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The Supreme Court, in its May 13, 2013 Opinion in Bullock v. BankChampaign, N.A., held that the scope of the term “defalcation” includes a culpable state of mind “involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior.” In other words, for a court to make a defalcation finding about a trustee, the person’s conduct must involve intentional “bad faith, moral turpitude or other immoral conduct,” or conduct where the person “’consciously disregards’ (or is willfully blind to) ‘a substantial and unjustifiable risk’ that his conduct will turn out to violate a fiduciary duty.” 

The Bankruptcy Code refers to, but does not define, “defalcation” in section 523(a)(4), “Exceptions to Discharge.” Section 523(a)(4) states that a “discharge in bankruptcy does not discharge an individual debtor from any debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny[.]”  In Bullock, Petitioner sought discharge of a state court judgment for breach of fiduciary duty, where the court found no apparent malicious motive.  Petitioner sought certiorari, asking the Supreme Court to decide whether “defalcation” applies where the court found no apparent malicious motive, and there is no “specific finding of ill intent or evidence of an ultimate loss of trust principal.”  Nearly a century and a half after the first time “defalcation” was used in bankruptcy law, the Supreme Court granted the petition to resolve the differences amongst courts as to the “state of mind” requirement of defalcation, and remanded the case to permit the 11th Circuit Court of Appeals to apply the heightened standard of defalcation as set forth in the Opinion.

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