Rent-A-Center East, Inc. v. Brian F. Leonard

United States Court of Appeals
For the Eighth Circuit
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No. 14-3190
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In re: WEB2B Payment Solutions, Inc.
lllllllllllllllllllllDebtor
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Rent-A-Center East, Inc.
lllllllllllllllllllllAppellant
v.
Brian F. Leonard, Trustee
lllllllllllllllllllllAppellee
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Appeal from United States District Court
for the District of Minnesota - Minneapolis
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Submitted: November 18, 2015
Filed: March 4, 2016
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Before SMITH, BYE, and BENTON, Circuit Judges.
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BENTON, Circuit Judge.
WEB2B Payment Solutions, Inc. provided automated clearinghouse and
electronic-check conversion services to Rent-A-Center East, Inc. (“RAC”). In 2011,
WEB2B filed for bankruptcy. North American Bank turned over WEB2B’s balances
to the Chapter 7 trustee, Brian F. Leonard. RAC filed a complaint, claiming
$801,378.76 of the balances as an express trust, resulting trust, or constructive trust.
The Bankruptcy Court dismissed RAC’s claims, granting summary judgment to the
Trustee. The District Court1 affirmed. RAC appeals. Having jurisdiction under 28
U.S.C. § 158(d)(1), this court affirms.
I.
RAC’s primary business is renting furniture and appliances. For check-
processing, RAC made a Processing Client Agreement with WEB2B in March 2007.
For about 100 customers, including RAC, WEB2B provided automated
clearinghouse, electronic-check conversion, credit verification, and credit-card
services.
The Processing Agreement prescribed how checks are processed: WEB2B
“has contracted with a financial institution where [WEB2B] maintains an account on
behalf of third parties such as [RAC] to accept electronic credit and debit entries for
[RAC].” WEB2B permitted RAC “to initiate electronic signals for paperless credit
and debit entries through the Processor [WEB2B] to accounts maintained by [RAC]
at one or more Originating Depository Financial Institutions (ODFIs) and in other
banks and financial institutions, by means of the Automated Clearing House (ACH)
or other applicable check and funds transfer clearing systems.” (Emphasis added).
In an exhibit to the Agreement, WEB2B agreed to “initiate debit and/or credit entries
to [RAC’s] Checking Account indicated below at the depository financial institution
1
The Honorable David S. Doty, United States District Judge for the District of
Minnesota.
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. . . and to debit and/or credit the same to such an account.” This checking account
was at Intrust Bank, RAC’s bank.
Before reaching Intrust’s checking account, WEB2B processed RAC’s checks
by ACH or Check 21. In ACH, an originator converts a check to a text file for
transmission by an ODFI to an automated clearinghouse, which transmits the entries
to a receiving depository financial institution. Check 21, an imaging system, allows
financial institutions to clear checks electronically without pre-existing agreements
between the bank of first deposit and the paying bank.
For both processes, RAC’s customers wrote checks payable to RAC or
endorsed checks to RAC. RAC then transmitted electronic images of the checks to
WEB2B (or converted them to ACH text files). Each day, WEB2B combined the
check images from its customers, including RAC, into one file that WEB2B
transferred to its secure website. North American Bank—WEB2B’s
bank—downloaded the check file and credited a single daily deposit to WEB2B’s
account 5165 at the Bank. North American Bank then sent check images to the
Federal Reserve for overnight clearing. After the checks cleared, WEB2B made a
single transfer for its customers from the 5165 account to WEB2B’s account 4548.
Finally, WEB2B made deposits to RAC’s account at Intrust Bank. From March 2007
to December 2010, WEB2B followed these steps in processing RAC’s checks,
usually taking one to two days for each day’s transactions.
In December 2010, RAC noticed that payments to its Intrust account were
delayed. WEB2B had begun transferring funds from its account 4548 into yet
another account (5173). WEB2B used the 5173 account to pay other customers and
its operational expenses, while misleading RAC about the delayed deposits. On
February 9, 2011, WEB2B made its last deposit to RAC’s Intrust account. Between
November 30, 2010, and February 28, 2011, WEB2B processed $11,880,076.91 of
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RAC’s checks. WEB2B remitted only $9,451,854.44 to RAC’s Intrust
account—leaving a $2.4 million shortage.
On April 4, 2011, WEB2B filed for bankruptcy. RAC claimed WEB2B owed
it $2,454,749.39. Creditors, including RAC, filed proofs of claim for $3,757,197.67.
North American Bank gave the Trustee $833,120.46 from WEB2B’s accounts,
including $719,480.78 from the 5173 account.
Before bankruptcy, RAC did not know how WEB2B processed its checks.
Clarence O. Wheeler IV, RAC’s designated agent for knowledge of check processing,
testified he had no interaction with North American Bank and did not know about
WEB2B’s accounts there. He stated that “we had no reason to be intimately involved
or knowledgeable about how they did—how they ran their business . . . . we were
obviously concerned that we get our money, but we did—because we got our money
to the penny we never dove into the process by which we got that money.” Wheeler
admitted that “all [he] knew and all RAC knew was that [WEB2B] would turn those
funds around at some point in time and remit to RAC’s bank accounts in Intrust
Bank.”
RAC filed a complaint seeking: a declaratory judgment that $801,378.76 in the
Trustee’s possession were RAC’s funds, a determination that an express or resulting
trust existed, or the imposition of a post-petition constructive trust. The Bankruptcy
Court denied RAC’s claim. RAC appealed to the District Court, which remanded the
case to the Bankruptcy Court. In a Restated Order, the Bankruptcy Court ruled: (1)
all proceeds from the North American Bank account were bankruptcy-estate property
under 11 U.S.C. § 541(a), (2) no express 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.
The District Court agreed.
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II.
“When a bankruptcy court’s judgment is appealed to the district court, the
district court acts as an appellate court and reviews the bankruptcy court’s legal
determinations de novo and findings of fact for clear error. As the second court of
appellate review, we conduct an independent review of the bankruptcy court’s
judgment applying the same standards of review as the district court.” In re Falcon
Prods., Inc., 497 F.3d 838, 840-41 (8th Cir. 2007). This court reviews a grant of
summary judgment de novo and “may affirm on any basis supported by the record.”
Hemmingsen v. Messerli & Kramer, P.A., 674 F.3d 814, 816 (8th Cir. 2012).
Summary judgment shall be granted “if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of
law.” Fed. R. Civ. Pro. 56(a). A court must view the evidence “in the light most
favorable to the nonmoving party.” Naucke v. City of Park Hills, 284 F.3d 923, 927
(8th Cir. 2002).
Generally, the bankruptcy estate is comprised of “all legal or equitable interests
of the debtor in property as of the commencement of the case.” 11 U.S.C. §
541(a)(1). “The nature and extent of the debtor’s interest in property are determined
by state law.” In re N.S. Garrott & Sons, 772 F.2d 462, 466 (8th Cir. 1985). Once
property rights are determined, “federal bankruptcy law dictates to what extent that
interest is property of the estate.” Id. “Congress plainly excluded property of others
held by the debtor in trust at the time of the filing of the petition.” United States v.
Whiting Pools, Inc., 462 U.S. 198, 205 n.10 (1983).
A.
RAC argues that the Processing Agreement established an express trust. Both
parties agree that Minnesota law applies.
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An express trust 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.” In re Bush’s Trust, 81 N.W.2d 615, 620 (Minn. 1957).
“A trust is created only if the settlor demonstrates, by external expression, the intent
to create a trust.” Bond v. Comm’r of Revenue, 691 N.W.2d 831, 837 (Minn. 2005).
No “particular form or words” are required to create a trust; however, “the settlor
must show ‘a definite, unequivocal, explicit declaration of trust.’” Id. “Express or
technical trusts are formed by direct and positive acts of both parties manifested by
some instrument in writing.” In re Bren, 284 B.R. 681, 697 (Bankr. D. Minn. 2002).
The Processing Agreement shows that no express trust existed. The Agreement
says that WEB2B is “acting in the capacity of an automated clearing house facilitator
providing and facilitating electronic credit and debit entries on behalf of [RAC].”
The words “on behalf of” sometimes appear in trusts. See Mahoney, Hagberg &
Rice v. Underwriting Serv. of N. Am., 1997 WL 666066, *2 (Minn. Ct. App. Oct. 28,
1997) (finding a trust when the contract stated, “The premium account shall be a
fiduciary account held in a bank . . . . This Account shall be used for all payments on
behalf of Gerber.”). The Agreement, however, explains that WEB2B “has contracted
with a financial institution where [WEB2B] maintains an account on behalf of third
parties such as [RAC] to accept electronic credit and debit entries for [RAC].”
(Emphasis added). The “account”—used to process the checks—was WEB2B’s
North American Bank account, which was used for other clients, not just RAC. By
the terms of the Agreement, RAC consented to commingling its funds with those of
WEB2B’s other clients in one account. Where “the depositor of cash consents to
commingling it with other funds of the depositee, the relationship resulting from the
transaction is not that of trustee and beneficiary . . . but that of debtor and creditor.”
In re LGI Energy Solutions, Inc., 460 B.R. 720, 729 (B.A.P. 8th Cir. 2011)
(applying Minnesota law). See also Farmers State Bank of Fosston v. Sig Ellingson
& Co., 16 N.W.2d 319, 323 (Minn. 1944) (“Where money paid to another is not
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required to be segregated by the payee and held as a separate fund for the benefit of
the payor, there is no trust.”).
RAC argues the Agreement did not permit commingling, asserting that funds
were to be processed directly to RAC’s Intrust account. By the Agreement, RAC
requested WEB2B to “permit [RAC] to initiate electronic signals for paperless credit
and debt entries through the processor [WEB2B] to accounts maintained by [RAC]
at one or more [ODFIs].” (Emphasis added). RAC emphasizes this language,
concluding it had no reason to believe that its funds would ever travel through an
account maintained by WEB2B. This conclusion is directly rebutted by the
Agreement, which states that “[WEB2B] maintains an account on behalf of third
parties such as [RAC] to accept electronic credit and debit entries for [RAC].” This
language shows that RAC’s funds would not only travel through a WEB2B account,
but also be commingled with other customers’ funds.
True, commingling of funds is not determinative; many common trust funds
regularly pool assets. See Third Nat’l Bank of St. Paul v. Stillwater Gas Co., 30
N.W. 440, 441 (Minn. 1886) (“The depositing of trust money in a bank . . . does not
change its character, or relieve the deposit from the trust. It is not the identity of the
form, but the substantial identity of the fund itself”); cf. Minn. Stat. § 48A.07(g)
(stating “a bank or trust company may: (1) establish and maintain common trust
funds for the collective investment of funds held in a fiduciary capacity”). Unlike
common trust funds, the Agreement provides for a debtor-creditor relationship for
processing checks. “If one person pays money to another, it depends upon the
manifested intention of the parties whether a trust or debt is created.” Am. Surety Co.
of New York v. Greenwald, 25 N.W.2d 681, 685 (Minn. 1946) (finding an express
trust where the writing clearly established a trust relationship—though it did not state
the word “trust,” explaining express trusts are “created by the parties in language
directly and expressly pointing out the persons, property, and purposes of the trust.”).
See also Central Nat’l Bank v. Connecticut Mut. Life Ins. Co., 104 U.S. 54, 70-71
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(1881) (finding a trust relationship where one party was not only a fiduciary and
agent “but was acting in respect to . . . all the money he collected while such agent,
under specific directions as to what he should do with it”).
The debtor-creditor relationship here is like the relationship in In re Bren,
where a family alleged that a contractor was “obligated to use the proceeds he
received from [the family] exclusively towards the construction of their home.” In
re Bren, 284 B.R. at 696. The court considered whether the written agreement
established an express trust, which would have fiduciary status in bankruptcy. Id.The court concluded there was “nothing in the Building Agreement which would
indicate the intent to create an express or technical trust. The substance of that
agreement created a debtor/creditor relationship.” Id. at 697. Applying Minnesota
law, the court declined to find an express trust because there was no requirement “to
segregate the [money] or to hold [it] in trust.” Id. So too here: the Agreement has
no requirement to segregate RAC funds, nor a definite, unequivocal, explicit
declaration of trust.
B.
RAC argues that the facts establish a resulting trust. “In Minnesota, if the
intention of the payor is that the receiving party shall keep the money in a separate
fund for the benefit of the payor or a third party, a trust is created.” In re BMC
Indus., Inc., 328 B.R. 792, 797 (Bankr. D. Minn. 2005), citing Am. Surety Co., 25
N.W.2d at 685-86. “A resulting trust is recognized when parties indicate an intent to
establish a trust relationship but fail to reflect that intent in writing.” Dollar Fed.
Sav. Bank v. Green Tree Acceptance, Inc., 1991 WL 40398, at *3 (D. Minn. Mar.
21, 1991), citing Am. Surety Co., 25 N.W.2d at 685-86. For a resulting trust “there
is always the element, although it is an implied one, of an intention to create a trust.”
Sieger v. Sieger, 202 N.W. 742, 743 (Minn. 1925). To find a resulting trust
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“circumstances must ‘show with reasonable certainty or beyond a reasonable doubt
that a trust was intended to be created.’” Bond, 691 N.W.2d at 837.
Although WEB2B eventually made deposits to RAC’s account at Intrust Bank,
the funds were first processed through, and held in various accounts with, other
clients’ funds. RAC’s agent testified that “all [he] knew and all RAC knew was that
[WEB2B] would turn those funds around at some point in time and remit to RAC’s
bank accounts in Intrust Bank.” The agent stated that RAC “had no reason to be
intimately involved or knowledgeable about how they did—how they ran their
business.” Cf. Am. Surety Co., 25 N.W.2d at 685 (“If the intention is that the person
receiving the money shall have the unrestricted use thereof, being liable to pay a
similar amount whether with or without interest to the payor . . . a debt is created.”).
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. Cf. Bond, 691 N.W.2d at 837-38 (“The [Social Security Administration] has
not manifested any intent to create a trust with individual taxpayers. The purpose of
Social Security was not to create trusts . . . but was to provide social insurance . . . .”).
The district court did not err in concluding that the undisputed facts here do not show
with reasonable certainty or beyond a reasonable doubt that a resulting trust exists.
C.
RAC requests the imposition of a constructive trust on the $801,378.76 of the
funds that North American Bank transferred to the Trustee.
A constructive trust is an equitable remedy “intended to prevent the unjust
enrichment of a person holding property under a duty to convey it or use it for a
specific purpose.” Koberg v. Jones, 157 N.W.2d 47, 52 (Minn. 1968). “[W]henever
the legal title to property is obtained through fraud, oppression, duress, undue
influence, force, crime, or similar means, or by taking improper advantage of a
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confidential or fiduciary relationship, a constructive trust arises in favor of the person
equitably entitled to the property.” Wright v. Wright, 311 N.W.2d 484, 485 (Minn.
1981). See also In re MJK Clearing, Inc., 371 F.3d 397, 401 (8th Cir. 2004) (“To
establish the right to a constructive trust under Minnesota law, Ferris must prove
MJK obtained the cash collateral by fraud, by bad faith, or by other improper
means.”). However, “fraud, in its true sense, need not even be present” and “it is not
even necessary that a fiduciary relation should exist.” Knox v. Knox, 25 N.W.2d 225,
228 (Minn. 1946). A court “is bound by no unyielding formula, but is free to effect
justice according to the equities peculiar to each transaction wherever a failure to
perform a duty to convey would result in unjust enrichment.” Id. A court must be
“persuaded by clear and convincing evidence that the imposition of a constructive
trust is justified to prevent unjust enrichment.” In re Estate of Eriksen, 337 N.W.2d
671, 674 (Minn. 1983).
In bankruptcy cases, courts are reluctant to impose post-petition constructive
trusts. A “constructive trust should not be imposed against the trustee in bankruptcy
who represents all of the creditors” when a claimant is “situated like every other
creditor and [is] not entitled to any special rights.” In re Jeter, 73 F.3d 205, 207 (8th
Cir. 1996). See also In re Omegas Group, Inc., 16 F.3d 1443, 1451 (6th Cir. 1994)
(stating a constructive trust is “fundamentally at odds with the general goals of the
Bankruptcy Code”); In re Mississippi Valley Livestock, Inc., 745 F.3d 299, 305 (7th
Cir. 2014) (imposing a constructive trust but acknowledging constructive trusts “can
subvert bankruptcy’s distribution scheme if courts lose sight of the fact that it is an
extraordinary equitable remedy, to be used sparingly.”). “When the claimant seeks
to impose the 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.” Chiu
v. Wong, 16 F.3d 306, 310 (8th Cir. 1994) (applying Minnesota law).
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RAC seeks a constructive trust, asserting the funds held by the Trustee are
traceable, converted property. Conversion requires a showing of the plaintiff’s
interest in the property and that the defendant deprived the plaintiff of it. Lassen v.
First Bank Eden Prairie, 514 N.W.2d 831, 838 (Minn. Ct. App. 1994). However,
a “plaintiff’s lack of an enforceable interest in the subject property is a complete
defense against conversion.” Id. When an entity becomes the holder of a negotiable
instrument, such as a check, that entity holds the property interest, defeating a claim
for conversion. See Id. at 839 (dismissing a claim for conversion because the
claimant “no longer had enforceable property rights in the checks and therefore no
cognizable conversion claims when First Bank mishandled them.”).
In the Agreement, RAC agreed to Check 21 “image replacement . . . pursuant
to Subpart D of 12 CFR Part 229 for those original paper checks received by [RAC]
from customers for deposit to [RAC’s] account.” Subpart D details the requirements
for substitute checks. 12 C.F.R. § 229.51. A bank receiving a substitute check “shall
ensure that a substitute check . . . (1) Bears all indorsements applied by parties that
previously handled the check in any form (including the original check, a substitute
check . . .) for forward collection or return.” § 229.51(b)(1). For ACH transactions,
by the Agreement, RAC was to “obtain proper authorization(s) for electronic signals
for paperless credit and debit entries performed on behalf of consumers in accordance
with ACH RULES.” The National Automated Clearing House Association
(“NACHA”) 2007 Operating Rules specify that authorizations must “be in a writing
that is signed or similarly authenticated.” NACHA Operating Rules § IV, Ch.
XVI.F.2 (2007).
WEB2B became the holder of the checks through a valid negotiation. See
Minn. Stat. § 336.3-201(b) (explaining that an entity becomes a holder of a check
through negotiation, which “requires transfer of possession of the instrument and its
endorsement by the holder.”). The Vice President of North American Bank testified,
“Rent-A-Center endorses the check over to [WEB2B].” These endorsements allowed
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WEB2B to deposit the funds into its accounts at North American Bank. A WEB2B
employee testified that WEB2B—not RAC—“put [the endorsements] there” because
North American Bank “wanted it.” However, that RAC was required to endorse (or
authorize) the check images or text files to WEB2B is not in genuine dispute.
Because WEB2B was the holder of the checks, RAC no longer had enforceable
property rights in the checks. See In re MJK Clearing, Inc., 286 B.R. 862, 880
(Bankr. D. Minn. 2002) (concluding no cause of action for conversion was
established and that there was “no clear and convincing evidence that a constructive
trust [was] necessary to prevent unjust enrichment”). The district court properly
concluded that RAC had identified no clear and convincing evidence of conversion
sufficient to justify imposing a constructive trust on the remaining funds.2
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The judgment is affirmed.
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2
This court need not reach questions of the Trustee’s strong-arm powers.
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