In In re: Edwards, No. 14–50717, 2017 WL 3037451 (W.D. Ky, July 17, 2017), Judge Stout found that a marine retailer’s conversion of funds out-of-trust from the sale of collateral rendered his debt to his floorpan lender non-dischargeable.

Taking these points together, this Court has no trouble finding that Mr. Edwards both read the documents he signed, and was aware of CFSB’s lien rights. Accordingly, the Court holds that based on the Security Agreement, and other documents, CFSB had a security interest in the proceeds of the sale of collateral and that Mr. Edwards had a duty to use the proceeds of sales of collateral to pay CFSB.  The record firmly establishes that Mr. Edwards knew about CFSB’s lien rights and knew that failure to remit the proceeds would be substantially certain to harm CFSB. The parties intended the proceeds of sale of collateral to be used to pay down the debt owed to CFSB and Mr. Edwards did not do so. He retained them for different, personal uses.  Under § 523(a)(6), the business person is held to a higher standard as a business person who is more knowledgeable of the natural consequences of his acts. In re Bradley, 507 B.R. 192, 203 (6th Cir. BAP 2014) citing Trust Co. Bank v. Ricketts (In re Ricketts), 16 B.R. 833, 834–35 (Bankr. N.D. Ga. 1982). See also Ford Motor Credit Co. v. Owens, 807 F.2d 1556, 1559 (11th Cir.1987)(A willful and malicious conversion occurs where an individual in bankruptcy obtains vehicles, as an officer of a dealership, with money advanced by a secured creditor, and then disposes of those vehicles without remitting the sale proceeds to the secured creditor. A debtor’s sales out of trust creates a debt that is nondischargeable under § 523(a)(6)).  Mr. Edwards signed the financing documents, and knew about CFSB’s lien rights in the collateral. At trial, Mr. Edwards admitted he sold the collateral without remitting the proceeds to CFSB. Consequently, the Court finds that the injury to CFSB was willful.  The Court now turns to the malicious element. The test for maliciousness in the context of § 523(a)(6) does not focus on a debtor’s subjective intent to repay, but instead “means in conscious disregard of one’s duties or without just cause or excuse; it does not require ill-will or specific intent to do harm.” Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir.1986). . . .  The Court finds Mr. Edwards acted maliciously as defined by § 523(a)(6). The record establishes that Mr. Edwards acted in “knowing disregard” of CFSB’s security interest in the proceeds of the collateral. Mr. Edwards knew that his action of keeping the proceeds of the sales was wrongful under the terms of the documents. Mr. Edwards knew that his use of the proceeds for other purposes other than repaying CFSB would injure CFSB. The fact that Mr. Edwards made minimum monthly payments does not excuse the injury to CFSB’s security interest. The record is devoid of any facts which could support the notion that Mr. Edwards’ retention of the proceeds was with just cause or excuse.  Mr. Edwards converted the proceeds of the sales of collateral which were subject to CFSB’s security interest. CFSB’s damages are a debt that is the result of a willful and malicious injury. Accordingly, as to Mr. Edwards, the $610,053.55 debt is non-dischargeable pursuant to the provisions of 11 U.S.C. § 523(a)(6).

In In re: Wille, No. 16-50315-can7, 2017 WL 3084402 (W.D. Mo., July 17, 2017), however, Judge Norton found that out-of-trust sales were not really “out-of-trust” because no fiduciary relationship was created by the flooring loan documents.  Therefore, Judge Norton found that a car dealer’s debt to its flooring lender were dischargeable.  First, Judge Norton found no fiduciary duty created by the loan documents.

Here, Plaintiff has not pointed to any provision in the Loan that creates a trust relationship before the alleged wrong – the selling of the cars without remitting the proceeds. As for the limited power of attorney, the only authority Plaintiff cites to is Missouri common law. Binding authority is clear that federal and not state law determines whether a fiduciary relationship exists for purposes of § 523(a)(4). E.g., In re Cochrane, 124 F.3d 978, 984 (8th Cir. 1997).  As a final matter, Plaintiff argues that disputed facts exist regarding the fiduciary relationship, precluding summary judgment. Specifically, Plaintiff argues that it “has no asserted separate counts for breach of fiduciary duty …” such that the court should construe Defendants’ motion as a motion in limine, and that there is a factual dispute because Plaintiff still holds title to the cars. The court agrees with Defendants; if Plaintiff is conceding it has not pled a separate § 523(a)(4) count, then why should not the court dismiss for failure to state a claim?  The court does not understand Plaintiff’s argument, but in the light most favorable to Plaintiff, construes the complaint as it is fairly pled, which clearly sounds in the elements of a § 523(a)(4) claim. Plaintiff has the burden to prove that Defendants acted in a fiduciary capacity as part of its complaint to determine dischargeability under § 523(a)(4). Under Celotex, Plaintiff had the burden of coming forward with evidence to establish this essential element of its case. The only facts Plaintiff relies on are either irrelevant or nonmaterial to the issue of whether the Loan created a fiduciary relationship, and, as a matter of law, the Loan terms themselves did not create a fiduciary relationship. Thus, the court must grant summary judgment in favor of Defendants with respect to the allegation that it is a debt for fraud or defalcation while acting in a fiduciary capacity under § 523(a)(4).

Judge Norton rejected the floorplan lender’s argument that the out-of-trust sales constituted embezzlement and, therefore, were non-dischargeable.  In particular, Judge Norton found that the floorplan lender did not own the collateral; it merely held a security interest.

Defendants argue here that the Loan established a secured creditor-borrower relationship, such that the Dealer owned the cars it allegedly sold “out of trust.” Defendants also cite numerous case authorities noting that one cannot embezzle property one owns. Plaintiff responds that a factual dispute exists as to whether Defendants or Plaintiff actually owned the cars, given that Plaintiff contends (1) it – and not the Dealer – advanced the funds to purchase the cars to the auction houses; (2) it still possesses the titles; and (3) a sale without transfer of the title is a crime and void under Missouri law. The court rejects Plaintiff’s arguments.  Although there is a factual dispute about whether or not Plaintiff advanced funds to the Dealer directly to purchase the seven cars at issue, that dispute is not material to the issue of who owned the cars and thus who had the right to use any sale proceeds under the Loan and applicable Missouri law. The Loan terms expressly provide that Plaintiff will advance funds to allow the Dealer to purchase cars; that the cars are collateral; that the Dealer will have title to the cars; and that, in the event of default, Plaintiff will have rights under the UCC as a secured creditor. See Mo. Rev. Stat. §§ 400.9-203(b)(3)(A) (a security agreement is one way a security interest “attaches” to collateral); 400.9-103 (purchase money security interest defined); 400.9-102(48) (inventory defined); 400.9-311(d) (certificate of title perfection does not apply to motor vehicle collateral held as inventory); 400.9-601 (rights of secured party upon default).  Notably, in response to Defendants’ Motion, setting forth the allegations of Plaintiff’s complaint alleging that the cars were collateral, the Affidavit of Plaintiff’s representative does not state that Plaintiff owns the cars, only that Plaintiff has possession of the titles. Under Missouri law, holding a title pursuant to a floorplan financing agreement does not as a matter of law give the secured lender ownership of the car. Mo. Rev. Stat. § 400.9-202 (UCC Article 9 provisions apply whether title to collateral is held by debtor or secured party); Van Hooser v. Banks, 816 S.W.2d 25, 28 (Mo. Ct. App. 1991) (possession of certificate of title not conclusive of ownership); Tinger v. Tinger, 709 S.W.2d 123, 124 (Mo. Ct. App. 1986) (same). Since the Dealer owned the cars under Missouri law, Plaintiff’s argument that Missouri law prevented the Dealer from legally transferring title to consumers is simply not relevant to whether the Dealer or Plaintiff owned the vehicles.  In sum, Plaintiff has failed to come forward with evidence that it owned the cars, such that when the Dealer sold them, Defendants acting as agents of the Dealer could have embezzled the sale proceeds. As a matter of law, Defendants have established that there are no material controverted facts and that they are entitled to judgment as a matter of law with respect to Plaintiff’s allegations that any debt they owe Plaintiff should be determined to be nondischargeable under § 523(a)(4).