May 13, 2013

Supreme Court Decides Bullock v. BankChampaign, N. A.

On May 13, 2013, the Supreme Court decided Bullock v. BankChampaign, N.A., No. 11-1518. Under 11 U.S.C. § 523(a)(4), an individual cannot obtain a bankruptcy discharge from a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." Bullock holds that "defalcation" in this subsection "includes a culpable state of mind requirement akin to that which accompanies the other terms in that same statutory phrase." The Court described the state of mind as one "involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior."

The petitioner was appointed by his father as the (nonprofessional) trustee for a trust established by the father for the benefit of his children, including the petitioner. The petitioner on several occasions borrowed, and later repaid, funds from the trust. As a result, the petitioner's brother sued the petitioner in Illinois state court for breach of fiduciary duty. The court explained that the petitioner did not have a "malicious motive," but nonetheless "was clearly involved in self-dealing." The state court ordered the petitioner to pay the trust the benefits he received from his breaches, along with costs and fees. The petitioner filed for bankruptcy. The bankruptcy court held that the petitioner could not obtain a discharge of the state-imposed debts to the trust because the debts fell within §523(a)(4)'s exception "as a debt for defalcation while acting in a fiduciary capacity." The federal district court and the Eleventh Circuit Court of Appeals affirmed.

The Court granted the petition for certiorari due to a disagreement among the circuits as to the state of mind required for "defalcation." The Court looked to the other terms included in the same statutory phrase. "[W]here the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term requires an intentional wrong. We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. … Where actual knowledge of the wrongdoing is lacking, we consider conduct as equivalent if the fiduciary 'consciously disregards' (or is willfully blind to) 'a substantial and unjustifiable risk' that his conduct will turn out to violate a fiduciary duty." That "risk" must be such that it's "disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor's situation."

The Court vacated the Court of Appeals decision and remanded the case for the court to apply this standard.

Justice Breyer delivered the opinion for a unanimous Court.

Download Opinion of the Court

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