In re Tester
| Decision Date | 23 June 1986 |
| Docket Number | Bankruptcy No. 7-85-00029-R,No. 7-85-0074.,7-85-0074. |
| Parties | In re Clarence B. TESTER, Betty C. Tester, Debtors. AMERICAN HONDA FINANCE CORPORATION, Plaintiff, v. Clarence TESTER, et ux., Defendants. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Virginia |
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Parvin & Wilson, Roanoke, Va., for debtor/defendants.
Strickland & Rogers, Roanoke, Va., for plaintiff.
A. Carter Magee, Jr., Roanoke, Va., Trustee.
The issue before the Court is whether the amount owing to American Honda Finance Corporation for unpaid floor-plan inventory shall be held nondischargeable pursuant to 11 U.S.C. § 523(a)(4) and (a)(6).
Upon hearing, the facts appeared as follows. The Plaintiff, American Honda Finance Corporation ("AHFC"), is a California corporation engaged in the floor-plan financing of Honda motorcycles and parts to authorized dealers. The Debtor, Clarence B. Tester, and two partners formed the corporation Valley Cycle Sales in 1976 for sale of motorcycles and parts. Since 1981 or 1982 when the two partners gave up their interests to Debtor, the Debtor has served as president. Valley Cycle Sales operated two stores — one in Roanoke, Virginia and a store in Christiansburg, Virginia, opened in 1979. The transactions relevant to this adversary proceeding arose from operation of the Christiansburg store which was managed by the Debtor's son, Wesley Tester.
On July 11, 1984, the Debtor, in his capacity as president of Valley Cycles Sales, entered into a security agreement with AHFC to provide floor-planning of inventory. The agreement was an update of an identical agreement which had been executed in 1980 when Tester was in business with his partners. The nine-page security agreement granted AHFC a continuing security interest in all collateral, including proceeds and accounts receivable. The agreement further provided in relevant part:
Shortly after execution of the security agreement, the Debtor also executed a personal guaranty statement in which he personally guaranteed performance of the obligations of Valley Cycle Sales to AHFC.
At the time relevant to these proceedings, Valley Cycle Sales had several general bank accounts at different banks upon which checks were drawn for operation of the business. Proceeds from sale of motorcycle units were not placed in a special account, nor was such an account ever discussed by the parties or requested orally or in writing by AHFC pursuant to the security agreement.
To ensure compliance with terms of the security agreement, AHFC employed floor-plan checkers to visit dealerships and conduct monthly audits. Testimony indicated that it was the common practice and procedure between the parties that at times, checks for units sold would be given to floor-plan checkers during their visits to forward to AHFC and, hence, were not immediately remitted. Some checks were mailed directly to AHFC by Valley Cycle Sales.
In 1984, Valley Cycle Sales began experiencing financial difficulty and cash flow problems. In March, 1984, it closed its operation in Roanoke. On August 24, 1984, a routine floor-plan audit was conducted at the Christiansburg store. Several days later, the report arrived at the New Jersey office of John C. Marr, Field Representative for AHFC. Entries on the report indicated that proceeds in the approximate sum of $28,000.00 from sale of eight (8) motorcycles by Valley Cycle Sales during August, 1984 had not been forwarded to AHFC. AHFC contacted Wesley Tester regarding the units and was told that checks were in the mail. The evidence reflects that two checks dated September 11, 1984 and September 12, 1984 totaling $13,906.40 were made out to AHFC but not deposited.
On September 11, 1984, the Debtor received a call from AHFC concerning the unpaid units. Debtor, who left the day-to-day operation of the business to his son and visited the Christiansburg store on an infrequent basis, testified that this was his first knowledge of any problem in remittance of proceeds. Thereafter, the Debtor contacted his son, who told him that all proceeds had been placed in the general business account and that the account had been used for payment of general business expenses, including the business payroll.
After consulting with William G. Belknap, Assistant Corporate Manager in charge of documentation for AHFC, Marr traveled to Christiansburg on September 13, 1984 to investigate the discrepancies and conduct his own audit. At that time, Wesley Tester told Marr that Valley Cycle Sales was attempting to switch its financing to another company and that approximately $10,000.00 was on hand to pay for unpaid units. Thereafter, the Debtor arrived and stated that he was unable to obtain alternative financing.
On September 14, 1984, the Debtor gave Marr a Certified check in the amount of $10,598.00 to cover payment on four (4) units to be titled. The Debtor testified that it was mutually advantageous to AHFC and Valley Cycle Sales to pay for and title these units to ensure that no problems with their sale would develop. Marr applied the amount to the units in accordance with this understanding.
On the same date, Marr prepared a handwritten agreement which acknowledged the remaining amount due AHFC for unpaid units of $17,920.40, to be paid in two monthly installments of $5,970.00 on October 14 and November 14 and one payment of $5,980.40 by December 14, 1980. The Debtor testified that it was his understanding at the time of signing the document that he was not going to be held to a strict repayment schedule, but merely given a period of 90 days within which he could obtain the necessary funds to repay the obligation. In support thereof, Tester testified that he requested that the word "agreement" in the first line of the document be changed to "letter of intent".
Almost immediately following execution of the document, AHFC repossessed all remaining floor-plan units, virtually closing the business. The units, all in good condition, were subsequently sold to American Honda Motor Company which paid the full amount outstanding on the units. Thereafter, the amount owed AHFC was reduced by a credit of balances due to Valley Cycle Sales from American Honda Motor Company for sale of parts. The total amount outstanding in controversy in this case is $13,490.40.
Valley Cycle Sales filed its Chapter 7 petition with this Court on December 31, 1984. On January 8, 1985, the Debtor and his wife filed their individual Chapter 7 petition. On April 4, 1985, AHFC filed a Complaint initiating this adversary proceeding alleging nondischargeability pursuant to 11 U.S.C. § 523(a)(4), which was thereafter amended to allege nondischargeability pursuant to § 523(a)(6). By Order of this Court previously entered, Mrs. Tester has been dismissed as a party-defendant from this adversary proceeding.
At the close of Plaintiff's evidence, the Debtor moved for summary judgment. Ruling on the motion was withheld pending presentation of the Debtor's case, at which time all matters were taken under advisement for determination.
Briefly stated, counsel for AHFC contends that the unpaid balance due AHFC should be held nondischargeable pursuant to § 523(a)(4) in that the terms of the security agreement establish a trust relationship with respect to the sale proceeds or, alternatively, that acts of the Debtor amounted to embezzlement. Further, counsel contends that the amount due AHFC should be found nondischargeable under § 523(a)(6) in that failure to remit the proceeds amounted to a willful and malicious injury to property.
11 U.S.C. § 523 outlines the exceptions to discharge in Bankruptcy proceedings. Exceptions to discharge are to be strictly construed against the objecting creditor and liberally in favor of the debtor. 3 Collier on Bankruptcy, § 523.05A at 523-15 (15th Ed.1985). See also Gleason v. Thaw, 236 U.S. 558, 35 S.Ct. 287, 59 L.Ed. 717 (1914); Roberts v. Ford, 169 F.2d 151 (4th Cir.1948); Royal Indemnity Co. v. Cooper, 26 F.2d 585 (4th Cir.1928).
The rationale for this strict construction is "to give debtors a new opportunity in life and a clear field for future effort, unhampered by the pressure of preexisting debt." Perez v. Campbell, 402 U.S. 637, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971); Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970); Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1934); Lewis v. Roberts, 267 U.S. 467, 45 S.Ct. 357, 69 L.Ed. 739 (1925); Williams v. United States Fidelity & Guaranty Co., 236 U.S. 549, 35 S.Ct. 289, 59 L.Ed. 713 (1915).
Section 523(a)(4) provides that "a discharge under Section 727, 1141, or 1328(b) of this Title does not discharge an individual debtor from any debt — . . . (4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny."
To except a debt from discharge under § 523(a)(4) on the basis of fraud as claimed in this case by AHFC, the activity of the debtor evincing that fraud must have occurred while acting in a "fiduciary capacity". The Bankruptcy Courts have developed a narrow interpretation of what constitutes a fiduciary relationship under § 523(a)(4). In re Myers, 52 B.R. 901, 904 (Bankr.E.D.Va.1985); In re Criswell, 52 B.R. 184 (Bankr.E.D.Va.1985). The term "fiduciary capacity" has consistently been limited in its application to apply only to...
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