguish or reject such things.

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