The debtor, as an indirect majority owner and manager of a car dealership (the “company” or “dealership”), financed the dealership’s floor inventory through the creditor. Under the Automotive Wholesale Financing and Security Agreement (the “Agreement”) between the creditor and the dealership, the creditor agreed to fund the vehicle inventory but had to receive a security interest in all assets of the company except for real property. After conducting three audits of the company’s inventory, the creditor determined that the company breached the Agreement by selling vehicles “out of trust,” or not paying the creditor after making sales. The debtor admitted this breach, claiming the company could not pay because some buyers had not yet paid the company. The debtor then obtained funding from outside sources to continue operating the company, which resulted in some of the vehicles being pledged to multiple lenders. The creditor sent a written notice of the default and a loan termination date by which the company must pay the balance owed. The company continued to breach the Agreement with the creditor. In response, the creditor sued in state court, where it obtained a judgment and a temporary order of replevin requiring the debtor and the company to preserve the creditor’s collateral. In violation of the order, the company continued to sell vehicles in breach of trust. The state court held the debtor in contempt and sentenced him to thirty days in jail; however, the court commuted his sentence because he submitted a payment to the creditor. Later, the creditor received court approval to remove its collateral from the company, which soon closed. The debtor filed for bankruptcy, listing the dealership as a business name he had used. In the bankruptcy case, the creditor sued the debtor for “fraud, embezzlement, and willful and malicious injury,” and asked the court to declare the debt nondischargeable based on the debtor’s fraudulent acts.
In Nissan Motor Acceptance Co. LLC v. Bunn (In re Bunn), Nos. BK22-40994-TLS, A23-4004-TLS, 2024 Bankr. LEXIS 2091 (Bankr. D. Neb. Sept. 9, 2024) (opinion not yet released for publication), the court found that the company owed the full amount claimed by the creditor, and, with respect to the debtor, excepted from discharge the portion of the debt attributable to the sale of collateral out of trust and the pledge of the collateral to another lender, under 11 U.S.C. §§ 523(a)(2)(A), (a)(4), and (a)(6). First, the court concluded that state law authorized the imposition of individual liability on “officers and directors” of a company for tortious acts. Huffman v. Poore, 569 N.W.2d 549, 557-59 (Neb. Ct. App. 1997). The court then considered both the Nebraska fraudulent misrepresentation and the bankruptcy code section 523 false representation claims. The court held that the debtor met the elements for both by accepting funds under the Agreement while also securing alternate financing with the same collateral, which financially harmed the creditor due to its justifiable reliance on the Agreement. Additionally, the court concluded that the out-of-trust sales independently supported fraud claims, regardless of the debtor’s assertion that he lacked knowledge of the out-of-trust sales, because as the director, he should have known of the company’s ongoing breaches of the Agreement. The court similarly held that the debtor’s conduct was “unarguably” willful and malicious because he “knowingly, intentionally, and wrongfully” caused economic injury to the creditor by repeatedly breaching both the Agreement and the state court’s replevin order. The court also noted that the debtor commingled funds from various businesses and treated business accounts as personal accounts, casting serious doubt on his claims that he did not personally benefit from the misused funds. Finally, the court held that the debtor committed embezzlement by failing to remit proceeds owed to the creditor and instead using the funds for the debtor’s own or the company’s purposes.
By Taylor O’Brien [email protected]
Edited By Conor Doris [email protected]
Edited By Callighan Ard [email protected]
Edited By Hayden Mariott [email protected]