               United States Bankruptcy Appellate Panel
                            FOR THE EIGHTH CIRCUIT



                                  No. 10-6057


In re:                                 *
                                       *
Elizabeth E. Nail,                     *
                                       *
         Debtor.                       *
                                       *
Arvest Mortgage Company,               *        Appeal from the
                                       *        United States
         Plaintiff - Appellee,         *        Bankruptcy Court for the
                                       *        Western District of Arkansas
               v.                      *
                                       *
Elizabeth E. Nail,                     *
                                       *
         Defendant - Appellant.        *
                                      No. 10-6061


In re: Elizabeth E. Nail,                  *
                                           *
             Debtor.                       *
                                           *
Arvest Mortgage Company,                   *        Appeal from the
                                           *        United States
             Plaintiff - Appellant,        *        Bankruptcy Court for the
                                           *        Western District of Arkansas
             v.                            *
                                           *
Elizabeth E. Nail,                         *
                                           *
             Defendant - Appellee.         *



                             Submitted: March 1, 2011
                              Filed: April 15, 2011


Before SCHERMER, FEDERMAN and VENTERS, Bankruptcy Judges

SCHERMER, Bankruptcy Judge

       Elizabeth E. Nail appeals from the judgment of the bankruptcy court
determining that her failure to turn over $46,016.25 in lawsuit settlement proceeds to
Arvest Mortgage Company and the Federal National Mortgage Association (together,
“Creditor”) resulted in a non-dischargeable debt pursuant to 11 U.S.C. § 523(a)(4).
The Creditor cross-appeals, arguing that the bankruptcy court should have found the
non-dischargeable debt to be $65,000, the gross amount of the settlement. We have
jurisdiction over this appeal and cross-appeal. See 28 U.S.C. § 158(b). For the
reasons set forth below, we reverse.

                                          -2-
                                         ISSUES
        As framed by the parties, the issues on appeal are: (1) whether the Debtor
assigned to the Creditor the proceeds of a settlement that the Debtor received from a
lawsuit against the builders of a house she purchased; and (2) whether the Debtor’s
failure to remit such proceeds to the Creditor is excepted from the Debtor’s discharge
pursuant to 11 U.S.C. § 523(a)(4) as a debt for defalcation by the Debtor while acting
in a fiduciary capacity.1 The issue presented by the cross-appeal is whether the Debtor
was entitled to reduce the debt excepted from her discharge.

       A threshold issue, however, is whether the settlement proceeds of $65,000 were
captured as “Miscellaneous Proceeds” under the terms of the mortgage that the Debtor
executed in favor of Arvest National Bank (“Arvest”). We hold that the settlement
proceeds were not, in fact, Miscellaneous Proceeds as defined in the mortgage. We
further hold that, if the settlement proceeds are determined to be Miscellaneous
Proceeds arising from a tort action, they could not be validly assigned to Arvest under
Arkansas law. Finally, we hold that, if the settlement proceeds are determined to be
Miscellaneous Proceeds under either a contract or tort theory, the Arkansas statutes
relied on by the bankruptcy court did not create a trust giving rise to a fiduciary duty
under § 523(a)(4) that would require the Debtor to pay the settlement proceeds to the
Creditor. Therefore, there is no basis for a non-dischargeable debt under § 523(a)(4).
Having reached these conclusions, we need not consider the issue raised in the cross-
appeal.
                                  BACKGROUND
       The Debtor obtained a loan from Arvest in 2006 to purchase a newly
constructed residence and executed a promissory note and mortgage (the “Mortgage”)
in favor of Arvest. After purchasing the house, the Debtor discovered certain

       1
               The Creditor also argued that the bankruptcy court could have excepted the
alleged debt from the Debtor’s discharge as one for embezzlement. Based on our holding
regarding whether the Debtor assigned the settlement proceeds to the Creditor and on the
bankruptcy court’s failure to address the embezzlement claim, we do not consider the Creditor’s
embezzlement argument.

                                              -3-
construction defects but was unable to persuade the builders to remedy them. At
about the same time, according to Arvest, the Debtor began missing her mortgage
payments. Although it declined to join in a lawsuit against the builders, Arvest
granted the Debtor two consecutive six-month forbearance periods beginning in
February 2007 so she could prosecute an action against the builders. The parties
agree that the Debtor’s state court lawsuit against the builders alleged tort and contract
causes of action.2 According to Arvest, the Debtor did not resume making her
mortgage payments to Arvest after the forbearance periods expired.

       The Debtor settled the state court lawsuit in January 2008 after arbitration. She
received $65,000 from the builders.3 While Arvest was aware of the state court
lawsuit, it maintains that it did not learn of the settlement and the Debtor’s receipt of
the $65,000 until some six months later, in July 2008. The Debtor did not remit any
of the settlement proceeds to Arvest. Rather, she spent the proceeds to pay attorneys
fees for the state court lawsuit, to pay for repairs and remodeling on her new home,
and to pay credit card debt.

      The Debtor filed a voluntary petition for relief under Chapter 13 of Title 11 of
the United States Code (the “Bankruptcy Code”) on April 28, 2009.

        Arvest obtained relief from the automatic stay in the Debtor’s bankruptcy case
and completed a judicial foreclosure that it had commenced pre-petition on the
property. Arvest purchased the property at the foreclosure sale and then transferred
title of it to Federal National Mortgage Association (“Fannie Mae”). Arvest stated



       2
               The parties also do not dispute that the state court action included a count for
piercing the corporate veil as well.
       3
               The state court complaint and documentation of the state court settlement between
the builders and the Debtor were admitted as exhibits at trial, but the parties did not provide to us
copies of these documents.

                                                -4-
that the price it paid to purchase the property at the foreclosure sale was less than the
amount owed by the Debtor on the loan.

       Arvest then brought an adversary proceeding in the Debtor’s bankruptcy case.
It asserted causes of action against the Debtor under 11 U.S.C. § 523(a)(2)(A), based
on false pretenses, false representation or actual fraud, and under 11 U.S.C. §
523(a)(4) for fraud or defalcation while acting in a fiduciary capacity or for
embezzlement or larceny.4 The Debtor moved to dismiss the complaint for failure to
prosecute in the name of Fannie Mae as the real party in interest. During the trial, the
bankruptcy court granted the Debtor’s motion for a directed verdict on the §
523(a)(2)(A) cause of action.5

       On April 9, 2010, the bankruptcy court entered an order determining that a debt
owed from the Debtor to the Creditor was excepted from the Debtor’s discharge
pursuant to 11 U.S.C. § 523(a)(4), based on the Debtor’s defalcation while acting in
a fiduciary capacity. It determined that the settlement proceeds were assigned to the
Creditor pursuant to a provision of the Mortgage assigning all “Miscellaneous
Proceeds” to the Creditor. In response to Arvest’s argument that the Mortgage
document created an express trust, the court explained that despite the fact that “there
is no language in the [M]ortgage that specifically creates a trust and § 523(a)(4) does
not reach constructive trusts . . . there is . . . an express trust recognized under
Arkansas law and in accord with the terms of the [M]ortgage.” The court did not find
fraudulent intent by the Debtor in her use of the settlement proceeds, but determined
that the Debtor committed defalcation while acting in a fiduciary capacity. It did not
decide whether the Debtor had embezzled the settlement funds.




       4
             The Creditor did not pursue the larceny claim at trial or on appeal.
       5
             The Creditor has not challenged the bankruptcy court’s grant of the directed
verdict.

                                              -5-
       The bankruptcy court also determined that even though Arvest had standing to
bring its cause of action, it was not the real party in interest based on its transfer of the
property to Fannie Mae after the foreclosure sale. It noted that, according to a
representative from Arvest, after title to the property was transferred to Fannie Mae,
Arvest’s only interest in the adversary proceeding was “whether Fannie Mae is going
to absorb the loss.” The court required Arvest to provide a copy of the order to
Fannie Mae “in sufficient time to allow Fannie Mae to ratify, join or be substituted in
[the] adversary proceeding,” explaining that if Fannie Mae did not comply, the
Debtor’s motion to dismiss would be granted. Fannie Mae filed its declaration of
ratification on May 6, 2010.

       Also in the April 9, 2010 order, the bankruptcy court indicated that it would
enter a judgment against the Debtor and in favor of the Creditor for the amount of
$65,000, subject to a reduction for the Debtor’s expenses and costs incurred in the
state court lawsuit. For this purpose, the court required the Debtor to file an
accounting of her costs and expenses.

       On July 16, 2010, the bankruptcy court entered an order accepting an
accounting submitted by the Debtor, in part, subject to certain disallowed expenses
specified at the hearing, and indicating that it would enter a separate judgment.6 The
bankruptcy court entered a judgment, incorporating its April 9, 2010 and July 16,
2010 orders, in favor of Arvest and Fannie Mae and against the Debtor in the amount
of $46,016.25 ($65,000 less the Debtor’s approved fees and expenses in obtaining the
settlement), plus interest at the highest rate allowed by law.

                        STANDARD OF REVIEW
     We review the bankruptcy court’s findings of fact for clear error, and its
conclusions of law and conclusions regarding mixed questions of law and fact de

         6
              The July 16, 2010 order also denied a motion by Arvest for attorneys’ fees and
costs.

                                             -6-
novo. DeBold v. Case, 452 F.3d 756, 761 (8th Cir. 2006) (citation omitted). The
bankruptcy court's interpretation of state law is reviewed de novo. Luxton v. U.S., 340
F.3d 659, 662 (8th Cir. 2003) (citation omitted); Kuelbs v. Hill, 615 F.3d 1037, 1041
(8th Cir. 2010), cert. denied, --- S.Ct.----, 2011 WL 940906 (Mar. 21, 2011); Reuter
v. Fields (In re Reuter) 443 B.R. 427, 433 (B.A.P. 8th Cir. 2011) (citation omitted).

                                  DISCUSSION
      The ultimate issue in this case, as the parties have argued, concerns whether the
Debtor owed a debt to the Creditor that was non-dischargeable under 11 U.S.C. §
523(a)(4), which provides that a bankruptcy discharge does not discharge a debt “for
fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”
However, to reach that ultimate issue, we must determine whether the settlement
proceeds were “Miscellaneous Proceeds” as defined in the Mortgage, whether the
settlement proceeds (assuming they constituted “Miscellaneous Proceeds”) could be
validly assigned to Arvest, and (again assuming they constituted “Miscellaneous
Proceeds”) whether the Arkansas statutes established an express trust meeting the
requirements of § 523(a)(4).

      According to the Creditor and the bankruptcy court, the settlement proceeds
were assigned to the Creditor under the Mortgage. The Creditor further maintains that
a debt for the amount of the settlement proceeds (without subtracting the Debtor’s
expenses and costs in the state court lawsuit) is excepted from the Debtor’s discharge
as the bankruptcy court determined, based on “an express trust recognized under
Arkansas law and in accordance with the terms of the [M]ortgage.” We disagree.

      We hold that the settlement proceeds were not, in fact, Miscellaneous Proceeds
as defined in the Mortgage.

      The Mortgage provides, in pertinent part:



                                          -7-
      DEFINITIONS
      (L) “Miscellaneous Proceeds” means any compensation, settlement,
      award of damages, or proceeds paid by any third party (other than
      insurance proceeds paid under the coverages described in Section 5) for;
      (i) damage to, or destruction of, the Property; (ii) condemnation or other
      taking of all or any part of the Property; (iii) conveyance in lieu of
      condemnation; or (iv) misrepresentations of, or omissions as to, the value
      and/or condition of the Property.

      11. Assignment of Miscellaneous Proceeds; Forfeiture. All
      Miscellaneous Proceeds are hereby assigned to and shall be paid to
      Lender.

      To be Miscellaneous Proceeds, the settlement proceeds would have to be from
the items described in sections (i) and (iv) of Paragraph (L); for “damage to, or
destruction of, the Property” or “misrepresentations of, or omissions as to, the value
and/or condition of the Property,” which both refer to tort causes of action. But the
bankruptcy court did not specify whether the settlement proceeds were derived from
the tort or contract causes of action (or both) asserted by the Debtor in her state court
lawsuit. Under Arkansas law, “it is the business of the trial court to determine
whether an action sounds more in contract or in tort . . . ”) (citations omitted).
Mallory v. Hartsfield, Almand & Grisham, LLP, 86 S.W.3d 863, 866 (Ark. 2002).
The bankruptcy court merely explained that “the [settlement] proceeds came into the
[D]ebtor’s hands as a result of a settlement relating to the condition of the property
and, as such, are [M]iscellaneous [P]roceeds under the terms of the [M]ortgage.”

      In addition, the Creditor has not supplied this Court with the state court lawsuit
pleadings or the settlement documents, so this Court is unable to determine whether
the bankruptcy court considered the question of whether the settlement proceeds were
derived from tort or contract causes of action and, if it did, what its findings were in


                                           -8-
that regard. Based on the Debtor’s and the Creditor’s agreement that the settlement
documentation was silent regarding the counts of the state court complaint for which
the settlement funds were paid, it is possible that the builders admitted no liability on
either a tort or contract theory, in which case it would appear that no determination
has been made on this question.

      In the absence of such findings or admissions, we hold that the settlement
proceeds were not proven to fall under section (i) or (iv) of Paragraph (L) and, thus,
could not be Miscellaneous Proceeds. The Creditor has simply not provided support
for the proposition that the settlement proceeds are recoverable by the Creditor as one
of the items discussed in sections (i) or (iv) of Paragraph (L).

     Secondly, the Debtor could not have assigned the settlement proceeds to the
Creditor.

        The Arkansas Supreme Court “recognized that ‘[a]n assignment is an
expression of intention by assignor that his rights shall pass to the assignee.’ “
Stuttgart Reg. Med. Ctr. v. Cox, 33 S.W.3d 142, 145 (2000) (quoting Robinson v. City
of Pine Bluff, 276 S.W.2d 419, 421 (Ark. 1955)); see also Beal Bank S.S.B. v.
Thornton, 19 S.W.3d 48, 51 (Ark Ct. App. 2000) (“[T]he assignor must intend to
transfer a present interest in the subject matter of the contract.”) (citation omitted).
Assignments are normally construed in accordance with the rules for contract
interpretation. Northwest Nat’l Bank v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
757 S.W.2d 182, 184 (Ark. Ct. App. 1988). The elements of an assignment in
Arkansas are “delivery of the subject matter with the intent to make an immediate and
complete transfer of all right, title, and interest from the assignor to the assignee.”
Koch v. Compucredit Corp., 543 F.3d 460, 465 (8th Cir. 2008) (citation omitted).
Under Arkansas law, “whether an assignment occurred is a question of fact for the
trial court.” Beal Bank, 19 S.W.3d at 51 (citation omitted).



                                           -9-
       “To constitute an assignment, no particular words are necessary.” Robinson,
276 S.W.2d at 421. An assignment “must adequately describe or identify the property
or thing to be assigned.” Merrill Lynch, 757 S.W.2d at 184. When a description of
the property or thing to be assigned is included, normally the assignment will pass to
the assignee the interest of the assignor “in or to the property or property rights that
are comprehended by the terms used, or are within the intention or understanding of
the parties, as ascertained in accordance with the general rules of construction.” Id. at
184 (citation omitted) (internal quotation marks omitted).

        To the extent the settlement proceeds paid to the Debtor were from a tort action
– which we do not believe they would be – the assignment of such tort proceeds
would be ineffective as a violation of Arkansas law. Tort claims and the proceeds of
tort claims are excluded from the scope of assignments permitted under Arkansas law.
Kuelbs, 615 F.3d at 1041 (citation omitted); Mallory, 86 S.W.3d at 866 (citing
Southern Farm Bureau Cas. Ins. Co. v. Wright Oil Co., 454 S.W.2d 69 (Ark. 1970)).

        The statutes upon which the bankruptcy court relied to determine the existence
of a fiduciary relationship and to except a debt from the Debtor’s discharge, §§ 4-58-
102 and 105 of the Arkansas Code, discuss assignments, but they do not create an
assignment where one does not exist. Section 4-58-102 provides that “[a]ll bonds,
bills, notes, agreements, and contracts in writing for the payment of money or
property, or for both money and property, shall be assignable.” ARK CODE ANN. § 4-
58-102. Section 4-58-105 provides, in part, that:

      (a) Every written assignment made in good faith, whether in the nature
      of a sale, pledge, or other transfer, or on account receivable or any
      moneys due or to become due on an open account or on a contract,
      except for wages or salaries, all of which shall be hereinafter referred to
      as “account”, with or without the giving of notice of the assignment to
      the debtor, shall be valid and complete at the time of the making of the
      assignment and shall be deemed to have been fully perfected at that time.


                                          -10-
      (b)(1) After an assignment made in good faith is complete, no bona fide
      purchaser from the assignor, no creditor of the assignor, and no other
      assignee or transferee of the assignor in any event shall have or be
      deemed to have acquired any right or interest in the account so assigned
      or transferred or in the proceeds thereof or in any obligation substituted
      therefor, superior to the rights and interest therein of the assignee.

      (2) In any case where, acting without knowledge of the assignment or
      transfer, the debtor in good faith pays all or part of such account to the
      assignor or to the creditor, subsequent purchaser, or other assignee and
      transferee, all payments so made shall be acquittance to the debtor to the
      extent thereof, and the assignor . . . shall be a trustee of any sums so
      paid and shall be accountable and liable to the prior assignee thereof.

ARK CODE ANN. § 4-58-105 (emphasis added).

Without an assignment of Miscellaneous Proceeds that would create an underlying
obligation for the Debtor to turn the settlement proceeds over to the Creditor, there is
no basis for a determination of non-dischargeability under § 523(a)(4).

      Finally, even if it should be determined that the settlement proceeds were
Miscellaneous Proceeds under the Mortgage and that they were validly assigned to
Arvest, we hold that neither the Mortgage nor §§ 4-58-102 and 105 created a trust that
would trigger the application of § 523(a)(4)’s fiduciary obligations.

       Exceptions to discharge are usually “strictly construed against the creditor, in
furtherance of the policy of providing the debtor with a fresh start in bankruptcy.”
Jafarpour v. Shahrokhi (In re Shahrokhi), 266 B.R. 702, 707 (B.A.P. 8th Cir. 2001)
(citations omitted). To except a debt for the settlement proceeds from the Debtor’s
discharge for defalcation while acting in a fiduciary capacity, the Creditor must prove:
(1) the existence of a fiduciary relationship between the Debtor and Creditor; and (2)
commission of defalcation by the Debtor in the course of that fiduciary relationship.
Because we hold that no fiduciary relationship existed between the Debtor and the

                                          -11-
Creditor, we need not address whether the Debtor committed defalcation in the course
of such a relationship.

        The issue of whether a relationship is a fiduciary relationship under § 523(a)(4)
is a question of federal law. Tudor Oaks Ltd. P’ship v. Cochrane (In re Cochrane),
124 F.3d 978, 984 (8th Cir. 1997) (citation omitted), cert. denied, 118 S.Ct. 1044
(1998). “It has long been established that the Bankruptcy [Code] reference to
‘fiduciaries’ applies only to trustees of express trusts.” Barclays Am./Buss. Credit,
Inc. v. Long (In re Long), 774 F.2d 875, 878 (8th Cir. 1985)(citation omitted);
Cochrane, 124 F.3d at 984 (fiduciary relationship must arise from express or technical
trust). In addition, the debtor “must have been a trustee before the wrong and without
reference thereto.” Hunter v. Philpott, 373 F.3d 873, 877 (8th Cir. 2004) (quoting
Davis v. Aetna Acceptance Co., 55 S.Ct. 151, 153 (1934))(quotation marks omitted).

       Like the bankruptcy court, we do not see language in the Mortgage expressly
creating a trust for the settlement proceeds.7 Rather, the Mortgage simply provides
for assignment and payment of Miscellaneous Proceeds to the Creditor and explains
how Miscellaneous Proceeds should be applied by the Creditor.

       The Debtor and Creditor disagree regarding whether §§ 4-58-102 and 105 could
form the basis for a trust that imposes fiduciary duties under § 523(a)(4). Here, 4-58-
102 and 105 did not suffice to establish a trust relationship under § 523(a)(4). While
“a statute or state law may create fiduciary status . . . which is cognizable in
bankruptcy proceedings,” to meet the requirements of § 523(a)(4), the debtor must be
a trustee “in the strict and narrow sense.” Id. Long, 774 F.2d at 878-79 (citation
omitted). “It is the substance of a transaction, rather than the labels assigned by the


       7
               At trial, the Creditor argued that the Mortgage document itself established an
express trust. On appeal, the Creditor changed the focus of its argument; maintaining that the
bankruptcy court properly determined that an express trust existed pursuant to Arkansas law “in
accord with the terms of the Mortgage.”

                                              -12-
parties, which determines whether there is a fiduciary relationship for bankruptcy
purposes.” Id. (citation omitted). A fiduciary relationship under § 523(a)(4) is not
as broadly defined as that required under general common law. Shahrokhi, 266 B.R.
at 707 (citing Long, 774 F.2d at 878). “The broad general definition of fiduciary - a
relationship involving confidence, trust and good faith - is inapplicable.” Id. (citation
omitted).

       Section 4-58-105 simply explains what happens when party owing an
“account,” acting in good faith and without knowledge of the assignment, pays the
“account” to the assignor rather than to the assignee. It would acquit the party owing
the “account” from liability and make the Debtor responsible to the Creditor for such
funds. The mere use of the word “trustee,” when viewed in the context of §§ 4-58-
102 and 105 as a whole, does not reflect a legislative intent to create a fiduciary
relationship “in the strict and narrow sense” required under § 523(a)(4). The facts of
this case do not suggest the existence of a fiduciary relationship under § 523(a)(4).
As we have explained, it is unclear that the settlement proceeds were Miscellaneous
Proceeds in the first instance and, if they were, that they were validly assigned to the
Creditor. The Debtor and Creditor had, at most, a mere contractual relationship, and
it is well-recognized that a fiduciary relationship does not arise simply by virtue of
a contractual relationship. Hunter, 373 F.3d at 875-76 (citations omitted) (“We are
not satisfied that the simple determination that an individual is an ERISA fiduciary is
enough to satisfy the requirement of § 523(a)(4).”).



                                 CONCLUSION
       In summary, we determine that the settlement proceeds received by the Debtor
from her state court action against the home builders were not “Miscellaneous
Proceeds” under the Mortgage. We further hold that, if the settlement proceeds should
be determined to be Miscellaneous Proceeds arising from a tort action, they could not
be validly assigned to the Creditor under Arkansas law. Finally, we hold that, if the


                                          -13-
settlement proceeds should be determined to be Miscellaneous Proceeds under either
a contract or tort theory, the Arkansas statutes relied on by the bankruptcy court did
not create an express trust giving rise to a fiduciary duty under § 523(a)(4) that would
require the Debtor to pay the settlement proceeds to the Creditor. Absent such a
fiduciary duty, there cannot be a non-dischargeable debt under § 523(a)(4).

      For the foregoing reasons, we reverse the decision of the bankruptcy court.




                                          -14-
