United States Bankruptcy Appellate Panel

For the Eighth Circuit

___________________________

No. 13-6013

___________________________ 

In re: Robert N. Armstrong

lllllllllllllllllllllDebtor

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Bank of America, N.A

lllllllllllllllllllll Plaintiff - Appellee

v.

Robert N. Armstrong

lllllllllllllllllllll Defendant - Appellant

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Appeal from United States Bankruptcy Court 

for the Eastern District of Missouri - St. Louis

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Submitted: July 17, 2013

Filed: September 19, 2013 (Corrected September 20, 2013)

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Before FEDERMAN, Chief Judge, SHODEEN and NAIL, Bankruptcy Judges.

FEDERMAN, Chief Judge
Debtor Robert N. Armstrong appeals from the Order of the Bankruptcy

Court finding his debt to Bank of America nondischargeable under 11 U.S.C. §

1

523(a)(2) for fraud and § 523(a)(4) for embezzlement. For the reasons that follow,

the Judgment finding the debt nondischargeable under § 523(a)(4) is AFFIRMED. 

FACTUAL BACKGROUND

Debtor Robert N. Armstrong was the owner, sole member, and primary

manager of RNA Properties, LLC. In August 2001, RNA Properties acquired a

strip mall in Dallas, Texas though financing from Southwest Bank. The financing

came from two loans, one in the amount of $1.6 million, and a second in the

amount of $400,000. The first note was secured by a Deed of Trust on the mall. 

As relevant here, the Deed of Trust required RNA Properties to list Southwest

Bank as the loss payee on its insurance policies. The mall was insured by Public

Service Mutual Insurance Company (“PSM”), but the policy listed Southwest as

the mortgage holder, rather than as a loss payee as was required under the loan

documents. 

On January 25, 2009, a fire destroyed one of the three structures at the mall. 

PSM issued nine checks under the policy, totaling $917,149.26, made payable to

the Debtor d/b/a RNA Properties. The Debtor endorsed and deposited all of the

checks. 

At issue here are three of those insurance checks in the amounts of $80,000,

$50,000, and $5,500 – totaling $135,500 – which were made jointly payable to

1

 The Honorable Kathy A. Surratt-States, Chief Judge, United States

Bankruptcy Court for the Eastern District of Missouri.

2
“Robert Armstrong d/b/a RNA Properties LLC and Southwest Bank, An M&I

Bank, ISAOA” (the “Three Checks”). The first two checks, for $80,000 and

$50,000, respectively, were dated February 12, 2009, and were deposited into RNA

Properties LLC’s account at Bank of America on February 13, 2009. The third

check, for $5,500, was dated May 26, 2009, and was deposited into RNA

Properties’ account on June 1, 2009. All three checks were deposited into RNA

Properties’ account without Southwest’s endorsement, despite the fact that

Southwest was a co-payee on each of the checks.

The Debtor used less than $5,000 of the funds from the Three Checks to

make repairs to a portion of the mall. Instead, the Debtor diverted the majority of

the funds to his personal use. Shortly after depositing the funds into the RNA

Properties account, the Debtor caused $100,000 of the money to be transferred to

his and his wife’s personal bank account. The Debtor’s wife then wrote two

checks dated February 17, 2009 from their personal account – one for $70,000 to

pay down their home equity line of credit, and a second check for $30,000 which

was deposited into their personal savings account. The Debtor admitted he used

the insurance proceeds for personal or other business issues at his sole discretion.

Indeed, despite being paid over $900,000 in total insurance proceeds, there was no

work started at the mall, except for some cleanup and $4,863.39 in minor repairs to

the adjoining building’s roof.

Meanwhile, despite being required to do so under the loan documents, the

Debtor never informed Southwest of the fire or of any of the insurance checks. 

Instead, he continued to make the regular payments on the loans to Southwest and

pay property taxes. Southwest learned of the fire sometime around August to

October 2009, from another source or from a routine inspection of the property. 

On December 9, 2009, Southwest declared the notes in default and made demand

for payment of approximately $1.6 million under the two notes. The Debtor paid

Southwest $400,000 from six different personal accounts in response to the

demand, but Southwest foreclosed on the mall in February 2010. PSM sued the

Debtor, RNA Properties, and Southwest Bank in the District Court of Dallas

County, Texas. Bank of America was joined by Southwest as a third-party

3
defendant in relation to the Three Checks. Bank of America filed a cross-claim

against the Debtor and RNA Properties. On April 2, 2011, Bank of America and

Southwest settled Southwest’s claim for negotiating the unendorsed checks. As

part of that settlement, Bank of America paid Southwest the $135,500 represented

by the Three Checks. The Order of Dismissal of Bank of America expressly

preserved any claims by Bank of America against the Debtor and RNA Properties.

The Debtor filed a Chapter 7 bankruptcy case on October 28, 2011, staying

the state court litigation. Bank of America filed a proof of claim in the Debtor’s

bankruptcy case, based on the Three Checks. Bank of America also sought denial

of the discharge of the debt pursuant to § 523(a)(2)(A), (a)(4), and (a)(6) of the

Bankruptcy Code. 

On cross motions for summary judgment, the Bankruptcy Court held in

favor of Bank of America, finding that the debt was excepted from the Debtor’s

discharge under § 523(a)(2)(A) for fraud, as well as embezzlement under §

523(a)(4) of the Code. The Debtor appeals. 

STANDARD OF REVIEW

We review the Bankruptcy Court’s grant of summary judgment de novo.

2

Summary judgment is appropriate if the record shows 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. The Bankruptcy Court is not to weigh evidence and make credibility 3

2

 Williams v. Marlar (In re Marlar), 252 B.R. 743, 750 (B.A.P. 8th Cir.

2000) (citations omitted).

3

 Id. (citations omitted); Fed. R. Civ. P. 56(c), made applicable here by Fed.

R. Bankr. P. 7056.

4
determinations, or to attempt to determine the truth of the matter, but is, rather,

solely to determine whether there is a genuine issue of fact for trial. The Court is 4

to view the facts in a light most favorable to the nonmoving party and to give that

party the benefit of all reasonable inferences to be drawn from that evidence.5

“Rule 56(c) mandates the entry of summary judgment, after adequate time for

discovery and upon motion, against a party who fails to make a showing sufficient

to establish the existence of an element essential to that party’s case, and on which

that party will bear the burden of proof at trial.”6

Because we conclude that the Bankruptcy Court did not err in finding the

debt to be nondischargeable under § 523(a)(4) for embezzlement, we limit our

analysis to that basis for nondischargeability. As a result, we do not reach the §

523(a)(2)(A) fraud issue. 

DISCUSSION

Section 523(a)(4) of the Bankruptcy Code provides that a discharge under §

727 “does not discharge an individual debtor from any debt . . . for fraud or

defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”7

“Embezzlement, for purposes of section 523(a)(4), is the fraudulent appropriation

of property of another by a person to whom such property has been entrusted or

4

 Id. (citations omitted).

5

 Id. (citations omitted).

6

 Id. (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548,

2552, 91 L.Ed.2d 265 (1986)).

7

 11 U.S.C. § 523(a)(4).

5
into whose hands it has lawfully come.” “A plaintiff must establish that the debtor

8

was not lawfully entitled to use the funds for the purposes for which they were in

fact used.” 

9

“To show embezzlement, the creditor has to prove that it entrusted its

property to the debtor, the debtor appropriated the property for a use other than that

for which it was entrusted, and the circumstances indicate fraud.” Courts often

10

examine whether the terms by which a debtor came into possession of the funds

create an obligation on the debtor. “Obligations sufficient to support a claim of 11

embezzlement are ones which make the debtor’s discretionary use of the payment,

prior to complying with the obligations, improper.”12

First, the Debtor asserts that the Bankruptcy Court erred in finding that Bank

of America proved standing to pursue a claim under § 523(a)(4) because Bank of

America did not plead or prove that the Debtor embezzled funds from it, as

opposed to Southwest Bank. Rather, the Debtor asserts, his debt to Bank of

America is based on breach of the presentment warranty under § 3.417 of the

Uniform Commercial Code and the Texas UCC (for depositing the checks without

Southwest Bank’s endorsement), not embezzlement. He further asserts that Bank

8

 In re Phillips, 882 F.2d 302, 304 (8th Cir. 1989) (quoting In re Belfry, 862

F.2d 661, 662 (8th Cir.1988)) (internal brackets and quotation marks omitted).

9

 In re Belfry, 862 F.2d 661, 662 (8th Cir. 1988).

10

 Hamilton v. Green (In re Green), 2012 WL 3028462 at *4 (Bankr. W.D.

Mo. 2012) (slip copy) (citation omitted).

11

 In re Belfry, 862 F.2d at 663.

12

 Id. (citation omitted).

6
of America could not pursue this cause of action on behalf of Southwest Bank

because there were no contractual subrogation rights between the two banks. 

To the contrary, however, the Debtor expressly stipulated that Bank of

America was subrogated to Southwest’s claims against him. Since Bank of 13

America is subrogated to Southwest, and stands in the shoes of Southwest, this

14

cause of action for embezzlement is not based on a breach of the presentment

warranty to Bank of America; rather, it is based on the Debtor’s use of funds in

which Southwest Bank claimed an interest. Bank of America does, therefore, have

standing to pursue the embezzlement claim. 

Next, pointing out that “[o]ne cannot embezzle one’s own property,” the 15

Debtor asserts that the Court erred when it found he had no ownership interest in

the insurance proceeds and that he had, therefore, fraudulently appropriated the

funds of another. Further, the Debtor asserts, a borrower cannot embezzle funds

which are proceeds of a creditor’s collateral, because the borrower retains an

ownership interest in the collateral subject to the creditor’s security interest. The 16

Debtor asserts that he owned the mall property, and thus the insurance proceeds,

which were merely pledged as collateral for the loan by Southwest Bank.

13

 See, e.g., Stipulation of Certain Undisputed Facts Between Bank of

America, N.A. and Robert N. Armstrong at ¶¶ 30 and 48, Adversary No. 12-4045

(Bankr. E.D. Mo. Jan. 10, 2013), ECF No. 41.

14

 The term “subrogate” means “[t]o substitute (a person) for another

regarding a legal right or claim.” Black’s Law Dictionary (9th ed. 2009).

15

 In re Belfry, 862 F.2d at 662. 

16

 See In re Phillips, 882 F.2d at 304.

7
The Bankruptcy Court held that Southwest Bank was the owner of the

insurance proceeds because (i) the Deed of Trust specifically stated that Southwest

Bank was to be the loss payee of any insurance policy concerning the mall; (ii)

RNA Properties, “by way of Debtor,” was required to immediately inform

Southwest Bank of any insurance claim; (iii) the Deed of Trust called for all

insurance proceeds to be paid directly to Southwest Bank rather than to Southwest

Bank and RNA Properties jointly; (iv) the Deed of Trust stated that Southwest

Bank had the power to endorse any check that was jointly payable to Debtor and

Southwest Bank; and, “most importantly,” (v) the Deed of Trust stated that,

“[Southwest] Bank shall have the right, as its sole option, to apply all such monies

as shall be thus collected and received [from insurance proceeds]... toward the

payment of the Secured Indebtedness of the cost of rebuilding or restoring the

damaged property ... or to apply all or any part of such monies against any part of

the Secured Indebtedness, without regard to the maturity thereof, and in any order

as Bank shall elect.”

Based on this language in the Deed of Trust, the Bankruptcy Court held that

neither the Debtor nor RNA Properties had any ownership interest in the insurance

proceeds, particularly the Three Checks. Rather, the Court held, Southwest Bank

held more than a mere security interest in the proceeds – it owned them. 

In so holding, the Bankruptcy Court acknowledged, but distinguished, the

contrary conclusion reached by the Eighth Circuit in In re Phillips. In that case,

17

the debtors were officers and shareholders of Midwest Poultry Equipment, Inc.

Midwest granted First National Bank of Fayetteville (FNB) a security interest in

proceeds owed to the company under a lease. Although Midwest had instructed

the funding bank to make the check for the lease payable jointly to Midwest and

FNB, the bank made the check payable only to Midwest. Midwest deposited the

check directly into its general funding account. After the debtors (who were

Midwest’s officers and directors), learned of the mistake, they did nothing to

17

 882 F.2d 302 (8th Cir. 1989).

8
correct the problem and did not notify FNB of it. When the debtors filed

bankruptcy, FNB alleged that the debtors had embezzled the funds. Notably,

although some of the funds were used to pay corporate debts which the officers

(debtors) had guaranteed, the debtors did not themselves walk off with the funds;

instead, they kept the funds for their corporation without paying them over to the

bank. The Eighth Circuit held that, despite certain “assignment” language in the

loan documents, Midwest owned the funds subject only to FNB’s security interest. 

Crucially, what no one has fully appreciated in our case thus far is the

distinction between the Debtor and RNA Properties LLC as separate entities. The

Eighth Circuit did not acknowledge the distinction in Phillips, either, apparently

because it had concluded that FNB, as the holder of a security interest, had no

ownership interest in the money to the exclusion of the owner/borrower (Midwest),

under the loan documents there.

Here, regardless of whether RNA Properties had an ownership interest in the

insurance proceeds to the exclusion of Southwest (as was the case in Phillips),

there is nothing in the record at all suggesting that the Debtor had any ownership

interest in mall property or the insurance proceeds. The Debtor’s repeated 18

unsupported statements in pleadings that he owned the property are perplexing.

We held in In re Potts that there could be “no doubt” that a contractual copayee of a check has an interest in the funds represented by the check. Similarly 19

18

 For instance, the Deed of Trust identifies the “Borrower” as “RNA

Properties LLC A/K/A RNA Properties, L.L.C.” and warrants that “Borrower is

lawfully seized of indefeasible title and estate to the Mortgaged Property. . . .” The

Debtor signed the Deed of Trust on behalf of RNA Properties, but he is not a party

to it. 

19

 469 B.R. 310, 313 (B.A.P. 8th Cir. 2012). See also Option One Mortgage

Corp. v. Fitzgerald, 687 F.Supp.2d 520, 525 (M.D. Pa. 2009) (holding that, where

9
here, there can be no doubt that, under the terms of the Deed of Trust and as copayee of the Three Checks, Southwest had an interest in the funds represented by

the Three Checks. Consequently, since the Debtor had no ownership interest in the

insurance proceeds, he either took money which was owned outright by Southwest

(as the Bankruptcy Court held), or he took money that was owned by RNA

Properties, subject to a lien in favor of Southwest Bank. Either way, in contrast to

Phillips – where the debtors themselves were not alleged to have taken the money

– the Debtor here did misappropriate “property of another.”

The gloss over the distinction between the Debtor and RNA Properties is

also relevant on the question of whether the Debtor initially came into possession

of the funds lawfully, one of the elements of embezzlement. As stated, the Three

Checks were made payable to Robert Armstrong d/b/a RNA Properties and

Southwest Bank. This is likely because, for some reason, the insurance policy

20

itself appears to have been issued to Robert Armstrong d/b/a RNA Properties

LLC, even though the Debtor had no ownership interest in the mall property. 

21

Because the Debtor had no ownership interest in the mall property, neither the

insurance policy nor any of the checks from it should have been issued to the

the plaintiff was a named co-payee on a check, and the mortgage agreement

provided that the defendants were obligated to turn the check over to the plaintiff,

the plaintiff’s right in an insurance check vested at the time it was issued, and the

defendants had no rights in the check without plaintiff’s endorsement).

20

 Similarly, all of the other insurance checks were made payable to Robert

Armstrong d/b/a RNA Properties LLC.

21

 See Affidavit of Jeffrey T. Bannon in Support of Public Service Mutual

Insurance Company’s Application for Temporary Restraining Order and

Temporary Injunction at ¶ 2, attached as Exhibit A to Affidavit of Rupert Baron,

Adversary No. 12-4045 (Bankr. E.D. Mo. Nov. 21, 2012), ECF No. 27-4; and

Exhibit B to Defendant’s Reply to Bank of America’s Response to Motion for

Summary Judgment, Adversary No. 12-4045 (Bankr. E.D. Mo. Nov. 27, 2012)

ECF No. 31.

10
Debtor. Nevertheless, because the checks were issued to the Debtor, we conclude

that he came into possession of the funds lawfully. But even if that were not the

case, the only difference between a nondischargeable debt for embezzlement and a

nondischargeable debt for larceny under § 523(a)(4) is whether the initial

possession of the property was lawful. While we conclude that the Debtor’s 22

initial possession of the Three Checks was lawful, if it was not, his taking of the

money was larceny. Either way, the debt is nondischargeable under § 523(a)(4).

The Debtor next asserts that the Bankruptcy Court erred in finding

fraudulent intent. While the Bankruptcy Court’s findings on this element of §

523(a)(4) were scant, the undisputed facts amply support a finding of intent. 

A debtor’s fraudulent intent for purposes of § 523(a)(4) may be, and often

must be, shown by circumstantial evidence. Here, the undisputed and

23

indisputable facts include the following circumstantial evidence of the Debtor’s

fraudulent intent: (i) the Debtor failed to disclose the fire to Southwest, despite the

obvious requirement in the loan documents that he do so; (ii) the Debtor failed to

disclose to Southwest that he had made an insurance claim or that he had received

over $900,000 in insurance proceeds, despite the requirement in the loan

documents that he do so, and despite the fact that the loan documents required

payment of any insurance proceeds be made to Southwest Bank to be applied at its

sole discretion; (iii) the Debtor deposited the checks without Southwest’s

22

 Treadwell v. Glenstone Lodge, Inc. (In re Treadwell), 459 B.R. 394, 406

(Bankr. W.D. Mo. 2011) (quoting 4 Collier on Bankruptcy ¶ 523.10[2] (15 ed. th

Rev.) (“In short, section 523(a)(4) excepts from discharge debts resulting from the

fraudulent appropriation of another’s property, whether the appropriation was

unlawful at the outset, and therefore a larceny, or whether the appropriation took

place unlawfully after the property was entrusted to the debtor’s care, and therefore

was an embezzlement.”).

23

 See Kruse v. Murray (In re Murray), 408 B.R. 268, 275 (Bankr. W.D. Mo.

2009).

11
endorsement or approval, despite the fact that the loan documents required

Southwest’s approval, Southwest’s endorsement was clearly required on the checks

as they were made jointly payable, and despite the fact that the deposit without the

endorsement was in contravention of Texas law; (iv) the Debtor immediately

diverted the money from RNA Properties’ bank account and used the money for

personal and other business purposes at his sole discretion, despite the fact that the

loan documents authorized only Southwest Bank to apply the proceeds at its own

discretion; and (v) RNA Properties, which was controlled by the Debtor, made

almost no repairs to mall. 

We recognize that fraudulent intent is ordinarily a question to be determined

by the fact-finder and is difficult to demonstrate on a motion for summary

judgment. However, when the “unmistakable picture painted by . . . stipulation”

24

establishes fraudulent intent, summary judgment is appropriate. 

25

Based on the foregoing undisputed circumstantial evidence, Bank of

America met its initial burden of showing no genuine issue of material fact that the

Debtor took the money with fraudulent intent. That being the case, the Debtor was

required to “advance specific facts to create a genuine issue of material fact for

trial.” While the Debtor generally asserted in responses to discovery and in 26

24

 See Jackson v. Star Sprinkler Corp. of Florida, 575 F.2d 1223, 1231 (8th

Cir. 1978). See also Thoms v. Vucurevich (In re Vucurevich), 2013 WL 662688

(Bankr. D. S.D. Feb. 25, 2013) (“Where motive and intent are at issue, disposition

of the matter by summary judgment may be more difficult.”).

25

 Id. at 1234 (finding that the stipulated facts in that case left no material

issue of fact remaining and that those facts established as a matter of law that the

transfer at issue was made with intent to hinder, delay, and defraud creditors).

26

 F.D.I.C. v. Bell, 106 F.3d 258, 263 (8th Cir. 1997) (“Mere arguments or

allegations are insufficient to defeat a properly supported motion for summary

judgment; a ‘nonmovant must present more than a scintilla of evidence and must

12
pleadings that he was not aware of any of loan documents’ requirements to notify

Southwest of anything, or of his obligation to obtain Southwest’s endorsement on

checks which were made payable to Southwest, and that he had done so in the past,

he pointed to no “specific facts” to support those claims. Moreover, that

27

assertion in light of the facts defies common sense.

In sum, the in order to prevail under § 523(a)(4), “[a] plaintiff must establish

that the debtor was not lawfully entitled to use the funds for the purposes for which

they were in fact used.” Southwest Bank established that the Debtor was not 28

lawfully entitled to use the insurance proceeds for the purposes for which he used

them and the Debtor has produced nothing to the contrary.

ACCORDINGLY, the Order of the Bankruptcy Court finding the Debtor’s

debt to Bank of America, as subrogee to Southwest Bank, to be nondischargeable

under 11 U.S.C. § 523(a)(4) is AFFIRMED. 

________________________

advance specific facts to create a genuine issue of material fact for trial.”) (citation

omitted).

27

 The Debtor’s attempt to offer evidence of specific instances of consistent

conduct in the past for the first time on appeal is not appropriate. McCleary v.

ReliaStar Life Ins. Co., 682 F.3d 1116, 1120 (8th Cir. 2012) (“Our review of the

evidence includes only the record that was before the [Bankruptcy Court] when it

ruled on the summary judgment motion.”).

28

 In re Belfry, 862 F.2d at 662.

13