EISEN, Bankruptcy Judge
Although a bankrupt did in fact convert the proceeds of sales of the creditor's gasoline, such conversion was not willful and malicious within the meaning of Section 17a(2) of the Bankruptcy Act since the creditor knew of the bankrupt's unreliability and prior failures to account and accurately report sales. See Sec. 17a(2) at ¶ 2146 and Sec. 523(a)(2) at ¶ 9228.
Former Bankruptcy Act — Discharge of Debts — Breach of Fiduciary Relationship — Dealer Consignment Agreement
If a fiduciary relationship does not exist between the parties to a dealer consignment agreement, a creditor's claim for misappropriation of funds under Section 17a(4) will be denied. See Sec. 17a(4) at ¶ 2148 and Sec. 523(a)(4) at ¶ 9230.
[Digest of Opinion]
The bankrupt was a gasoline service station operator who purchased petroleum products from the creditor under a dealer consignment agreement which called for a regular accounting and payments based on receipts from sales. The relationship commenced September 9, 1977 and concluded in June of 1979 at which time the bankrupt failed to account for certain proceeds of sales of gasoline. The evidence showed that the bankrupt was not a good businessman, kept poor records and failed repeatedly to properly account to the creditor throughout the course of their relationship.
The complaint alleged that the bankrupt's failure to remit proceeds and to account for sales of the consigned fuel amounts to a willful and malicious conversion of the creditor's property under Section 17a(2) of the Bankruptcy Act. The creditor also argued that this debt is nondischargeable pursuant to Section 17a(4) of the Act, which provides that discharge of the debt is denied if the liability was created "by the debtor's fraud, embezzlement, misappropriation or defalcation while acting as an officer or in any fiduciary capacity."
Turning its attention to the first issue, the court cited Bennett v. W.T. Grant Co., 481 F.2d 664 (4th Cir. 1973), which found that even where there is a finding of malicious intent to convert, if, after the conversion, the creditor "acquired knowledge of the transaction at a time when it could have asserted its security interest in the property and failed to take reasonable steps to protect its security, the indebtedness secured thereby should be discharged."
In the instant case, the creditor knew that the bankrupt was unreliable and in financial difficulty. It also knew that the bankrupt had from time to time failed to account and not accurately report sales as required under the dealer agreement. Thus, the court concluded that although the bankrupt did in fact convert the proceeds of sale of the creditor's gasoline, such conversion was not wilful and malicious as required for a finding of non-dischargeability under the statute.
The court next turned its attention to the second issue. To prevail on such a claim, the court observed it must be shown first that the debtor stands in a fiduciary relationship to the creditor, and that he was a fiduciary prior to and without regard to the alleged wrongful act. The court concluded, that there was no showing that the dealer consignment agreement predated a fiduciary relationship. Therefore, the creditor's claim of non-dischargeability pursuant to Section 17a(4) was denied. Consequently, the bankrupt's debt was discharged.