Matter of Schnitz

• Court: U.S. District Court — Western District of Missouri
• Writing for the Court: SCOTT O. WRIGHT
• Citation: Matter of Schnitz, 52 B.R. 951 (W.D. Mo. 1985)
• Decision Date: 25 June 1985
• Docket Number: No. 84-1145-CV-W-5.,84-1145-CV-W-5.
• Parties: In the Matter of James H. SCHNITZ, Debtor. MISSOURI DEPARTMENT OF CONSERVATION, State of Missouri, Plaintiff, v. James H. SCHNITZ, Defendant.

52 B.R. 951 (1985)

In the Matter of James H. SCHNITZ, Debtor MISSOURI DEPARTMENT OF CONSERVATION, State of Missouri, Plaintiff, v. James H. SCHNITZ, Defendant.

No. 84-1145-CV-W-5.

United States District Court, W.D. Missouri, W.D.

June 25, 1985.

Richard G. McMorris, Kansas City, Mo., for plaintiff.

Carolyn DeRoos, Jefferson City, Mo., for defendant.

ORDER

SCOTT O. WRIGHT, District Judge.

The issue in this bankruptcy appeal is whether an agreement between the debtor/appellant and creditor/appellant Missouri Department of Conservation by which the debtor was authorized to issue hunting and fishing permits created an express trust. Following a hearing, the Bankruptcy Court held that a trust had been created, and that the debtor's defalcation while acting in a fiduciary duty rendered a debt of $2,685.14 nondischargeable pursuant to 11 U.S.C. § 523(a)(4) of the Bankruptcy Code. For the following reasons, this Court reverses and concludes that no trust was created by the agreement and, therefore, the debt was dischargeable.

Although the parties are in disagreement as to the correct legal conclusion in this case, there is no dispute as to the facts which are set forth in the Bankruptcy Court's opinion as follows:

On December 11, 1980, James H. Schnitz, debtor/defendant (hereinafter Schnitz), entered into an Agreement with Plaintiff, Missouri Department of Conservation, where Schnitz was appointed as a hunting and fishing permit issuing agent for Jackson County, Missouri. This relationship was documented by a Permit Issuing Agreement which Schnitz dated and signed. (PL Ex. 2). The Agreement sets forth guidelines which the Permit Agent must follow. For example, the Agent may only sell the hunting and fishing permits, collect the money, and remit the sale proceeds, less the seven percent (7%) fee "not less than once monthly or at any time the amount reaches or exceeds $500.00 . . ." (Permit Issuing Agent Agreement ¶ 3). Schnitz sold these permits to the public from his own business, Coast to Coast Hardware, located in Oak Grove, Missouri.

The Agreement also establishes conditions regarding the permits, records, and funds collected. All permits and records remain property of the Missouri Conservation Commission. Id. at ¶ 1. The Agreement also states that "it is further understood that monies collected from the sale of hunting and fishing permits are State funds and any use of such funds for personal gain is prohibited by law and is a felony." Id. at ¶ 3.

Finally, the Agreement states that all monies received are held in trust for the Missouri Conservation Commission.

Plaintiff additionally produced the Manual for Hunting and Fishing Permit Issuing Agents which outlines the agent\'s responsibilities and procedures in more detail, (PL Ex. 1), and a certified copy of the State Audit for the Department of Conservation. On page nine (9) under the heading of Remittance Procedures, the Manual clearly states that the permit money is held in trust and that a report and remittance must be made at least once a month. The audit reveals that the Department of Conservation has a financial statement entry entitled "Trust Fund" with a balance of about five (5) million dollars.

It is apparent from the testimony and pleadings that Schnitz failed to follow these required guidelines. He merely placed the funds collected from the sale of the permits into his general business checking account. From this account he commingled funds and paid his general expenses. Over the course of several months, he continually had insufficient funds to remit the sale proceeds to the Department of Conservation. The Department of Conservation contends it is owed $2,685.14, while the Debtor scheduled the claim for $3,685.14. The repeated demands for payment created no response, so the Department of Conservation was preparing to file its suit in the state court. Schnitz claims that no one contacted him in person, only by letter. After thirty days, all contact ceased. However, on September 21, 1983, Schnitz voluntarily filed for relief under Chapter 7 of the Bankruptcy Code. Plaintiff seeks to have this debt excepted from discharge based upon defalcation while acting in a fiduciary capacity.

In the instant case, the Bankruptcy Court determined that an express trust was created by the licensing agreement with the State of Missouri. The Bankruptcy Court's conclusions of law are in part set forth as follows:

Generally the term "fiduciary capacity" is associated with the notion of a trust or confidence relationship arising when one\'s property is placed in the custody of another. See, e.g. In re Niven, 32 B.R. 354 (Bkrptcy.W.D.Okla.1983). For purposes of dischargeability of a debt, "fiduciary capacity" means an express or technical trust, not a trust imposed ex-maleficio. See, Davis v. Aetna Acceptance Co., 293 U.S. 328 55 S.Ct. 151, 79 L.Ed. 393 (1934). "The relationship must be created prior to the act of wrongdoing and not be a result of the act." In re Marshall, 24 B.R. 105, 107 (Bkrptcy.W.D.Mo.1982). The fact that a commercial agreement contains the word, "trust," does not automatically create a trust agreement or fiduciary relationship. In re Paley, 8 B.R. 466, 469 (Bkrptcy.E.D.N.Y.1981). The Court must analyze the substance of the relationship and not its form when determining if an express or technical trust exists. Id.

There are several factors to consider when characterizing a potential trust relationship. First, an explicit declaration of the creation of a trust is necessary. Second, there should be a clearly defined res. Third, the parties need to intend to create a trust. In re Cairone, 12 B.R. 60, 62 (Bkrptcy.D.R.I.1981). Finally, a separation of legal title and equitable ownership of the res is necessary. In re Adkisson, 26 B.R. 879, 882 (Bkrptcy.E.D. Tn.1983).

In re Cairone, 12 B.R. 60 (Bkrptcy.D. R.I.1981) involves a lottery sales agent license from the State of Rhode Island. Debtor failed to remit proceeds of the sale to the state. According to state law, the proceeds of the sale were held in trust for the state. The Court, finding the debt non-dischargeable, reasoned that:

"by applying for and accepting a Lottery Sales Agent license, the Debtors became subject to the obligations imposed by the State, including the requirement that the monies they collected belonged to the State of Rhode Island and were to be held by them in trust for the State until delivered to the Commission. The relationship between the Cairones and the Lottery Commission was clearly of a fiduciary nature."

Id. at 63.

In re Niven, 32 B.R. 354 (Bkrptcy.D. Okla.) concerns a "Trust Agreement" to sell money orders to the public. Defendant failed to pay the sums due to the plaintiff company and commingled the proceeds of the sale with other business funds. The Court stated that each case should be scrutinized according to the facts, finding the debt non-dischargeable because the res was clearly defined.

By contrast, the debtor, in the case at bar, relies primarily upon Matter of Lucas, 21 B.R. 585 (Bkrptcy.W.D.Pa.1982) which involves a debtor who sold hunting and fishing licenses and was required to remit the proceeds, less commissions, to the Commonwealth at least once a month. The Court found that no express trust existed thereby discharging the debt. Even though the facts in Lucas appear virtually identical to the case at bar, it may be distinguished for one crucial reason. The Pennsylvania statute establishing the relationship does not state that the funds are held in trust and no other evidence was presented to establish a trust relationship. 30 P.L. § 2711 (Supp.1984).

In the case at bar, the Court must determine whether a fiduciary relationship exists between the parties. The Court finds that an express trust was created for the following reasons: 1) the permits and records remain property of the Conservation Commission, thereby retaining legal title in the Department of Conservation and equitable ownership in the debtor; 2) the Permit Agreement and Manual clearly state that the funds from the sale are held in trust for the Department of Conservation; 3) it is a felony to use the money from the sale of permits for personal use; 4) the financial statement for the Department of Conservation has a specific account for a "Trust Fund"; 5) the res is clearly identified as the amount received the sale of the permits, less a 7% commission; 6) the Department of Conservation intended to create a trust, and by signing the Agreement, Schnitz also agreed, and 7) the trust arose before the defalcation.

Once the fiduciary relationship is established, the plaintiff must prove that Schnitz committed defalcation. "`Defalcation\' has been defined as `the failure of one who has received monies in trust to pay it over as he ought . . .\'" In re Niven, 32 B.R. at 355-356, quoting In re Herbst, 22 F.Supp. 353, 354 (D.C.S.D.N.Y.1937). This term is broader than fraud or embezzlement. Id. The debtor has admitted his failure to pay the monies due by listing the Department of Conservation as a creditor in the amount of $3,685.14. Additionally, within the Defendant\'s Suggestions in Opposition to Plaintiff\'s Motion for Summary Judgment, Defendant states that:

"the only thing that happened was that the Respondent sold numerous hunting licenses, deposited the funds in the bank account with all the other funds that was (sic) received during the normal operation of the store, and then deposited those funds in his bank to pay debts as they became due. The problem in this case was that more utility bills and rent came due than there were funds in the bank, and it became necessary for the Respondent to file bankruptcy."

Because the debtor/defendant cannot remit the funds received from the sale of the permits to the Department of Conservation the Court finds that a defalcation occurred. According to testimony, the final audit determined that the amount due is $2,685.14.

This Court finds that Plain

...