In In re Ferreira, No. 18-5264, 2019 Bankr. LEXIS 3342, at *6-8 (Bankr. N.D. Ga. Oct. 24, 2019), the Bankruptcy Court found no fiduciary duty between a floorplan lender and dealer.

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 reSalim), 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 reMejorado), 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 relationship.”)  In Salim, the court found that use of nomenclature, including the phrase “hold in trust,” without more was not enough to create an express or technical trust in a floorplan contract. 2015 WL 1240000 at *17. Similarly, in In re Rifai, 604 B.R. 277 (Bankr. S.D. Tex. 2019), the court rejected the argument a trust had been created in an agreement which provided a car lot would “hold all amounts received from the sale of any Unit of Lender Financed Inventory in the form as received in trust for the sole benefit of and for Lender, and to remit such funds satisfying all amounts due Lender and owing by Borrower for such Unit of Lender Financed Inventory . . .”. The court concluded the agreement did not sufficiently establish a trust res and failed to require the debtor to segregate funds for the sole benefit of the plaintiff. Therefore, it failed to establish an express or technical trust. A similar floor plan agreement was rejected as a trust in Bagsby, 2017 WL 3084405. The agreement required the dealer to hold sales proceeds “in Trust” for the benefit of the lender and pay the lender all amounts due. The court granted summary judgment to the defendant, concluding the plaintiff did not identify a provision in the loan documents that created a trust relationship before the alleged wrong – the selling of the cars without remitting the proceeds. Accordingly, plaintiff failed to prove the defendants acted in a fiduciary capacity.

The Bankruptcy Court also rejected the floorplan lender’s argument that SoT sales were non-dischargeable because there was no intent to cause injury to the floorplan lender or to divert the funds to the debtor’s own use.

As stated above, to establish willfulness Mr. Ferreira must have actually intended the injury to ACE, not simply intended the act of using the sales proceeds to pay other expenses. The facts in this case show that Mr. Ferreira and Triple A made payments of almost $20,000 to ACE by cashier’s checks after the audit showed the shortfall owed to ACE. Mr. Ferreira also testified without contest that he believed he had arranged with ACE for a payment plan for the remainder owed. Those are not the acts of one who intended to injure ACE.  Moreover, to establish that an act is malicious, it must be wrongful and without just cause. Several courts have decided that when the money that was not paid to a floor plan lender was used for the operation of the business as opposed to diverted, the act was not malicious. [*13]  See FloridaOutdoor Equipment v. Tomlinson (In re Tomlinson), 220 B.R. 134 (Bankr. M.D. Fla. 1998). There, the court focused on the fact the debtor reinvested the proceeds in his business and voluntarily surrendered the remaining inventory to the creditor when the creditor came for it. Similarly, in Mayfield Grain Co. v. Crump (In re Crump), 247 B.R. 1 (W.D. Ky. 2000), the court found the debtor’s failure to remit proceeds subject to a security interest was not willful and malicious where the debtor’s intent was to keep his farming business afloat, there was no evidence of intent to harm, and there was significant evidence of the debtor’s good intent. Likewise, in Inre Wikel, 229 B.R. 6 (Bankr. N.D. Ohio 1998), the court found the debtor used the proceeds in an effort to preserve his business. The court noted that although the Debtor’s actions of using the proceeds of collateral blatantly breached the security agreement, Section 523(a)(6) requires more than just a knowing breach of a contract. This emphasis on how the debtor used proceeds is set out clearly in Ford Motor Credit Co.LLC v. Franceschini (In re Franceschini), 2012 WL 113337 (Bankr. S.D. Tex. January 12, 2012). There, the court held that as long as the debtor was reinvesting the proceeds from the sale of vehicles in the business, his acts were not willful or malicious. However, once he began to transfer the proceeds to affiliates and family members, the court found the efforts were no longer reasonable, and those funds were subject to being nondischargeable. This follows another Texas case, In re Grier, 124 B.R. 229, 232 (Bankr. W.D. Tex. 1990), where the court also determined the debt was dischargeable even though the debtor had used the proceeds of collateral in violation of the security agreement. The debtor’s decision was based on his belief that monies would come in eventually from the business’s cash flow and the creditor would be paid out of that cash flow. The court noted the debtor did not try to hide the fact he had sold the items and spent the next nine months after the revealing audit trying to find ways to repay the lender. The court drew a distinction between a violation of the security agreement and “something extra” that demonstrates the debtor acted without just cause or excuse. The court explained “[s]imply because the sale was in violation of the security agreement and was in fact an intentional sale on the part of the debtor should not be enough to trigger a finding of malice. If this were the case, then merely intentional conduct would fall within this exception to discharge, and the term ‘malicious’ would be effectively read out of the statute.” Id. at 233. Here, Mr. Ferreira did violate the Agreement by not remitting the proceeds upon sale of the vehicles. However, the audit reflected the sales and Mr. Ferreira did not block or impair anyone’s ability to conduct an audit. When the audit revealed the shortfall, he promptly paid a substantial sum of money to ACE by cashier’s check and believed he had worked out a payment plan for the balance. Mr. Ferreira testified, without contest, that his business had previously been profitable and he expected it to return to profitability but he felt like he needed to pay his rent, pay for his business license, and pay some of the vendors who were doing work in the meantime. He did acknowledge paying himself $500 to $1,000/week. The evidence did not reveal the total amount paid to Mr. Ferreira, the period of time over which the payments were made, how the payments post-default compared to those pre-default or anything else about the payments. While this fact is relevant in considering the willful or malicious nature of his acts, given the relatively small amount used by the Debtor and the lack of additional evidence about the payments, the Court finds the Plaintiff has failed to carry its burden of showing Mr. Ferreira acted maliciously. Based on all of the facts, the Court concludes Mr. Ferreira’s actions in not remitting proceeds to ACE were not willful and malicious and therefore the obligation to ACE is dischargeable.