Opinion ID: 786069
Heading Depth: 3
Heading Rank: 3

Heading: KCB's Liability for Receipt of Funds in Breach of Trust

Text: 25 As we have noted, see Discussion, Part I, ante, a third-party transferee's liability for receiving PACA funds in breach of [a PACA] trust is predicated on a transfer of those funds to the third party that itself constitutes a breach of trust on the part of the PACA trustee. See Restatement (Second) of Trusts § 283 (1959) (Where Transfer Is Not In Breach of Trust: If the trustee transfers trust property to a third person ... and the trustee in making the transfer ... does not commit a breach of trust, the third person holds the interest so transferred ... free of the trust, and is under no liability to the beneficiary. (emphasis added)). 26 To hold, as the District Court did, that KCB is liable for receipt of PACA funds in breach of trust to any extent that the funds it received from DLPS were ultimately disbursed to non-PACA creditors illogically collapses the timeline relevant to the PACA trust, and thereby conflates several occasions of potential breach of the PACA trust. That is, the analysis conducted by the District Court does not distinguish between the questions whether DLPS initially breached the PACA trust by depositing funds at KCB and whether DLPS later breached the PACA trust by withdrawing funds by transferring them to non-PACA creditors. KCB's liability for receiving funds from DLPS in breach of trust, however, depends not on DLPS breaching the trust by misallocating those funds at any time, but rather, on DLPS breaching the trust in depositing them with KCB. 27 Regardless of whether DLPS later breached its duty as trustee when it transferred PACA funds from the bank to non-PACA creditors, there is no evidence that its deposit of funds at KCB constituted a breach of trust. Indeed, no one disputes that, with the exception of the $18,390.09 retained by KCB in payment of interest and fees, which we discuss post, Discussion, Part IV, the funds DLPS deposited at KCB remained unencumbered and freely available for withdrawal by DLPS or its creditors. 12 Because DLPS's deposit of funds at KCB did not render the funds less freely available to its creditors, the deposit did not constitute a breach of DLPS's PACA obligations. See 7 C.F.R. § 46.46(d)(1); see also Discussion, Part I, ante. Accordingly, because DLPS committed no breach of trust by depositing PACA funds into a bank account in which they remained freely available for disbursement to creditors and withdrawal by DLPS, KCB cannot be liable for receiving such deposits from DLPS in breach of trust. See Restatement (Second) of Trust § 283 (1959). 28