UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE DIVISION

IN RE:

WILLIAM FLOYD DAVIS

DEBTOR CASE NO. 90-00648

FORD MOTOR CREDIT COMPANY PLAINTIFF

VS. ADV. NO. 91-0092

WILLIAM FLOYD DAVIS DEFENDANT

MEMORANDUM OPINION

This matter is before the Court on the plaintiff's Motion to Strike Answer and Renewed Motions for Summary Judgment and/or to Strike Answer and Alternative Motion to Enforce Settlement Agreement. Relief sought herein by the plaintiff is a money judgment for the amount of the debt owed to it by the defendant and a declaration of nondischargeability of that debt pursuant to 11 U.S.C. ''523(a)(4) and (a)(6). The defendant has not filed a response to any of the plaintiff's motions. This Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(I).

The defendant herein, William Floyd Davis, filed his bankruptcy petition in this Court on December 11, 1990. The plaintiff filed its Complaint in this matter on April 8, 1991. Therein it demanded a judgment against the defendant, holding him personally liable for $98,966.70, plus allowable interest, and a declaration of nondischargeability. The defendant filed his Answer on May 10, 1991. This Court issued its Trial Order in this matter on June 21, 1991, setting the trial for October 4, 1991.

On August 27, 1991, the plaintiff filed a Motion for Sanctions Including Striking of Answer and Judgment, alleging that the defendant had failed to produce various documents and canceled checks that had been requested, and which this Court had ordered him to produce at a hearing conducted on August 13, 1991. At a hearing conducted on September 10, 1991, the defendant was given until September 11 to produce the requested documents and until September 15 to produce the canceled checks.

The plaintiff filed an Affidavit of Noncompliance on September 17, 1991, and a Motion for Summary Judgment on September 20, 1991. The plaintiff filed its Motion to Strike Answer and Renewed Motions for Summary Judgment and/or to Strike Answer and Alternative Motion to Enforce Settlement Agreement on October 24, 1991. On the same date the defendant's attorney filed a Motion to Withdraw as Counsel of Record. Attached to that Motion was a copy of an Agreed Judgment that reflected a settlement negotiated by counsel for the plaintiff and counsel for the defendant. The defendant, according to the Motion, had refused to sign the Agreed Judgment, but had not suggested any alternative language.

The parties have memorialized stipulations of fact which establish that the defendant, as president of W.F. Davis Motor Company ("the Dealership") signed an Automotive Wholesale Plan, Application for Wholesale Financing and Security Agreement ("Wholesale Plan") on August 3, 1984, in substitution for one originally signed in May 1984. The Wholesale Plan contains language which provides for the plaintiff's security interest in the merchandise financed, as well as for the defendant's holding in trust the proceeds of the sale or other disposition of the merchandise and his remitting those proceeds to the plaintiff to the extent of the defendant's obligation to the plaintiff.

An additional security agreement was executed on July 3, 1985. The plaintiff's security interests were properly perfected by the timely filing of financing and continuation statements, and were perfected when the defendant filed his bankruptcy petition. In 1990, the defendant knew that the plaintiff had a security interest in Ford vehicles at the Dealership for resale or lease to the public, as well as in any proceeds from the sale or lease of those vehicles.

In 1990, the defendant also understood his obligation to remit to the plaintiff the wholesale balance on each vehicle out of the specific proceeds from the sale of that vehicle. Both the defendant and Debbie Miles, the only other employee to handle payments to the plaintiff, knew in 1990 that wholesale balances were to be mailed to the plaintiff within three days of the sale of a vehicle.

An audit performed on behalf of the plaintiff revealed nine cars that had been sold by the Dealership for which the proceeds had not been paid to the plaintiff, nor were those proceeds otherwise available for accounting. The vehicles sold out of trust had been reflected on monthly and weekly inventory reports the defendant received from the plaintiff prior to the time of the audit. The defendant did not disclose the sales out of trust until the audit.

The funds from the sales of vehicles made out of trust were entrusted to, or came lawfully into the hands of, the defendant as president of the Dealership. The defendant implemented no system for the segregation of funds owed to the plaintiff under its floorplan agreement from other funds of the corporation. The defendant knew that the proceeds from the vehicles sold out of trust were not being paid to the plaintiff at the time the vehicles were sold, and he failed to pay those proceeds to the plaintiff. The defendant knew that the plaintiff would lose its security interest on a vehicle when it was sold in the ordinary course of business to a bona fide purchaser, as the plaintiff's security interest in the vehicles sold out of trust terminated upon the sale of those vehicles. The defendant knew that the proceeds from vehicle sales were property of the plaintiff to the extent of the wholesale balance due on each car sold.

By letter dated October 15, 1990, the plaintiff demanded immediate payment of all proceeds from sales of vehicles out of trust. Neither the defendant nor the Dealership paid the plaintiff the proceeds from the sales out of trust. The defendant continued to draw his salary from the Dealership until November 1990. The Dealership had no funds from which to pay the plaintiff the balances owed on the vehicles sold out of trust.

After the defendant spent the proceeds from the vehicles sold out of trust without payment to the plaintiff, he had no prospects for borrowing funds with which to pay the plaintiff the balance owed on those vehicles, or for securing those funds from any other source. The defendant was, throughout September, October, and November 1990, personally aware of all sales, receipts from sales, and the balances in all of his checking accounts.

The plaintiff's damages are the balances on the vehicles sold out of trust, plus interest. The total wholesale balance due on those vehicles is $98,966.70, not including interest.

In addition to the stipulation of facts, the record in this case includes the deposition of the defendant, wherein the following testimony was elicited:

Q352 Okay. At the time that you were selling the vehicles that I was referring to as the nine (9) SOT's, or vehicles sold out of trust, did you understand that you were violating the wholesale agreement by not remitting those monies to Ford Credit?

A Yes, Sir.

(Davis depo., p. 67).

The plaintiff contends that the defendant's failure to remit the proceeds of sales out of trust constitutes either a willful and malicious injury pursuant to 11 U.S.C. '523(a)(6) or embezzlement pursuant to '523(a)(4), or both. The cases cited by the plaintiff support a finding of nondischargeability based on either or both of those subsections. Two of the plaintiff's cases, Ford Motor Credit Company v. Owens, 807 F.2d 1556 (11th Cir. 1987) and In re Branch, 54 B.R. 211 (Bkrtcy.D.Colo. 1987), deal specifically with failure to remit proceeds from sales out of trust and find that such conduct renders the underlying debt nondischargeable pursuant to '523(a)(6). It is the opinion of this Court that the plaintiff has carried forward its burden of proof in establishing that the debt of the defendant herein is nondischargeable pursuant to '523(a)(6).

As concerns embezzlement, the plaintiff must demonstrate that the defendant appropriated funds for his own benefit and that he did so with fraudulent intent. In re James, 42 B.R. 265 (Bkrtcy.W.D.Ky. 1984). See also In re Hoffman, 70 B.R. 155 (Bkrtcy.W.D.Ark. 1986) The standard of proof of fraud in dischargeability cases is a preponderance of the evidence. Grogan v. Garner, 111 S.Ct. 654 (1991). The facts stipulated in this case, as well as the defendant's own testimony, establish that the defendant knowingly failed to remit the proceeds of vehicles sold out of trust, proceeds to which the secured creditor, the plaintiff, was entitled pursuant to the terms of the Wholesale Agreement. It is the opinion of this Court that the plaintiff has carried forward its burden of proof in establishing that the debt of the defendant herein is nondischargeable pursuant to 11 U.S.C. '523(a)(4).

Federal Rule of Civil Procedure 56(c) provides that "[t]he judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FRCP 56(e) requires that the party against whom the motion for summary judgment has been made must "set forth specific facts showing that there is a genuine issue for trial."

The defendant herein has not set forth any specific facts showing that there is a genuine issue for trial. The entire record in this case shows that there is no genuine issue as to any material fact and that the plaintiff is entitled to judgment as a matter of law. Therefore, in consideration of all of the foregoing, it is the opinion of this Court that the plaintiff's Motion for Summary Judgment should be sustained.

Entered this ____day of ______________, 1992.

By the Court -

__________________________________

Judge

Copies to:

Jeffrey D. Damron, Esq.

Bruce A. Levy, Esq.

mdavis.opi