In re Rebhan

• Decision Date: 04 January 1985
• Docket Number: Adv. No. 84-0286-SMW-A.,Bankruptcy No. 84-0417-BKC-Weaver
• Citation: 45 BR 609
• Parties: In re Charles M. REBHAN, Debtor. CHRYSLER CREDIT CORPORATION, a Delaware corporation, Plaintiff, v. Charles M. REBHAN, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Florida

45 B.R. 609 (1985)

In re Charles M. REBHAN, DebtorCHRYSLER CREDIT CORPORATION, a Delaware corporation, Plaintiff, v.Charles M. REBHAN, Defendant.

Bankruptcy No. 84-0417-BKC-Weaver, Adv. No. 84-0286-SMW-A.

United States Bankruptcy Court, S.D. Florida.

January 4, 1985.

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

Robert Solone, Miami, Fla., for defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

SIDNEY M. WEAVER, Bankruptcy Judge.

THIS CAUSE having come on to be heard upon the amended complaint and the Court, having heard the testimony and examined the evidence presented; observed the candor and demeanor of the witnesses; considered the arguments of counsel and being otherwise fully advised in the premises, does hereby make the following findings of fact and conclusions of law:

Chrysler Credit Corporation("Chrysler Credit") seeks a determination that certain debts of the defendant, Charles M. Rebhan, are nondischargeable under sections 523(a)(4)and523(a)(6) of the Bankruptcy Code,11 U.S.C. §§ 523(a)(4)and523(a)(6).Chrysler Credit alleges that defendant 1) committed fraud or defalcation while acting in a fiduciary capacity; 2) embezzled sales proceeds which plaintiff had entrusted to him; and 3) willfully and maliciously converted sales proceeds.These claims were tried before this Court on November 1 and 2, 1984.This Court has jurisdiction of the parties and of the subject matter of this action by virtue of 28 U.S.C. §§ 1334and157.

The evidence established that there is no dispute as to the creation, existence and amount of the debt for which Chrysler Credit seeks a nondischargeability finding.Defendant, Charles M. Rebhan, was the president, fifty percent owner, director and personal guarantor of an automobile dealership known as Coral Gables Imported Cars, Inc. d/b/a Kalamazoo Chrysler Plymouth (hereinafter "the dealership"), which operated in Kalamazoo, Michigan from May, 1979 until November, 1980.

Chrysler Credit financed the dealership's wholesale purchases of new and used cars in accordance with duly executed corporate resolutions and authorizations, and the defendant executed two "Continuing Guaranties" through which he, as a primary obligor, guaranteed the dealership's existing and future obligations to Chrysler Credit.Each time the dealership ordered new cars, it executed a promissory note and trust agreement.Chrysler Credit was given a security interest in each car it financed as well as the proceeds of its sale, and these security interests were duly perfected.Each trust agreement created well-defined obligations as to the handling and payment of sales proceeds to Chrysler Credit.At paragraph 3 of each agreement, the trustee agreed:

to keep the proceeds of any sale separate from all other funds and on the day of the receipt of such proceeds to transmit them to the Entruster Chrysler Credit.

(Emphasis added).

Chrysler Credit conducted bimonthly audits of the dealership's inventory of financed vehicles to ascertain their status and whereabouts.Douglas Streng, a Chrysler Credit employee, conducted an audit of the dealership's inventory on August 27, 1980 and, as was the case with all prior audits of the dealership, no irregularities were found.On October 23, 1980 Mr. Streng again audited the dealership's inventory and discovered that the dealership had sold twelve cars out of trust, in that the cars were sold and proceeds had actually been received by the dealership, but were not paid to Chrysler Credit.Neither the dealership nor the defendant honored Chrysler Credit's subsequent demand for payment of the proceeds of the twelve cars which totaled $68,689.09.

In May of 1982, Chrysler Credit sued the defendant and his co-guarantors in North Carolina¹ on their Continuing Guaranties of the dealership's debts and obligations to Chrysler Credit, including the $68,689.09 due and owing for the twelve cars sold out of trust (hereinafter the "North Carolina action").That action was stayed as to the defendant when he filed his voluntary petition for relief under Chapter 7 of the Bankruptcy Code, and this adversary proceeding followed.

I.

NONDISCHARGEABILITY UNDER SECTION 523(a)(6)

Under Section 523(a)(6) of the Bankruptcy Code, when a debtor injures a creditor by converting his property, the debt is nondischargeable in bankruptcy if the conversion was "willful and malicious."In re Simmons,9 B.R. 62(Bkrtcy.S.D.FLA.1981);2 Collier on Bankruptcy, ¶ 53.163 n. 35 (15th Ed.1984).A conversion is willful and malicious if done with reckless disregard for the rights of the property owner.Tinker v. Colwell,193 U.S. 473, 24 S.Ct. 505, 48 L.Ed. 754(1904);In re Simmons, supra, and "the sale of property subject to a security interest by a debtor without payment of the debt so secured is a willful and malicious conversion.In re Goddaeus,1 C.B.C. 105 (W.D.Mich.1974)."Matter of Auvenshine,9 B.R. 772, 775(Bkrtcy.W.D.Mich.1981).

The evidence established, and the defendant did not dispute, that the cars were sold out of trust and that the sales proceeds were converted; instead, defendant attempted to avoid responsibility for the conversion by claiming that he was not actively engaged in the operation of the dealership.However, defendant is judicially estopped from denying his active participation in, and management and control of, the dealership under the doctrine of judicial estoppel: "A party is precluded from taking a position before any court which is inconsistent with a prior position taken in a judicial proceeding."In re Holiday Isles, Ltd.,29 B.R. 827, 831(Bkrtcy.S.D.Fla.1983).

In the Defendant's verified "Motion, Answer, Counterclaim and Third Party Claim"(the "verified counterclaim")² filed in the North Carolina action, which was admitted into evidence at the trial of this case, the defendant alleged that both he and his brother were "essential to the operation of Coral Gables's (sic) business and in control of same."(Emphasis added).And in an amendment to the verified counterclaim the defendant stated that:

Charles and Douglas Rebhanas individuals were inextricably woven into Coral Gables\' the dealership\'s franchise agreement by provisions in same which required them to maintain beneficial ownership and control of stock in the dealership.The dealership\'s Direct Dealer Agreement with Chrysler Corporation expressly stated:

Chrysler has entered into this agreement relying on the active, substantial and continuing personal participation in the management of the dealership\'s organization by Charles M. Rebhan and Douglas L. Rebhan.

(Emphasis added).Defendant admits that both pleadings were filed on his behalf by his counsel of record.These admissions estop the defendant from taking an inconsistent position before this Court.

Further, the defendant's prior admissions are in accord with the testimony and evidence presented at trial.Charles Rebhan testified that his brother was primarily responsible for the dealership's management but he admitted being in contact with his brother once a month to discuss the dealership's management and affairs, including discussions in September and October of 1980.He also admitted that he had been in Kalamazoo to attend to the dealership's business in late August of 1980.Thus, the evidence, admissions and estoppel all establish the debtor's personal involvement in running the dealership.

Further, the Court finds that defendant received some of the converted sales proceeds.To circumvent Michigan law, which prohibits an automobile dealership from receiving a commission on sales of credit life insurance to auto buyers, the defendant and his brother formed T.K.R. AGENCY, INC.("TKR") to receive commissions on the dealership's sales of credit life insurance.Their wives were TKR's nominal principals but the evidence established that defendant and his brother actually managed TKR.It was stipulated that routinely, when the dealership sold a car, it remitted any credit life insurance premiums to the insurance provider, American Way Service Corporation("American Way"), which sent any commissions earned on the sale to TKR.

On September 3, 1980, after the audit in which no irregularities in the dealership's inventory were found and just prior to the discovery of the sales out of trust, the dealership deviated from routine and wrote a check from its general checking account in the amount of $11,462.51 directly to TKR.And, on September 29, 1980, TKR wrote four checks, totaling $11,800.00 of which two were made payable to defendant's wife, Catherine.The defendant admitted personally receiving both of these checks, signing his wife's name to them and depositing them in his joint bank account.

Considering these facts together with the North Carolina admissions and the evidence establishing defendant's involvement in the dealership's management and conversion of the sales proceeds, the Court finds the debt to be nondischargeable under § 523(a)(6) of the Bankruptcy Code.

II.NONDISCHARGEABILITY UNDER SECTION 523(a)(4) OF THE BANKRUPTCY CODE

Section 523(a)(4) of the Bankruptcy Code provides that an individual debtor does not receive a discharge from any debt

for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.

11 U.S.C. § 523(a)(4).Count II of the amended complaint alleges that 1) the defendant breached his fiduciary duty owing plaintiff under the several trust agreements, and 2) that the defendant embezzled the proceeds of the sales of cars financed by plaintiff.These claims are both independent and alternative.

A.Fraud or defalcation while acting in a fiduciary capacity.

An agreement which requires the debtor to hold the sales proceeds of financed vehicles in trust and to keep those proceeds separate under a formal, express trust, imposes a fiduciary duty upon the debtor with respect to the handling of those proceeds.The debtor's failure...