## United States B ankru ptcy A ppel late P ane l

For t he Ei ght h C ircu it

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No. 1 3-6013

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In re: Ro be rt N. Arm stron g

lll lll lll lll lll lll lll

De bto r

----- ----- ----- ----- ----- -----

Ba nk o f Am eri ca , N.A

lll lll lll lll lll lll lll Pla int iff

- Appe lle e

v.

Ro be rt N. Arm stron g

lll lll lll lll lll lll lll De

fe ndan t - Ap

pe lla nt

____ ____ ____
Appe al from

Uni te d Sta te s B an krupt cy Co urt for the Ea ste rn Dis tric t of M iss ouri - St . Lou is

____ ____ ____

Subm itt ed : J

uly 17, 2013
File d: Sept em

be r 19, 2 013 (Corre ct ed

Sep te m be r 20, 2 013)

____ ____ ____

Be fore FEDE RM AN, C hie f Judg e, SHODEEN an d NAIL, B an krupt cy Jud ge s.

FEDER MAN, Ch ie f Judg eDe bto r Ro be rt N. Arm stron g ap pe al s fro m th e O rder of the Ba nkrupt cy Co urt f in din g his de bt to Ba

nk of Am eri ca nond isc ha rgea ble unde r 11 U.S.C

. § 1 523(a )(2) for fraud an d § 523( a)(4) for em be zz le m en t. For the rea sons tha t follo w, the Jud gm en t fin din g th e de bt n ondi sc ha rgea ble und er § 523 (a)(4) is AFFIRM ED.

FACTU AL B ACK GRO UND

De bto r Ro be rt N. Arm stron g wa s the ow ne r, sol e m em be r, an d prim ary

m an ag er of RNA P r op ertie s, LLC

. In Augu st 2001

, RNA Propert ie s ac qui red a
st r ip mall in Da lla s, Te xa s tho ugh fina nc ing from South we st Ba nk. The fina

nc in g

ca m e from two loa

ns, one in the am ount of $1.6 m ill ion

, an d a se co nd in the

am ount of $400 ,000

. The first no te w as se cu red by a De ed of Trust on the m al l.
As rel ev an t he re, the De ed of Trust requ ire d RN A Propert ie s to lis t South we st
Ba nk as th e lo ss pa y ee on its ins uran ce pol ic ie s. The m al l wa s ins ured by Publi c Servi ce Mut

ua l Insura nc e Co m

pa ny (“ PSM” ), but the pol ic y lis te d South we st as the m ortga ge hol de r , r at he r tha n as a los s pa

y ee as wa s requ ire d unde r the loa n doc um en ts.

On Ja nua ry 25, 2009

, a fire de stroy ed one of the thre e structu r es at th e m al l.
PSM iss ue d nin e ch ec ks unde r the pol ic y , tot al ing $917 ,149 .26, m ad e pa y ab le to the De bto r d/b /a RNA Propert ie s. The De bto r en dorse d an d de posi te d al l of the
ch ec ks.

At iss ue he re are thre e of tho se ins uran ce ch ec ks in the am ount s of $80, 000, $5 0,00 0, an d $5,5 00 – tot al ing $135 ,500 – whic h we re m ad e joi ntl y payabl e to

1 The Hono rabl e Ka thy A. Surrat t-Sta te s, C hie f Judg e, Uni te d Sta te s Ba nkrupt cy Co urt for t

he Ea ste rn Dis tric t of M iss ouri.

2“ Ro be rt Arm stron g d/b /a RNA Propert ie s LLC an d South we st Ba nk, An M&I
Ba nk, ISAOA” (the “ Thre e Ch ec ks” ). The first two ch ec ks, for $80, 000 an d $50, 000, res pe ct ivel y, w ere da te d Februa ry 12, 2009

, an d we re de posi te d int o RNA Propert ie s LLC ’s ac co unt at Ban k of Am eri ca on Februa ry 13, 2009

. The thi rd
ch ec k, for $5,5 00, wa s da te d Ma y 26, 2009

, an d wa s de posi te d int o RNA Propert ie s’ ac co unt on June 1, 2009

. All thre e ch ecks w er e de posite d int o RNA Propert ie s’ ac co unt wit hout South we st’ s en dorse m en t, de spi te the fac t tha t South we st w as a

c o-pa y ee on e ac h of t

he c he ck s.

The De bto r us ed le ss tha n $5,0 00 of the funds from the Thre e Ch ec ks to

m ak e repa irs to a porti on of the m al l. Inste ad

, the De bto r div ert ed the m ajorit y of
the funds to his pe rsona l use

. Shortl y aft er de posi tin g the funds int o the RNA Propert ie s ac co unt
, the De bto r ca use d $100 ,00 0 of the m one y to be tra nsfe rred to his an d his wife ’s pe rsona l ba nk ac co unt

. The De bto r’s wife the n wrote two ch ecks da te d Februa

ry 17, 2009 from the ir pe rsona l ac co unt – one for $70, 000 to

pa y down the ir hom e eq

uit y lin e of cre dit

, an d a se co nd ch ec k for $30, 000 w hi ch

wa s de posi te d int o the ir pe rsona l sa vin gs ac co unt

. The De bto r ad m itted he use d
the ins uran ce proc ee ds for pe rsona l or oth er busi ne ss iss ue s at hi s sol e dis cre tio n. Inde ed

, de spi te be ing pa id ove r $900 ,000 in tot al ins uran ce proc eeds

, th ere wa s no

wor k st ar te d at the m al l, ex ce pt for som e cl ea nup an d $4,8 63.3 9 in m ino r repa irs to the a djo ini ng b uil din g’ s roof.

Meanwhile

, de spi te be ing requ ire d to do so unde r the loa n doc um en ts, the
De bto r ne ve r inform ed South we st of th e f ir e or of an

y of the ins uran ce ch ec ks.
Inste ad

, he co nti nue d to m ak e the regu la r pa y m en ts on the loa

ns to South

we st an d

pa y prope rty ta xe s. South we st le arne d of the fire som et im e arou nd Augu st to Oc tob er 2009

, from an oth er sourc e or f r om a routi ne ins pe ct ion of the prope rty

. On De ce m

be r 9, 2009

, Sout hw est de cl are d the not es in de faul t an d m ad e de m an d
for pa y m en t of ap proxi m at el y $1

. 6 million unde r the two not es

. The De bto r pa id
South we st $400 ,000 from six diffe rent persona l ac co unt s in res pons e to the
de m an d, but South we st forec losed on the m al l in Februa ry 2010

. PSM sue d the
De bto r, RNA Propert ie s, an d South we st Ba nk in the Dis tr ic t Co urt of Da lla s Co unt y , Te xa s. Bank of A mer ic a wa s joi ne d by South we st as a thi rd-part y

3de fend an t in rel at ion to the Thre e Ch ec ks. Ba nk of Am eri ca file d a cros s-c la im

ag ai ns t th e D eb tor an d RNA Propert ie s. On April 2, 2011

, Ba nk of Am eri ca an d
South we st se ttl ed South

we st’ s cl ai m for ne got ia tin g the unendorsed ch ec ks. As

pa rt of tha t se ttl em en t, Ba

nk of Am eri ca pa id South we st the $135 ,500 repre se nte d by the Thre e Ch ec ks. The Or de r of Dism iss al of Ba nk of Am eri ca ex pres sly

pres erve d a

ny c la im s by

Ba nk o f Am eri ca

a ga ins t t he De bto r an d R

NA Prope rtie s.

The De bt or f

il ed a Ch ap te r 7 ba

nkrupt cy ca se on Oc tob er 28, 2011

, sta y ing
the sta te co urt lit iga

tio n. Ba nk of Am eri ca file d a pr oo f of cl ai m in the De bto r’s
ba nkrupt cy ca se , ba se d on th e Thre e Ch ec ks. Ba nk of Am eri ca al so soug ht de nia l
of the dis ch arge of the de bt pursu an t to § 523(a )(2)(A), (a)(4), an d ( a) ( 6) of the
Ba nkrupt cy Co de

.

On cros s m oti ons for sum m ary jud gm en t, the Ba

nkrupt cy Co ur t he ld in
favo r of Ba

nk of Am eri ca , findi ng tha t the de bt wa s excep te d f r om the De bto r’s
dis ch arge un de r § 523(a)(2)(A) for fraud, as we ll as em be zz le m en t unde r § 523(a )(4) of the Co de . The De bto r ap pe al s.

STANDAR

D OF R EVIEW

W e revi ew the Ba

nkrupt cy Co urt’ s gran t of sum m ary jud gm en t de nov o

. 2
Sum m ary jud gm en t is ap propria te if the recor d show s tha t the re is no ge nui ne iss ue

as to an y mater ia l fac t an d tha t the m ovi ng pa

rty is en tit le d to jud gm en t as a m at te r of la w. The Ba

nkrupt cy Co urt is not to we ig h ev ide nc e an d m ak e cre dib ili ty 3

2 W ill iams v . Mar lar (

In re Marl

ar ), 252 B.R . 743 , 750 (B.A .P. 8th Ci r. 2000 ) (cit at ion s om itt ed ).

3 Id. (ci ta tio ns o m itt ed ); Fed . R . C iv. P. 56(c ), m ad e ap pli ca ble he re b y

Fed

. R. Ba nkr. P. 70 56.

4de te rm ina

tio ns, or to at

te m pt to de te rm ine the truth of the m at ter
, but is, rat

he r, sol el y to de te rm ine whe the r the re is a ge nui ne iss ue of fac t for tria l. The Co urt is 4

to vie w the fac ts in a lig ht m ost favo rabl e to th e nonm ovi ng pa rty an d to giv e tha t

pa rty the be ne fit of al l rea sona ble in f er en ces to be draw n from tha t ev ide nc e. 5

“ Ru le 56(c ) m an da te s the en try of sum m ary jud gm en t, af

te r ad eq ua te tim e for
dis co ve ry an d upon m oti on, ag ai nst a pa rty who fai ls to make a show ing suffic ie nt

to es ta bli sh the ex ist ence of an el em en t es se nti al to tha t pa rty ’s ca se , an d on whic h
tha t pa rty wil l be ar t

he burde n of pro of a t t

ria l.” 6

Be ca use we co nc lud e tha t the Ba nkrupt cy Co urt did not err in finding the
de bt to be nond isc ha

rgea ble unde r § 523(a )(4) for em bezz le m en t, we lim it our

an al y sis to tha t ba sis for nond isc ha rgea bil ity

. As a res ult

, w e do not rea ch the § 523(a )(2)(A) fr au d is sue

.

DISCUSSION

S ect io n 523(a )(4) of the Ba nkrupt cy Co de provi de s tha t a dis ch arge unde r §
727 “ doe s not dis ch arge an ind ivi dua l de bto r from an y de bt

. . . for fraud or de fal ca tio n whil e ac tin g in a fiduc iar y ca pa ci ty
, em

be zz le m en t, or la

rce ny .” 7

“ Em be zz le m en t, for purpos es of se ct ion 523(a )(4), is the fraudu le nt ap propria tio n of prope rty of an oth er by a pe rson to whom suc h prope rty ha s be en en trust ed or

4 Id. (ci ta tio ns o m itt ed ).

5 Id. (ci ta tio ns o m itt ed ).

6 Id. (quot ing Ce lot ex Co rp. v . C

atr et t , 477 U.S. 31 7, 32 2, 10 6 S.C t. 2 548, 2552 , 91 L.Ed. 2d 2 65 (19 86)).

7 11 U. S.C. § 52 3(a)(4).

5int o whos e ha nds it ha s la

wfull y come.” “ A pla int iff m ust es ta bli sh tha t the de bto r 8

wa s not la

wfull y en tit le d to use the funds for the purpos es for whic h th ey w ere in
fac t us ed .” 9

“ To show em

be zz le m en t, the cre dit or ha s to prove tha t it en trust ed its

prope rty to th e de bt or , the de bto r ap propria te d the prope rty for a use oth er tha n tha t for whic h it wa s en trust ed

, an d the ci rcum sta nc es ind ic at e fraud. ” Co urts ofte n 1 0

ex am ine whe ther th e te rm s by whic h a de bto r ca m e int o poss es sio n of the funds

cre at e an obl iga tio n on th e de bto r. “ Obli ga tio ns suffic ie nt to supp ort a cl ai m of 1 1

em be zz le m en t are on es whic h m ak e the de bto r’s dis cre tio na ry use of the pa

y m en t, prior t o c om

ply ing wit

h th e obl iga tio ns, i m

prope r.” 1 2

First, the De bto r as se rts tha t the Ba nkrupt cy Co ur t erre d in findi ng tha t Ba nk
of Am eri ca prove d sta

ndi ng to pursu e a cl ai m unde r § 523(a )(4) be ca use Ba nk of
Am eri ca did not ple ad or pr ove tha t the De bto r em be zz le d funds from it, as
oppo se d to South we st Ba nk. Ra the r, the De bto r as se r ts
, hi s de bt to Ba nk of
Am eri ca is ba se d on brea ch of the pres en tm en t wa rrant y un der § 3.41 7 of the
Unifo r m Co m

m erc ia l Co de an d the Te xa s UCC (for de posi tin g the ch ec ks wit hout
South we st Ba

nk’ s en dorse m en t), not em be zz le m ent. He furthe r as se rts tha t Ba nk

8 In re

Phi lli ps , 882 F.2d 3 02, 3 04 (8t h C ir. 19 89) (quo tin g In re Be lfr y , 862 F.2d 66 1, 66 2 (8th

Ci r.1988 )) (inte rnal bra ck et s a nd q uot at ion m arks om itt ed ).

9 In re Be lfr

y , 862 F.2d 6 61, 6 62 (8t

h C ir. 19 88).

10 Hami lto n v . Gre en ( In re Gre en ), 2012 W L 302 8462 a t *4 (Ba nkr. W .D. Mo. 201 2) (sli p c opy ) (cit at ion om itt ed ).

11 In re Be lfr

y , 862 F.2d a t 66 3.

12 Id . (ci ta tio n om itt ed ).

6of Am eri ca co uld no t pu r su e thi s ca use of ac tio n on be ha lf of South we st Ba nk
be ca use the re we re n o c ont

rac tua l su broga tio n righ ts b et

we en the two ba

nks.

To the co ntra

ry , howe ve r, the De bto r ex pres sly sti pul at ed tha t Ba nk of
Am eri ca wa s subro ga te d to South we st’ s cl ai m s ag ai nst him

. Sinc e Ba nk of 1 3

Am eri ca is su br oga te d to South we st, an d sta nds in the shoe s of South we st, thi s 1 4

ca use of ac tio n for em

be zz le m en t is not ba sed on a br eac h of the pres en tm en t

wa rrant y to Ba nk of Am eri ca ; rat

he r, it is ba se d on the De bto r’s use of fu nd s in
whic h South we st Ba

nk cl ai m ed an int ere st. Ba nk of Am eri ca doe s, ther ef or e, ha ve
sta ndi ng t o pu

rsue the e m

be zz le m en t c la im

.

Ne xt, poi nti ng out tha t “ [o] ne ca nnot em be zz le one ’s own prope rty ,” the 1 5

De bto r as se rts tha t the Co urt erre d whe n it found he ha d no owne rship int ere st in
the ins uran ce proc ee ds an d tha t he ha d, the r efore, fraudu le ntl y ap propria te d the
funds of an oth er. Furthe r, the De bto r as serts, a borrowe r ca nnot em be zz le funds
whic h are proc ee ds of a cre dit or’ s co lla te ral

, be ca

us e th e borrowe r ret ai ns an

owne rship int ere st in the co lla te ral subj ec t to the cre dit or’ s se cu rity int ere st. The

1 6

De bto r as se rts tha t he owne d the m al l prope rty
, an d thu s the ins uran ce proc ee ds,
whic h we re m ere ly

ple dge d a s c oll at era l for t he loa n by South we st B an k.

13 Se e, e .g., S

tip ula tio n of

Ce rta in U

ndi sput ed Fac ts B et

we en Bank

of Ame ric a, N

.A. an d Rob er t N

. Arm str ong

a t ¶¶ 30 a

nd 4 8, Ad ve rsa ry No. 1 2-4045 (Ba nkr. E. D. M o. Ja

n. 10 , 201 3), EC F No. 41

.

14 The te rm

“ subro ga te ” m ea ns “ [t] o su

bst itu te (a p ers on) for a

not he r rega rding a le ga l rig ht o r cl ai m .” B la ck ’s La w Dic tio na

ry (9th ed . 200 9).

15 In re

Be lfr y , 862 F.2d a t 66 2.

16 Se e In re Phi lli

ps , 882 F.2d a t 30 4.

7The Ba nkrupt cy Co urt he ld th at S ou thwe st Ba nk wa s the owne r of the
ins uran ce proc ee ds be ca

use (i) the De ed of Trust spe ci f ic al ly sta te d tha t South we st
Ba nk wa s to be the los s pa y ee of an y in suranc e pol ic y co nc erni ng the m al l; (ii)
RNA Propert ie s, “ by way of De bto r,” wa s requ ire d to im m ed ia te ly inform
S ou th w es t Bank of an y ins uran ce cl ai m ; (iii ) the De ed of Trust ca lle d for al l
ins uran ce proc ee ds to be pa id dire ct ly to South we st Ba nk r athe r tha

n to South we st
Ban k an d RNA Propert ie s joi ntl y ; (iv) the De ed of Trust sta te d tha t South we st
Ba nk ha d the powe r to en dorse an y ch ec k tha t wa s jo in tl y pa

y ab le to De bto r an d
South we st Ba

nk; an d, “ m ost im

porta ntl y ,” (v) the De ed of Trust sta te d tha t,

“ [Southwes t] Ban k sha ll ha ve the right

, as its sol e opt ion

, to ap ply al l suc h m oni es

as shall be th us co lle ct ed an d rec ei ve d [from ins uran ce proc ee ds]

... towa rd the

pa y m en t of the Sec ured Inde bte dne ss of th e co st of rebu ild ing or res torin g the
da m ag ed prope rty

... or to ap ply al l or an y pa rt of suc h m oni es ag ai nst an y pa rt of
the Sec ured Inde bte dne ss, wit hout rega rd to the m at

urity the reof, an d in an y orde r

as Ba nk s ha ll el ec t.”

Ba se d on thi s la

ngua ge in the De ed of Tr ust
, the Ba nkrupt cy Co urt he ld tha t

ne ith er the De bto r nor RNA Propert ie s ha d any ow ne r shi p int ere st in the ins uran ce
proc ee ds, pa

rtic ula rly the Thre e Ch ec ks. Ra the r, the Co urt he ld, South we st Ba nk
he ld m ore tha

n a m ere se cu

rity int ere st i n th e proc ee ds – it owne d th em

.

In so hol din g, the Ba

nkrupt cy Co urt ac know le dge d, but dis tin gui she d, the

co ntra ry co nc lus io n r each ed by the Eigh th Ci rcui t in In re Phil lip s

. In tha t ca se , 1 7
the de bto rs we re offic ers an d sha reho lde rs of Mi dwe st Poult ry Equi pm en t, Inc.
Mi dwe st gran te d First Na tio na l Ba nk of Fay et

te vil le (FNB) a se cu rity int ere st in

proc ee ds owe d to the co mp an y unde r a le as e. Alt

houg h Mi dwe st ha d ins truc te d
the fundi ng ba

nk to m ak e the ch ec k fo r th e lea se pa y ab le joi ntl y to Mi dwe st an d FNB, the ba

nk m ad e the ch eck pa yable onl y to Mi dwe st. Mi dwe st de posi te d the
ch ec k dire ct ly int o its ge ne ral fundi ng ac co unt

. Afte r the de bto rs (who we re Mi dwe st’ s offic ers an d di r ec tors), le arne d of the m ist ak e, the y did not hin g to

17 882 F.2d 30 2 (8th

Ci r. 1989 ).

8co rrec t the probl em an d did not not ify FNB of it. W he n the de bto rs f il ed
ba nkrupt cy , FNB al le ge d tha t the de bto rs ha d em be zz le d the funds

. Nota bly

, al tho ugh som e of the funds we re use d to pa y co rporat e de bts w hi ch the offic ers (deb tors) ha d gua

rant ee d, the de bto rs did not the m se lve s wa lk off wit h th e f un ds ; ins te ad

, the y ke pt the funds for the ir co r po r at io n wit

hout pa y ing the m ove r to the
ba nk. The Eigh th Ci rcui t he ld tha t, de spi te ce rta in “ as si gn ment ” la ngua ge in the
loa n doc um en ts, Mi dwe st owne d the funds subj ec t on ly to FNB’ s se cu rity int ere st.

Cruc ia lly

, wha t no one ha s fully ap prec ia te d in our ca se th us far is the
dis tin ct ion be twe en the De bto r an d RNA Propert ie s LLC as se pa r at e en tit ie s. The Eigh th Ci rcui t did not ac know le dge the dis tin ct ion in Phil lip s , ei th er , ap pa rent ly
be ca use it had co nc lud ed tha t FNB, as the hol de r of a se cu rity int ere st, ha d no

owner sh ip intere st in the m one y to the ex cl usi on of the owne r/borrowe r (Mid we st),
unde r the loa

n do cu m en ts t he re.

He re, rega

rdle ss of whe the r RN

A Prop er tie

s ha d an own er sh ip int ere st in the
in su r ance proc ee ds to the ex cl usi on of South we st (as wa s the ca se in Phil lip s )

, the re is not

hin g in the rec ord at al l sugg es tin g tha t the De bto r ha d an y owne rship
int ere st in m al l prope rty or the ins uran ce proc ee ds. The De bto r’s repe at ed 1 8

unsu pport ed sta te m en ts i n pl ea din gs t

ha t he owne d th e prope rty a re p erpl ex ing

.

W e he ld in In re Pott

s th at th er e could be “ no doub t” tha t a co ntra ct ua l co

pa y ee of a ch ec k ha s an int ere st in the funds repre se nte d by the ch ec k. S imil ar ly 1 9

18 For ins ta

nc e, the De ed

of Trus t i de nti fie s th e “ Bo rrower” a s “ RNA Propert ie s LLC A/K/

A R NA Prope rtie s, L. L.C .” a nd wa rrant s th at “ Bo rrower i s la wfull y se iz ed of in de fea sib le ti tle a nd e sta te to the Mo rtga ge d Prope rty

. . . . ” The De bto r sig ne d th e De ed

of Trus t on

be ha lf of R

NA Prope rtie s, bu t he is not a pa rty to i t.

19 469 B.R . 310 , 313 (B.A .P. 8th Ci r. 2012 ). Se e als o Opt ion One Mort gage Co rp. v . Fit

zge ral d

, 687 F.Supp.2d

520 , 525 (M.D. Pa. 2009 ) (hold ing tha t, wh ere

9he re, the re can be no do ub t tha t, unde r the te rm s of the De ed of Trust an d as co

pa y ee of the Thre e Ch ec ks

, S ou th w es t ha d an int ere st in the funds repre se nte d by
the Thre e Ch ec ks. Co nse que ntl y , sin ce the De bto r ha d no owner shi p int ere st in the
ins uran ce proc ee ds, he ei the r too k m one y whic h wa s owne d ou trigh t by South we st (as the Ba

nkrupt cy Co urt he ld), or he too k m one y tha t wa s owne d by RNA Propert ie s, subj ec t to a lie n in favo r of S ou th w es t Ba nk. Eit he r wa y , in co ntra st to Phil lip s – whe re the de bto rs the m se lve s we re not al le ge d to ha ve ta ke n the mon ey – th e De bto r he re d id m isa ppropri at e “ prope rty

of a not he r.”

The glo ss ove r the dis tin ct ion be twe en the De bto r an d RNA Propert ie s is
al so rel ev an t on the que sti on of whe the r the De bto r ini tia lly cam e into poss es sio n of the funds la

wfull y , one of the el em en ts of em be zz le m en t. As sta

te d, the Thre e Ch ec ks we re made pa y ab le to Ro be rt Arm stron g d/b /a RNA Propert ie s an d
South we st Ba

nk. This is lik el y be caus e, for som e rea son, the ins uran ce pol ic y 2 0
its el f ap pe ars to ha ve be en iss ue d to Ro bert Arm stron g d/b /a RNA Propert ie s LLC

, ev en th ou gh the De bto r ha d no owne rship int ere st in the m al l prope rty

. 2 1

Be ca use the De bto r ha d no owne rship int er es t in the m al l prope rty
, ne ith er the
ins uran ce pol ic y nor an y of the ch ec ks from it shou ld ha ve be en iss ue d to the

the pla int iff wa s a

na m ed c o-pa y ee on a c he ck , a nd t he m ortga ge a gree m en t provi de d th at

the de fend an ts w ere obl iga te d to turn the c he ck ove r to t he pla int iff, the pla int iff’s right

in an ins uran ce c he ck

ve ste d a t t he ti m e it wa s is sue d, a

nd t he de fend an ts h ad

no ri ght s in

the c he ck

wit hout pla int iff’s e ndors em en t).

20 Sim ila

rly , a ll of the oth er i nsura nc e ch ec ks we re m ad e pa y ab le to Ro be rt Arm stron g d/

b/a RN A Prope rtie s LLC

.

21 Se e Aff

ida vi t of J ef fre y T. Bann on i n Su

ppor t of Publ ic Se rv ic e Mutu al Insur anc e Co mpan

y’s Appl ic ati on f

or Te mpor ary

Re str ain ing Orde r an d Temp orar y Injun ct ion a t ¶ 2, at

ta ch ed a s Ex hib it A to Aff

ida vi t of Rupe rt B aron , Adve rsa ry No. 1 2-4045 (Ba

nkr. E. D. M o. No v. 21 , 201 2), EC F No. 27 -4; a nd Ex hib it B to De

fe ndan t’s Re

ply to Bank of Ame ric a’s Re

spon se to Moti on f

or Summa ry J udgm en t , Adv ers ary

No. 1 2-4045 (Ba

nkr. E. D. M o. No v. 27 , 201 2) EC F No. 31

.

10De bto r. Ne ve rthe le ss, be ca use th e ch eck s we re iss ue d to the De bto r, we co nc lud e tha t he ca m e int o poss es sio n of the funds la wfull y

. Bu t ev en if tha t w er e no t the

ca se , the onl y diffe renc e be twe en a nond isc ha rgea ble de bt for em

be zz le m en t an d a

no ndi sc ha

rgea ble de bt for la

rce ny unde r § 523(a )(4) is whe the r the initi al

po ss es si on of the prope rty wa s la wful. W hil e we co nc lud e tha t the De bto r’s 2 2
ini tial po ss es si on of the Thre e Ch ec ks wa s la wful, if it wa s not
, his ta kin g of the

m one y wa s la rce ny . Ei the r way , th e de bt i s no ndi sc ha rgea ble und er § 523 (a)(4).

The De bto r ne xt as se rts tha t the Ba nkruptc y Co urt erre d in findi ng fraudu le nt int en t. W hil e the Ba nkrupt cy Co urt’ s finding s on thi s el em en t of § 523(a )(4) were sc an t, t

he und isp ute d fa ct s a

m ply sup port a findi ng o f int en t.

A de bto r’s fraudu le nt int en t for purpos es of § 523(a )(4) m ay be

, an d ofte n

m ust be

, sh own by ci rcum sta nti al ev ide nc e. He re, the undi sput ed an d 2 3
ind isp uta ble fac ts inc lud e the follo win g ci rcum sta nti al ev ide nc e of the De bto r’s
f r audul en t int en t: (i) the De bto r fai le d to dis cl ose the fire to South we st, de sp it e th e obvi ous r eq ui rem en t in the loa n doc um en ts tha t he do so; (ii) the De bto r fai le d to dis cl ose to South we st tha t he ha d m ad e an ins uran ce cl ai m or tha t he ha d rec ei ve d

ove r $900 ,000 in ins uran ce proc ee ds, de spi te the requ ire m en t in the loa n doc um en ts tha t he do so, an d de spi te the fac t tha t the loa n doc um en ts requ ire d

paym en t of an y ins uran ce proc ee ds be m ad e to South we st Ba nk to be ap pli ed at its
sol e dis cre tio n; (iii ) the De bto r de posi te d the ch ec ks wit hout Sout hw es t’ s

22 Trea dw el l v . Gle nst one Lodge , Inc

. ( In re Tre adw el l ), 459 B.R . 394 , 406 (Ba nkr. W .D. M o. 20 11) (quo tin g 4 C oll ie r on B an krupt cy ¶ 523. 10[2] (15 e d. th
Re v.) (“ In sho rt, se ct ion

523 (a)(4) e xc ep ts from

dis ch arge de bts res ult ing from the fraudu le nt a

ppropri at ion

of a not he r’s prope rty , whe the r the a ppropri at ion

wa s unl aw ful a t t

he out se t, a

nd t he refore a la rce ny , or whe the r the a

ppropri at ion

too k pla ce unl aw fully

a fte r the prope rty

wa s e ntrus te d to the de bto r’s c are , a nd t he refore

wa s a n e m be zz le m en t.” ).

23 Se e Kr use v . Mur

ray ( In re Murr

ay ), 408 B.R . 268 , 275 (Ba nkr. W .D. M o. 2009 ).

11en dorse m en t or ap prova l, de spi te the fac t tha t the lo an do cu m en ts requ ire d

South we st’ s ap prova l, So ut hw est’ s en dorse m en t wa s cl ea rly requ ire d on the ch ec ks

as the y we re m ad e joi nt ly pa y ab le

, an d de spi te the fac t tha t the de posi t wit

hout the

en dorsem en t wa s in co ntra ve nti on of Te xa s la w; (iv) the De bto r im

m ed iatel y div ert ed the m one y from RNA Propert ie s’ ba nk ac co unt an d used the m one y for

pe rsona l an d oth er busi ne ss purpos es at his sol e dis cre tio n, de spi te the fac t tha t the
loa n doc um en ts au tho riz ed onl y South we st Ba nk to ap pl y th e pr oc ee ds at its own dis cre tio n; an d (v) RNA Propert ie s, whic h wa s co ntrol le d by the De bto r, m ad e al m ost no re pa irs t o m al l.

W e rec ogni ze tha t fraudu le nt int en t is ordin ari ly a que sti on to be de te rm ine d by the fac t-find er an d is diffic ult to de m onst rat e on a m oti on f

or su mm ary jud gm en t. Howe ve r, whe n the “ unm ist ak ab le pi ct ur e pa int ed by

. . . sti pul at ion ”

2 4

es ta bli she s frau dul en t i nte nt, sum m ary jud gm en t i s a

ppropri at e. 2 5

Ba se d on the forego ing undi sp ut ed ci rcum sta nti al ev ide nc e, Ba

nk of
Am eri ca m et its ini tia l burde n of show ing no ge nui ne iss ue of m at eri al fact th at the
De bto r too k the m one y wit h fraudu le nt int en t. Tha t be ing the ca se , the De bto r wa s
requ ire d to “ ad

va nc e spe ci fic fac ts to cre at e a ge nui ne iss ue of m ater ia l f act for
tria l.” W hil e the De bto r ge ne ral ly as se rte d in res pons es to dis co ve r y and in 2 6

24 Se e Ja ck

son v. Sta r Sp rin kl er

Co rp. o f Fl ori da , 575 F.2d 1 223, 123 1 (8th Ci r. 1978 ). Se e als o Thoms v . Vuc ure vi ch ( In re Vuc ure vi ch ), 2013 W L 662 688 (Ba nkr. D. S.D. Feb . 25, 201 3) (“ W he re m oti ve a nd i nte nt a re a t i ssu e, dis posi tio n of the m at te r by sum m ary jud gm en t m ay

be m ore diffic ult .” ).

25 Id . a t 12 34 (fin din g th at the sti pul at ed

fac ts i n th at

c as e le ft no m at eri al iss ue of fac t re m ai nin g a

nd t ha t t hose fac ts e sta

bli she d a s a

m at te r of la w th at the
tra nsfe r at iss ue wa s m ad e wit

h in te nt t o hi nde r, de la

y , a nd d efra ud c redi tors).

26 F.D.I.C

. v . Be ll , 106 F.3d 2 58, 2 63 (8t h C ir. 19 97) (“ Me re a

rgum en ts o r al le ga tio ns a

re i nsuffic ie nt t o de fea t a

prope rly sup porte d m oti on for s um m ary jud gm en t; a ‘n onm ova

nt m ust pre se nt m ore tha

n a sc int ill a of e vid en ce a nd m ust

12ple ad ing s tha t he wa s not aw are of an y of loa n doc um en ts’ requ ire m en ts to not ify
South we st of an y thi ng, or of hi s obl iga tio n to obt ai n South we st’ s en dorse m en t on ch eck s w hi ch we re m ad e pa y ab le to South we st, an d tha t he ha d done so in the pa st
, he poi nte d to no “ spe ci f ic fac ts” to supp ort tho se cl ai m s. More ove r, tha t 2 7

as se rtion in lig ht o f the fac ts d efi es c om m on s en se

.

In sum , the in orde r to prev ai l unde r § 523(a )(4), “ [a] pla in ti f f must es ta

bli sh
tha t the de bto r wa s not la wfull y en tit le d to use the funds for the purpos es for whic h
the y we re in fac t use d.” South we st Ba nk es ta bli she d th at th e D ebtor wa s not 2 8
la wfull y en tit le d to use the ins uran ce proc ee ds for the purpos es for whic h he us ed
the m a nd t he De bto r ha s prod

uc ed not hin g to the c ont

rary

.

ACC ORD INGLY, the Orde r of the Ba nkrupt cy Co urt fin din g the De bto r’s
de bt to Ba

nk of Am eri ca , as subro ge e to South we st Ba nk, to be nondisc ha

rgea ble
unde r 11 U.S.C . § 5 23(a )(4) is AFFIRM ED.

____ ____ ____ ____ ____ ____

ad va nc e spe ci fic fac ts t o c rea te a ge nui ne iss ue of m at eri al fac t for t ria l.” ) (cit at ion

om itt ed ).

27 The De bto r’s a tte m pt t o offe r ev ide nc e of spe ci fic ins ta nc es of c onsi ste nt

co nduc t i n th e pa st fo r the first tim e on a ppe al is not

a ppropri at e. McC

le ary v

. Re lia Sta r Lif

e Ins. C o. , 682 F.3d 1 116, 112 0 (8th Ci r. 2012 ) (“ Our rev ie w of th e

ev ide nc e inc lud es onl y

the rec ord th at

wa s be fore t

he [Ba nkrupt cy Co urt] whe n it rule d on the sum m ary jud gm en t m oti on.” ).

28 In re Be lfr

y , 862 F.2d a t 66 2.

13