Bullock v. BankChampaign

Whether §523(a)(4) of the Bankruptcy Code requires a showing of “extreme recklessness” or merely “objective recklessness” to constitute defalcation.

Petitioner was named trustee of his father’s trust. Petitioner made himself three loans from the trust, totaling over $264,000, which were outside the scope of his borrowing abilities as defined by the trust instrument. Petitioner repaid each of the loans, but Petitioner’s brothers brought suit claiming that Petitioner breached his fiduciary duty by self-dealing through the loans. The state trial court found against Petitioner and awarded damages to the brothers. The court placed the property obtained through the self-dealing loans under a constructive trust to secure the property as collateral against the judgment. Respondent replaced Petitioner as trustee and was awarded the constructive trust. Respondent prevented Petitioner from selling the underlying property, stopping him from satisfying the state court judgment debt. Petitioner filed for Chapter 7 bankruptcy in 2009, hoping to discharge the debt.

The bankruptcy court held that the judgment debt arose out of fraud or defalcation while acting in a fiduciary capacity and was therefore not dischargeable under 11 U.S.C. § 523(a)(4). The Court of Appeals for the Eleventh Circuit affirmed and aligned itself with the Fifth, Sixth, and Seventh Circuits in finding that defalcation requires a showing of objective recklessness by the fiduciary.

On appeal Petitioner argues that defalcation requires “extreme recklessness” as held by the First and Second Circuits. The Supreme Court granted cert to resolve the circuit split and to decide what degree of fiduciary misconduct is necessary to constitute “defalcation” under §523(a)(4) of the Bankruptcy Code and to disqualify resulting debt from relief.