Chrysler Credit Corp. v. Rebhan

• Decision Date: 21 April 1988
• Docket Number: No. 87-5359,87-5359
• Citation: 17 BCD 1051,842 F.2d 1257
• Parties: 18 Collier Bankr.Cas.2d 1078, 17 Bankr.Ct.Dec. 1051, Bankr. L. Rep. P 72,277 CHRYSLER CREDIT CORPORATION, a Delaware corporation, Plaintiff-Appellee, v. Charles M. REBHAN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1257

842 F.2d 1257

18 Collier Bankr.Cas.2d 1078, 17 Bankr.Ct.Dec. 1051,

Bankr. L. Rep. P 72,277

CHRYSLER CREDIT CORPORATION, a Delaware corporation, Plaintiff-Appellee, v. Charles M. REBHAN, Defendant-Appellant.

No. 87-5359.

United States Court of Appeals, Eleventh Circuit.

April 21, 1988.

Robert A. Solove, Miami, Fla., for defendant-appellant.

Philip A. Allen III, Mershon, Sawyer, Johnston, Dunwody & Cole, Miami, Fla., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before HILL, Circuit Judge, HENDERSON ^*, Senior Circuit Judge, and VINING ^**, District Judge.

VINING, District Judge:

Charles Rebhan, a debtor in bankruptcy, appeals from the district court's order affirming the partial final judgment entered by the bankruptcy court. In particular, the appellant challenges the district court's affirmance of the bankruptcy court's determination that a particular debt was not dischargeable under sections 523(a)(4) and (6) of the Bankruptcy Code, 11 U.S.C. Secs. 523(a)(4), 523(a)(6), and reinstatement of the appellee's cause of action under section 523(a)(2)(B), which the bankruptcy court had earlier dismissed with prejudice. For the following reasons we affirm the district court's order affirming the bankruptcy court's partial final judgment.

The appellant and his brother, Douglas Rebhan, incorporated and commenced operation of a business venture known as Coral Gables Imported Cars, Inc., which did business under the name of Kalamazoo Chrysler Plymouth ("dealership"). The dealership was located in Kalamazoo, Michigan. In order to commence operations, the appellant invested $75,000 in the dealership. He and his brother became the sole directors, officers, and shareholders. Despite holding these positions in the dealership, the appellant continued to reside in Miami, Florida, for virtually the duration of the dealership's operation. In his brother's absence, Douglas Rebhan became primarily responsible for managing the dealership's affairs. The appellant did, however, maintain periodic contact with his brother regarding the management of the dealership through regular monthly phone calls and at least one personal visit. The dealership operated from March 1979 until November 1980 when Chrysler Credit Corporation ("Chrysler"), closed and liquidated the dealership.

Chrysler's decision to close and liquidate the dealership involves a complicated set of facts. Shortly after the dealership began operation, it entered into a series of agreements with Chrysler to facilitate its operations. Chrysler provided the dealership with a capital loan and a line of credit to finance purchases of new and used cars to be held as inventory. In addition, the dealership executed a "corporate form signatory authorization" which appointed Chrysler and its officers and employees as the dealership's "attorneys-in-fact" for the execution of all documents necessary to Chrysler's financing the dealership's car purchases. These agreements entered into on behalf of the dealership were authorized by appropriate corporate resolution.

Chrysler held perfected security interests in each individual car it financed as well as the proceeds from all car sales. The appellant executed two personal continuing guarantees by which he assumed the responsibility as primary obligor to honor all of the dealership's obligations to Chrysler. The dealership further promised to separate car sales proceeds from other operating funds and to immediately remit sales proceeds to Chrysler.

This set of agreements and contracts between a car dealership and a financing corporation is commonly known as a "floor-plan arrangement." A typical condition for entering into such a floor-plan arrangement is an agreement by the dealership to allow the financing corporation to conduct regular audits of the dealership's inventory. The dealership in this case agreed to allow Chrysler to conduct such audits, and, in fact, Chrysler's representatives conducted monthly or bi-monthly audits of the dealership's inventory after operations began in 1979. All inventory audits conducted by Chrysler up to and including the one conducted on August 27, 1980, disclosed that the dealership had satisfactorily accounted for all cars and all sales proceeds in which Chrysler maintained perfected security interests.

On October 23, 1980, Chrysler conducted another routine audit of the dealership's inventory. That audit disclosed that twelve cars subject to security interests had been sold and the sales proceeds received by the dealership were not paid to Chrysler. At that point, Chrysler demanded immediate payment and an accounting. The dealership failed to satisfy Chrysler's demands, and Chrysler decided at that point to close and liquidate the dealership. Because of the failure to sell the cars and remit the proceeds as contemplated in the floor-plan arrangement, Chrysler designated the twelve automobiles as having been "sold out of trust."

During the course of liquidation, the dealership sold an additional twelve cars which were confirmed as part of its inventory for the October 23, 1980, audit. Proceeds from the sale of these twelve cars were remitted to Chrysler according to the floor-plan arrangement. However, the original sold-out-of-trust condition persisted. This fact was revealed when the appellee conducted the final inventory audit on November 7, 1980. The sold-out-of-trust condition involving the twelve cars produced a deficit for Chrysler in the amount of $68,689.89.

Chrysler instituted suit in North Carolina ("the North Carolina action") to collect on the personal guarantee executed by the appellant. Shortly thereafter, the appellant filed a voluntary petition for bankruptcy and Chrysler's action on the personal guarantee was stayed. As the bankruptcy proceeded, Chrysler instituted an adversary action objecting to the dischargeability of the debt which the dealership allegedly owed it for the twelve automobiles sold out of trust.

I. NON-DISCHARGEABILITY UNDER SECTION 523(a)(6) OF THE BANKRUPTCY CODE

The bankruptcy court ¹ first considered whether the appellant's debt was non-dischargeable because the conversion of the proceeds was alleged to be "willful and malicious." Section 523(a)(6) provides that a willful and malicious conversion is a non-dischargeable debt in bankruptcy. The bankruptcy court found that the appellant did willfully and maliciously convert the sales proceeds from the twelve cars. According to the bankruptcy court's order, the appellant did not dispute that the twelve cars were sold out of trust or that the sale proceeds had been converted. Rather, the appellant contended that he could not be held responsible for the conversion due to the fact that he was not actively engaged in the operation of the dealership. The bankruptcy court rejected the appellant's contention for three reasons.

First, relying on a verified counterclaim ² filed by the appellant in the North Carolina action which stated that the appellant was engaged in the "active, substantial, and continuing personal participation in the management of the dealership's operations," the bankruptcy court determined that the appellant was judicially estopped from later maintaining that he was not actively engaged in the operation of the dealership. Second, the bankruptcy court concluded that other evidence presented at trial was in accordance with the appellant's prior admissions regarding his active and substantial participation in the dealership's operations. In particular, the court noted that the appellant made monthly telephone calls to Kalamazoo during which the dealership's operations were discussed. Furthermore, the bankruptcy court also found that the appellant made a personal visit to Kalamazoo to attend to the dealership's operations in August of 1980.

Third, the bankruptcy court found that the defendant had actually received some of the converted sales proceeds from the cars sold out of trust. In reaching this conclusion, the bankruptcy court relied heavily on the following factual findings: Contemporaneous with the commencement of the dealership's operations, the appellant and his brother formed T.K.R. Agency, Inc. ("TKR"). TKR was created to circumvent Michigan law and to allow the dealership to receive a commission on sales of credit life insurance which was routinely offered to individuals purchasing automobiles from the dealership. Catherine and Nina Rebhan, wives of the appellant and Douglas Rebhan, respectively, functioned as the nominal shareholders of TKR. However, the appellant and his brother actually conducted TKR's affairs. Normally the dealership collected all credit life insurance premiums and remitted them to the insurance underwriter, American Way Service Corporation ("American Way"), which would then send all commissions earned on the insurance sales back to TKR. Those commissions were then paid in the form of dividends to Catherine and Nina Rebhan.

Some time early in September 1980, the dealership and TKR deviated from the normal procedure of remitting premiums and paying commissions. Rather than remitting premiums directly to American Way, the dealership issued a check for $11,462.51 drawn on the dealership's checking account and payable to TKR. On September 29, 1980, TKR then issued four checks totaling $11,800.00; two checks totaling $5,900.00 were payable to Catherine Rebhan. The appellant admitted receiving these two checks made payable to his wife and endorsing the checks with his wife's name and depositing them in his bank account. The bankruptcy court held that the appellant converted some of the proceeds from the twelve cars through the TKR artifice.

Based on the admissions which the appellant made in the North Carolina action, the evidence establishing the appellant's active involvement in the dealership's operations, and the evidence indicating that the appellant converted a portion of the...