815 F.3d 400
8th Cir.2016Background
- Rent-A-Center (RAC) contracted with WEB2B to process customer checks via ACH and Check 21; the contract acknowledged WEB2B maintained an account “on behalf of” clients to accept credits/debits and to remit to RAC’s Intrust account.
- In practice WEB2B pooled customer funds at North American Bank (account 5165, then 4548, and 5173) and commingled receipts from multiple clients before remitting to RAC; between Nov. 2010–Feb. 2011 RAC’s processed checks totaled about $11.88M but RAC received about $9.45M, leaving a ~ $2.4M shortage.
- WEB2B filed chapter 7 bankruptcy in April 2011; North American Bank turned over funds (including $833,120.46) to the Chapter 7 Trustee; RAC sought declaratory relief and asserted express, resulting, or constructive trusts to recover $801,378.76 in the Trustee’s possession.
- Bankruptcy Court granted summary judgment to the Trustee, holding the funds were estate property, no express or resulting trust existed, and a post-petition constructive trust was not warranted; the District Court affirmed on remand, and the Eighth Circuit affirmed.
- Key factual points: RAC authorized WEB2B to initiate electronic entries and endorsed or authorized checks/images to WEB2B; RAC’s agent testified RAC did not know the processing details and did not require segregation of funds.
Issues
| Issue | Plaintiff's Argument (RAC) | Defendant's Argument (Trustee/WEB2B) | Held |
|---|---|---|---|
| Whether an express trust existed over RAC funds | Agreement and practice created a trust "on behalf of" RAC; funds were to be held for RAC | Agreement expressly contemplated WEB2B accounts and commingling; relationship is debtor-creditor | No express trust; agreement permitted commingling and created debtor-creditor relationship |
| Whether a resulting trust arose | RAC intended funds be held separately for its benefit; intent can be implied | No evidence RAC intended segregation; RAC consented to processing arrangement | No resulting trust; facts do not show intent to create trust |
| Whether a post-petition constructive trust should be imposed on estate funds | WEB2B’s diversion/unjust enrichment warrants constructive trust over traceable funds | Constructive trust is extraordinary in bankruptcy and would upset distribution; RAC lacks clear conversion evidence and cannot trace funds sufficiently | No constructive trust; RAC failed to show clear and convincing evidence of conversion/traceability |
| Whether RAC had a conversion claim in support of equitable relief | Endorsements/auths did not transfer enforceable property; WEB2B converted RAC’s funds | WEB2B became holder of the negotiable instruments via endorsement/authorization; RAC lost enforceable property rights | No conversion; WEB2B was holder and RAC lacked enforceable rights necessary for conversion claim |
Key Cases Cited
- United States v. Whiting Pools, 462 U.S. 198 (trust property of others excluded from bankruptcy estate)
- In re Falcon Prods., Inc., 497 F.3d 838 (standard of appellate review for bankruptcy appeals)
- In re LGI Energy Solutions, Inc., 460 B.R. 720 (commingling and debtor-creditor relationship under Minnesota law)
- In re Bren, 284 B.R. 681 (written agreement creating debtor-creditor relationship, not express trust)
- In re MJK Clearing, Inc., 371 F.3d 397 (constructive trust and conversion claims in bankruptcy context)