In re Fox

• Decision Date: 13 June 2007
• Docket Number: No. 06-8043.,06-8043.
• Citation: 370 B.R. 104
• Parties: In re Robert R. FOX, Debtor. Cash America Financial Services, Inc., Plaintiff-Appellant, v. Robert R. Fox, Defendant-Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

370 B.R. 104

In re Robert R. FOX, Debtor Cash America Financial Services, Inc., Plaintiff-Appellant, v. Robert R. Fox, Defendant-Appellee.

No. 06-8043.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued: February 7, 2007.

Decided and Filed: June 13, 2007.

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ARGUED: John J. Rutter, Roetzel & Andress, Akron, Ohio, for Appellant. Richard G. Zellers, Richard G. Zellers & Associates, Canfield, Ohio, for Appellee. ON BRIEF: John J. Rutter, John W. Becker, Bruce R. Schrader, Roetzel & Andress, Akron, Ohio, for Appellant. Richard G. Zellers, Melody Dugic Gazda, Richard G. Zellers & Associates, Canfield, Ohio, for Appellee.

Before: GREGG, LATTA, and PARSONS, Bankruptcy Appellate Panel Judges.

OPINION

GREGG, Bankruptcy Judge.

Cash America Financial Services, Inc. ("Appellant") appeals the bankruptcy court's, judgment holding that Robert R. Fox ("Debtor") was not personally liable for the debt owed to the Appellant by the Debtor's corporation, R.R. Fox, Inc. ("R.R.Fox"). In so holding, the bankruptcy court rejected the Appellant's claim that the debt should be excepted from the Debtor's discharge under §§ 523(a)(4) or (a)(6) of the Bankruptcy Code.¹ For the reasons that follow, the bankruptcy court's judgment is AFFIRMED.

I. ISSUES ON APPEAL

This appeal involves two interrelated issues: whether the Debtor, as President of R.R. Fox, engaged in tortious conduct giving rise to personal liability for the damages suffered by the Appellant as a result of its business relationship with R.R. Fox and whether the Debtor's actions or omissions constituted defalcation while acting in a fiduciary capacity or embezzlement under § 523(a)(4), or willful and malicious injury under § 523(a)(6), resulting in a nondischargeable debt.

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit ("BAP") has jurisdiction to decide this appeal. The United States District Court for the Northern District of Ohio has authorized appeals to the BAP, and a final order of the bankruptcy court may be appealed by right under 28. U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it "ends the litigation on the merits and leaves nothing for the court to do' but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 103 L.Ed.2d 879 (1989) (citations omitted). "A bankruptcy court's judgment determining dischargeability is a final and appealable order." Hertzel v. Educ. Credit Mgmt. Corp. (In re Hertzel), 329 B.R. 221, 224-25 (6th Cir. BAP 2005) (citing Cundiff v. Cundiff (In re Cundiff), 227 B.R. 476, 477 (6th Cir. BAP 1998)).

"Determinations of dischargeability under 11 U.S.C. § 523 are conclusions of law reviewed de novo." Bailey v. Bailey (In re Bailey), 254 B.R. 901, 903 (6th Cir. BAP 2000) (citation omitted). "De novo means that the appellate court determines the law independently of the trial court's determination." O'Brien v. Ravenswood Apartments, Ltd. (In re Ravenswood Apartments, Ltd.), 338 B.R. 307, 310 (6th Cir. BAP 2006) (quoting Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 653 (6th Cir. BAP 2001)). The factual findings underlying the bankruptcy court's dischargeability ruling are upheld on appeal unless they are clearly erroneous. In re Hertzel, 329 B.R. at 225 (citations omitted); see also Van Aken v. Van Aken (In re Van Aken), 320 B.R. 620, 622 (6th Cir. BAP 2005) (dischargeability determinations present mixed questions of law and fact; the bankruptcy court's conclusions of law are reviewed de novo, while findings of fact are reviewed for clear error). "A finding of fact is clearly erroneous when, although there is evidence to support it, the reviewing court is left with a definite and firm conviction that a mistake has been committed." Rogan v. Bank One, N.A. (In re Cook), 457 F.3d 561, 565 (6th Cir.2006) (citing Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1027 (6th Cir.2001)).

III. FACTS

R.R. Fox, a debt collection agency, was incorporated in 1990. In 1993, the Debtor and his wife became R.R. Fox's only directors, each owning one half of the shares of the corporation. The Debtor also served as the corporation's President and Chief Operating Officer. In this capacity, the Debtor oversaw R.R. Fox's operations and made financial decisions on its behalf.

The Appellant provides short-term, or "pay day," loans to consumers who may not have access to traditional credit sources. When a loan is not timely repaid, and its internal collection efforts are unsuccessful, the Appellant frequently assigns the account to a third party debt collection agency. On or around January 10, 2003, the Appellant entered into one such Agreement for Collection with R.R. Fox ("Agreement"). Under this Agreement, the Appellant was to provide information related to debts owed it ("Accounts") to R.R. Fox, and R.R. Fox was to collect on the Accounts. The Agreement entitled R.R. Fox to a fee equal to one-quarter of the total amount collected. On or before the fifth day of each calendar month, R.R. Fox was contractually required to deliver all sums it collected on Accounts during the previous month, less its fee, to the Appellant. The Agreement stated that it was to be construed in accordance with the laws of Texas.

Three provisions in the Agreement are particularly germane to this appeal. Paragraph 3, titled "Surety Bond," states:

[R.R. Fox] agrees that it will maintain a surety bond in the amount of $10,000 or such other amount as may be required by [the Appellant] (provided, however, that the amount of the surety bond shall not exceed the total sum of the Accounts then in the possession of [R.R. Fox] ). Such bond shall be renewable annually on January first of each year, shall be approved by [the Appellant] as to form and content, and shall be executed by [R.R. Fox] as principal and by a surety company as surety. The bond shall run to and be for the benefit of [the Appellant] as obligee and conditioned that [R.R. Fox] shall faithfully and truly perform all of its obligations under this Agreement and shall, within five (5) days after the close, of each calendar month, account to and pay to [the Appellant] the net proceeds of all collections made during the preceding calendar month. [R.R. Fox] shall provide [the Appellant] with a copy of the bond upon [the Appellant's] request.

(J.A. at 184.)

Paragraph 6, entitled "Trust Account," states:

[R.R. Fox] shall hold all sums that it collects for the benefit of [the Appellant] in a trust account ("Trust Account") until such time as the funds are paid to [the Appellant] pursuant to paragraph 7. The Trust Account shall be maintained separate and apart from [R.R. Fox's] operating accounts. The Trust Account shall be maintained at a bank, savings and loan association, savings bank, or credit union that is insured by the Federal Deposit Insurance corporation or the National Credit Union Administration. All sums received by [R.R. Fox] in connection with the Accounts shall be placed in the Trust Account within two (2) business days after their receipt by [R.R. Fox]. All sums held by [R.R. Fox] in the Trust Account for the benefit of [the Appellant] shall be free of any right of offset or security interest in favor of the depository institution or any other person or entity.

(J.A. at 185.)

Paragraph 13, entitled "Nature of Relationship," states:

This Agreement does not constitute any party hereto as an agent, legal representative, fiduciary, joint venturer, partner, employee, or servant of the other for any purpose whatsoever. [The Appellant] and [R.R. Fox] agree that [R.R. Fox] is an independent contractor. Nothing in this Agreement authorizes [R.R. Fox] to make any contract, agreement, warranty, or representation on [the Appellant's] behalf, or to incur any debt or other obligation in [the Appellant's] name; and [the Appellant] shall in no event assume liability for, or be deemed liable hereunder, as a result of any such action.

(J.A. at 186 (emphasis supplied).)

The Vice President of the Appellant's Pay Day Lending Division, Wayne Gerlosky ("Gerlosky") testified that these provisions were included in the Agreement exclusively for the benefit of the Appellant and to ensure that R.R. Fox satisfied the terms and conditions of the Agreement. More specifically, Gerlosky explained that the "Trust Account" provision was intended to protect the Appellant's interest in the proceeds that R.R. Fox collected for its benefit by preventing R.R. Fox from commingling funds belonging to the Appellant with its general operating funds. He also stated that this provision was important to the Appellant because it assisted the. Appellant in accounting for funds that were due it under the Agreement. Finally, Gerlosky testified that the "Nature of Relationship" paragraph was included in the Agreement "[t]o ensure that [the Appellant was] not bound by any actions that R.R. Fox took outside of [the Agreement]."² (J.A. at 28.)

It is undisputed that the Debtor neither acquired a surety bond nor established a separate trust account as required by the Agreement. According to the Debtor, he failed to create the trust account because he did not know what a trust account was. On the Friday before the first Accounts were to be downloaded, the Debtor contacted his "business banker" at Bank One to set up the account. Allegedly, neither the business banker nor the branch manager had any "idea what [the Debtor] was talking about." (J.A. at 103-04.) The Debtor stated that the trust account the bank wanted to set up was "maybe for an heir, as a child or future generation." (J.A. at 104.) When asked to provide a copy of the surety bond that same afternoon, the Debtor sent a copy of the "dec. page" from R.R. Fox's commercial insurance policy instead. Despite the Debtor's failure to provide adequate evidence of the surety...