Background

• Nail borrowed from Arvest to purchase a newly-constructed home, executing a promissory note and mortgage.
• In April 2009 Nail filed a voluntary Chapter 13 petition; Arvest foreclosed after a forbearance period and bought the property for far less than Nail owed.
• Arvest filed an adversary proceeding seeking nondischargeability of the mortgage debt under § 523(a)(2) and (4); the bankruptcy court directed verdict for Nail on § 523(a)(2) and held $65,000 nondischargeable under § 523(a)(4) based on Ark. Code § 4-58-105(b)(2).
• The BAP reversed on grounds that the Arkansas statute did not create the requisite fiduciary relationship, that the settlement proceeds were not established as Miscellaneous Proceeds, and that there was no § 523(a)(4) fiduciary relationship.
• Arvest appeals arguing defalcation in a fiduciary capacity and embezzlement under § 523(a)(4); the court agrees with the BAP that no fiduciary relationship was created and that embezzlement is not established, affirming the judgment.

Issues

Key Cases Cited

• Davis v. Aetna Acceptance Co., 293 U.S. 328 (U.S. Supreme Court 1934) (fiduciary capacity requires pre-existing trust, not mere liability from wrongdoing)
• Matter of Marchiando, 13 F.3d 1111 (7th Cir. 1994) (statutory trust must have definable res and trust-like duties)
• In re Long, 774 F.2d 875 (8th Cir. 1985) (substance of transaction controls fiduciary analysis, not labels)
• In re Belfry, 862 F.2d 661 (8th Cir. 1988) (defalcation standard and fiduciary relationship burden of proof)
• In re Phillips, 882 F.2d 302 (8th Cir. 1989) (embez zlement requires ownership/entrustment; not embezzlement when funds are secured by security interest)
• In re Tran, 151 F.3d 339 (5th Cir. 1998) (state statutes creating trusts must impose trust-like duties)