461 B.R. 343
E.D. Va.2011Background
- Racetrac sued Khan in adversary proceeding in bankruptcy court seeking non-dischargeability of missing gasoline proceeds.
- Khan operated a Racetrac Raceway store under a Gasoline Services Agreement (GSA) that stated Racetrac owned gasoline proceeds and Khan acted as trustee.
- Under the GSA, proceeds from gasoline sales were Racetrac's property; Khan was to collect and hold them for Racetrac's benefit and could not use them for his own purposes.
- Gasoline and convenience-store proceeds were deposited into a common account, with Racetrac sweeping proceeds for gasoline minus a per-gallon service fee kept by Khan.
- In May–June 2008, a large sum of gasoline proceeds went missing after store closure; attempts to locate Adeel Khan (Khan’s brother) failed.
- Bankruptcy court held the debt was not defalcation under § 523(a)(4) because no express trust was proven; the decision was appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an express trust was created under state law | Khan's conduct created a trust in Racetrac's funds | No express trust was created; funds were commingled and used under agreement | Yes; express trust created, giving rise to fiduciary capacity |
Key Cases Cited
- In re Strack, 524 F.3d 493 (4th Cir.2008) (express trust creation depends on intent to keep funds for beneficiary)
- Airlines Reporting Corp. v. Ellison (In re Ellison), 296 F.3d 266 (4th Cir.2002) (fiduciary relationship where proceeds held for carrier)
- Old Repub. Nat'l Title Ins. Co. v. Tyler (In re Dameron), 155 F.3d 718 (4th Cir.1998) (express trust when debtor holds funds for specified third parties)
- Davis v. Aetna Acceptance Co., 293 U.S. 328 (1934) (use of terms 'trust' not alone enough to create trust)
- Chattowah Open Land Trust v. Jones, 281 Ga. 97 (2006) (trust concepts under Georgia law; duties on trustee)
- Quaif v. Johnson, 4 F.3d 950 (11th Cir.1993) (funds segregation not strictly necessary for trust)