SCOTUS protects Bankruptcy Discharge For "Innocent" Trustee.
May the Trustee's Personal Debt to the Trust Be Discharged in the Trustee's Bankruptcy?
The U.S. Bankruptcy Code, 11U.S.C §523(a)(4) provides that a personal debt is not dischargeable if the debt had been occasioned by the debtor’s defalcation while acting in a fiduciary capacity. Courts of appeals had long disagreed about the mental state that must accompany the bankruptcy-related definition of “defalcation,” particularly in the context defalcation by trustees. The U.S. Supreme Court has recently settled the matter in the case of Bullock v. Bank Champaign, N.A., 569 U.S. ___ (2013).
The Court decided in its Opinion on May 13, 2013 that: 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.
SYLLABUS
Bullock v. BANK CHAMPAIGN, N.A., No. 11-1518, Argued March 18, 2013 - Decided May 13, 2013, Supreme Court of the United States, Certiorari to the United States Court of Appeals for the Eleventh Circuit [569 U.S.____ (2013)].
Petitioner’s father established a trust for the benefit of petitioner and his siblings, and made petitioner the (nonprofessional) trustee. The trust’s sole asset was the father’s life insurance policy. 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.”
Justice Breyer delivered the opinion of the Court.
Section 523(a)(4) of the Federal Bankruptcy Code 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.” 11 U. S. C. §523(a)(4).
We here consider the scope of the term “defalcation.” We hold that it includes a culpable state of mind requirement akin to that which accompanies application of the other terms in the same statutory phrase. We describe that state of mind as one involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior.
[www.scotusblog.com/05-14-2013/Bullock v. Bank Champaign]
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