Ford Motor Credit Co. v. Gallaudet (In Re Gallaudet)Ford Motor Credit Co. v. Gallaudet (In Re Gallaudet)
MEMORANDUM OPINION
This matter is before the Court on the Amended Complaint of Ford Motor Credit Company, see
“(2) for obtaining money, property, services, or an extension, renewal, or refinance of credit, by — ...
“B) use of a statement in writing— “(i) that is materially false;
“(ii) respecting the- debtor’s or an insider’s financial condition;
"(in) on which the creditor to whom the debtor is liable for obtaining such money, property, services, or credit reasonably relied; and “(iv) that the debtor caused to be made or published with intent to deceive;
“(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;
“(6) for willful and malicious injury by the debtor to another entity or to the property of another entity;”
The parties agreed that the issues be bisected with a hearing on dischargeability first and a continued one on damages, if necessary. This Memorandum pertains to the first issue.
The Defendants, Thomas H. Gallaudet, III, and Gail H. Gallaudet, individually and as an officer, director or shareholder of Gallaudet Motors, Inc., a Vermont corporation, filed a Petition for Relief under Chapter 7 of the Bankruptcy Code on September 23,1983, and, in their Schedules, they listed Ford Motor Credit Company, the Plaintiff, as an unsecured creditor in the sum of $150,000.00 for a business loan to Gallau-det Motors from 6/79 — 6/83 and this obligation was characterized as “Contingent.”
In June, 1979, Thomas H. Gallaudet organized Gallaudet Motors, Inc., a Vermont corporation, for the purpose of conducting a dealership in the sale of new and used automobiles, as well as servicing them. Gallaudet made an original investment of $100,000.00 from money saved by him and borrowed from relatives. From 1980 through 1982, he invested an additional sum of $95,000.00 in the business, which he received from the sale of stock, two Porsche ears, and money borrowed from relatives. From the time that Gallaudet Motors, Inc., was organized until the business was terminated, Gallaudet had made a total investment of $195,000.00 in the business.
The shares of stock in the business corporation were issued in the proportion of 87% to Gallaudet and his wife and 13% to his brother and brother-in-law. Gallaudet at all times was the president and executive officer of the business corporation. The dealership was under the direct and complete control of Gallaudet, who acted as sales manager, service manager, wreck manager and he was involved in everything relating to the business to the point that he even washed cars, controlled sales, controlled the office, and did a bit of everything. Any dealings with the Ford Motor Credit Company were strictly his responsibility. His wife, Gail, first went to work for Gallaudet Motors, Inc., in June of 1981 on a part-time basis. She assisted in the office and received a salary of $100.00 a week, which was continued until January of 1983 when she became office manager and was paid $200.00 a week. She held the titles of secretary and treasurer in the corporation, but she performed merely ministerial duties of a routine nature including the cutting of checks, which she carried out only upon instruction from her husband. She signed some papers in behalf of the corporation, but only when she was requested to do so by her husband. She never carried out any functions in connection with the business without instructions from him.
Tom Gallaudet’s salary was fixed at $25,-000.00 a year, and it never increased during the entire period of the operation of the business. The dealership suffered a loss of $16,000.00 in 1979, of $88,000.00 in 1980, with a profit of $38,000.00 in 1981 and an apparent profit of $4,000.00 in 1982, but, upon audit, there was a loss of $40,000.00 at the end of 1982. When the business was finally terminated in May, 1983, the Gallau-dets had nothing left from their investment of $195,000.00 and at that time did not even own a car.
Shortly after the dealership was formed, Gallaudet Motors, Inc., as a corporation by and through its president, Thomas H. Gal-laudet, did on July 3, 1979, execute an Automotive Wholesale Plan Application for Wholesale Financing and Security Agreement with Ford Motor Credit Company, and this provided, in part, under paragraph “5” as follows:
“Dealer’s possession of the merchandise financed hereunder shall be for the sole purpose of storing and exhibiting the same for sale or lease in the ordinary course of Dealer’s business.... Any and all proceeds of any sale, lease or other disposition of such merchandise by Dealer shall be received and held by dealer in trust for Ford Credit and shall be fully, faithfully and promptly accounted for and remitted by Dealer to Ford Credit to the extent of Dealer’s obligation to Ford Credit with respect to such merchandise.”
Further paragraph “7” of this agreement provided:
“All funds or other property belonging to Ford Credit and received by Dealer shall be received by Dealer in trust for Ford Credit and shall be remitted to Ford Credit forthwith. Ford Credit, at all times, shall have a right to offset and apply any and all credits, monies or properties of Dealer in Ford Credit’s possession or control against any obligation of Dealer to Ford Credit.”
Also, on July 3, 1979, Thomas H. Gallau-det and Gail H. Gallaudet, the Debtors, did execute and deliver to Ford Motor Credit Company a written continuing guaranty under which they as Guarantors jointly and severally and unconditionally guaranteed to Ford Motor Credit Company, its successors and assigns, that the dealer, Gallaudet Motors, Inc., would fully, promptly and faithfully perform, pay and discharge all of the Dealer’s present and future obligations without the necessity of the Ford Motor Credit Company first having to proceed against the Dealer or to liquidate paper or any security therefor and to pay on demand all sums due and to become due to Ford Motor Credit Company from the Dealer and all losses, costs, attorney’s fees or expenses which it might suffer by reason of the Dealer’s default.—
The Wholesale Financing and Security Agreement was mailed by Ford to Gallau-det and he signed it without reading it for the reason that he understood that he was obligated to do so if he wished to receive the dealership. Further, Ford had been delivering cars to him even before he received the agreement. As a result, he was not aware that he was required to pay for the vehicles to Ford Credit promptly after they were sold, and even if he had not received payment himself. It was not until sometime later when James Foley, Field Representative for Ford in charge of auditing, notified Gallaudet of this obligation to make payment promptly.
Prior to June, 1979, when Gallaudet received the dealership from Ford, he had had no previous experience in automobile wholesale financing and Ford made no effort to train or assist him in the procedure to be followed in carrying out the obligations required under the agreement. Ford Credit through its field representative, James Foley, conducted a monthly audit of Gallaudet Motors, Inc., for the purpose of determining whether Gallaudet was complying with the requirements of making payments for vehicles sold pursuant to the financing agreement. On a number of occasions Foley discovered that payment had not been made as required, and he would, in behalf of Ford Credit, accept payment at the time of the audit.
Although the financing agreement provided that the proceeds of any sale received by Gallaudet as dealer were to be held in trust for Ford Credit, he was not required to maintain a separate bank account for deposit of these proceeds, and Ford Credit was fully aware that Gallaudet was depositing the money received from the sale of the cars in his regular checking account and most all of the payments made for the vehicles were by checks on this general account.
Ford Credit was fully aware of the financial distress of Gallaudet Motors, Inc., during practically all of the time that Gallau-det operated the dealership. This was reflected in its credit reviews and reports from which they attempted to analyze the credit rating of the dealership. As early as July, 1980, its report indicates that there was a loss trend and it rated the risk of the dealer as “Poor — This dealer is a problem waiting to happen. — ”... “Dealer's financial position is poor. I have told dealer he must inject more cash immediately. He claimed that May financial statement was incorrect through bookkeeping and accounting errors.” Again in February, 1981, the dealership was rated as poor and the report showed that the account was critical and required very close attention. In July, 1981, the report showed that the dealer continued to pre-bill deals causing violations and that he had lost his bookkeeper and had to hire a new bookkeeper with no previous dealership experience. In September, 1982, the report recited that the dealer was having trouble paying all of his
On the basis of credit packages prepared by Ford Credit, as of February, 1982, Gal-laudet Motors, Inc., was awarded a line of credit in the sum of $375,000.00 for new cars and $40,000.00 for used cars for a total of $415,000.00. Yet, as of that date, Ford Credit extended to Gallaudet a line of credit of $688,000.00, and this was done in spite of all of the previous reports that the dealership was a poor risk, and on one occasion the account was termed as “critical.” The credit packages prepared by Ford Credit were based in part upon financial statements furnished by Gallaudet Motors, Inc., but, in spite of this, the package of September, 1982, was put together with at least four financial statements missing.
As security for any sums owing from Gallaudet Motors, Inc., to Ford Credit, the latter held a second mortgage on 5.76 acres of land on Route 7 in Middlebury, Vermont, owned by Thomas Gallaudet and his wife, Gail. This property was also encumbered by a first mortgage to the Vermont Federal Savings Bank with a third mortgage to one Brush from whom Gallaudet purchased the garage premises. Gallaudet had an agreement with Brush whereby the latter would discharge the mortgage on the land at anytime requested by Gallaudet in exchange for a mortgage on the home premises owned by Gallaudet and his wife. Sometime prior to the fall of 1982, Ford Credit suggested to Gallaudet that he should increase the capital available to the dealership. In an effort to meet the wishes of Ford Credit, Gallaudet listed the property on Route 7 for sale and the several agents with whom he listed the property suggested that he obtain a release of the mortgage held by Ford Credit. Ford Credit agreed to release the mortgage provided that Gallaudet invested the proceeds received from his equity in the property, which amounted to about $40,000.00, in the business. The Ford Credit mortgage was released and in late October, 1982, Gallau-det borrowed the sum of $40,000.00 from the Chittenden Bank and Small Business Administration, which he invested in the business. As security for this loan, SBA required Gallaudet to execute and deliver to it a mortgage on the Route 7 property. Gallaudet continued to list the Route 7 property for sale at a price of $97,500.00 and, in the event of such a sale, Gallaudet would be able to net the sum of $58,000.00 after payment of the Vermont Federal Bank mortgage, and it was his intention then to invest it in Gallaudet Motors, INC. Gallaudet had an understanding with the Chittenden Bank and SBA that, upon sale of the Route 7 property, the mortgage to SBA would not have to be repaid as long as the proceeds were invested in the business.
This property was appraised by Armand Bicknell, a realtor, and from September, 1982 through May, 1983 it had a continuing fair market value of $100,000.00. When Gallaudet obtained the release of the mortgage from Ford Credit, he fully intended to comply with its request to use the proceeds from the sale of his equity in the property as an additional investment in the dealership, and it was with this in mind that he continued to list the property for sale at $97,500.00, which was less than the appraised value of $100,000.00. However, he received only one offer which amounted to $75,000.00.
Gallaudet Motors, Inc., was obligated to furnish financial statements to Ford Credit on a monthly basis. Gallaudet was unfamiliar with the preparation of such statements, and in order to facilitate the process, he installed a computer system, but the bookkeeper hired to operate it made a number of mistakes on a continuing basis with the result that the financial state
Gallaudet had overdraft privileges as to his checking account with Chittenden Trust Company since it held a mortgage on his home premises in which there was considerable equity and the bank felt that it could rely upon this equity as a hedge against any overdrafts in the Gallaudet checking account.
This overdraft privilege with Chittenden Bank was afforded to Gallaudet Motors, Inc., on a month-to-month basis, but in February, 1983, the privilege was temporarily suspended due to the fact that an officer of the bank monitoring the account was on vacation, and as a result, several checks issued to Ford Credit were returned for insufficient funds. Upon the officer’s return, the overdraft privileges were reinstated.
From February of 1983 until the close-down of the dealership in May, 1983, Gal-laudet Motors, Inc., sold eleven vehicles which were floorplanned by Ford Credit and Gallaudet failed to make payment for these cars. Gallaudet anticipated that payment would be made during the month of April when sales accelerated which would result in increased profits. Gallaudet fully intended to make payment for these vehicles. He never meant to cause Ford Credit any harm. Gallaudet’s anticipated sales did not materialize in April. The financial condition of Gallaudet Motors, Inc., deteriorated even more with the result that Gal-laudet was under extreme pressure, working about 60 hours a week in an attempt to salvage his business. About the beginning of May, although his health was impaired, he .'made efforts to raise additional capital without success, and on May 4, 1983, he and his wife had a meeting with officials from Chittenden Bank and S.B.A., and at that time, the Bank decided to withdraw the overdraft privileges and refused to hon- or any checks drawn on Gallaudet Motors, Inc., checking account. A decision was made to liquidate all of the assets of the dealership by a sale conducted on the garage premises in which Gallaudet and his wife cooperated fully.
An auction was held on June 9, 1983 at which the remaining assets were sold and the proceeds were retained by Chittenden Bank and the S.B.A. The proceeds from the sale of the 11 vehicles sold “out of trust” were used in the operation of the business of Gallaudet Motors, Inc., and neither Gallaudet nor his wife received any personal benefit from them.
DISCUSSION
This case presents a classical example of a dedicated and hard working individual attempting to fulfill the American dream by the ownership of a successful business. In spite of his unyielding effort and the constant devotion of his wife the venture turned into a dismal failure. It is apparent from the testimony adduced at the hearings that Gallaudet lacked the business experience and was not afforded the necessary guidance by Ford Credit to cope with the spirited competition which prevails in the sale of automobiles where wheeling and dealing is an accepted art. This was aptly put by the representative of Ford Credit, Lindsey Boyd-Robertson, who after the business failed told Gallaudet’s wife, “Tom was too much of a gentleman and that is why the dealership didn’t make it.” The representatives of Ford Credit who were most sophisticated in the area of wholesale car financing were made aware of Gallaudet’s shortcomings very early in the life of the dealership. Yet they made no attempt to offer suggestions to Gallau-
The Court is greatly impressed with the testimony of both Gallaudet and his wife. Their candor attests their veracity. This is not to impugn the credibility of the witnesses improved by Ford Credit but the overall evidence tends to establish that their recollection of events was faulty. Further, it does not establish that the debt incurred by Gallaudet and his wife under the continuing guaranty agreement is non-dischargeable. Gail Gallaudet did not participate in the management of the corporate business. She performed ministerial functions only and these pursuant to direct instructions from her husband who was in complete charge of every facet of the operation. As a result Gail Gallaudet, the co-debtor in this proceeding, is entitled to a discharge without consideration by the Court of any of the exceptions to discharge under § 523 upon which Ford Credit relies.
If Ford Credit is to prevail against Thomas Gallaudet it must establish by clear and convincing evidence every element of the exceptions, i.e., (2), (4) and (6) of § 523(a).
In Re Cerrato
(Bkrtcy.S.D.N.Y.1983)
It is clear from the evidence that the financial statements furnished to Ford Credit were inaccurate due to computer malfunction, that Ford Credit was fully aware of the situation, that it made no attempt to obtain accurate statements and that there was no reliance upon them by Ford Credit. It has failed to meet its burden under this exception.
Ford Credit’s position under § 523(a)(4) is also untenable. The evidence does not establish that Gallaudet was guilty of fraud or defalcation while acting in a fiduciary capacity. In the recent case of
In Re Banister
(2d Cir.CCA 1984)
“It is not enough that by the very act of wrongdoing out of which the contested debt arose, the bankrupt has become chargeable as a trustee ex maleficio. He must have been a trustee before the wrong and without reference thereto.”
The Court further observed:
“As we have ruled in rejecting non-dis-chargeability under section 17(a)(2) the financing agreements did not create an express obligation requiring Northern Yachts to hold in trust for Wachovia the specific proceeds of inventory sold.”
In
Davis,
supra, Justice Cardozo con-gently remarks at page 334,
“It is not enough that by the very act of wrongdoing out of which the contested debt arose, the bankrupt has become chargeable as a trustee ex maleficio. He must have been a trustee before the wrong and without reference thereto ... Was petitioner a trustee in that strict and narrow sense?
“We think plainly he was not, though multiplicity of documents may observe his relation if the probe is superficial ... The resulting obligation is not turned into one arising from a trust because the parties to one of the documents has chosen to speak of it as a trust.”
See also Colier on Bankruptcy 15th Edition § 523.14, pages 523-14, 115;
In Re Paley
(Bkrtcy.E.D.N.Y.1981)
The fact that a commercial agreement contains the word “trust” does not make the agreement a trust agreement nor does it create a fiduciary relationship.
Lord’s, Inc. v. Maley,
The pertinent provisions in the Wholesale Financing and Security Agreement executed by Ford Credit and Gallaudet Motors, Inc.', do not meet the litmus test for an express or technical trust. Even though it provided that the proceeds were to be held “in trust” for Ford Credit the document was nothing more than a commercial agreement which contained the word “trust.” This conclusion is buttressed by the fact that the agreement did not provide nor did Ford Credit require Gallaudet Motors, Inc., to segregate the proceeds received from the sale of the floor-planned vehicles and to deposit them in a special account for the benefit of Ford Credit. On the contrary, Gallaudet Motors, Inc., deposited these funds in its regular cheeking account with the full knowledge of Ford Credit and without any disapproval by it. During the entire existence of the dealership payments were made to and accepted by Ford Credit by checks drawn on the regular checking account of Gallaudet Motors, Inc. In sum, an express or technical trust did not exist and a fiduciary relationship was not created. On the contrary a creditor-debtor relationship resulted from the commercial agreement with the word “trust” executed by the parties.
In addition, if Ford Credit is to prevail under § 523(a)(4) it must establish that the funds received from the sale of the floor-planned vehicles were in fact used by Gal-laudet for his personal benefit.
In Re Banister
(2d Cir.C.C.A.1984), supra,
Finally, Ford Credit maintains that Gallaudet converted, the proceeds re
There is no unanimity of opinion among the courts as to what constitutes a willful and malicious conversion. Some cases have construed “willful and malicious” rather loosely and have adopted the common law definition of implied or constructive malice, rather than the rigid standard of actual, subjective, conscious intent to harm.
In Re McCloud
(Bkrtcy.M.D.Tenn.1980)
The Court observes that in this state a “conversion” consists in appropriating another’s property to one’s own use, or its destruction, or in exercising dominion over it in exclusion or defiance of that other’s rights, or in withholding the possession from him under a claim inconsistent with his rights.
Manley Bros. v. Boston & M.R.R.,
Further, it has been held that the sale of mortgaged personal property by the mortgagee constitutes a conversion which may be barred by a discharge in bankruptcy.
Mason v. Sault,
However, the Court is unable to find a Vermont case which specifically relates to a willful and malicious conversion arising as a result of a breach of a floor-planning agreement and construing § 523(a)(6) of the Bankruptcy Code. It is also noted that the
Banister
case, supra, was decided by the Second Circuit under the Bankruptcy Act which permitted a more liberal and loose interpretation of “willful and malicious.”
Banister,
however, did cite
The legislative history of § 523 clearly indicates that the loose and liberal interpre
“Paragraph (6) excepts debts for willful and malicious injury by the debtor to another person or to the property of another person. Under this paragraph, “willful” means deliberate or intentional. To the extent that Tinker v. Colwell, 139 [193] U.S. 473 [24 S.Ct. 505 ,48 L.Ed. 754 ] (1902), held that a looser standard is intended, and to the extent that other cases have relied on Tinker to apply a ‘reckless disregard’ standard, they are overruled.”
The Senate made the same observation. See S.R.Rep. 95-989 at page 79.
Consistent with the foregoing legislative history of § 523 the Court is convinced that it was incumbent upon Ford Credit to establish that there was an actual conscious intent on the part of Gallaudet to harm it by failing to make payment for the 11 cars that were sold out of trust. See
In Re Finnie,
(Bkrtcy.D.Mass.1981)
Having failed to establish a willful and malicious conversion, Gallaudet should not be denied a discharge pursuant to the exception under § 523(a)(6) of the Code.
In sum, Ford Credit, under the facts in this case, has failed to prove that Gallau-det should be denied a discharge under either subparagraph (2), (4) or (6) of § 523(a). This conclusion is further supported by the established rule that an exception to the discharge should be strictly construed against the objecting creditor and liberally in favor of the debtor. Any other construction would be inconsistent with the liberal spirit that has always pervaded the entire bankruptcy system. 3 Collier 15th Ed. § 523.05A, page 523-15. See also
Gleason v. Thaw,
In accordance with the basic purpose of the Bankruptcy Act, the debtors should be granted a discharge so that they are given “new opportunity in life and a clear field for future effort, unhampered by the pressure of pre-existing debt — .”
Lines v. Frederick
The Clerk is instructed to enter judgment dismissing the Complaint and, in view of this, the issue of damages has become moot, and there is no necessity for further hearing.