In re Bruce E. STRACK, Debtor. Kubota Tractor Corporation, a California corporation, Plaintiff-Appellant, v. Bruce E. Strack, Defendant-Appellee, and U.S. Trustee, Trustee.
No. 07-1200.
United States Court of Appeals, Fourth Circuit.
Decided: March 11, 2008.
524 F.3d 493
Argued: January 30, 2008.
Before NIEMEYER, MOTZ, and DUNCAN, Circuit Judges.
Reversed by published opinion. Judge DUNCAN wrote the opinion, in which Judge NIEMEYER and Judge MOTZ joined.
DUNCAN, Circuit Judge:
In October 2005, Appellee Bruce Strack (“Strack“), along with his wife, filed for relief under Chapter 7 of the Bankruptcy Code. Strack listed Appellant Kubota Tractor Corporation (“Kubota“) as a creditor holding an unsecured judgment claim against him for approximately $124,000. Kubota later brought an adversary proceeding against the Stracks in the United States Bankruptcy Court for the Eastern District of Virginia, challenging the pending discharge of the debt under two statutory exceptions to the presumption of dischargeability: “defalcation while acting in a fiduciary capacity,” under
I.
The relevant facts here are not in dispute. Strack served as President and majority owner of Enterprise Equipment Inc. (“Enterprise“).1 Enterprise sold farming equipment, such as tractors, and parts for such equipment at its retail facility located in York County, Virginia. Kubota was one of the numerous agricultural machinery manufacturing companies for which Enterprise acted as an authorized dealer. In his capacity as Enterprise‘s President, Strack agreed to personally guarantee Enterprise‘s indebtedness to Kubota. In September 2003, Strack also signed Kubota‘s Dealer Sales and Service Agreement (the “Agreement“), which forms the basis of this appeal.
The Agreement‘s purpose was to renew Enterprise‘s “right to purchase and resell [Kubota] products.” J.A. 171. Pursuant to the Agreement, Kubota sold “whole goods,” or equipment, to Enterprise through a “floor-planning” arrangement.2 Under such an arrangement, a dealer can purchase goods from a manufacturer without paying for the goods up front. Here, Enterprise would order a piece of equipment from Kubota for either immediate resale or to hold in its product inventory. Although no money changed hands, Enterprise‘s purchase of the equipment would, in substance, result in the automatic issuance of a “loan” to Enterprise from Kubota for the purchase price amount. If an interest-free promotion was in place, as appears to have frequently been the case, Kubota did not require payment of either principal or interest on this “loan” for the first several months immediately following the date of Enterprise‘s purchase. If no such program was in place, Enterprise was required to make interest payments during this period. Under either scenario, at the end of the period the entire purchase price became due to Kubota.
“To secure the performance and payment of all obligations of [Enterprise] to [Kubota],” Enterprise granted to Kubota a security interest in, and lien on, the equipment. J.A. 26. To further protect Kubota‘s interests, the Agreement prohibited Enterprise from disposing of, or selling, any equipment “except in the ordinary course of business upon customary terms for value received.” J.A. 27. The following terms governing Enterprise‘s handling of the proceeds from these sales form the crux of this appeal:
Until [Enterprise] shall have made settlement with [Kubota] of the full amount due to [Kubota] with respect to any [equipment] disposed of by [Enterprise], [Enterprise] shall segregate the proceeds and hold the same in trust for [Kubota]. [Enterprise] shall be entitled to transfer proceeds free of trust if at, or prior to, the time of such transfer, the payment due from [Enterprise] to [Kubota] shall
be assured to the satisfaction of [Kubota].
Id. (emphasis added).
Kubota would conduct regular inventory audits at Enterprise‘s facility to determine whether Enterprise had sold any Kubota equipment without then “segregating the proceeds” and remitting them to Kubota. J.A. 27, 151. Enterprise frequently sold equipment in such fashion, a breach Kubota dubs as “going out of trust,” and had to repay Kubota at the conclusion of the audits. Enterprise was able to repay Kubota until March 2004, at which time its financial condition deteriorated.
By July 2004, Enterprise was indebted to Kubota for nearly $200,000. According to Strack, Enterprise was unable to repay Kubota because all proceeds garnered were used to pay employees, taxes, and other expenses necessary for Enterprise to remain in business. Strack went to great lengths to try to keep Enterprise afloat, even borrowing against the equity in his home and placing those funds into Enterprise‘s account. Strack managed to reduce Enterprise‘s debt to Kubota to approximately $124,000 by returning parts and inventory that Enterprise had previously purchased and by making payments whenever possible.3 Despite these efforts, Enterprise ultimately went out of business, and was unable to make any further payments to Kubota. Kubota subsequently sued Strack in the Circuit Court for the County of York, Virginia, pursuant to his personal guarantee of Enterprise‘s indebtedness, for the balance due under the Agreement. In the proceedings, Strack admitted the legitimacy of the debt and Kubota obtained a judgment against him on July 18, 2005 in the amount of $123,914.96.
On October 14, 2005, the Stracks filed for Chapter 7 relief and listed Kubota as a creditor. Kubota later filed an adversary proceeding with the bankruptcy court, alleging that such debt should be non-dischargeable under one of two exceptions to the presumption of dischargeability: defalcation by a fiduciary,
II.
Kubota maintains that the bankruptcy court and district court erred in finding that Strack‘s debt was not excepted from discharge under either
Generally, “all legal obligations of the debtor, no matter how remote or contingent” are potentially dischargeable in bankruptcy. See H.R. Rep. No. 95-595, at 309 (1977); see also Nunnery v. Rountree (In re Rountree), 478 F.3d 215, 219 (4th Cir. 2007). Congress, however, has provided, in
A.
We first address Kubota‘s argument that
The courts below rejected Kubota‘s claim because of their view that Kubota failed to make the preliminary showing that a fiduciary relationship existed between it and Enterprise. Kubota urges us to reverse that finding, arguing that the Agreement created an express trust between the parties, giving rise to a fiduciary duty on behalf of Enterprise to protect the proceeds from the sale of Kubota equipment.8 In finding that a mere debt, and not a trust, was created, the bankruptcy court, Kubota asserts, erred by improperly focusing on the chattel itself—the equipment—rather than on the ”proceeds flowing from the sale of the chattel.” Appellant‘s Br. at 26. This “error,” in Kubota‘s view, was perpetuated by the district court. With due respect for those courts’ analyses, we agree with Kubota.
As both parties acknowledge, the creation of an express trust can give rise to the requisite fiduciary duty under
Under Virginia law, “[a]n express trust is based on the declared intention of the trustor,” manifested either in writing or through the parties’ actions. Leonard v. Counts, 221 Va. 582, 272 S.E.2d 190, 194 (1980); see also Woods v. Stull, 182 Va. 888, 30 S.E.2d 675, 682 (1944) (“In order to constitute an express trust there must be either explicit language to that effect or circumstances which show with reasonable certainty that a trust was intended to be created.“). Although the parties’ use of the word “trust” is to be given great weight, it is not determinative. See
In sum, whether an express trust was created between Kubota and Enterprise depends on the intent of the parties as evinced by the Agreement. As noted above, the Agreement provided that if Enterprise sold a piece of equipment to a third party before it remitted to Kubota the total payment due for that equipment, Enterprise ”shall segregate the proceeds [from the sale] and hold the same in trust for [Kubota].” J.A. 27 (emphasis added). Enterprise was entitled to use or transfer the proceeds ”free of trust” only when Kubota was repaid to its “satisfaction.” Id. (emphasis added). In addition to twice using the word “trust” to describe the interest in question, this language “unequivocally show[s] an intention” that Enterprise take possession of the proceeds, segregate them from its own funds, and “h[o]ld” them “on behalf of,” Kubota. In re Dameron, 155 F.3d at 722 (internal quotations omitted). Although this provision forms a relatively small part of the Agreement, it demonstrates, “with reasonable certainty,” the intent to establish an express trust. See Woods, 30 S.E.2d at 682. Because such a trust was created, we find the existence of a fiduciary relationship between Enterprise and Kubota with respect to the sales proceeds. See id.; In re Ellison, 296 F.3d at 270-71 (acknowledging that a fiduciary relationship existed between two corporations when the agreement between them provided that sales proceeds “were the ‘property of the carriers,’ to be ‘held in trust’ by [the debtor] ‘until satisfactorily accounted for.‘“).
Notwithstanding the above express language, the bankruptcy court determined that the Agreement was insufficient to create an express trust, relying primarily on the Supreme Court‘s decision in Davis, 293 U.S. at 333-34. The Davis Court, applying the law of Illinois, found that a writing characterized as a “trust receipt” was insufficient to transform an ordinary debtor-creditor relationship into a fiduciary relationship. Id. at 333-34. The bankruptcy court here held that because the Agreement between Enterprise and Kubota, like the agreements forming the basis of the relationship between the parties in Davis, provided for title to the equipment to pass to Enterprise and for Kubota to retain merely a security interest in it, the Agreement created a standard debtor-creditor relationship, not an express trust. The district court agreed.
In so holding, however, both the bankruptcy court and the district court failed to recognize two critical distinctions between this case and Davis. First, in Davis, the creditor was claiming the existence of a trust with respect to the chattel—the automobile. Here, the proper focus is on the proceeds from the sale of the chattel. Even if Enterprise‘s holding of title to the equipment would preclude the finding of a trust relationship between the parties with
B.
Having concluded that the debt arose due to Enterprise‘s defalcation while it was acting in a fiduciary relationship with Kubota, we must now determine whether Strack‘s personal indebtedness to Kubota, arising out of his guarantee of Enterprise‘s debt, is therefore non-dischargeable under
In In re Ellison, the debtors were officers, directors, and shareholders of a West Virginia corporation. The debtors’ corporation entered into an express trust agreement with another corporation, ARC, giving rise to a fiduciary relationship between the two entities. The debtors also agreed to personally guarantee their corporation‘s indebtedness to ARC. The debtors’ corporation later breached the trust agreement and amassed a significant debt. When the debtors subsequently filed for bankruptcy under Chapter 7, ARC challenged the dischargeability of the debt under
The same “confluence” of factors present in In re Ellison exists here. See id. at 271. First, Strack personally guaranteed Enterprise‘s debt to Kubota. Second, as determined above, the indebtedness arose from Enterprise‘s defalcation or failure to remit the proceeds to Kubota as the Agreement required. Third, Strack was personally responsible for this defalcation by willfully violating the Agreement and using the proceeds owed to Kubota for other purposes. And, finally, this wrongful conduct constituted a breach of the fiduciary duty that Strack owed to Enterprise as the corporation‘s President. See
III.
For the foregoing reasons, the judgment of the district court
REVERSED.