BULLOCK v. BANKCHAMPAIGN, N.A., 569 U.S.___(2013): SCOTUS REPORT BY ATTORNEY AND AUTHOR CHARLES WARE

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"DEFALCATION" AND THE "INNOCENT TRUSTEE": In the Supreme Court of the United States (SCOTUS), Certiorari to the United States Court of Appeals for the Eleventh Circuit, BULLOCK v. BANKCHAMPAIGN, N.A., 569 U.S.___(2013), No. 11-1518 (May 13, 2013).

Petitioner Rand Bullock's father established a trust for the benefit of his five children (including petitioner), and he made petitioner the (nonprofessional) trustee.  The trust's sole asset was the father's life insurance policy [670 F. 3d1160, 1162 (CA11 2012); App. to Petition for Certiorari 33a].

Petitioner borrowed funds from the trust three times; all borrowed funds were repaid with interest. His siblings obtained a judgment against him in state court for breach of fiduciary duty, though the court found no apparent malicious motive. The court imposed constructive trusts on certain of petitioner’s interests—including his interest in the original trust—in order to secure petitioner’s payment of the judgment, with respondent serving as trustee for all of the trusts. Petitioner filed for bankruptcy.

Respondent opposed discharge of petitioner’s state-court-imposed debts to the trust, and the Bankruptcy Court granted respondent summary judgment, holding that petitioner’s debts were not dischargeable pursuant to 11 U. S. C. §523(a)(4), which provides that an individual cannot obtain a bankruptcy discharge from a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” The Federal District Court and the Eleventh Circuit affirmed. The latter court reasoned that “defalcation requires a known breach of fiduciary duty, such that the conduct can be characterized as objectively reckless.”

Held: The term “defalcation” in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior. Pp. 4−9.