Arvest Mortgage Co. v. Nail (In re Nail)
- Citation:
- No. 10-6061 (8th Cir. B.A.P., April 15, 2011)
- Tag(s):
-
- Ruling:
- Settlement proceeds debtors received from the builder of their home were not "Miscellaneous Proceeds," assigned under the terms of their mortgage. But if they were validly assigned, the failure to remit those funds to the mortgagee did not constitute defalcation by a fiduciary for purposes of section 523(a)(4) of the Code, because no express trust existed under which the debtors were fiduciaries for purposes of section 523(a)(4). More specifically, the court construed the definition of "Miscellaneous Proceeds" to include only tort, and not contract, claims. Because the trial court failed to clarify whether it found the settlement funds to be in the nature of a tort or a contract settlement, the record was insufficient to support the creditor's claim that the money fell within the assignment language, i.e., that it was an assignment of tort proceeds. In any event, under the applicable state (Arkansas) law, tort claims and proceeds from tort claims cannot be assigned. Even if the settlement proceeds were validly assigned, an Arkansas statute that provides in part that an assignor "shall be a trustee of any sums so paid" did not create a fiduciary relationship for purposes of federal as the term is used in section 523(a)(4). Only express trusts, and not "trust" relationships arising upon, or as a result of a wrong act, satisfy the "strict and narrow" sense of a fiduciary for purposes of section 523(a)(4). A fiduciary relationship does not arise simply by virtue of a contractual relationship. The cross-appeal by the contractor, to not reduce its judgment by the amount of the attorney's fees and expenses incurred in obtaining the settlement, was rendered moot.
- Procedural context:
- Debtors appealed a judgment finding that the amount of the deficiency owed on a mortgage note was a non-dischargeable debt under section 523(a)(4) of the Code because they failed to remit proceeds from a lawsuit against the contractor who built their home in spite of a provision in their mortgage for assignment of "Miscellaneous Proceeds." The creditor/mortgagee cross-appealed that its non-dischargeable judgment should not be reduced by the amount of the attorney's fees and expenses incurred in obtaining the settlement with the contractor.
- Facts:
- The debtors purchased a newly constructed house in 2006. They simultaneously found construction defects and began to miss mortgage payments. The debtors sued the home builder. The mortgagee, while not joing the suit, granted extended forbearances to the debtors on their mortgage payments. The lawsuit against the builder alleged tort and contract claims. The debtors settled with the home builder, and used the settlement proceeds to pay the attorneys fees and costs associated with the suit, made home improvements, and paid credit card debts. The mortgage was foreclosed, and a deficenecy remained on the mortgage debt. The mortgage contained an assignment of "Miscellaneous Proceeds" in favor of the mortgagee.
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