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In re Armstrong

United States Bankruptcy Appellate Panel of the Eighth Circuit

September 19, 2013

In re: Robert N. Armstrong, Debtor
Robert N. Armstrong, Defendant-Appellant Bank of America, N.A., Plaintiff-Appellee

Submitted: July 17, 2013.

Corrected September 20, 2013.

Appeal from United States Bankruptcy Court for the Eastern District of Missouri - St. Louis.

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

FEDERMAN, Chief Judge.

Debtor Robert N. Armstrong appeals from the Order of the Bankruptcy Court[1] finding his debt to Bank of America nondischargeable under 11 U.S.C. § 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.


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 "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 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 ยง 523(a)(2)(A) for fraud, as well as ...

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