Case Summary:
Dealer Services Corporation (“DSC”) filed this adversary action to determine the nondischargeability of its claim under § 523(a)(2), § 523(a)(4) and § 523(a)(6). At trial, DSC established that the Defendant, owner of a used car dealership, purchased his inventory under a “flooring planning” agreement whereby DSC financed the purchase of all inventory in exchange for a security interest in the vehicles. Under the agreement, all proceeds that the Defendant received from the sale of his inventory were to be held “in trust” for DSC. When the Defendant stopped making payments to DSC on the loan, a DSC representative performed a field audit and determined that the inventory had inexplicably “disappeared.” The Debtor denied all wrongdoing, and at trial was asked no questions by DSC’s counsel relating to the vehicles’ whereabouts. Accordingly, the Court found that DSC did not meet its burden of proof under either § 523(a)(2), or § 523(a)(6) as there was no proof that the defendant acted with any “negative intent” or “scienter.” The Court also found that while the floor planning agreement did constitute an express trust, DSC failed to establish that the Debtor committed defalcation. The Court dismissed DSC’s complaint.

Statute/Rule References:
11 U.S.C. § 523(a)(2)(A) -- Nondischargeability - Fraud
11 U.S.C. § 523(a)(4) -- Nondischargeability - Fraud in Fiduciary Capacity
11 U.S.C. § 523(a)(6) -- Nondischargeability - Willful and Malicious Injury

Key Terms:
Actual Fraud
Defalcation while Acting as a Fiduciary
Express Trust