U.S. Supreme Court Defines ‘Defalcation’

( 3 votes, average: 4.5 out of 5)
What do you think about this article? Rate it using the stars above and let us know what you think in the comments below.

On Monday, for the first time in almost one and a half century, the U.S. Supreme Court clarified the meaning of the term ‘defalcation’ which is generally used in bankruptcy code to indicate both embezzlement and misuse of funds. Under the federal law, a person in the position of a fiduciary cannot seek bankruptcy relief to discharge debts if his action is tainted by “fraud or defalcation.”

NY Upstate Town Justice Removed
Though the term ‘defalcation’ was introduced in bankruptcy law in 1841, and its relation to discharge of debt was mentioned in the law in 1867, this is the first time the Supreme Court determined the precise meaning of “defalcation.”

In its unanimous decision, the Supreme Court held in the matter of Bullock v. BankChampaign, U.S. Supreme Court, No. 11-1518, that if a court were to make a defalcation finding about a trustee, it must be proved that the person so accused was acting either with gross negligence, or with some knowledge of the impropriety of his actions.

Writing for the court, Justice Stephen Breyer observed that the term “defalcation” should be treated in bankruptcy law in the same fashion as the term “fraud.” The decision observed that the definition of ‘defalcation’ includes “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.”

In the instant case, one Randy Bullock tried to discharge his debts by seeking bankruptcy protection. However, Randy Bullock was the sole trustee of his father’s life insurance, which featured a $1 million benefit upon the death of the policy holder upon Bullock and four of his siblings. In his capacity as a trustee of the life insurance for 20 years, on three occasions, Bullock used the trust funds to issue loans. He financially benefited from two of them.

Though Bullock paid back the money with interest to the trust, two of his brothers sued him for breaching his duty as a trustee, and a state court ordered him to pay $250,000 to the trust plus a fine of $35,000, attorney’s fees and other costs.

Bullock sought bankruptcy and asked a federal bankruptcy court in Alabama to discharge the debt to the trust, which is currently supervised by BankChampaign. The federal government also intervened in the matter in support of the bank.

Bullock, being unsuccessful in discharging his debts to the trust created by order of the state court, appealed. The 11th U.S. Circuit Court of Appeals ruled in favor of the bank.

Bullock appealed again placing the question before the U.S. Supreme Court whether his actions, which did not deprive the trust of any money whatsoever, fell into the legal definition of “defalcation,” which was used to refuse his attempt to discharge his debts.

Though the Supreme Court did not decide whether Bullock’s actions fitted the definition of “defalcation,” it clarified what the term meant and remanded the case back to the district court. The district court is now expected to judge Bullock’s actions armed with the latest definition of “defalcation.”

Featured Testimonials

LawCrossing has a wonderful concept of providing its customers with the best, it is really worth all the money.


LawCrossing Fact #66: Users can easily locate jobs in their areas when they type in their zip codes before they search.

Let's Do It!

Only LawCrossing consolidates every job it can find in the legal industry and puts all of the job listings it locates in one place.

  • We have more than 25 times as many legal jobs as any other job board.
  • We list jobs you will not find elsewhere that are hidden in small regional publications and employer websites.
  • We collect jobs from more than 250,000 websites and post them on our site.
  • Increase your chances of being seen! Employers on public job boards get flooded with applications. Our private job boards ensure that only members can apply to our job postings.

Success Stories

LawCrossing was probably the best legal board I have used. I liked the layout and it was user friendly. I tried to use another job board, but it was not user friendly and was kind of a pain, whereas LawCrossing was easy to use to find jobs. I really liked it. I would certainly recommend this site and service to my colleagues.
  • Stephen Kobza Tinley Park, IL