Auction Credit Enters., LLC v. Ferreira (In re Ferreira)

608 B.R. 300

IN RE: Ariane FERREIRA, Debtor.

Auction Credit Enterprises, LLC, Plaintiff,

v.Ariane Ferreira, Defendant.

CASE NO. 18-64399-WLH

ADV. PROC. NO. 18-5264

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

Signed October 24, 2019

James W. Martin, Hays Potter & Martin, LLP, Peachtree Corners, GA, Plaintiff.

Eric E. Thorstenberg, Eric E. Thorstenberg, Attorney at Law, Atlanta, GA, Defendant.

ORDER AFTER TRIAL

Wendy L. Hagenau, U.S. Bankruptcy Court Judge

Plaintiff's assertion that its judgment is non-dischargeable under §§ 523(a)(4) and (a)(6) came before the Court for trial on October 8, 2019. Both parties were represented by counsel. The Court has jurisdiction of this matter pursuant to 28 U.S.C. §§ 1334 and 157, and this matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). After consideration of the evidence and the law, the Court enters judgment for the Debtor/Defendant.

FINDINGS OF FACT

Mr. Ferreira started Triple A Auto Brokers, LLC ("Triple A") in 2014. He was at all times the sole member of Triple A. In 2015, Triple A began buying cars at auction, having them repaired, and then reselling them. Plaintiff Auction Credit Enterprises, LLC ("ACE") is a "floor plan" lender. It provided funds to Triple A for the purchase of many of the cars acquired by Triple A. On January 2, 2015, a "Demand Promissory Note and Security Agreement" was signed by ACE as the lender and Mr. Ferreira (the "Debtor") and Triple A as the identified dealer ("Agreement"). The Agreement provided, inter alia , for the advance of funds to purchase inventory. The Agreement required Triple A to pay ACE within a short time of the sale of a vehicle. ACE argues that payment had to be made within 24 hours pursuant to Section 7.7 of the Agreement. The Agreement also allowed for payment within 48 hours in some circumstances (Section 2.3(e)) and the Debtor testified he had been allowed up to seven days to make payment after the sale of a car. As the facts unfold below, the Court need not reconcile this inconsistency. The Debtor understood that if he did not sell a car within 30 days, he had to make additional payments to ACE. Another payment was due if the car was not sold within 60 days, and yet another payment was due if a car was not sold within 90 days. Mr. Ferreira individually signed an unlimited and continuing guarantee of the Agreement.

Under the Agreement, ACE was granted a security interest in the vehicles financed by it and also on virtually all property of the "Dealer". The security interest continued in all proceeds and products of the Collateral. The Agreement stated the Dealer remained the owner of the vehicles. No evidence was presented of the perfection of the Plaintiff's security interest, but the Debtor did not dispute that ACE held a security interest in the vehicles. The Debtor also testified that he asked ACE to relinquish certain titles, thereby indicating to the Court that ACE either physically held the title or had placed a lien on the title. The Agreement did not require the Dealer to segregate proceeds from the sale of floor planned vehicles, and Triple A at all times had only one operating account. The business of Triple A had been profitable until August through October 2016, when Triple A's sales decreased. Mr. Ferreira expected the company to return to profitability. Evidence was not presented as to the funds received by Triple A or payments made to ACE, but Triple A and Mr. Ferreira used some funds from the sale of the cars to pay business expenses such as a business license, rent, utilities and the cost of car repairs. Mr. Ferreira also paid himself $500 to $1,000/week – but the total amount paid or the period over which payments were made was not established.

On a periodic basis, ACE conducted a physical inventory of the cars on Triple A's lot. ACE conducted such an audit on October 25, 2016, in part because a check from Triple A to ACE had been returned for insufficient funds on October 21, 2016. Mr. Ferreira did not block or impair ACE's audit. Although Triple A and the Debtor provided some explanations for cars that were not present on the lot at the time of the audit, ACE concluded that Triple A had sold between 15 and 18 cars¹ floor planned by ACE without paying for them. The Debtor stated some cars had been sold for less than the debt. After the October audit, the Debtor and/or Triple A paid ACE almost $20,000 in cashier's checks and believed they had an arrangement with ACE to pay the balance due over two years. Nevertheless, in late 2016, ACE repossessed all the vehicles on Triple A's lot. The number of cars repossessed or the date of repossession was not disclosed. Some of those cars were not property of Triple A and were ultimately returned to their owners. On November 9, 2017, ACE obtained a judgment against Mr. Ferreira in the amount of $42,254.00 plus $6,978.00 in interest and $4,948.20 in attorney's fees. It is this judgment which ACE seeks the Court to determine to be nondischargeable.

CONCLUSIONS OF LAW

A presumption exists that all debts owed by the Debtor are dischargeable unless the party contending otherwise proves nondischargeability. 11 U.S.C. § 727(b). The purpose of this "fresh start" is to protect the "honest but unfortunate" debtors. U.S. v. Fretz (In re Fretz), 244 F.3d 1323, 1326 (11th Cir. 2001). The burden is on the creditor to prove an exception to discharge by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 287-88, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ; St. Laurent v. Ambrose (In re St. Laurent), 991 F.2d 672, 677 (11th Cir. 1993) ; Griffith v. U.S. (In re Griffith), 206 F.3d 1389, 1396 (11th Cir. 2000). Courts should narrowly construe exceptions to discharge against the creditor and in favor of the debtor. Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 304 (11th Cir. 1994) ; St. Laurent, 991 F.2d at 680. In the complaint, ACE alleged that its debt was nondischargeable under 11 U.S.C. §§ 523(a)(2), (a)(4) and (a)(6). At trial, however, ACE announced it was not pursuing nondischargeability under Section 523(a)(2), but only under Sections 523(a)(4) and (a)(6).

Section 523(a)(4)

ACE argues first that the debt is nondischargeable under Section 523(a)(4) because Mr. Ferreira committed fraud or defalcation while acting in a fiduciary capacity. ACE relies on Section 7.7 of the Agreement which provides as follows:

Dealer shall hold as a fiduciary all amounts received from the sale of Lender-Financed Inventory in the form as received in trust for the sole benefit of Lender and shall remit funds satisfying all amounts due and owing Lender for the sold item of Lender-Financed Inventory within twenty-four (24) hours of receipt of said funds.

A fiduciary relationship under Section 523(a)(4) is to be construed narrowly. Quaif v. Johnson, 4 F.3d 950, 953 (11th Cir. 1993) (citation omitted). " Section 523(a)(4) requires that the debtor, acting as a fiduciary in accordance with an express or technical trust that existed prior to the wrongful act, committed an act of fraud or defalcation." Estate of Newton v. Lemmons (In re Lemmons), 2005 WL 6487216, at *4 (Bankr. N.D. Ga. Dec. 20, 2005) (citation omitted). A technical trust has been defined by the Eleventh Circuit as "an express trust created by statute or contract that imposes trust-like duties on the defendant and that pre-exists the alleged defalcation," as opposed to constructive or resulting trusts. Parker v. Ferland (In re Ferland), 2010 WL 2600588, at *3 (Bankr. M.D. Ga. June 21, 2010) (citation omitted); see also Guerra v. Fernandez-Rocha (In re Fernandez-Rocha), 451 F.3d 813, 816 (11th Cir. 2006). "Mere friendship does not meet this standard, nor does an ordinary business relationship." In re Ferland, 2010 WL 2600588, at *3 (citation omitted). Thus, a plaintiff must show that (i) the debtor held a fiduciary position vis a vis the plaintiff under a technical, express, or statutory trust; (ii) that the claim arose while the debtor was acting as a fiduciary; and (iii) that the claim is for fraud or defalcation. Gen. Ret. Sys. of the City of Detroit et al. v. Dixon (In re Dixon), 525 B.R. 827, 845 (Bankr. N.D. Ga. 2015).

A number of courts have considered whether contracts in a floor planning relationship create such a technical trust. As the bankruptcy court explained in VW Credit, Inc. v. Salim (In re Salim), 2015 WL 1240000, at *14 (Bankr. E.D.N.Y. Mar. 16, 2015), "the use of the term ‘trust,’ without more, may not be enough." Indeed, "courts are careful to distinguish between a debtor-creditor relationship with trust provisions imposed by the creditor to enhance collection of the debt, and a true fiduciary or trust relationship." In re Bowles, 318 B.R. 129, 142 (Bankr. E.D. Wis. 2004) (explaining that only "a debtor-creditor relationship existed" where trust terminology was used, "similar to that of a retailer who agrees to hold the collateral proceeds of his floor plan lender in trust"); see also Gravett v. Thompson (In re Thompson), 581 B.R. 300, 316 (Bankr. W.D. Ark. 2017) (explaining courts have been historically reluctant to construe a contract between a secured lender and a debtor as a trust for purposes of Section 523(a)(4), regardless of the language used by the parties and finding, absent direction from the plaintiff regarding the basis for its allegation the debtor committed fraud or defalcation while acting in a fiduciary capacity, the debtor's duties to the bank were contractual rather than fiduciary in nature); Floorplan Xpress, LLC-OK v. Bagsby (In re Bagsby), 2017 WL 3084405, *4 (Bankr. W.D. Mo. July 18, 2017) ("Most secured lending agreements impose duties on the borrower in dealing with the creditor's collateral, but those duties seldom create a § 523(a)(4) fiduciary capacity."); NextGear Capital Inc. v. Mejorado (In re Mejorado), 605 B.R. 116, 124 (Bankr. N.D. Tex. 2019) ("Mere recitals in a document that an obligation is "in trust" alone will not establish a fiduciary...