Posted on May 15, 2013

On May 13, 2013, The U.S. Supreme Court issued an opinion that interprets the meaning of the term "defalcation" in Section 523(a)(4) of the Bankruptcy Code.

The debtor Bullock's father established a trust before he died. Bullock was the trustee, and he borrowed money from the trust on three occasions. Each time he repaid the trust with interest, but his siblings sued him in state court and won a judgment against him for breach of fiduciary duty.

The debtor filed bankruptcy, but when the siblings objected to the discharge of their judgment under Section 523(a)(4) of the Bankruptcy Code, the bankruptcy court excepted the judgment from discharge. On appeal, the district court and the 11th Circuit affirmed the bankruptcy court. The 11th Circuit held that “defalcation requires a known breach of fiduciary duty, such that the conduct can be characterized as objectively reckless.”

The Supreme Court vacated and remanded the case, holding that there is a heightened standard of conduct required to constitute "defalcation in a fiduciary capacity."  The Court decided that where the conduct at issue does not involve bad faith, moral turpitude or other immoral conduct, it requires that there be an intentional wrong. Recklessness is included, but it must be a "gross deviation from the standard of conduct that a law-abiding person would observe in the actor's situation."

The Court then listed its reasons, which are too lengthy to go into hear, but a copy of the opinion is attached. The Court remanded the case for the 11th Circuit to determine if further proceedings are needed, and if so to apply the heightened standard that the Court announced in its opinion.

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J Thomas Black
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Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization