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

Filing 15

ORDER that the judgment of the bankruptcy court is affirmed in its entirety(Written Opinion). Signed by Senior Judge David S. Doty on 7/18/2014. (PJM)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Civil No. 13-2496(DSD)
In re:

BKY Case No.: 11-42325

WEB2B Payment Solutions, Inc.

Chapter 7

Debtor.
Rent-A-Center East, Inc.,
Appellant,
ORDER

v.
Brian F. Leonard, Trustee,
Appellee.

Paul L. Ratelle, Esq. and Fabyanske, Westra, Hart &
Thomson, PA, 333 South Seventh Street, Suite 2600,
Minneapolis, MN 55402, counsel for appellant.
Andrea M. Hauser, Esq. and Leonard, O’Brien, Spencer,
Gale & Sayre Ltd., 100 South Fifth Street, Suite 2500,
Minneapolis, MN 55402, counsel for appellee.

This matter is before the court upon the appeal by appellant
Rent-A-Center East, Inc. (RAC) of a final judgment by United States
Bankruptcy Judge Robert J. Kressel.

Based on a review of the

record, the file and the proceedings herein, and for the following
reasons, the court affirms.

BACKGROUND
This adversary proceeding arises out of an arrangement between
RAC and Web2B Payment Solutions, Inc. (Web2B) relating to checkcashing services.

RAC, a business primarily engaged in renting

furniture and appliances, established a financial services division
in 2007.

Compl. ¶ 7.

payday loan services.

The division offered check-cashing and
Id.

On March 19, 2007, RAC entered into a

client agreement (Agreement) with Web2B, pursuant to which Web2B
processed

checks

received

from

clients.

See

id.

¶

8.

In

furtherance of its obligations under the Agreement and similar
contracts with other clients, Web2B agreed to establish an account
at non-party North American Banking Company (NABC), through which
it would “accept electronic credit and debit entries for” RAC. See
id. Ex. A, at 1.
On April 4, 2011, Web2B filed a voluntary petition for relief
under Chapter 11.

Compl. ¶ 3.

converted to Chapter 7.

Id.

On April 20, 2011, the case was

Appellee Brian F. Leonard (trustee)

was appointed as trustee of the bankruptcy estate.

Thereafter,

NABC turned over approximately $933,000, held by NABC in various
Web2B accounts, to the trustee.

Appellant’s App. at APP001558.

RAC demanded that the trustee transfer $801,378.76 of such funds,
which it claimed were proceeds traceable to it, to RAC.
Request for Relief.

The trustee declined.

Compl. at

Id. ¶ 30.

On February 24, 2012, RAC filed an adversary proceeding
against the trustee, seeking (1) a declaratory judgment that the
contested

funds

were

RAC

property

and

that

the

trustee

was

obligated to turn them over to RAC and (2) a determination that an
express or resulting trust exists or, in the alternative, (3) a

2

determination that the imposition of a constructive trust on the
contested funds is warranted.
summary judgment.

RAC and the trustee each moved for

The bankruptcy court granted the trustee’s

motion for summary judgment and entered final judgment.
Nos. 1-8, 1-9.

See ECF

RAC appeals.

DISCUSSION
This court has jurisdiction under 28 U.S.C. § 158(a). When an
appellant elects to have the district court hear its appeal of a
final judgment of the bankruptcy 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.”

In

re Falcon Prods., Inc., 497 F.3d 838, 840-41 (8th Cir. 2007)
(citation and internal quotation marks omitted).

“The district

court may not make its own independent factual findings.”
v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir. 1987).
“[i]f

the

bankruptcy

court’s

factual

findings

Wegner

Additionally,
are

silent

or

ambiguous as to an outcome determinative factual question, the
district court may not engage in its own factfinding but, instead,
must remand the case to the bankruptcy court for the necessary
factual determination.”

Id. (citations omitted).

“The court shall grant summary judgment 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.”

3

Fed. R. Civ.

P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
A fact is material only when its resolution affects the outcome of
the case.
(1986).

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248

A dispute is genuine if the evidence is such that it could

cause a reasonable jury to return a verdict for either party.

See

id. at 252.
On a motion for summary judgment, the court views all evidence
and inferences in a light most favorable to the nonmoving party.
See id. at 255.

The nonmoving party, however, may not rest upon

mere denials or allegations in the pleadings but must set forth
specific facts sufficient to raise a genuine issue for trial.
Celotex, 477 U.S. at 324.

See

A party asserting that a genuine dispute

exists - or cannot exist - about a material fact must cite
“particular parts of materials in the record.”
56(c)(1)(A).

Fed. R. Civ. P.

If a plaintiff cannot support each essential element

of a claim, the court must grant summary judgment, because “a
complete failure of proof concerning an essential element of the
nonmoving

party’s

immaterial.”
I.

case

necessarily

renders

all

other

facts

Celotex, 477 U.S. at 323.

Existence of a Trust
RAC

first

argues

that

the

bankruptcy

court

erred

in

determining that Web2B’s NABC accounts became bankruptcy estate
property upon the commencement of the bankruptcy proceedings.
Specifically, RAC argues that it holds an equitable interest in the

4

funds - that is, that an express, resulting or constructive trust
exists - such that Web2B held only legal title at the time the
bankruptcy petition was filed.

In other words, RAC argues that,

upon the filing of the petition, Web2B could contribute to the
bankruptcy

estate

only

the

title

it

held,

meaning

that

the

equitable interest held by RAC was not included in the bankruptcy
estate.

See 11 U.S.C. § 541(d).

“The bankruptcy estate generally consists of all the debtor’s
legal and equitable interests at the time the bankruptcy petition
is filed ....”

Drewes v. Schonteich, 31 F.3d 674, 676 (8th Cir.

1994) (citation omitted).

“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) (citation
omitted).

Here, the Agreement specifies - and the court agrees -

that Minnesota law applies.

Compl. Ex. A, at 3; see In re MJK

Clearing, Inc., 371 F.3d 397, 401 (8th Cir. 2004).

“[O]nce that

determination is made, federal bankruptcy law dictates to what
extent that interest is property of the estate.”

In re N.S.

Garrott & Sons, 772 F.2d at 466.
A.

Express Trust

RAC first argues that the funds at issue are subject to an
express

trust.

Specifically,

RAC

5

argues

that

the

Agreement

required Web2B to make daily remittances to RAC of the payments it
processed on RAC’s behalf, and that such a requirement constitutes
an express trust.
Under Minnesota law, “[i]n order to constitute an express
trust

there

enforceable

must
duties,

be:

(1)

(2)

a

a

designated

designated

trustee

beneficiary

subject
vested

to
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) (citation omitted).

“No particular form and no

specific words are necessary to create a trust ... [T]he settlor’s
language ... is adequate if it reveals an intent to create the
incidence of a trust relationship.”
omitted).
trust

Id. at 619-20 (citations

A definite trust res sufficient to establish an express

exists

when

a

contractual

proceeds ... as a trust [r]es.”

provision

“segregat[es]

the

Farmers State Bank of Fosston v.

Sig Ellingson & Co., 16 N.W.2d 319, 323 (Minn. 1944). “Where money
paid to another is not required to be segregated by the payee and
held as a separate fund for the benefit of the payor, there is no
trust.”

Id. (citation omitted).

Here, the Agreement states that Web2B “maintains an account on
behalf of third parties such as [RAC].”
(emphasis

added).

Such

a

provision

Compl. Ex. A, at 1

reflects

no

contractual

requirement of segregation and no intent to create the incidence of

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a trust relationship.

Rather, such language1 “contemplate[s] ...

a commingling of the proceeds ... so that there was no segregation
thereof as a trust [r]es.”

Farmers State Bank, 16 N.W.2d at 323.

Indeed,
in the context of bank accounts, [w]here 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, even
though the deposit is for the latter’s
benefit, but that of debtor and creditor ....
Money deposited in a bank to be commingled
with its other funds loses its identity and
the depositor ceases to be the owner of the
deposit, even if the deposit is to be used for
the benefit of the depositor.
In re LGI Energy Solutions, Inc., 460 B.R. 720, 729 (B.A.P. 8th
Cir. 2011) (first alteration in original) (citations and internal
quotation marks omitted).

Here, the Agreement demonstrates that

RAC consented to the potential comingling of its funds with those
of other Web2B clients.
B.

As a result, no express trust existed.

Resulting Trust

RAC next argues that, even in the absence of an express trust,
the contested funds are subject to a resulting trust.

1

Under

RAC urges the court to consider evidence outside the
Agreement, including Web2B’s practices and the testimony of its
employees concerning such practices. See Appellant’s Br. 23-24.
“Where the language used in a contract is plain and unambiguous,
the meaning is to be ascertained from the writing alone, not from
what was intended to be written.” In re Bren, 284 B.R. 681, 691
(Bankr. D. Minn. 2002). Here, the Agreement is not ambiguous on
the point of whether a definite trust res existed. As a result,
the court need not look to extrinsic evidence in determining
whether an express trust was created.
7

Minnesota law, “[a] resulting trust arises when one party makes a
disposition

of

property

under

circumstances

which

raise[]

a

presumption that the party making the disposition does not intend
the other party holding the interest in the property have the
remaining beneficial interest in it.”

In re BMC Indus., Inc., 328

B.R. 792, 797 (Bankr. D. Minn. 2005) (citation omitted), rev’d on
other grounds by 2006 WL 2502354 (D. Minn. Aug. 29, 2006).

“In

order to create a trust the settlor, alone or together with the
trustee,

must

properly

manifest

an

intention

relationship that constitutes a trust.”
Trusts2 § 13 (2003).

to

create

a

Restatement (Third) of

“The manifestation of intention requires an

external expression of intention as distinguished from undisclosed
intention,” and “ordinarily requires that the intention be to
create the trust at that time.”

Id.

“Vagueness or uncertainty

with respect to possible purposes or beneficial interests tends to
suggest that the transferor did not intend to create a trust.”

2

Id.

“The Minnesota Supreme Court has yet to use the Restatement
(Third) of Trusts to decide an issue.”
In re Jorgenson Family
Trust dated Mar. 12, 2001, No. A12-2292, 2013 WL 3155471, at *4
(Minn. Ct. App. 2013). The court, however, “is obligated to apply
state law as declared by statute or by opinion of the state’s
highest court.”
Wilson v. Colonial Penn Life Ins. Co., 454 F.
Supp. 1208, 1211 n.4 (D. Minn. 1978) (citing Erie R.R. v. Tompkins,
304 U.S. 64 (1938)). In the absence of a statute or a decision of
such a court, the court must predict the ruling that the state’s
highest court would adopt. Id. Here, lower Minnesota courts have
cited to the Restatement (Third) of Trusts, as have other courts in
this district, and, as a result, the court does so in considering
the instant appeal. See, e.g., United States v. Peterson, No. 0987, 2009 WL 3428896, at *1 (D. Minn. Oct. 16, 2009).
8

cmt. d.

“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 [resulting] trust is
created.”

In re BMC Indus., 328 B.R. at 797.

“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., No. 4-90-375, 1991
WL 40398, at *3 (D. Minn. Mar. 21, 1991) (citation omitted).
Here, contrary to RAC’s argument, the record does not support
a finding that RAC intended to create a trust.

As already

explained, RAC expressly agreed to the comingling of its funds with
those of other Web2B clients.

See Compl. Ex. A, at 1.

Further,

RAC only learned of the existence of the 5173 account - one of
Web2B’s NABC accounts, which RAC identifies as the “RAC Account” after NABC turned the funds in Web2B accounts over to the trustee.
See Compl. ¶ 12; Wheeler Dep. 26:4-25, ECF No. 9, at Aee-D-42.
Moreover, Clarence Wheeler, a RAC representative deposed pursuant
to Rule 30(b)(6), testified consistently about the lack of RAC’s
involvement in Web2B’s internal operations.

For example, Wheeler

stated that RAC “had no reason to be intimately involved or
knowledgeable about how they did - how they ran their business ...
[W]e were obviously concerned that we get our money ... [but] we
never dove into the process by which we got that money.”

Wheeler

Dep. 50:21-51:2, ECF No. 9, at Aee-D-48; see also id. at 23:8-21.

9

Unsurprisingly, RAC now seeks to explore avenues to recover funds
included

in

the

bankruptcy

estate.

The

attempted

post-hoc

announcement of a trust relationship, however, is not sufficient to
satisfy the intent requirement as needed for a resulting trust. As
a result, the bankruptcy court did not err in finding no resulting
trust.
C.

Constructive Trust

Finally, RAC argues that, even if the Agreement does not
reflect an express or a resulting trust, the court should impose a
post-petition

constructive

trust.

“The

imposition

of

a

constructive trust in bankruptcy may be appropriate if it would be
sufficient under applicable state law ....
federal

bankruptcy

law

that

ultimately

However, it is the

determines

whether

a

constructive trust is appropriate in a bankruptcy case.” In re MJK
Clearing, Inc., 286 B.R. 109, 126 (Bankr. D. Minn. 2002) (citations
omitted).
Minnesota

court

recognize

three

requirements

for

the

imposition of a constructive trust:
1. The existence of an appropriate reason to
override the status of legal title and
ownership ...; 2. The existence of an
identifiable res, or the traceable proceeds of
it, to which the constructive trust may attach
...; and 3. Possession of the res or its
traceable proceeds by the wrongdoer .....
In re Dartco, Inc., 197 B.R. 860, 867 (Bankr. D. Minn. 1996)
(citations

omitted).

In

Minnesota,

10

a

court

may

impose

a

constructive

trust

“only

when

there

is

clear

and

convincing

evidence that a constructive trust is necessary to prevent unjust
enrichment and whenever legal title to property is obtained through
fraud,

oppression,

duress,

undue

influence,

force,

crime,

or

similar means, or by taking improper advantage of a confidential or
fiduciary relationship.” In re Graphics Tech., Inc., 306 B.R. 630,
636-37

(B.A.P.

8th

Cir.

2004)

(citations

omitted).

Such

requirements are not met in the instant dispute.
1.

Conversion

RAC first argues that Web2B converted the funds at issue,
warranting

imposition

of

a

constructive

trust.

The

court

disagrees.

In Minnesota, “[t]he elements of common law conversion

are (1) the plaintiff has a property interest and (2) the defendant
deprives the plaintiff of that interest.”

Lassen v. First Bank

Eden Prairie, 514 N.W.2d 831, 838 (Minn. Ct. App. 1994) (citations
omitted).

“A plaintiff’s lack of an enforceable interest in the

subject property is a complete defense against conversion.”

Id.

Here, RAC, the initial holder of the checks, endorsed them to
Web2B, which became the holder in due course.

See Lovaas Dep.

93:8-13, ECF No. 9, at Aee-E 102; Grengs Dep. 48:13-19, ECF No. 6,
at APP 001202.
holder.”

“A negotiable instrument is the property of the

Lassen, 514 N.W.2d at 838 (citation omitted).

“A holder

is a person in possession of an instrument drawn, issued, or
endorsed to him or to his order.”

11

Id. at 838 n.6 (citation

omitted).

Therefore,

“[a]ppellant

no

longer

had

enforceable

property rights in the checks and therefore had no cognizable
conversion claims.”

Id. at 839; see also Comm. Credit Corp. v.

Univ. Nat’l Bank of Fort Collins, 590 F.2d 849, 852 (10th Cir.)
(applying

analogous

state

law).

As

a

result,

RAC

cannot

demonstrate that Web2B converted the funds at issue and such an
argument does not warrant imposition of a constructive trust.
2.

Unjust Enrichment

RAC next argues that imposition of a constructive trust is
warranted

to

prevent

unjust

enrichment.

“To

show

unjust

enrichment, a claimant must prove that another party knowingly
received something of value to which he was not entitled, and that
the circumstances are such that it would be unjust for that party
to retain the benefit of the enrichment.”

In re BMC Indus., Inc.,

328 B.R. at 796 (citation omitted). Unjust enrichment claims arise
“when a party gains a benefit illegally or unlawfully, and there is
no valid contract completely governing the rights of the parties.”
Stein v. O’Brien, 565 N.W.2d 472, 474 (Minn. Ct. App. 1997)
(citation and internal quotation marks omitted).

As already

explained, however, “[h]ere there is a valid contract completely
governing the rights of the parties ... and [RAC] has not proven
that the debtor or the trustee committed any illegal or unlawful
acts.”

In re MJK Clearing, Inc., 286 B.R. 109, 127 (Bankr. D.

Minn. 2002). Thus, RAC “fail[s] to allege any unjust enrichment or

12

wrongful conduct other than what may be inferred by the debtor’s
breach of its contractual duty.”

Matter of U.S.N. Co., Inc., 32

B.R. 675, 677 (Bankr. S.D.N.Y. 1983).

An alleged breach of

contract, however, is not sufficient to satisfy the inequity
requirement.

See id.

Indeed, “[i]t must be kept in mind that the

principle of unjust enrichment should not be invoked merely because
a party has made a bad bargain.”

In re MJK Clearing, 286 B.R. at

127 (citation omitted).
Further, the trustee argues that the imposition of a postpetition constructive trust is not warranted according to federal
bankruptcy law.

The court agrees.

Indeed, “[t]he Eighth Circuit

has not placed a total ban on constructive trusts, but allows them
[only] in very limited circumstances.”

Id. at 128 n.18.

The

instant case does not present circumstances analogous to those in
which the Eighth Circuit has approved the imposition of postpetition constructive trusts.

See id. (collecting cases).

In sum, the court finds no reason to override the status of
legal title and ownership by creating a constructive trust.3

As a

result, RAC had no equitable interest in the contested funds under
11 U.S.C. § 541(d), and the bankruptcy court correctly determined
that such funds are part of the bankruptcy estate.

3

The trustee also argues that, even if RAC held an
interest in the funds at issue, such an interest was
pursuant to the trustee’s strong-arm powers pursuant to
§ 544(a).
Because the court finds that RAC had no
interest, however, it need not reach such an argument.
13

equitable
avoidable
11 U.S.C.
equitable

CONCLUSION
Accordingly, IT IS HEREBY ORDERED that the judgment of the
bankruptcy court is affirmed in its entirety.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated:

July 18, 2014
s/David S. Doty
David S. Doty, Judge
United States District Court

14