ERNEST M. ROBLES, Bankruptcy Judge.
C.H. Robinson Worldwide, Inc. ("Plaintiff") seeks a determination that Guillermo Alvarado ("Defendant") is indebted to it in the amount of $133,338.29, and that such indebtedness is excepted from discharge pursuant to §§ 523(a)(2)(A) and (a)(4). Trial was conducted on September 26 and October 30, 2017.
On September 8, 2015, Plaintiff filed a Complaint for Damages and Injunctive Relief (the "District Court Complaint") against Defendant and Global Fresh in the United States District Court for the Central District of California (the "District Court"). The District Court Complaint alleged the following:
Based upon the foregoing allegations, the District Court Complaint sought damages of $96,805.00, plus interest and attorneys' fees, against Defendant and Global Fresh.
After fourteen attempts to serve the District Court Complaint upon Defendant and Global Fresh failed, Plaintiff sought leave to effectuate service by publication. On January 7, 2016, the District Court authorized Plaintiff to serve Defendant and Global Fresh by publishing the Summons in the Santa Clarita Valley Signal once a week for four consecutive weeks. The District Court further ordered Plaintiff to mail the Summons and Complaint to Defendants at 16923 Royal Pines Lane, Canyon Country, CA 91387 (the "Royal Pines Address"). On February 1, 2016, Plaintiff left a copy of the District Court Complaint and Summons at the Royal Pines Address. When Defendant commenced his voluntary Chapter 7 petition on June 15, 2016, he listed the Royal Pines Address as his residence. Plaintiff also caused the Summons to be published in the Santa Clarita Valley Signal.
On April 27, 2016, the District Court entered default judgment in favor of Plaintiff (the "District Court Judgment") and against Defendant and Global Fresh. The District Court Judgment, in the total amount of $133,338.29, consists of $96,805.00 in principal, $28,286.53 in interest, and $8,246.76 in attorneys' fees. The District Court found that Defendant was personally liable for Global Fresh's indebtedness because he was the owner, officer, and director of Global Fresh. See Minute Order Granting Motion for Default Judgment [Doc. No. 28, Case No. 2:15-cv-07082-DSF-AJW] (Central Dist. Cal. April 27, 2016).
Plaintiff filed a Motion in Limine seeking to prevent Defendant from contesting the indebtedness established by the District Court Judgment, which the Bankruptcy Court denied. First, the Court found that the District Court Judgment was not entitled to preclusive effect because it was obtained by default:
Final Ruling Denying Motion in Limine [Doc. No. 41] at 4-5.
Second, the Court found that Plaintiff could not rely upon the District Court Judgment to preclude Defendant from asserting that he did not possess the culpable state of mind giving rise to liability for defalcation under § 523(a)(4):
Id. at 6-7.
The Court has entered a Pretrial Order that governs the course of this proceeding. See Pretrial Stipulation of the Parties as Amended by the Court (the "Pretrial Order") [Doc. No. 29]. The following stipulated facts have been established by the Pretrial Order:
Under the Perishable Agricultural Commodities Act of 1930 ("PACA"), codified at 7 U.S.C. § 499a et seq., a seller of perishable agricultural commodities holds a statutory trust against all proceeds generated by such commodities, provided that the seller takes actions necessary to perfect the trust. The statute provides, in relevant part:
7 U.S.C. § 499e(c)(2)-(4).
The Ninth Circuit has held that the principal of a produce buyer is personally liable to PACA trust creditors if the principal controls the buyer:
Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 283 (9th Cir. 1997) (internal citations omitted).
Defendant asserts that the invoices proffered by Plaintiff to establish that Global Fresh purchased the produce at issue are not admissible. As a result, Defendant asserts, there is no admissible evidence demonstrating that Plaintiff timely delivered to either Global Fresh or Defendant the notices containing the language required by 7 U.S.C. § 499e(c)(4). Defendant maintains that, having failed to show that it took the requisite actions to preserve the PACA trust, Plaintiff cannot establish the existence of any of the underlying indebtedness.
To establish that Global Fresh purchased produce from Plaintiff and that such produce was subject to the PACA trust, Plaintiff introduced two Statements of Account and six invoices (Exhibits 6-13). For the reasons set forth below, all of Defendant's evidentiary objections to the admissibility of Exhibits 6-13 are overruled.
To authenticate Exhibits 6-13, Plaintiff presented the testimony of Ryan Oscarson. Mr. Oscarson has been employed by Plaintiff since May 2011. Tr. Oct. 30 at 54:1-2. His current position, which he has held since 2013, is Regional Category Manager. Id. at 54:4-5. As Regional Category Manager, Mr. Oscarson was responsible for overseeing the procurement and sales of a particular category of produce for an assigned region. Id. at 54:20-24. His responsibilities also included collections work. Id. at 54:25-55:1. Prior to working as a Regional Category Manager, Mr. Oscarson worked as a Sourcing Representative. Id. at 54:7-8. In that capacity, he was responsible for buying and selling produce to various customers. Id. at 54:11-17. Mr. Oscarson was responsible for the Global Fresh account. Id. at 55:25-56:9.
The Court finds Mr. Oscarson's testimony to be especially credible. Mr. Oscarson described his job responsibilities clearly and succinctly and exhibited a solid understanding of Plaintiff's business practices and internal operating procedures.
The Court finds that Exhibits 6-13 are admissible as records of a regularly conducted activity pursuant to Evidence Rule 803(6). A record is admissible under Evidence Rule 803(6) if:
Mr. Oscarson's testimony established that all the criteria for admissibility under Evidence Rule 803(6)(a)-(d) are satisfied. First, Mr. Oscarson testified that he maintained files concerning Global Fresh that contained information regarding the quantities of produce Plaintiff sold to Global Fresh, the price at which the produce was sold, and the date upon which the produce was sold. Tr. Oct. 30 at 90:9-22. As the Regional Category Manager responsible for the Global Fresh account, Mr. Oscarson qualifies as a person with knowledge of Plaintiff's produce sales to Global Fresh. Mr. Oscarson testified that Plaintiff's information technology system would generate invoices, based upon the files that Mr. Oscarson maintained, that in the vast majority of cases would automatically be sent by e-mail to Global Fresh. Id. at 94:1-15. Mr. Oscarson testified that in the event the invoices were not automatically sent to Global Fresh by e-mail, they would be sent to Global Fresh by someone in Plaintiff's accounts receivable department, or that he would personally e-mail the invoices to Global Fresh. Id. at 94:6-16. Mr. Oscarson testified that Plaintiff's systems would not generate an invoice if a product was not delivered. Id. at 60:8-10. Mr. Oscarson's testimony shows that Exhibits 6-13 were records kept in the regular course of Plaintiff's business and that generating those records was a regular practice of Plaintiff's. Finally, Mr. Oscarson qualifies as a custodian of the records within the meaning of Evidence Rule 803(6)(d).
Defendant has failed to demonstrate that the source of the information or the method or circumstances of preparation associated with Exhibits 6-13 indicate a lack of trustworthiness. In support of his contention that Exhibits 6-13 are not trustworthy, Defendant points to Mr. Oscarson's acknowledgment on cross examination that Plaintiff sometimes makes mistakes on its invoices:
Tr. Oct. 30 at 105:11-12.
Mr. Oscarson's acknowledgment that it is possible for Plaintiff to make invoicing mistakes does not call into doubt the reliability of Exhibits 6-13. Mr. Oscarson did not state that the exhibits in question were mistaken. To the contrary, he testified that he regularly spoke with Carlos, an employee of Global Fresh, regarding Global Fresh's receipt of the produce evidenced by Exhibits 6-13; that Carlos would have advised him had Global Fresh not received the produce; and that Carlos never informed him that Global Fresh had not received the produce. Tr. Oct. 30 at 75:14-19, 93:1-22, and 102:4-17.
Defendant asserts that Plaintiff failed to adequately authenticate Exhibits 6-13. Defendant's objection with respect to authentication is overruled. Mr. Oscarson's testimony showed that Exhibits 6-7 are Statements of Account generated by Plaintiff and that Exhibits 8-13 are invoices generated by Plaintiff.
Defendant further objects that Exhibits 6-13 are not admissible pursuant to Evidence Rule 1002. Evidence Rule 1002 states that an "original writing, recording, or photograph is required in order to prove its content unless these rules or a federal statute provides otherwise." However, Evidence Rule 1003 provides that a "duplicate is admissible to the same extent as the original unless a genuine question is raised about the original's authenticity or the circumstances make it unfair to admit the duplicate." In Field v. Trust Estate of Kepoikai (In re Maui Indus. Loan & Fin. Co.), 477 B.R. 134, 142 (Bankr. D. Haw.), order amended on denial of reconsideration, 483 B.R. 346 (Bankr. D. Haw. 2012), the court admitted copies of checks pursuant to Evidence Rule 1003 after finding no genuine issues as to the original's authenticity or unfairness regarding admission of the duplicates. Having determined the checks were admissible pursuant to Evidence Rule 1003, the Maui Indus. court found it unnecessary to examine whether an original was not required under Evidence Rule 1004 (which provides that an original is not required only if it cannot be obtained or if other circumstances apply). As was the case in Maui Indus., there is no indication that the copies presented here are incorrect, and there are no circumstances making admission of the copies unfair. Defendant's objection under Evidence Rule 1002 is overruled.
A produce seller loses the benefits of the PACA trust if the seller does not timely deliver to the buyer notices containing the PACA trust language as set forth at 7 U.S.C. § 499e(c)(4). Here, there is no dispute that the invoices at issue (Exhibits 8-13) contain the required PACA trust language. Defendant's theory is that Plaintiff has failed to establish that those invoices were delivered to Global Fresh within the thirty-day timeframe necessary to preserve the trust benefits. Except with respect to the invoices admitted as Exhibits 12 and 13, Defendant's contentions lack merit. (The Court generally refers to each invoice by its exhibit number—that is, the invoice admitted as Exhibit 12 is denoted as Invoice 12.)
First, Defendant asserts that Plaintiff has not shown that Invoices 8-11 were delivered at all. Defendant is mistaken. Mr. Oscarson, who displayed intimate familiarity with Plaintiff's record-keeping and invoicing procedures, credibly testified that the invoices were sent to Global Fresh, either by means of an automated e-mail, by e-mail that he personally sent, or by e-mail sent by another employee in Plaintiff's accounts receivable department. Tr. Oct. 30 at 94:6-16.
On the top left corner of each invoice are the words "Invoice Date:" followed by a date. Mr. Oscarson testified that in the regular course of Plaintiff's business, the invoices would be sent to Global Fresh either on the indicated invoice date or within twenty-four hours thereafter. Tr. Oct. 30 at 95:25-96:2. With respect to Invoices 8-11, each invoice date falls within the thirty-day timeframe necessary to preserve the PACA trust benefits. The Court finds that the products specified on these invoices, and the proceeds thereof, are subject to PACA trust protections.
Defendant argues that the invoices themselves do not contain any indication upon the face of the document that they were delivered. Defendant's argument misapprehends the burden of proof standard. Plaintiff is not required to show delivery of the invoices beyond a metaphysical doubt.
With respect to Invoices 12 and 13, Plaintiff failed to establish that the invoices were provided to Global Fresh within the timeframe necessary to preserve the protections of the PACA trust. Invoice 12 states that payment is due on September 9, 2014. The invoice date is October 27, 2014. Based upon Mr. Oscarson's testimony, Invoice 12 would have been sent to Global Fresh on October 27 or within 24 hours thereafter. The relevant statute provides that the unpaid seller loses the benefits of the PACA trust unless written notice of intent to preserve the trust benefits is provided "within thirty calendar days . . . after expiration of such other time by which payment must be made, as the parties have expressly agreed to in writing before entering into the transaction." 7 U.S.C. § 499e(c)(3). Because Plaintiff did not establish that Invoice 12 was supplied to Global Fresh within thirty calendar days of September 9, 2014, Plaintiff is not entitled to the benefits of the PACA trust with respect to that invoice. Similar to Invoice 12, Invoice 13 contains an invoice date (November 6, 2014) more than thirty days after the payment due date (September 14, 2014). Consequently, Plaintiff has not established that Invoice 13 was timely supplied to Global Fresh.
The Court's findings are summarized in the following table:
Plaintiff attempted to establish indebtedness in excess of the amounts set forth in the table above, but the evidence that Plaintiff submitted was inadequate. Plaintiff points to the District Court Judgment to support its contention that Defendant is indebted to it in the amount of $133,338.29. The damages as set forth on the District Court Judgment include the invoice amounts reflected upon Exhibits 12 and 13 as well as interest and attorneys' fees. However, the District Court Judgment was not admitted into evidence. The Court takes judicial notice of the District Court Judgment, but the mere taking of judicial notice is insufficient to establish the indebtedness. For the reasons explained by the Court in its denial of the Motion in Limine, Plaintiff is required to establish its indebtedness before this Court.
Plaintiff also submitted two Statements of Account. However, neither Statement of Account sets forth the PACA trust language. Therefore, Plaintiff cannot rely upon the Statements of Account to show that the PACA trust benefits were preserved with respect to the indebtedness reflected thereon.
Section 523(a)(4) excepts from discharge "any debt for fraud or defalcation while acting in a fiduciary capacity." Defalcation is the "misappropriation of trust funds or money held in any fiduciary capacity" or "the failure to properly account for such funds." In re Niles, 106 F.3d 1456, 1460 (9th Cir. 1997). Liability for defalcation requires a "culpable state of mind." Bullock v. BankChampaign, N.A., 569 U.S. 267, 273-74 (2013). A culpable state of mind exists if the fiduciary engages in conduct that he knows is improper, engages in reckless conduct, or "`consciously disregards' (or is willfully blind to) `a substantial and unjustifiable risk' that his conduct will turn out to violate a fiduciary duty." Id. at 274. To except debts from discharge, Plaintiff has the burden of proof under the preponderance of the evidence standard. Grogan v. Garner, 498 U.S. 279, 287 (1991).
There is no dispute that Defendant controls Global Fresh. As such, Defendant is personally liable for Global Fresh's breach of its obligations to preserve PACA trust assets for Plaintiff. Sunkist Growers, Inc. v. Fisher, 104 F.3d 280, 283 (9th Cir. 1997).
Plaintiff established that Defendant possessed the culpable state of mind necessary to give rise to liability for defalcation within the meaning of § 523(a)(4). Defendant is familiar with PACA; he caused PACA trust language to be placed upon invoices that Global Fresh issued in the course of its own produce business for the purpose of protecting Global Fresh's PACA trust rights. Tr. Sept. 26 at 25:5-7. Thus, Defendant knew that by causing Global Fresh not to pay Plaintiff, he was causing Global Fresh to breach its PACA trust obligations. At the same time as Defendant was facilitating Global Fresh's breach of its PACA trust obligations, he was drawing a monthly salary of approximately $15,000 from Global Fresh. Defendant, as the person in control of Global Fresh, could determine the amount of his salary. Defendant used his salary to purchase, among other things, luxury goods, including an Infiniti QX80 SUV upon which he was required to make monthly payments of $1,406.12. Tr. Sept. 26 at 37:11-14. Defendant's decision to continue drawing a large salary from Global Fresh, at the same time Global Fresh was failing to preserve the PACA trust rights of creditors such as Plaintiff, when Defendant could have reduced his salary and still have maintained a comfortable standard of living, qualifies as defalcation for purposes of § 523(a)(4).
Section 523(a)(2)(A) excepts from discharge indebtedness "to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." The Supreme Court has recently held that for § 523(a)(2)(A) purposes, "actual fraud" includes a debtor's transfer of assets where such transfer "impairs a creditor's ability to collect the debt." Husky Int'l Elecs., Inc. v. Ritz, 136 S.Ct. 1581, 1587, 194 L. Ed. 2d 655 (2016). Here, Defendant caused Global Fresh to transfer a substantial salary to himself; those transfers played a role in Global Fresh's inability to satisfy Plaintiff's indebtedness. This conduct qualifies as "actual fraud" for § 523(a)(2)(A) purposes.
Plaintiff asserts that Defendant is liable for $38,286.53 in accrued interest and attorneys' fees as set forth in the District Court Judgment. As noted, the District Court Judgment has not been admitted into evidence and therefore cannot support Plaintiff's claim to attorneys' fees. Tr. Sept. 26 at 5:6-11.
For the reasons set forth above, the Court finds that the PACA trust protections apply to indebtedness of Global Fresh to Plaintiff in the amount of $68,361.00. As the person in control of Global Fresh, Defendant is personally liable for that indebtedness. Also as set forth above, such indebtedness is excepted from Defendant's discharge, pursuant to § 523(a)(4) and (a)(2)(A).
The Court will enter judgment consistent with this Memorandum of Decision.
