- Rent-A-Center East, Inc. v. Leonard (In re WEB2B Payment Solutions, Inc.), Case No. 14-3190
- The court held that: (1) all proceeds from the debtor's bank account from its automated clearinghouse and electronic-check conversion services to Rent-A-Center East, Inc. ("RAC") were bankruptcy estate property under Section 541(a), (2) no express trust or resulting trust was created, (3) a post-petition imposition of a constructive trust was not warranted, and (4) whatever equitable interests RAC had could be avoided by the trustee's strong-arm powers.
- Procedural context:
- RAC appealed the District Court's decision affirming the Bankruptcy Court's denial of RAC's request for a declaratory judgment that the funds turned over to the trustee were RAC's funds, a determination that an express trust or resulting trust existed, or the imposition of a post-petition constructive trust.
- The Debtor, WEB2B Payment Solutions, Inc., provided automated clearinghouse and electronic-check conversion services to RAC, pursuant to the terms of a certain Processing Agreement ("Agreement"). Under the Agreement, the Debtor allowed RAC to process electronic debit and credit entries through the Debtor to accounts maintained by RAC at one or more financial institutions by means of the ACH or other applicable check and funds transfer clearing systems. RAC's customers wrote checks payable to RAC or endorsed checks to RAC. RAC then transmitted electronic images of the checks to the Debtor. Each day, the Debtor transferred the checks to one file in its secure website. The Debtor's bank, North American Bank ("Bank"), downloaded the check file and credited a daily deposit to a certain account at the Bank. The Bank then sent check images to the Federal Reserve Bank for overnight clearing. After the checks cleared, the Debtor made a single transfer for its customers from one account to a second account at the Bank. Finally, the Debtor made deposits to RAC's account at its bank, Intrust Bank. RAC began to notice that payments to its Intrust account were being delayed. The Debtor had begun transferring funds from its first account into yet another account. The Debtor used that account to pay other customers and its operational expenses, while misleading RAC about the delayed deposits. When the Debtor subsequently filed bankruptcy, RAC claimed the Debtor owed it approximately $2.4 million. The Bank turned over $833,120.46 from the Debtor's accounts. RAC argued that the Agreement established an express trust. An express trust under Minnesota law requires: (1) a designated trustee subject to enforceable duties; (2) a designated beneficiary vested with enforceable rights; and (3) a definite trust res wherein the trustee's title and estate is separated from the vested beneficial interest of the beneficiary. The court held that the Agreement shows that no express trust existed. The Agreement proud that the Debtor had contracted with a financial institution where it maintains "an account on behalf of third parties" such as RAC to accept electronic credit and debit entries. The "account" used to process the checks was the Debtor's Bank account, which was used for other clients, not just RAC. The court noted that where "the depositor of cash consents to commingling it with other funds of the deposit, the relationship resulting from the transaction is not that of trustee and beneficiary ... but that of debtor and creditor." The court rejected RAC's argument that the Agreement did not permit commingling, asserting that the funds were to be processed directly to RAC's account at Intrust. This conclusion was directed rebutted by the Agreement, which provided that the Debtor maintains an account on behalf of third parties such as RAC to accept electronic credit and debit entries for RAC. This language showed that RAC's funds would not only travel through an account of the Debtor, but they would also be commingled with other customers' funds. Further the Agreement had no requirement to segregate RAC's funds, nor a definite, unequivocal, explicit declaration of trust. RAC next argued that the facts established a resulting trust. A resulting trust is established where the parties indicate an intent to establish a trust relationship but fail to reflect that intent in writing. Although the Debtor eventually made deposits to RAC's account, the funds were first processed through, and held in various accounts with, other clients' funds. The court noted that RAC's ignorance whether its funds were processed through a non-commingled account does not establish the intent needed to imply a trust relationship between the parties. The facts did not show with reasonable certainty or beyond a reasonable doubt that a resulting trust existed. Finally, RAC requested the imposition of a constructive trust on the funds, asserting that the funds held by the trustee are traceable, converted property. The court noted that "when a claimant seeks to impose a constructive trust upon property of a debtor in bankruptcy, and the trust fund has been mingled with the personal property of the debtor, the claimed beneficiary to the constructive trust must sufficiently trace the trust property." Referring to the Agreement and applicable banking regulations, the court observed that the Debtor became the holder of RAC's checks through a valid negotiation. RAC's endorsement of the checks over to the Debtor allowed the Debtor to deposit the funds into its account at the Bank. Because the Debtor was the holder of the checks, RAC no longer had enforceable property rights in the checks. Consequently, RAC had identified no clear and convincing evidence of conversion sufficient to justify imposing a constructive trust on the funds.
- Smith, Bye, and Benton
Joseph Hill v. Raquel King
Summarizing by J Newman
3048 in the system
3 Being Processed