Opinion
No. 02-82350, Adv. No. 02-8167
January 7, 2004
Frank J. Galvin, for Debtor, Illinois
Timothy M. Feeney, for Plaintiffs, Illinois
Robert E. Maclin, III, for Plaintiffs, Lexington,
Richard E. Barber, Trustee, Illinois
OPINION
Before the Court is the Motion for Summary Judgment filed by the Plaintiffs, NATIONAL TOUR ASSOCIATION, INC. CONSUMER PROTECTION PLAN, by and through NATIONAL TOUR ASSOCIATION, INC. and NATIONAL TOUR ASSOCIATION, INC. (collectively referred to as "NATIONAL TOUR") against the Debtor, ALON E. NORDSTROM (DEBTOR).
The DEBTOR did not counter with her own motion for summary judgment.
This adversary proceeding arises out of the failure of the DEBTOR'S tour business. NATIONAL TOUR, a non-profit corporation which administers a consumer protection trust to reimburse consumers for losses from packaged travel deposits or prepayments upon the bankruptcy of a tour operator, paid claims of $169,910.14 on behalf of the DEBTOR, taking an assignment of her customers' claims. By its complaint, NATIONAL TOUR contests the dischargeability of that debt under Sections 523(a)(2), (a)(4) and (a)(6) of the Bankruptcy Code. NATIONAL TOUR has moved for summary judgment on all counts of the complaint, contending that there is no issue of material fact to be resolved at trial. Its motion is based in large part upon the DEBTOR'S failure to comply with the requirement imposed on travel promoters pursuant to the Travel Promotion Consumer Protection Act, to deposit ninety percent of all monies received for future trips.
The parties have stipulated to the admission of the DEBTOR'S testimony at the Rule 2004 exam conducted by NATIONAL TOUR. The DEBTOR, an active member of NATIONAL TOUR, operated a travel agency known as Pearsall Best Time Tours for a period of ten years. Throughout that period, she organized and promoted numerous excursions to various locations throughout the United States, offering both extended and short trips. The DEBTOR admitted that she routinely used deposits and prepayments for future packaged travel to pay for expenses related to current packaged travel. As a result of the tragedy of September 11, 2001, her business suffered an unprecedented decline. During the six-month period preceding the closing of the agency in the spring of 2002, the DEBTOR continued to market trips, running a number of specials, in an attempt to save the business. She applied for, but did not receive, a Small Business loan. The DEBTOR testified that she had put over $100,000 of family money into the business over the years.
The DEBTOR sponsored tours to New York, Daytona Beach and Fort Meyers Beach, Florida, and Branson, Missouri. The longest trip offered by the DEBTOR was a 28-day tour to Fort Meyers Beach in Florida in January of every year. In addition, the DEBTOR promoted numerous three day tours to the Mall of America. Many of her customers had participated in other tours promoted by the DEBTOR.
Despite the DEBTOR'S efforts to keep the business operating, the doors closed in April of 2002. The DEBTOR cancelled the scheduled tours, but was unable to refund the deposits made by customers for those trips. One month later, on May 20, 2002, the DEBTOR filed a Chapter 7 petition. As a participating member of NATIONAL TOUR'S Consumer Protection Plan, her customers, meeting certain criteria set forth in the plan, became entitled to recover the amount of their deposits from NATIONAL TOUR by reason of the bankruptcy filing. In order to receive payment, customers are required to assign their claim to NATIONAL TOUR. NATIONAL TOUR timely filed a proof of claim in the bankruptcy proceeding, classifying its claim as contingent and unliquidated, and asserting a priority under Section 507(a)(6). NATIONAL TOUR filed this adversary complaint seeking to determine both the dischargeability of, and the amount of, the DEBTOR'S debt.
Summary Judgment
Summary judgment is properly granted when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Celotex v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Summary judgment will be granted only where it is clear that there is no dispute about the facts or inferences to be drawn therefrom. Central Nat. Life Ins. v. Fidelity and Deposit Co. of Maryland, 626 F.2d 537 (7th Cir. 1980). On a motion for summary judgment, the court must view the evidence in the light most favorable to the nonmoving party. In re Chambers, 348 F.3d 650 (7th Cir. 2003). It is not the role of the trial court to weigh the evidence or to determine its credibility, and the moving party cannot prevail if any essential element of its claim for relief requires trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
In support of its Motion for Summary Judgment, NATIONAL TOUR filed a Memorandum, attaching a copy of the transcript of the DEBTOR'S deposition, copies of certain checks and bank deposit tickets, a copy of the DEBTOR'S response to a request for admissions, a copy of the DEBTOR'S response to interrogatories, and copies of certain travel brochures. The DEBTOR filed a response admitting or denying the statement of facts relied upon by NATIONAL TOUR, but did not attach any affidavits, documents or other evidentiary papers. In reply, NATIONAL TOUR objects to the response, alleging that it does not conform to the local rule governing summary judgment motions and responses, CDIL — LR 7.1(D). NATIONAL TOUR contends that it is entitled to summary judgment on the basis that the response should be disregarded and because the DEBTOR failed to present evidence sufficient to controvert the factual allegations underpinning the motion.
NATIONAL TOUR misapprehends the summary judgment process. It is the movant who bears the burden to prove each fact material to its claim and to establish (1) that there is no genuine issue of material fact and (2) that, based upon an application of the law to those established facts, the movant is entitled to judgment as a matter of law. Where the movant fails to establish that entitlement in the first instance, summary judgment is not proper, even if the opposing party fails to respond or the response fails to adequately controvert the facts established by the movant. See, Hoover v. Switlik Parachute Co., 663 F.2d 964, 967 (9th Cir. 1981) (where no opposition to motion filed, summary judgment should not be granted if the evidence in support of the motion is insufficient); Hibernia Nat. Bank v. Administration Cent. Sociedad Anonima, 776 F.2d 1277, 1279 (5th Cir. 1985) (summary judgment cannot be granted simply because there is no opposition, even if the failure to oppose violated a local rule); Henry v. Gill Indus., Inc., 983 F.2d 943, 950 (9th Cir. 1993) (local rule that requires the entry of summary judgment simply because no papers opposing the motion are filed, without regard to whether genuine issues of material fact exist, would be inconsistent with Rule 56). The opposing party may rely on the movant's failure to prove its claim, and is under no obligation to offer affidavits or any other materials in support of its opposition. In re Rogstad, 126 F.3d 1224, 1227-28 (9th Cir. 1997).
Moreover, even though not tendered by the DEBTOR, the transcript of her deposition and her responses to written discovery requests, having been submitted by NATIONAL TOUR, are part of the record and must be considered by the Court in toto. Since the sworn testimony of the DEBTOR is contained in the deposition transcript and her testimony is competent evidence, there is simply no need for an additional affidavit from her.
Accordingly, the Court rejects the contention of NATIONAL TOUR that it is entitled to summary judgment without consideration of whether it has carried its threshold burden of proving the absence of any genuine issue of material fact and its entitlement to judgment as a matter of law.
Nondischargeability
Exceptions to discharge are contained in Section 523(a) of the Bankruptcy Code. The burden is on the creditor to establish each element of the exception to dischargeability by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661,112 L.Ed.2d 755 (1991). In order to afford the debtor a "fresh start," exceptions to discharge are construed strictly against the creditor and liberally in favor of the debtor. Meyer v. Rigdon, 36 F.3d 1375 (7th Cir. 1994). The complaint filed by NATIONAL TOUR asserts claims under Section 523(a)(2)(A) for false pretenses and actual fraud; under (a)(4) for embezzlement, larceny and fraud or defalcation while acting in a fiduciary capacity; and under (a)(6) for willful and malicious injury.
NATIONAL TOUR'S claim against the DEBTOR is not based on any right of indemnification, but is asserted as assignee of the customers' claims.
Section 523(a)(2)(A): Fraud and False Pretenses
NATIONAL TOUR contends that its debt is excepted from discharge under Section 523(a)(2)(A), for false pretenses and actual fraud. In order to sustain a prima facie case of fraud, courts have traditionally required a creditor to establish that: (1) the debtor made a representation to the creditor; (2) at the time of the representation, the debtor knew it to be false; (3) the debtor made the representation with the intent and purpose of deceiving the creditor; (4) the creditor relied on the representation resulting in a loss to the creditor; and (5) the creditor's reliance was justifiable. Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). Those courts differentiating a claim for false pretenses require the creditor to show that the property was obtained by the debtor "through representations which the debtor either knew to be false or made with such reckless disregard for the truth as to constitute willful misrepresentation." Matter of Sheridan, 57 F.3d 627 (7th Cir. 1995). In addition, the creditor must prove that the debtor acted with an intent to deceive and that the creditor relied on the debtor's misrepresentation. Id.
Though NATIONAL TOUR does not rely on the Seventh Circuit's revivified definition of fraud as "any artifice, trick or design involving direct and active operation of the mind, used to circumvent and cheat another," it would have fared no better under that standard at this juncture of the proceeding. See, McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000).
NATIONAL TOUR relies on the rule noted in Sheridan, that a misrepresentation exists when a creditor entrusts the debtor with money to use for a designated purpose and the debtor, from the moment that the funds are received, has no such intention to use the funds for that purpose. NATIONAL TOUR contends that the DEBTOR solicited the deposits for future trips in order to meet expenses on current trips and that she never intended to set aside the deposits for the future trips. No evidence has been offered of any assurances or representations made by the DEBTOR to any of her customers that the deposited funds would be set aside and used only in connection with their impending trip. Moreover, the DEBTOR'S advertisements or promotional flyers make no such representations. Rather, the flyers state that the customers' deposits are fully refundable, subject to certain cancellation fees. Absent any representation by the DEBTOR to segregate each deposit, the relationship between the DEBTOR and her customers is simply that of creditor and debtor based upon a contractual agreement. A customer's payment of the deposit to the DEBTOR transferred ownership of the monies, permitting her unrestricted use of the funds in the operation of her tour business.
NATIONAL TOUR attaches several of the DEBTOR'S recent flyers to its motion. The promotion of the bus trips to the Mall of America states that the tour is fully refundable, fixing a cancellation fee of $39 applicable during the 45-day period preceding the trip. The flyers attached for the Daytona Beach trip and Panama Canal Cruise make no mention of any refund of monies paid. The advertisement for the 2002 trip to New York contained a detailed explanation regarding the refund of monies deposited.
Even if it is assumed that she had a statutory duty to hold ninety percent of deposits in a trust account that assumed fact does not relieve NATIONAL TOUR from proving that she made a representation to each customer that the deposits, or some portion thereof, would be set aside or held in trust.
NATIONAL TOUR'S claim of nondischargeability for fraud and false pretenses is also premised upon the DEBTOR'S alleged concealment of her insolvency. Employing an "implied promise" analysis, NATIONAL TOUR maintains that the DEBTOR could never have intended to return the deposits to her customers because she was insolvent during the time she accepted those deposits, and was admittedly using them for current trips. NATIONAL TOUR contends that the DEBTOR admitted her insolvency as of January 1, 2001, by acknowledging that if every customer had made a demand for a return of monies paid for future trips, she would have been unable to satisfy more than fifty percent of their demands. While the DEBTOR may have been insolvent under a balance sheet test in that the sum of her debts exceeded the value of her assets, she may not have been insolvent in the cash-flow sense, if she was able to pay her debts as they became due. See, In re Gabor, 280 B.R. 149 (Bankr.N.D.Ohio 2002). Even so, the majority of courts consider that insolvency, of itself, does not establish fraud. See, In re Trombadore, 201 B.R. 710 (D.N.J. 1996). The DEBTOR insists that she attempted to do whatever she could to keep the business afloat. She attributes its failure to the general slump in the travel business, and denies any scheme on her part to defraud her customers. At this juncture, NATIONAL TOUR has failed to establish the elements of its claim under Section 523(a)(2)(A).
This Court notes that many of the same contentions made here by NATIONAL TOUR were rejected by the court in National Tour Ass'n v. Rodriguez, 221 B.R. 1012 (M.D.Fla. 1998). In that case, the court held that a tour operator who, like the DEBTOR here, commingled deposits received from customers for packaged travel and used those funds for general business purposes and continued to solicit deposits with knowledge of the business' financial difficulties, did not commit fraud. Rather, the court agreed with the bankruptcy court's determination that the debtor's continued efforts to save the company amounted only to poor business judgment.
The court's conclusion, made after a review of evidence far more extensive than presented here, bears repeating:
[T]he evidence does not show a pattern of Debtor "pushing for collections" on the eve of bankruptcy. The evidence does not show that Debtor's personal expenses were paid from customers' funds. There is no evidence in the record of fraudulent documents, falsified records, fictitious loans or transfers in and out to various parties, or of the Debtor's personal gain at the expense of [her] customers.
While empathizing with the debtor's customers who suffered losses, the court emphasized that those losses did not indicate the debtor's fraudulent intent. Very little in the record in this case points to a fraudulent intent on the part of the DEBTOR.
Section 523(a)(4): Larceny, Embezzlement and Fiduciary Fraud
Section 523(a)(4) excepts from discharge debts resulting from "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. § 523(a)(4). NATIONAL TOUR'S claim under this section is directed to all three bases. NATIONAL TOUR asserts that the DEBTOR'S failure to hold and preserve the customers' deposits for use on their trips constitutes larceny or embezzlement. Larceny requires a showing that the debtor wrongfully took property with fraudulent intent to convert it to his own use without the owner's consent. Matter of Rose, 934 F.2d 901 (7th Cir. 1991). Embezzlement is defined as the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come. Matter of Weber, 892 F.2d 534 (7th Cir. 1989). In order to prove embezzlement, the creditor must show that the property was rightfully in the possession of a nonowner and that the nonowner appropriated the property to a use other than which it was entrusted. In re Hayden, 248 B.R. 519 (Bankr. N.D.Tex. 2000). In addition, embezzlement requires fraud in fact. U.S. Life Title Ins. Co. of New York v. Dohm, 19 B.R. 134 (N.D.Ill. 1982). Larceny and embezzlement differ only in the manner in which possession of the funds is acquired. Hayden, supra.
Because the DEBTOR lawfully received the customers' deposits, NATIONAL TOUR'S claim of larceny is without merit. In addition, this Court's determination that the DEBTOR received the deposits from her customers without any restrictions is determinative with respect to NATIONAL TOUR'S claim of embezzlement. The DEBTOR became an owner of the funds. By way of contrast, the court's decision in In re Wada, 210 B.R. 572 (9th Cir. BAP 1997), is instructive. In that case, the debtor/travel agent received funds from the creditor to reserve travel, lodging and dining accommodations for a conference and workshop. Pursuant to their oral agreement, if the creditor canceled any of the plans, the debtor was to return all remaining funds, less any non-refundable deposits. Holding that the general rule that payment of funds pursuant to a contract confers ownership of the funds, did not apply because the debtor was acting solely as a conduit for the payment of expenses and had no contractual right to any of the monies received, the court deemed the debtor to be a nonowner of the funds. In the case at bar, the monies paid to the DEBTOR were not expressly earmarked for the payment of designated travel provider expenses. The DEBTOR was not acting as a conduit and the general rule applies.
NATIONAL TOUR admits that the DEBTOR'S initial receipt of the deposits was not wrongful, ft erroneously contends that her subsequent actions with regard to those deposits may be larcenous.
NATIONAL TOUR contends that a fiduciary relationship within the meaning of Section 523(a)(4) existed between the DEBTOR and her customers based on Section 6 of the Travel Promotion Consumer Protection Act (the "Act"). 815 ILCS 420/1 et seq. Section 6 of the Act provides:
(a) A travel promoter shall deposit 90 percent of all sums received, including but not limited to those made by cash, credit card or any other method of payment, for air or sea transportation or any other services or goods offered by the travel promoter in conjunction with that transportation, directly into a trust account in a federally insured bank or savings and loan association.
(b) The trust required by this Section shall be created and maintained for the benefit of the persons paying money to the travel promoter. The travel promoter shall not in any manner encumber the corpus of such account and shall not withdraw money therefrom except: (1) in partial or full payment for the goods or services contracted for by the passengers to the carrier or person providing the other goods or services offered by the travel promoter, or (2) to make the refunds as required by this Act or provided for by written contract between the travel promoter and passengers. This Section shall not prevent the withdrawal from the trust account of any interest earned and credited to the trust account for the sole benefit of the travel promoter, after all goods and services have been provided as contracted for, or the withdrawal at that time of any other sums on deposit in that account.
815 ILCS 420/6. Section 5(a) of the Act requires the travel promoter to promptly return any deposit or prepayment in the event the transportation is cancelled through no fault of the passenger. 815 ILCS 420/5(a).
The statute provides for an exception to the return of monies if the passenger notifies the travel promoter in writing of a different directive.
The question of whether Section 6 of the Act creates a trust relationship between travel promoters and passengers for purposes of Section 523(a)(4) is a question of federal law. The broad, general definition of fiduciary under state law, as one involving confidence, trust and good faith, is not determinative in the dischargeability context. The term only applies to a fiduciary under an express or technical trust, which must exist prior to, or independent of, the transaction from which the contested debt arose. In re Cochrane, 124 F.3d 978 (8th Cir. 1997).
The issue of whether, because of the duties imposed by Section 6 of the Act, a "travel promoter" is a fiduciary for purposes of nondischargeability need not be decided here, however. Section 2 of the Act defines a "travel promoter" to mean:
[A] person, including a tour operator, who sells, provides, furnishes, contracts for, arranges or advertises that he or she will arrange wholesale or retail transportation by air, land, sea or navigable stream, either separately or in conjunction with other services.
815ILCS420/2(a). It is not disputed that the DEBTOR meets that definition. The remaining portion of that section, however, provides a dispensation that is applicable here. In addition to excluding air carriers and their officially appointed agents, sea carriers, and river boats subject to gambling regulation, Section 6 of the Act excludes:
[A] travel promoter who has in force $1,000,000 or more of liability insurance coverage for professional errors and omissions and a surety bond or equivalent surety in the amount of $100,000 or more for the benefit of consumers in the event of a bankruptcy on the part of the travel promoter.
Viewing Section 2 of the Act in conjunction with Section 6 set forth above, it appears clear to this Court that the purpose of the statute is to alleviate the risk of defaulting travel promoters by requiring them to either obtain a surety bond or establish a trust account for deposits made by customers. A travel promoter who elects to be bonded is free from the statutory trust account requirements.
The DEBTOR carried the requisite liability insurance, in the amount of one million dollars, for errors and omissions, from the Berkley Company from 1992 through 2002. In addition, the DEBTOR, in lieu of a bond, entered into a consumer protection plan inuring to the benefit of those customers making advance payments on packaged travel, thereby satisfying the " surety bond or equivalent surety" condition. Contrary to NATIONAL TOUR'S contention, she is absolved from the statutory duty of maintaining a trust account for deposits.
DEBTOR'S response to Interrogatory No. 12.
NATIONAL TOUR alternatively suggests that a fiduciary relationship exists between the parties based on common law, citing Krautsack v. Anderson, 329 Ill. App.3d 666, 768 N.E.2d 133, 145 (Ill.App. 1 Dist. 2002), where the court noted that a travel agent has a duty to disclose all information learned by the agent which is material to the travel arrangements. Viewing travel agents as "information specialists," courts are increasingly willing to characterize those duties of the travel agent as fiduciary in nature. See, Pellegrini v. Landmark Travel Group, 165 Misc.2d 589, 628 N.Y.S.2d 1008 (N.Y. City Ct., 1995). However, a fiduciary duty to disclose material information acquired by a travel agent in making accommodations for a customer is not at issue here.
In addition, the Seventh Circuit has recently construed what it means to be a fiduciary under Section 523(a)(4) in In re McGee, 2003 WL 22999279, — F.3d — (7th Cir. 2003), a case involving a landlord who wrongfully spent a security deposit. The court noted that, with respect to deposits, the characteristics that denote a fiduciary relationship include requirements that the funds be segregated and managed by or deposited with a financial institution, as well as a recognition that the holder of the deposit has, at most, bare legal title to the funds. Because each of these requirements was imposed on landlords by the Chicago Municipal Code, the court concluded that Chicago landlords hold security deposits as fiduciaries for purposes of Section 523(a)(4).
The DEBTOR, however, exempted from the Act's definition of "travel promoter," was under no obligation to segregate the deposits or to place them in a bank account. Neither is there any evidence of an agreement with the customers that the DEBTOR'S title to or use of the deposits was limited. The fact that the customers had a right of reimbursement upon cancellation of the trip is, based on the record before the Court, an independent contractual obligation payable out of the DEBTOR'S general funds, and is not to be construed as a restriction on the DEBTOR'S title to and right to use the deposits upon receipt. NATIONAL TOUR'S suggestion that the DEBTOR was engaged in a "kiting" scheme, because she used new deposits to pay reimbursements, is a pejorative allegation that is wholly unfounded based upon the existing record.
For the purpose of its motion, NATIONAL TOUR has failed to prove that the DEBTOR acted as a fiduciary under Section 523(a)(4).
Section 523(a)(6): Willful and Malicious Injury
NATIONAL TOUR also contends the DEBTOR'S indiscriminate use of the packaged tour deposits creates a debt which is nondischargeable under Section 523(a)(6) of the Bankruptcy Code, which excepts from discharge a debt "for willful and malicious injury by the debtor to another entity or to the property of another entity," 11 U.S.C. § 523(a)(6). In order to prevail, a creditor must prove, by a preponderance of the evidence: 1) that the debtor caused an injury; 2) that the debtor's actions were willful, and 3) that the debtor's actions were malicious. In re Carlson, 224 B.R. 659, 662 (Bankr.N.D.Ill. 1998), aff'd 2000 WL 226706 (N.D.Ill.), aff'd 2001 WL 1313652 (7th Cir.). "Willful" means deliberate or intentional, and as modifying the word "injury," requires the creditor to show that the debtor actually intended to harm him and not merely that the debtor acted intentionally and was thus harmed. Kawaauhau v. Geiger, 523 U.S. 57, 18 S.Ct. 974, 140 L.Ed.2d 90 (1998). "Malicious" means in conscious disregard of one's duties or without just cause or excuse. Matter of Thirtyacre, 36 F.3d 697, 700 (7th Cir. 1994).
Generally, a claim under Section 523(a)(6) cannot be based upon a claim of fraud which falls short of meeting the test for nondischargeability under Section 523(a)(2). In re Bogdanovich, 301 B.R. 129, 143-45 (Bankr.S.D.N.Y. 2003). At this stage of the proceeding, the Court will consider NATIONAL TOUR'S Section 523(a)(6) claim on its merits without deciding, for subsequent stages, whether such claim is a viable alternative to the primary claim under Section 523(a) (2).
NATIONAL TOUR'S claim for willful and malicious injury is based on its contention that the DEBTOR misappropriated and misused her customers' deposits. As determined above, however, the DEBTOR was under no duty to segregate the deposits and NATIONAL TOUR'S claim must rest on other grounds. The DEBTOR testified that she continued to arrange trips in an attempt to keep the business going and to fulfill her obligations to the customers who had money on deposit. She invested over $100,000 from her mother in the business and sought additional financing. There is no evidence that the DEBTOR used her customers' deposits for personal gain. While NATIONAL TOUR has submitted a list of the DEBTOR'S customers and the amounts of their deposits which make up its claim, the record contains no information as to the dates the deposits were made nor any details as to the DEBTOR'S business activities during that time. The record is devoid of any evidence that the DEBTOR harbored an actual intent to harm any customer who made a deposit. NATIONAL TOUR has categorically failed to prove its claim under Section 523(a)(6).
For the foregoing reasons, the Motion for Summary Judgment filed by NATIONAL TOUR is hereby denied. This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED that the Motion for Summary Judgment filed by NATIONAL TOUR is DENIED.