498 B.R. 229
8th Cir. BAP2013Background
- Robert N. Armstrong was sole member/manager of RNA Properties LLC, borrower on loans secured by a Dallas strip mall and required by the deed of trust to list lender (Southwest Bank) as loss payee on insurance.
- A 2009 fire generated insurer (PSM) payouts totaling ~$917,149; nine checks were issued, including three jointly payable checks totaling $135,500 to “Robert Armstrong d/b/a RNA Properties LLC and Southwest Bank.”
- Armstrong deposited the three jointly payable checks into RNA Properties’ Bank of America account without Southwest’s endorsement, then diverted most funds for personal use (transferring $100,000 to personal accounts; only ~$4,863 in repairs were performed).
- Southwest later discovered the fire, declared default, foreclosed, and Bank of America (as subrogee to Southwest by stipulation) paid Southwest $135,500 for negotiating the unendorsed checks and preserved its claims against Armstrong.
- Bank of America sued in debtor’s Chapter 7 adversary proceeding seeking nondischargeability under 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6); the bankruptcy court granted summary judgment in favor of Bank of America on fraud and embezzlement grounds; Eighth Circuit affirms as to § 523(a)(4).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to press embezzlement claim | Bank of America, as subrogee to Southwest, stands in Southwest’s shoes and may pursue embezzlement | Armstrong: BA lacked standing; claim against him arises from UCC presentment warranty to BA, not embezzlement of Southwest’s funds | Held for BA — Armstrong stipulated BA’s subrogation; BA has standing to assert embezzlement on Southwest’s behalf |
| Ownership of insurance proceeds | Proceeds belonged to Southwest under deed of trust (loss-payee language and bank’s right to apply proceeds) | Armstrong: borrower (or RNA Properties) owned proceeds subject to security interest; one cannot embezzle one’s own property | |
| The court found Armstrong had no ownership interest; Southwest (or RNA subject to Southwest’s lien) owned the funds, so Armstrong misappropriated another’s property | |||
| Lawful initial possession / embezzlement vs larceny | BA: checks were jointly payable and in any event Armstrong’s diversion after lawful possession shows embezzlement | Armstrong: if he had lawful possession, cannot be embezzlement of another’s property | |
| Court: Armstrong came into possession via checks payable to him, so possession was lawful; regardless, unlawful appropriation after possession supports nondischargeability (would be larceny if initial possession unlawful) | |||
| Fraudulent intent required for §523(a)(4) | Circumstantial evidence (failure to notify Southwest, depositing without endorsement, diverting funds, minimal repairs) shows fraudulent intent | Armstrong: disputed knowledge/intent; claimed past practice and lack of awareness of obligations | |
| Court: Facts create an "unmistakable picture" of fraudulent intent; Armstrong offered no specific, admissible contrary facts; summary judgment appropriate |
Key Cases Cited
- In re Phillips, 882 F.2d 302 (8th Cir. 1989) (distinguishes ownership of proceeds where borrower retained ownership subject to security interest)
- In re Belfry, 862 F.2d 661 (8th Cir. 1988) (definition of embezzlement for § 523(a)(4))
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standard; movant bears burden to show no genuine issue of material fact)
- F.D.I.C. v. Bell, 106 F.3d 258 (8th Cir. 1997) (nonmovant must present specific facts to create genuine issue at summary judgment)
- Jackson v. Star Sprinkler Corp. of Fla., 575 F.2d 1223 (8th Cir. 1978) (intent and motive often require factfinder but may be shown circumstantially)
Result: Judgment affirmed as to nondischargeability under 11 U.S.C. § 523(a)(4) (embezzlement).