In In re: Moroni (Ford Motor Credit Company v. Moroni), 2017 WL 436148, at *11 (Bkrtcy.N.D.Ill., 2017), Judge Cassling found that a car dealer’s principals could not use the bankruptcy laws to discharge their debt to their floorplan lender.

Some courts have held that “a debtor did not have the necessary fraudulent intent when the debtor used money in violation of contractual obligations [but did so] with the intent to keep his company afloat so that it could eventually pay all of its debts.” Sherman v. Potapov, 403 B.R. 151, 157 (D. Mass. 2009) (citing cases), aff’d, Sherman v. Potapov (In re Sherman), 603 F.3d 11 (1st Cir. 2010). Another line of cases runs in the opposite direction, holding that even where a debtor’s “ ‘intent was to repay [the lender] from future profits from the continued operation of the [business] it is no defense to the offense of embezzlement.” ’ Id. at 158 (quoting Nat’l Bank of Commerce of Pine Bluff v. Hoffman (In re Hoffman), 70 B.R, 155, 163-64 (Bankr. W.D. Ark. 1986)).   The Court will follow the cases which hold that a debtor’s failure to remit proceeds from the sale of collateral to the secured creditor in an effort to keep the debtor’s business afloat is not a valid defense to a claim of embezzlement. “The essence of the common law concept [of embezzlement] is knowing use of entrusted property for an unauthorized purpose; there is no exception for financial joy riding (unauthorized ‘borrowing’ with intent to repay is still embezzlement, the borrowing being unauthorized)….” Sherman, 603 F.3d at 14 (citation omitted); see also Joyce v. Wish (In re Wish), 472 B.R. 763, 782 (Bankr N.D. Ill. 2012) (quoting Sherman).  Here, the Debtors repeatedly sold vehicles out of trust and did not remit the proceeds to FMCC. The Debtors did this knowingly and without authorization from FMCC.  The Debtors were directly involved with the management of the Dealerships, were directly involved in making the out-of-trust sales, and were directly involved in efforts to conceal those sales from FMCC. The Debtors were both actively managing the money generated by the Dealerships and made decisions regarding which expenses would be paid and which would not be paid. Thus, Mr. and Ms. Moroni are personally liable for damages to FMCC by virtue of the out-of-trust sales because they were both responsible for the day-to-day operations of the Dealerships and are thus liable for the Dealerships’ failure to fulfill the obligations under the Wholesale Agreements. See Champion Home Builders Co. v. Tarrant (In re Tarrant), 84 B.R. 831, 833 (Bankr. M.D. Fla. 1988).   Even though the Debtors’ taking of FMCC’s property knowingly and without authorization by itself satisfies the fraudulent intent element of embezzlement, the Court will discuss additional evidence of the Debtors’ fraudulent intent as well as the Debtors’ defense that they were using the proceeds of FMCC’s collateral to keep their business afloat. . . . However, for the reasons discussed above with respect to the § 523(a)(4) claim, the Court finds that the Debtors did not use the proceeds from out of trust sales in an effort to save their business and eventually repay FMCC. Instead, the following evidence demonstrates that the Debtors intended to deprive FMCC of its collateral and the proceeds thereof: (1) Mr. Moroni instructed Ms. Gersch, the office manager at Elmhurst, to change the date of the sale on the paperwork during FMCC’s audits of Elmhurst to make it appear that the vehicles were sold recently in an effort to disguise that the vehicles were sold out of trust; (2) Mr. Moroni instructed salespeople to tell customers to return leased vehicles directly to Elmhurst; (3) the Debtors failed to remit proceeds of the sales from the returned vehicles to FMCC; (4) Mr. Moroni stored the RV at a dealership that was no longer operating in an effort to conceal the RV from FMCC in violation of a state court order; (5) the Debtors deposited the erroneously issued $120,000 rebate check into Elmhurst’s business account when the Debtors were required to turn it over to FMCC; (6) the Debtors auctioned FMCC’s collateral without its consent and in defiance of a state court replevin order; and (7) the Debtors withdrew $105,000 and another $12,000 from the Elmhurst business account at a time when Elmhurst had ceased operating, without explaining the disposition of those funds.