            IN THE UNITED STATES COURT OF APPEALS
                     FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                     Fifth Circuit

                                                  FILED
                                                                            June 15, 2009

                                             No. 08-30468              Charles R. Fulbruge III
                                                                               Clerk

In The Matter Of: KENNETH CHARLES SAVAGE; SHARON M SAVAGE

                                                     Debtors

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

KENNETH CHARLES SAVAGE; SHARON M SAVAGE

                                                     Appellants
v.

PORT LOUIS OWNERS ASSOCIATION, INC

                                                     Appellee




                      Appeal from the United States District Court
                   for the Eastern District of Louisiana, New Orleans
                                USDC No. 2:07-CV-3067


Before KING, GARWOOD, and DAVIS, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:*
        Kenneth Charles and Sharon M. Savage appeal the judgment of the
district court, which affirmed the bankruptcy court’s judgment that their debt



        *
         Pursuant to 5TH CIR . R. 47.5, the Court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
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to the Port Louis Owners Association (“PLOA”) is non-dischargeable pursuant
to 11 U.S.C. § 523(a)(4).
                                             I.
       The Savages owned a condominium in the Port Louis condominium
development and were members of the PLOA.                  On January 29, 2004, the
Savages’ condominium, and the adjoining condominium, which was owned by
David Wilbur, sustained substantial damage from a fire of unknown origin in the
common wall between the two units. The fire caused extensive damage to both
units. Further damage was caused by water from the fire hoses used to put out
the fire.
       The PLOA had secured hazard insurance from Scottsdale Insurance
Company (“Scottsdale”) for the units of its members and for the common areas
of the development. The policy insured property owned by the PLOA. The
Savages were not named or additional insureds under the policy.1
       Shortly after the fire, Mr. Savage met with David Burke, who at that time
was the president of the PLOA, and with the adjuster for Scottsdale. Mr. Savage
testified that Burke and the adjuster inspected the damage and, during the
inspection, Burke pointed out to the adjuster damages covered by insurance and
those not covered. Burke and Scottsdale’s adjuster took the position that the
policy did not cover damages to the interior of the Savages’ unit. Mr. Savage
objected to this interpretation of the policy, contending that the policy covered
all of the damage to his condominium.
       Neil Rudd, who was the president of the PLOA at the time of trial in the
bankruptcy court, testified that the Scottsdale policy covered damages to the
buildings from the exterior walls through and up to, but not including, the inside


       1
        The insurance policy was not introduced into evidence in the bankruptcy court. Our
description of its provisions is based on the testimony presented at trial in the bankruptcy
court.

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                                  No. 08-30468

layer of paint; damage to the roof down to the interior layer of paint on the
ceiling; and damage from the ground through the subfloor, but not the finished
flooring. He testified that costs of replacement of interior lighting fixtures,
appliances, finish millwork, bathroom fixtures, cabinetry, and paint were not
covered under the policy. Mr. Savage disagreed with Mr. Rudd’s interpretation
of what was covered. He testified that anything that fell out of the house if the
house was turned upside down was not covered, but that everything that was
part of the structure was covered. The policy itself was never introduced. The
Savages did not have their own insurance covering their contents. According to
Mr. Savage, his mortgage lender told him that the Scottsdale policy was all he
needed, except that he had to provide his own flood coverage.
      Following the fire, both units were uninhabitable. Because Scottsdale took
the position that its policy did not cover the interior of the units or the risk of
loss to the Savages, the policy did not pay for the Savages’ loss of use of the
premises.
      According to the testimony presented at trial, the PLOA was responsible
under its bylaws to handle the adjustment of the insurance claim and to
coordinate the reconstruction of the fire-damaged units. When the PLOA had
made no progress by April 2004, the PLOA board of directors, at the Savages’
request, gave the Savages the authority to administer the insurance claim with
Scottsdale.
      A bank account, referred to as the “Fire Account,” was established by the
PLOA.    The PLOA board gave the Savages the authority to manage the
insurance claim and the repairs to their unit and Wilbur’s unit, and gave the
Savages signature authority on the Fire Account.
      The only deposits made to the Fire Account were the proceeds received
from the PLOA insurance policy and the insurance deductible deposited by the
PLOA.

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      Scottsdale’s initial adjustment was for $86,252.25 for both units. The
Savages and Wilbur disputed this adjustment because they believed it was
insufficient. The Savages requested a new adjustment and obtained an estimate
of $162,922.44 for restoration of their unit. Of that amount, $105,901.86 is the
estimated cost of repairing the roof, exterior structure to the interior layer of
paint, and subfloor. The remainder ($57,830.58) is the cost of restoration of the
interior space.
      The Savages retained an attorney. He demanded a timely resolution of the
claim from Scottsdale and asserted claims against the PLOA for delays in
resolution of the matter and for failing to assert the Savages’ claims against
Scottsdale for loss of property.
      The Savages obtained three bids for reconstruction of both units.
Although the lowest bid that they received was $117,000, the Savages chose to
contract with Marino Construction for a total of $209,760 for repairs to both
units, because Marino was available immediately. The PLOA was aware of the
cost of the Marino contract, and the bankruptcy court found that the PLOA at
least tacitly acquiesced in the execution of the Marino contract. The Savages
sued Scottsdale for the additional costs to repair the structure, in addition to the
costs of restoring the interior. That suit was pending at the time of the trial in
the bankruptcy court.
      After beginning work, Marino encountered problems with mold and could
not proceed with the repairs. Scottsdale obtained a plan for remediation and a
bid of $33,326.19. It sent a check for that amount to the PLOA. The Savages
deposited the check into the Fire Account. Additional insurance proceeds from
Scottsdale were received later and deposited into the Fire Account. The total
payments received from Scottsdale and the PLOA (for the insurance deductible)
were $176,546.16.



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      The Savages used some of the money in the Fire Account for additional
living expenses for themselves and Wilbur ($21,250 for the Savages and $3,900
for Wilbur). Mr. Savage testified that these expenses were incurred as a result
of their having to pay rent while still paying the mortgage on their burned,
uninhabitable condominiums. They also used $4,475 of the funds in the Fire
Account to pay attorney’s fees; $25,491.39 for interior restoration expenses
(flooring, bathroom fixtures, cabinetry, recessed lighting, and windows); and
$1,750 for storage. Mr. Savage testified that he relied on the advice of counsel
that these expenditures were authorized. Savage paid these expenses by check
drawn on the fire account. No argument is made that Savage attempted to
disguise any of these payments.
      Before the repairs were completed, the condominiums were damaged again
by Hurricane Katrina. As of February 2007, when the case was tried in the
bankruptcy court, the Savages’ and Wilbur’s condominiums were still
uninhabitable.
                                       II.
      The Savages filed a Chapter 7 bankruptcy petition in March 2006. The
PLOA filed an adversary complaint against the Savages, alleging that the
Savages had induced the PLOA to tender the insurance proceeds to them based
upon their representations that the proceeds would be utilized to conduct repairs
covered under the policy.     The PLOA alleged further that the Savages’
representations were false and fraudulent and that the Savages had converted
the insurance proceeds to their own personal use and benefit, without
completing the repairs. The PLOA alleged that the Savages were indebted to it
for use of the insurance proceeds for unauthorized expenditures and that the
debt was non-dischargeable under the Bankruptcy Code, 11 U.S.C. § 523.
      At trial, the PLOA objected to the Savages’ use of funds from the Fire
Account for living expenses, attorney’s fees, interior restoration expenses, and

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storage. When the PLOA’s attorney tried to cross-examine Mr. Savage about the
policy not providing for living expenses, the Savages’ attorney objected on the
ground that the policy had not been introduced into evidence. The bankruptcy
court nevertheless found that those expenses were not covered by the Scottsdale
insurance policy. The court also found that the PLOA gave the Savages control
over the insurance claim and the proceeds of the PLOA policy, making them
fiduciaries of the PLOA and thus responsible for the proper use of its assets. The
court further found that the Savages were well aware that the Fire Account,
provided from proceeds of the PLOA policy, lacked sufficient funds to complete
the estimated structural damages to the building covered by the policy, and yet
they elected to use over $56,000 for their personal benefit. The court held that
the Savages embezzled the funds and that they intended to defraud the PLOA
when they reimbursed themselves for living expenses, attorney’s fees, storage
fees, and interior building materials. The bankruptcy court entered judgment
for the PLOA, holding that the Savages were indebted to the PLOA in the
amount of $56,866.39, and that the debt was non-dischargeable under 11 U.S.C.
§ 523(a)(4). The Savages appealed to the district court, which affirmed the
judgment of the bankruptcy court.
                                       III.
      Before us, the Savages argue that the bankruptcy court clearly erred in
finding that they had embezzled the insurance proceeds. They contend that
because the Scottsdale policy was not offered or admitted into evidence, there is
nothing to support the bankruptcy court’s findings about what the policy covered
and did not cover. The Savages further argue that they relied on legal advice
that Scottsdale was liable for the living expenses and other expenditures because
of its improper handling and payment of the claim.
      Section 523(a)(4) of the Bankruptcy Code provides that debts for “fraud or
defalcation while acting in a fiduciary capacity, embezzlement, or larceny” may

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not be discharged in bankruptcy.      11 U.S.C. § 523(a)(4). This exception is
“intended to reach those debts incurred through abuses of fiduciary positions
and through active misconduct whereby a debtor has deprived others of their
property by criminal acts; both classes of conduct involve debts arising from the
debtor’s acquisition or use of property that is not the debtor’s.” Miller v. J. D.
Abrams Inc. (Matter of Miller), 156 F.3d 598, 602 (5th Cir. 1998) (quoting In re
Boyle, 819 F.2d 583, 588 (5th Cir. 1987)). “The term ‘while acting in a fiduciary
capacity’ does not qualify the words ‘embezzlement’ or ‘larceny.’” 4 C OLLIER ON
B ANKRUPTCY ¶523.10[2], at 523-76 (15th ed. rev.). Accordingly, the existence of
a fiduciary relationship between the debtor and creditor is not necessary in order
for a debt for embezzlement or larceny to be non-dischargeable. Id.
      “Embezzlement is defined for purposes of § 523(a)(4) as the fraudulent
appropriation of property by a person to whom such property has been
entrusted, or into whose hands it has lawfully come.” Miller, 156 F.3d at 602
(internal quotation marks and citations omitted). “To meet the definition of
‘embezzlement,’ there must be proof of the debtor’s fraudulent intent in taking
the property.”   Id. at 602-03.   The PLOA had the burden of proving non-
dischargeability. See Grogan v. Garner, 498 U.S. 279, 287 (1991).
      We review the bankruptcy court’s decision under the same standards
applied by the district court: “conclusions of law are reviewed de novo, findings
of fact are reviewed for clear error, and mixed questions of fact and law are
reviewed de novo.” Century Indemnity Co. v. Nat’l Gypsum Co. Settlement Trust
(In re Nat’l Gypsum Co.), 208 F.3d 498, 504 (5th Cir. 2000). Under the clearly
erroneous standard applied to the bankruptcy court’s factual findings, “if the
bankruptcy court’s account of the evidence is plausible in light of the record
viewed in its entirety, the court of appeals may not reverse it even though
convinced that had it been sitting as a trier of fact, it would have weighed the



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evidence differently.” First Nat’l Bank LaGrange v. Martin (In re Martin), 963
F.2d 809, 814 (5th Cir. 1992) (internal quotation marks and citation omitted).
      The bankruptcy court’s finding that the Savages acted with fraudulent
intent when they spent funds from the Fire Account for living expenses,
attorney’s fees, storage costs, and interior repairs was based on its determination
that the Scottsdale policy did not provide coverage for such expenses. The court
found the Savages knew that the insurance proceeds were insufficient to cover
the structural damage to the building, and that they had no basis for their belief
that they could recover damages from Scottsdale for the unauthorized
expenditures for items not covered by the policy. As we have noted previously,
the Scottsdale insurance policy was not offered or admitted into evidence at trial.
Mr. Savage and Mr. Rudd gave conflicting testimony about what the policy
covered and what it did not cover.          The Savages now contend that the
bankruptcy court’s factual findings are not adequately supported because the
insurance policy was not in evidence. Moreover, there was no testimony or
evidence that the Savages were placed on notice by the PLOA of specific
restrictions on the expenditures of the insurance proceeds.
      By failing to introduce the insurance policy and by failing to present any
evidence that the PLOA communicated any restrictions on the use of the
insurance proceeds, we conclude that the PLOA failed to carry its burden of
proving that the Savages actually embezzled funds belonging to the PLOA.
Although Rudd testified that the PLOA board did not authorize the Savages to
make payments from the Fire Account to Mr. Savage, to cash, to Wilbur, and to
the Savages’ attorney, the PLOA did not present any evidence that any
restrictions or conditions were placed on the Savages’ use of the funds in the Fire
Account, other than that the funds were to be used “to restore the units”
damaged by the fire. The PLOA board, after having done nothing to restore the
units for four months following the fire, turned over the insurance proceeds to

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the Savages and gave them complete authority to handle the restoration of the
damaged units. As we have said, there is no evidence that the PLOA board
attached any conditions to the use of the funds; nor does the record indicate that
it engaged in any oversight to determine that the funds were expended properly.
      Because the PLOA did not introduce the insurance policy into evidence,
there is no evidentiary basis for the bankruptcy court’s determinations of what
damages were covered by the policy, and circumstances under which otherwise
excluded damages might be covered. Both Mr. Rudd and Mr. Savage testified
that they had read the policy, and each was adamant in his interpretation of the
policy’s coverage.   Rudd testified that the policy did not cover the costs of
replacement of interior lighting fixtures, appliances, millwork, bathroom
fixtures, cabinets, and paint. Mr. Savage took the position that cabinetry,
lighting, flooring, and fixtures were covered by the policy because they were part
of the “structure.” When the court asked Mr. Savage if he understood that the
Scottsdale policy covered the structural damage to the building and that it did
not include damage to the interior spaces, Mr. Savage responded:          “No, it
included both.” It was the PLOA’s burden to prove that the Savages spent
insurance proceeds on items not covered by the insurance policy. Without the
policy, coverage was arguable, and when combined with no express restrictions
on the insurance proceeds, the PLOA failed to carry its burden of demonstrating
the intent necessary for a finding of embezzlement.
      Finally, Mr. Savage testified that, when making the challenged
expenditures, they relied on the advice of counsel that Scottsdale would be liable
for their living expenses and the other expenditures because of its improper
handling and payment of the claim. By failing to rebut this testimony, the
PLOA further failed to carry its burden of proving that the Savages made the
challenged expenditures with fraudulent intent.



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      For the foregoing reasons, we conclude that the bankruptcy court clearly
erred in finding that the Savages acted with fraudulent intent.
                                       III.
      For the foregoing reasons, the judgment of the district court, affirming the
judgment of the bankruptcy court, is REVERSED, and the case is REMANDED
to the district court, with instructions to REMAND it to the bankruptcy court for
entry of judgment consistent with this opinion.
      REVERSED and REMANDED.




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