Bullock v. BankChampaign, N.A.

Under Bankruptcy Code 11 U.S.C §523(a)(4) the term “defalcation” includes a mental culpability requirement of knowingly or gross recklessness in regard to improper fiduciary behavior.

Petitioner was the non-professional trustee of an insurance policy created by his father for the benefit of the Petitioner and his siblings. Petitioner borrowed money from the trust on three occasions to purchase a mill and real property for himself and his mother, but repaid the trust with interest. Several of the Petitioner’s siblings sued Petitioner for breach of fiduciary duty in Illinois state court. The Illinois state court found that Petitioner had breached his fiduciary duty and ordered Petitioner to repay the trust for benefits of the breaches. Petitioner was unable to successfully liquidate assets to pay the court order and subsequently filed bankruptcy in federal district court. Respondent challenged Petitioner’s bankruptcy claim and received a favorable summary judgment decision by the Bankruptcy Court. The Bankruptcy Court held that the debts fell under 11 U.S.C §523(a)(4)’s exception as a “debt for defalcation while acting in a fiduciary capacity” and could not be discharged. The Federal District Court and Eleventh Circuit Court of Appeals both affirmed the Bankruptcy Court’s grant of summary judgment.

The Supreme Court granted certiorari, vacated, remanded and held that under Bankruptcy Code 11 U.S.C §523(a)(4) the term “defalcation” includes a mental culpability requirement of “knowingly” or gross recklessness in regard to improper fiduciary behavior. The Court cited Neal v. Clark, 95 U. S. 704, 709 (1878) and used statutory canons of construction in reasoning that the term “defalcation” should be treated in the same manner as the like terms of “embezzlement,” “fraud,” and “larceny” in that there must be an intentional wrong committed. If knowledge of an intentional wrong is lacking, but the fiduciary’s conduct “consciously disregards a substantial and unjustifiable risk” then the fiduciary duty owed has been violated.