Rent-A-Center E., Inc. v. Leonard (In re WEB2B Payment Solutions, Inc.), 14–3190.
| Decision Date | 04 March 2016 |
| Docket Number | No. 14–3190.,14–3190. |
| Citation | 815 F.3d 400 |
| Parties | In re WEB2B PAYMENT SOLUTIONS, INC.Debtor Rent–A–Center East, Inc., Appellant v. Brian F. Leonard, Trustee, Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Paul Laurin Ratelle, argued and on the brief, Minneapolis, MN, for Appellant.
Andrea M. Hauser, argued and on the brief, Minneapolis, MN, for Appellee.
Before SMITH, BYE, and BENTON, Circuit Judges.
WEB2B Payment Solutions, Inc. provided automated clearinghouse and electronic-check conversion services to Rent–A–Center East, Inc. ("RAC"). In 2011, WEB2B filed for bankruptcy. North American Bank turned over WEB2B's balances to the Chapter 7 trustee, Brian F. Leonard. RAC filed a complaint, claiming $801,378.76 of the balances as an express trust, resulting trust, or constructive trust. The Bankruptcy Court dismissed RAC's claims, granting summary judgment to the Trustee. The District Court1 affirmed. RAC appeals. Having jurisdiction under 28 U.S.C. § 158(d)(1), this court affirms.
RAC's primary business is renting furniture and appliances. For check-processing, RAC made a Processing Client Agreement with WEB2B in March 2007. For about 100 customers, including RAC, WEB2B provided automated clearinghouse, electronic-check conversion, credit verification, and credit-card services.
The Processing Agreement prescribed how checks are processed: WEB2B "has contracted with a financial institution where [WEB2B] maintains an account on behalf of third parties such as [RAC] to accept electronic credit and debit entries for [RAC]." WEB2B permitted RAC "to initiate electronic signals for paperless credit and debit entries through the Processor [WEB2B] to accounts maintained by [RAC] at one or more Originating Depository Financial Institutions (ODFIs) and in other banks and financial institutions, by means of the Automated Clearing House (ACH) or other applicable check and funds transfer clearing systems." (Emphasis added). In an exhibit to the Agreement, WEB2B agreed to "initiate debit and/or credit entries to [RAC's] Checking Account indicated below at the depository financial institution ... and to debit and/or credit the same to such an account." This checking account was at Intrust Bank, RAC's bank.
Before reaching Intrust's checking account, WEB2B processed RAC's checks by ACH or Check 21. In ACH, an originator converts a check to a text file for transmission by an ODFI to an automated clearinghouse, which transmits the entries to a receiving depository financial institution. Check 21, an imaging system, allows financial institutions to clear checks electronically without pre-existing agreements between the bank of first deposit and the paying bank.
For both processes, RAC's customers wrote checks payable to RAC or endorsed checks to RAC. RAC then transmitted electronic images of the checks to WEB2B (). Each day, WEB2B combined the check images from its customers, including RAC, into one file that WEB2B transferred to its secure website. North American Bank—WEB2B's bank—downloaded the check file and credited a single daily deposit to WEB2B's account 5165 at the Bank. North American Bank then sent check images to the Federal Reserve for overnight clearing. After the checks cleared, WEB2B made a single transfer for its customers from the 5165 account to WEB2B's account 4548. Finally, WEB2B made deposits to RAC's account at Intrust Bank. From March 2007 to December 2010, WEB2B followed these steps in processing RAC's checks, usually taking one to two days for each day's transactions.
In December 2010, RAC noticed that payments to its Intrust account were delayed. WEB2B had begun transferring funds from its account 4548 into yet another account (5173). WEB2B used the 5173 account to pay other customers and its operational expenses, while misleading RAC about the delayed deposits. On February 9, 2011, WEB2B made its last deposit to RAC's Intrust account. Between November 30, 2010, and February 28, 2011, WEB2B processed $11,880,076.91 of RAC's checks. WEB2B remitted only $9,451,854.44 to RAC's Intrust account—leaving a $2.4 million shortage.
On April 4, 2011, WEB2B filed for bankruptcy. RAC claimed WEB2B owed it $2,454,749.39. Creditors, including RAC, filed proofs of claim for $3,757,197.67. North American Bank gave the Trustee $833,120.46 from WEB2B's accounts, including $719,480.78 from the 5173 account.
Before bankruptcy, RAC did not know how WEB2B processed its checks. Clarence O. Wheeler IV, RAC's designated agent for knowledge of check processing, testified he had no interaction with North American Bank and did not know about WEB2B's accounts there. He stated that "we had no reason to be intimately involved or knowledgeable about how they did—how they ran their business.... we were obviously concerned that we get our money, but we did—because we got our money to the penny we never dove into the process by which we got that money." Wheeler admitted that "all [he] knew and all RAC knew was that [WEB2B] would turn those funds around at some point in time and remit to RAC's bank accounts in Intrust Bank."
RAC filed a complaint seeking: a declaratory judgment that $801,378.76 in the Trustee's possession were RAC's funds, a determination that an express or resulting trust existed, or the imposition of a post-petition constructive trust. The Bankruptcy Court denied RAC's claim. RAC appealed to the District Court, which remanded the case to the Bankruptcy Court. In a Restated Order, the Bankruptcy Court ruled: (1) all proceeds from the North American Bank account were bankruptcy-estate property under 11 U.S.C. § 541(a), (2)no express or resulting trust was created, (3) a post-petition imposition of a constructive trust was not warranted, and (4) whatever equitable interests RAC had could be avoided by the Trustee's strong-arm powers. The District Court agreed.
In re Falcon Prods., Inc., 497 F.3d 838, 840–41 (8th Cir.2007). This court reviews a grant of summary judgment de novo and "may affirm on any basis supported by the record." Hemmingsen v. Messerli & Kramer, P.A., 674 F.3d 814, 816 (8th Cir.2012). Summary judgment shall be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. Pro. 56(a). A court must view the evidence "in the light most favorable to the nonmoving party." Naucke v. City of Park Hills, 284 F.3d 923, 927 (8th Cir.2002).
Generally, the bankruptcy estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). "The nature and extent of the debtor's interest in property are determined by state law." In re N.S. Garrott & Sons, 772 F.2d 462, 466 (8th Cir.1985). Once property rights are determined, "federal bankruptcy law dictates to what extent that interest is property of the estate." Id. "Congress plainly excluded property of others held by the debtor in trust at the time of the filing of the petition." United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n. 10, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983).
RAC argues that the Processing Agreement established an express trust. Both parties agree that Minnesota law applies.
An express trust requires: "(1) a designated trustee subject to enforceable duties, (2) a designated beneficiary vested with enforceable rights, and (3) a definite trust res wherein the trustee's title and estate is separated from the vested beneficial interest of the beneficiary." In re Bush's Trust, 249 Minn. 36, 81 N.W.2d 615, 620 (1957). "A trust is created only if the settlor demonstrates, by external expression, the intent to create a trust." Bond v. Comm'r of Revenue, 691 N.W.2d 831, 837 (Minn.2005). No "particular form or words" are required to create a trust; however, "the settlor must show 'a definite, unequivocal, explicit declaration of trust.' " Id. "Express or technical trusts are formed by direct and positive acts of both parties manifested by some instrument in writing." In re Bren, 284 B.R. 681, 697 (Bankr.D.Minn.2002).
The Processing Agreement shows that no express trust existed. The Agreement says that WEB2B is "acting in the capacity of an automated clearing house facilitator providing and facilitating electronic credit and debit entries on behalf of [RAC]." The words "on behalf of" sometimes appear in trusts. See Mahoney, Hagberg & Rice v. Underwriting Serv. of N. Am., 1997 WL 666066, *2 (Minn.Ct.App. Oct. 28, 1997) ). The Agreement, however, explains that WEB2B "has contracted with a financial institution where [WEB2B] maintains an account on behalf of third parties such as [RAC] to accept electronic credit and debit entries for [RAC]." (Emphasis added). The "account"—used to process the checks—was WEB2B's North American Bank account, which was used for other clients, not just RAC. By the terms of the Agreement, RAC consented to commingling its funds with those of WEB2B's other clients in one account. Where "the depositor of cash consents to commingling it with other funds of the depositee, the relationship resulting from the transaction is not that of trustee and beneficiary ... but that of debtor and creditor." In re LGI Energy Solutions, Inc., 460 B.R. 720, 729 (8th Cir. BAP 2011) (applying Minnesota law). See also Farmers State Bank of Fosston v. Sig...
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