In Auto. Fin. Corp. v. Nunez (In re Nunez), Nos. 17-33845-hdh7, 18-03004, 2019 Bankr. LEXIS 824 (Bankr. N.D. Tex. Mar. 15, 2019), Judge Hale denied a Floorplan lender’s non-dischargeability claim.
The Plaintiff alleges that the Defendant committed fraud in securing advances from the Plaintiff and by transferring the Secured Vehicles without being paid in full. The Plaintiff also alleges the Defendant made false representations to the Plaintiff by (1) representing that he had good and marketable title for the Secured Vehicles, and (2) representing that at the time of each advance, he had not defaulted under the terms of the Note. Contrary to the Plaintiff’s assertions, the record suggests that Mr. Brito was the main actor responsible for the sales of the 4Runner and the Highlander. As to the Elantra, the Defendant admitted he sold that vehicle and received some proceeds from the sale, but the testimony suggests that those proceeds were deposited in an account that the Plaintiff had access to. To the extent the Defendant made representations with respect to these vehicles, the Plaintiff has not satisfied its burden in proving the Defendant knew those representations were false at the time they were made or that the Defendant acted with fraudulent intent. For these reasons, the Plaintiff’s claim under section 523(a)(2)(A) fails. Section 523(a)(4) excepts from discharge a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”. . .In this case, the Plaintiff argues there was an express trust between the parties based on the following language from paragraph 4.0 of the Note: Upon the sale of any item of Purchase Money Inventory, Dealer shall hold the amount received from the disposition of inventory in Trust for the benefit of LENDER and Dealer shall pay to LENDER, in accordance with Section 2.6, an amount equal to the unpaid balance of the Purchase Money Inventory Obligations and Obligations relating to such Purchase Money Inventory. The Plaintiff claims that the Defendant “was clearly put on notice at the time he executed the Note that he was undertaking the special responsibilities of a trustee with respect to the [sale proceeds].”4 The Court disagrees. The Defendant speaks limited English and required a translator at trial. Although the Defendant is bound by the terms of the Note, his testimony revealed that he did not understand the terms of the Note when it was signed. The mere fact that the Note contains “in trust” language is insufficient to establish a fiduciary, trust relationship. See First Nat’l Bank v. Parr (In re Parr), 347 B.R. 561, 565 (Bankr. N.D. Tex. 2006). In addition, unlike the cases that the Plaintiff relies upon, the Note did not provide that the Defendant segregate the alleged trust funds into a separate account. Cf. Kubota Tractor Corp. v. Strack (In re Strack), 524 F.3d 493, 495 (4th Cir. 2008); Chrysler Credit Corp. v. Perry Chrysler Plymouth, Inc., 783 F.2d 480, 484 (5th Cir. 1986). Rather, the behavior of both parties indicates that the proceeds of vehicles were not being treated as property held in trust. The Defendant deposited all proceeds from the operation of the Dealership into a single bank account, and the Plaintiff effectively had access to that account. The Defendant gave the Plaintiff signed blank checks, and the Plaintiff would periodically complete the amounts on those checks and take money out of the Defendant’s commingled bank account regardless of whether cars were sold. Based on these facts, the Court does not believe there was intent to create an express trust. Therefore, the Plaintiff has not met its burden of proof for defalcation under section 523(a)(4). The Plaintiff next alleges the Defendant committed embezzlement, which is defined for purposes of section 523(a)(4) as the “fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come.” Miller v. J.D. Abrams Inc. (In re Miller), 156 F.3d 598, 602 (5th Cir. 1998). To prove embezzlement, the Plaintiff must show that (1) the debtor appropriated funds, (2) the appropriation was for the debtor’s use or benefit, and (3) the debtor did the appropriation with fraudulent intent. Smith v. Hayden (In re Hayden), 248 B.R. 519, 525 (Bankr. N.D. Tex. 2000) (listing cases). It is undisputed that the Plaintiff advanced funds to the Defendant and entrusted these funds with the Defendant pursuant to the terms of the Note for the purpose of purchasing the Secured Vehicles. At trial, the Defendant admitted he received $6,000 for the sale of the Elantra.5 He later testified that all of the proceeds he received from the Dealership went into a single bank account from which the Plaintiff regularly withdrew funds. But the Plaintiff maintains it never received any sale proceeds from the Elantra.6 While these facts may satisfy the first element of a claim for embezzlement, the Court does not believe the Plaintiff has met its burden of proof as to the second and third elements. There was no testimony or line of questioning suggesting that the Defendant actually used these funds for his personal use [*11] or benefit, and the Court is unable to conclude from the surrounding circumstances that the Defendant acted with fraudulent intent. For these reasons, the Plaintiff’s claim for embezzlement under section 523(a)(4) also fails.