                              UNPUBLISHED

                     UNITED STATES COURT OF APPEALS
                         FOR THE FOURTH CIRCUIT


                              No. 07-1200



In Re:    BRUCE E. STRACK,

                                                                  Debtor.
----------------------------

KUBOTA TRACTOR       CORPORATION,   a   California
corporation,

                                                Plaintiff - Appellant,

            versus


BRUCE E. STRACK,

                                                     Defendant - Appellee,

            and

US TRUSTEE,

                                                                 Trustee.



Appeal from the United States District Court for the Eastern
District of Virginia, at Newport News. Henry Coke Morgan, Jr.,
Senior District Judge.   (4:06-cv-00145-HCM; BK-05-53453; AP-06-
05002-DHA)


Argued:    January 30, 2008                   Decided:     March 11, 2008


Before NIEMEYER, MOTZ, and DUNCAN, Circuit Judges.


Reversed by unpublished opinion. Judge Duncan wrote the opinion,
in which Judge Niemeyer and Judge Motz joined.
ARGUED: Ryan Ashby Shores, HUNTON & WILLIAMS, Washington, D.C., for
Appellant. Carolyn Louise Camardo, MARCUS, SANTORO & KOZAK, P.C.,
Chesapeake, Virginia, for Appellee.     ON BRIEF: R. Hewitt Pate,
HUNTON & WILLIAMS, Washington, D.C., for Appellant.


Unpublished opinions are not binding precedent in this circuit.




                                2
DUNCAN, Circuit Judge:

     In October 2005, Appellee Bruce Strack (“Strack”), along with

his wife, filed for relief under Chapter 7 of the Bankruptcy Code.

Strack listed Appellant Kubota Tractor Corporation (“Kubota”) as a

creditor holding an unsecured judgment claim against him for

approximately    $124,000.       Kubota     later   brought   an   adversary

proceeding against the Stracks in the United States Bankruptcy

Court for the Eastern District of Virginia, challenging the pending

discharge   of   the   debt   under   two   statutory   exceptions   to   the

presumption of dischargeability: “defalcation while acting in a

fiduciary capacity,” under 11 U.S.C. § 523(a)(4), and “willful and

malicious injury by the debtor,” under 11 U.S.C. § 523(a)(6).             The

bankruptcy court found neither exception to apply and the debt

therefore dischargeable.        On appeal, the United States District

Court for the Eastern District of Virginia affirmed the bankruptcy

court’s Opinion and Order.      Because we find that the debt arose by

reason of Strack’s “defalcation,” or nonfraudulent default, while

he was acting in a fiduciary capacity, we find that § 523(a)(4)

renders the debt non-dischargeable, and reverse the judgment of the

district court.        Having found the debt non-dischargeable under

§ 523(a)(4), we do not reach Kubota’s claim under § 523(a)(6).




                                      3
                                          I.

     The relevant facts here are not in dispute.                  Strack served as

President       and   majority    owner        of    Enterprise   Equipment       Inc.

(“Enterprise”).1         Enterprise    sold         farming   equipment,   such     as

tractors, and parts for such equipment at its retail facility

located in York County, Virginia.               Kubota was one of the numerous

agricultural machinery manufacturing companies for which Enterprise

acted as an authorized dealer.                In his capacity as Enterprise’s

President,      Strack   agreed   to   personally        guarantee   Enterprise’s

indebtedness to Kubota.           In September 2003, Strack also signed

Kubota’s Dealer Sales and Service Agreement (the “Agreement”),

which forms the basis of this appeal.

     The Agreement’s purpose was to renew Enterprise’s “right to

purchase and resell [Kubota] products.” J.A. 171. Pursuant to the

Agreement, Kubota sold “whole goods,” or equipment, to Enterprise

through     a    “floor-planning”         arrangement.2           Under    such     an

arrangement, a dealer can purchase goods from a manufacturer

without paying for the goods up front.                   Here, Enterprise would

order a piece of equipment from Kubota for either immediate resale

or to hold in its product inventory.                  Although no money changed



     1
      Strack, together with his wife Stephanie Strack, owned sixty
percent of Enterprise’s stock.
     2
      Kubota also sold parts to Enterprise on “open account,” under
which Enterprise could order the parts and be billed at a later
date. Those sales, however, are not relevant to this appeal.

                                          4
hands, Enterprise’s purchase of the equipment would, in substance,

result in the automatic issuance of a “loan” to Enterprise from

Kubota    for   the   purchase       price      amount.        If    an   interest-free

promotion was in place, as appears to have frequently been the

case,    Kubota   did    not      require    payment      of   either     principal     or

interest on this “loan” for the first several months immediately

following the date of Enterprise’s purchase.                        If no such program

was in place, Enterprise was required to make interest payments

during this period.            Under either scenario, at the end of the

period the entire purchase price became due to Kubota.

       “To secure the performance and payment of all obligations of

[Enterprise] to [Kubota],” Enterprise granted to Kubota a security

interest in, and lien on, the equipment.                       J.A. 26.      To further

protect Kubota’s interests, the Agreement prohibited Enterprise

from    disposing     of,    or   selling,      any    equipment      “except      in   the

ordinary    course      of   business       upon      customary      terms   for    value

received.”      J.A. 27.       The following terms governing Enterprise’s

handling of the proceeds from these sales form the crux of this

appeal:

       Until [Enterprise] shall have made settlement with
       [Kubota] of the full amount due to [Kubota] with respect
       to any [equipment] disposed of by [Enterprise],
       [Enterprise] shall segregate the proceeds and hold the
       same in trust for [Kubota].       [Enterprise] shall be
       entitled to transfer proceeds free of trust if at, or
       prior to, the time of such transfer, the payment due from
       [Enterprise] to [Kubota] shall be assured to the
       satisfaction of [Kubota].


                                            5
Id. (emphasis added).

       Kubota would conduct regular inventory audits at Enterprise’s

facility to determine whether Enterprise had sold any Kubota

equipment without then “segregating the proceeds” and remitting

them       to    Kubota.    J.A.   27,   151.      Enterprise   frequently   sold

equipment in such fashion, a breach Kubota dubs as “going out of

trust,” and had to repay Kubota at the conclusion of the audits.

Enterprise was able to repay Kubota until March 2004, at which time

its financial condition deteriorated.

       By July 2004, Enterprise was indebted to Kubota for nearly

$200,000.          According to Strack, Enterprise was unable to repay

Kubota because all proceeds garnered were used to pay employees,

taxes, and other expenses necessary for Enterprise to remain in

business.          Strack went to great lengths to try to keep Enterprise

afloat, even borrowing against the equity in his home and placing

those funds into Enterprise's account.                Strack managed to reduce

Enterprise’s debt to Kubota to approximately $124,000 by returning

parts and inventory that Enterprise had previously purchased and by

making          payments   whenever   possible.3      Despite   these   efforts,


       3
      Strack also tried to find a buyer for the Kubota dealership
rights, and thought he had done so in Irvine Spurlock--the owner of
another lawn and garden company in Virginia. On July 21, 2004,
Spurlock sent Kubota’s manager a letter offering to pay up to
$150,000 on Enterprise's debt in exchange for a new Kubota-
authorized dealership encompassing Enterprise’s territory. Kubota
then provided forms to Enterprise, which were completed by Strack,
that terminated Enterprise's Agreement with Kubota. Strack felt
that his debt with Kubota had been settled at that time, as all

                                          6
Enterprise ultimately went out of business, and was unable to make

any further payments to Kubota. Kubota subsequently sued Strack in

the Circuit Court for the County of York, Virginia, pursuant to his

personal guarantee of Enterprise’s indebtedness, for the balance

due under the Agreement.   In the proceedings, Strack admitted the

legitimacy of the debt and Kubota obtained a judgment against him

on July 18, 2005 in the amount of $123,914.96.

     On October 14, 2005, the Stracks filed for Chapter 7 relief

and listed Kubota as a creditor.       Kubota later filed an adversary

proceeding with the bankruptcy court, alleging that such debt

should be non-dischargeable under one of two exceptions to the

presumption of dischargeability: defalcation by a fiduciary, 11

U.S.C. § 523(a)(4),4 or willful and malicious injury by the debtor,

11 U.S.C. § 523(a)(6).5    The bankruptcy court rejected Kubota’s

arguments and found the debt dischargeable.         Specifically, the


Kubota equipment was removed by Kubota from Enterprise's store and
Strack did not hear from Kubota for several months. Strack later
learned, however, that the deal between Spurlock and Kubota fell
through and Kubota still held Enterprise liable for the accrued
debt.   Feeling still obligated to repay Kubota even after the
Agreement was terminated, Strack subsequently admitted the
legitimacy of the debt in a state court proceeding. Kubota was
thus able to obtain the judgment against Strack that forms the
predicate of this dispute.
     4
      Section 523(a)(4) prohibits the discharge of any debt “for
fraud or defalcation while acting in a fiduciary capacity,
embezzlement, or larceny.”
     5
      Section 523(a)(6) prohibits the discharge of any debt “for
willful and malicious injury by the debtor to another entity or to
the property of another entity.”

                                   7
court found that (1) the Agreement did not unequivocally create an

“express trust” between Kubota and Enterprise and therefore the

debt did not arise while Strack was acting as a fiduciary for the

purposes of § 523(a)(4);6 and (2) Strack's efforts to repay Kubota

negated the “willful” requirement of § 523(a)(6).   Kubota appealed

the bankruptcy court’s judgment, unsuccessfully, to the United

States District Court for the Eastern District of Virginia.   This

appeal followed.



                               II.

     Kubota maintains that the bankruptcy court and district court

erred in finding that Strack’s debt was not excepted from discharge



     6
      The bankruptcy court also recapitulated its earlier holding
that “the term ‘fiduciary’ as used in § 523(a)(4) [is restricted
to] ‘the class of fiduciaries including trustees of specific
written declarations of trust [i.e. express trusts], guardians,
administrators, executors or public officers and, absent special
considerations, [does not] extend to the more general class of
fiduciaries such as agents, bailees, brokers, factors and
partners.’”   J.A. 156-57 (quoting E.L. Hamm & Assocs., Inc. v.
Sparrow (In re Sparrow), 306 B.R. 812, 828 (Bankr. E.D. Va. 2003).
This court has not yet had the opportunity to determine, in a
published opinion, the proper contours of the term “fiduciary” as
used in § 523(a)(4). But see Harrell v. Merchant’s Express Money
Order co. (In re Harrell), 173 F.3d 850, at *3 (4th Cir.
1999)(unpublished    table   decision)   (holding    that   “under
[§ 523(a)(4)], a fiduciary is limited to instances involving
express or technical trusts”). Here, the dispute concerns only
whether an express trust was created, which, as both parties
acknowledge, is clearly sufficient to establish a fiduciary
relationship for the purposes of § 523(a)(4). See Davis v. Aetna
Acceptance Co., 293 U.S. 328, 333-34 (1934). Thus, because the
reach of the term “fiduciary” is not squarely presented here, we
decline to elaborate on the question further.

                                8
under either § 523(a)(4) or § 523(a)(6).   “We review the judgment

of a district court sitting in review of a bankruptcy court de

novo, applying the same standards of review that were applied in

the district court.”   Three Sisters Partners, LLC v. Harden (In re

Shangra-La, Inc.), 167 F.3d 843, 847 (4th Cir. 1999).   Thus, here,

we examine the bankruptcy court’s conclusions of law de novo and

its findings of fact for clear error.   See Fed. R. Bankr. P. 8013;

IRS v. White (In re White), 487 F.3d 199, 204 (4th Cir. 2007).

     Generally, “all legal obligations of the debtor, no matter how

remote or contingent” are potentially dischargeable in bankruptcy.

See H.R. Rep. No. 95-595, at 309 (1977); see also Nunnery v.

Rountree (In re Rountree), 478 F.3d 215, 219 (4th Cir. 2007).

Congress, however, has provided, in 11 U.S.C. § 523, several

limited exceptions to this presumption of dischargeability, which

we must construe narrowly “to protect the [Bankruptcy Act’s]

purpose of providing debtors a fresh start.”     In re Biondo, 180

F.3d 126, 130 (4th Cir. 1999).        Kubota’s claim turns on the

applicability of two such exceptions, § 523(a)(4) and § 523(a)(6).

As the party challenging dischargeability, Kubota bears the burden

of proving the debt non-dischargeable by a preponderance of the

evidence.   See Grogan v. Garner, 498 U.S. 279, 291 (1991).

                                 A.

     We first address Kubota’s argument that § 523(a)(4), excepting

from discharge those debts “for fraud or defalcation” committed by


                                 9
one “acting in a fiduciary capacity,” proscribes the discharge of

Strack’s debt.           To prevail under this provision, a creditor must

ordinarily make a two-part showing: (1) that the debt in issue

arose while the debtor was acting in a fiduciary capacity; and (2)

that       the    debt   arose   from   the    debtor’s   fraud    or   defalcation.

Pahlavi v. Ansari (In re Ansari), 113 F.3d 17, 20 (4th Cir. 1997).

Here,       the    second   criterion,    “defalcation,”      or    non-fraudulent

default, is not in dispute.7             However, since Kubota is attempting

to prevent the discharge of Strack’s debt based on his guarantee of

Enterprise’s indebtedness, Kubota must demonstrate not only that

Enterprise defalcated while acting in a fiduciary capacity for

Kubota, but also that Enterprise’s actions can be attributed to

Strack.          See Airlines Reporting Corp. v. Ellison (In re Ellison),

296 F.3d 266, 270-71 (4th Cir. 2002) (requiring more than the

existence of a fiduciary duty on behalf of the corporation to find

that the corporation’s officers’ indebtedness, based on their

guarantees of the corporation’s debt, was for “fraud or defalcation

while acting in a fiduciary capacity” under § 523(a)(4)).



       7
      To be defalcation for purposes of 11 U.S.C. § 523(a)(4), an
act need not “rise to the level of . . . ‘embezzlement’ or even
‘misappropriation.’” In re Ansari, 113 F.3d at 20. “[N]egligence
or even an innocent mistake which results in . . . [the] failure to
account is sufficient.”    Republic of Rwanda v. Uwimana (In re
Uwimana), 274 F.3d 806, 811 (4th Cir. 2001). Here, Enterprise, by
Strack’s instruction, failed to remit the proceeds from the sale of
Kubota equipment as required by the Agreement, instead using the
funds for Enterprise’s own expenses. Thus, both Enterprise’s and
Strack’s actions constitute defalcation.

                                              10
      The courts below rejected Kubota’s claim because of their view

that Kubota failed to make the preliminary showing that a fiduciary

relationship existed between it and Enterprise. Kubota urges us to

reverse that finding, arguing that the Agreement created an express

trust between the parties, giving rise to a fiduciary duty on

behalf of Enterprise to protect the proceeds from the sale of

Kubota equipment.8     In finding that a mere debt, and not a trust,

was   created,   the   bankruptcy   court,   Kubota   asserts,   erred   by

improperly focusing on the chattel itself--the equipment--rather

than on the “proceeds flowing from the sale of the chattel.”

Appellant’s Br. at 26.        This “error,” in Kubota’s view, was

perpetuated by the district court.           With due respect for those

courts’ analyses, we agree with Kubota.

      As both parties acknowledge, the creation of an express trust

can give rise to the requisite fiduciary duty under § 523(a)(4).

See Davis, 293 U.S. at 334.          The parties also agree that in

determining whether such a trust was established, we look to the

law of the Commonwealth of Virginia, where the trust was allegedly

created, for guidance.      See Am. Bankers Ins. Co. v. Maness, 101


      8
      As will be discussed further below, under Virginia law, an
express trust is created when the parties affirmatively manifest an
intention that certain property be held in trust for the benefit of
a third party. See Peal v. Luther, 97 S.E.2d 668, 669 (Va. 1957).
If such a trust is created, the beneficiary of the trust “is
equitable owner of the trust property. If the trustee transfers
the trust property . . ., or if the trustee becomes insolvent, the
beneficiary is still entitled to the property.”        Broaddus v.
Gresham, 26 S.E.2d 33, 35-36 (Va. 1943).

                                    11
F.3d 358, 363 (4th Cir. 1996) (“[W]hile federal law creates the

bankruptcy estate, . . . state law, absent a countervailing federal

interest, determines whether a given property falls within this

federal framework.”).

       Under Virginia law, “[a]n express trust is based on the

declared intention of the trustor,” manifested either in writing or

through the parties’ actions.         Leonard v. Counts, 272 S.E.2d 190,

194 (Va. 1980); see also Woods v. Stull, 30 S.E.2d 675, 682 (Va.

1944) (“In order to constitute an express trust there must be

either explicit language to that effect or circumstances which show

with      reasonable    certainty   that    a   trust    was   intended   to    be

created.”).       Although the parties’ use of the word “trust” is to be

given great weight, it is not determinative.               See Exec. Comm. v.

Shaver, 135 S.E. 714, 716 (Va. 1926); see also Broaddus, 26 S.E.2d

at   36    (Va.   1943)   (recognizing     that   an    express   trust   can   be

established without use of any “technical words”).                 All that is

necessary is the “unequivocal” intent “‘that the legal estate [be]

vested in one person, to be held in some manner or for some purpose

on behalf of another.’”        Old Republic Nat’l Title Ins. Co. (In re

Dameron), 155 F.3d 718, 722 (4th Cir. 1998) (quoting Broaddus, 26

S.E.2d at 35).         At bottom, “[i]f the intention is that the money

shall be kept or used as a separate fund for the benefit of the

payor or a third person, a trust is created.               If[, however,] the

intention is that the person receiving the money shall have the


                                      12
unrestricted use thereof, being liable to pay a similar amount

whether with or without interest to the payor or to a third person,

a debt is created.”      Broaddus, 26 S.E.2d at 37.

       In sum, whether an express trust was created between Kubota

and Enterprise depends on the intent of the parties as evinced by

the Agreement.       As noted above, the Agreement provided that if

Enterprise sold a piece of equipment to a third party before it

remitted to Kubota the total payment due for that equipment,

Enterprise “shall segregate the proceeds [from the sale] and hold

the same in trust for [Kubota].”             J.A. 27 (emphasis added).

Enterprise was entitled to use or transfer the proceeds “free of

trust” only when Kubota was repaid to its “satisfaction.”             Id.

(emphasis added).      In addition to twice using the word “trust” to

describe the interest in question, this language “unequivocally

show[s] an intention” that Enterprise take possession of the

proceeds, segregate them from its own funds, and “h[o]ld” them “on

behalf of,” Kubota.       In re Dameron, 155 F.3d at 722 (internal

quotations omitted).      Although this provision forms a relatively

small part of the Agreement, it demonstrates, “with reasonable

certainty,” the intent to establish an express trust.          See Woods,

30 S.E.2d at 682.      Because such a trust was created, we find the

existence of a fiduciary relationship between Enterprise and Kubota

with respect to the sales proceeds.          See id.; In re Ellison, 296

F.3d   at   270-71   (acknowledging   that    a   fiduciary   relationship


                                   13
existed between two corporations when the agreement between them

provided that sales proceeds “were the ‘property of the carriers,’

to    be   ‘held   in    trust’    by    [the   debtor]    ‘until   satisfactorily

accounted for.’”).

       Notwithstanding the above express language, the bankruptcy

court determined that the Agreement was insufficient to create an

express trust, relying primarily on the Supreme Court’s decision in

Davis, 293 U.S. at 333-34.              The Davis Court, applying the law of

Illinois, found that a writing characterized as a “trust receipt”

was    insufficient        to     transform     an    ordinary      debtor-creditor

relationship into a fiduciary relationship.                  293 U.S. at 333-34.

The bankruptcy court here held that because the Agreement between

Enterprise and Kubota, like the agreements forming the basis of the

relationship between the parties in Davis, provided for title to

the equipment to pass to Enterprise and for Kubota to retain merely

a security interest in it, the Agreement created a standard debtor-

creditor relationship, not an express trust.                  The district court

agreed.

       In so holding, however, both the bankruptcy court and the

district     court      failed    to    recognize    two   critical   distinctions

between this case and Davis.               First, in Davis, the creditor was

claiming the existence of a trust with respect to the chattel--the

automobile.        Here, the proper focus is on the proceeds from the

sale of the chattel.         Even if Enterprise’s holding of title to the


                                           14
equipment would preclude the finding of a trust relationship

between the parties with respect to that equipment, Davis still

would not foreclose the existence of an express trust with respect

to the proceeds from the sale of that equipment.    Furthermore, and

more critically, the language of the Agreement here, unlike the

incidental labeling of a document as a “trust receipt” in Davis, in

no uncertain terms demonstrates “the intention . . . that the

[proceeds] . . .      be kept or used as a separate fund for the

benefit of [Kubota].”   See Broaddus, 26 S.E.2d at 36-37 (comparing

the intent necessary to create a trust with that necessary to

create an ordinary debt).     Unlike in a standard debtor-creditor

relationship, in which “the person receiving the money [has] the

unrestricted use thereof, being liable [only] to pay a similar

amount . . . to the payor,” id., Enterprise was not entitled to

treat the proceeds as its own and use them as it wished.      Rather,

Enterprise was required to separate the proceeds, hold them for

Kubota’s benefit, and use them only once Kubota allowed.     See J.A.

27.   Thus, we find that the Agreement gave rise to an express trust

and a consequent fiduciary relationship between Enterprise and

Kubota, notwithstanding the guidance of Davis.

                                 B.

      Having concluded that the debt arose due to Enterprise’s

defalcation while it was acting in a fiduciary relationship with

Kubota,   we   must   now   determine   whether   Strack’s   personal


                                 15
indebtedness   to   Kubota,      arising   out     of   his   guarantee   of

Enterprise’s    debt,      is    therefore       non-dischargeable    under

§ 523(a)(4).   We need not labor long over this issue, however.           The

facts of this case are analogous to those in our decision in In re

Ellison, 296 F.3d 266, and therefore must yield the same result.9

     In In re Ellison, the debtors were officers, directors, and

shareholders   of   a   West    Virginia   corporation.       The   debtors’

corporation entered into an express trust agreement with another

corporation, ARC, giving rise to a fiduciary relationship between

the two entities.   The debtors also agreed to personally guarantee

their corporation’s indebtedness to ARC.          The debtors’ corporation

later breached the trust agreement and amassed a significant debt.

When the debtors subsequently filed for bankruptcy under Chapter 7,

ARC challenged the dischargeability of the debt under § 523(a)(4).

This court found the debt non-dischargeable based on the following

factors: (1) the debtors personally guaranteed the indebtedness;

(2) the indebtedness arose due to defalcation or “the breach of a

fiduciary relationship between the two corporations”; (3) the

debtors “were personally responsible for the conduct that gave

rise” to their corporation’s breach or defalcation; and (4) the




     9
      We note that      this court’s decision in In re Ellison was
based, in part, on      West Virginia law. However, Virginia law on
this subject does       not differ substantially from that of West
Virginia. Thus, we      find a similar outcome to be warranted here.

                                     16
debtors “conduct amounted to a breach of their fiduciary duty” to

their corporation.      Id. at 270-71.

       The same “confluence” of factors present in In re Ellison

exists here.    See id. at 271.    First, Strack personally guaranteed

Enterprise’s debt to Kubota.           Second, as determined above, the

indebtedness arose from Enterprise’s defalcation or failure to

remit the proceeds to Kubota as the Agreement required.                 Third,

Strack was personally responsible for this defalcation by willfully

violating the Agreement and using the proceeds owed to Kubota for

other purposes.      And, finally, this wrongful conduct constituted a

breach of the fiduciary duty that Strack owed to Enterprise as the

corporation’s President.       See Adelman v. Conotti Corp., 213 S.E.2d

774,    779   (Va.   1975)   (“Under    Virginia   law   an   officer    of   a

corporation, in his dealings with the corporation, has the same

duty of fidelity which arises in dealings between a trustee and a

beneficiary of the trust.”).           We therefore conclude, like this

court did in In re Ellison, that Strack’s indebtedness to Kubota

arose from his “defalcation while acting in a fiduciary capacity”

and is therefore excepted from discharge in bankruptcy under 11

U.S.C. § 523(a)(4).10




       10
      Because we find Strack’s debt non-dischargeable under §
523(a)(4), we do not reach Kubota’s alternative argument under §
523(a)(6).

                                       17
                              III.

     For the foregoing reasons, the judgment of the district court

is

                                                        REVERSED.




                               18
