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    The Lawletter Blog

    BANKRUPTCY: Definition of "Defalcation" Under 11 U.S.C. § 523(a)(4)

    Posted by Gale Burns on Mon, Mar 31, 2014 @ 15:03 PM

    Anne Hemenway, Senior Attorney, National Legal Research Group

    The Lawletter Vol 39 No 1

         Section 523(a)(4) of the U.S. Bankruptcy Code states that any debt arising from an individual debtor's "fraud or defalcation while acting in a fiduciary capacity" is nondischargeable. 11 U.S.C. § 523(a)(4). Recently, in Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013), the Supreme Court attempted to settle the differences in several different federal circuits as to how federal courts define "defalcation" within the context of the Bankruptcy Code's discharge exceptions. The Court was also intent on establishing some consistency between the terms "defalcation," "embezzlement," "larceny," and "fraud."

         Specifically, the Court held that "defalcation" incorporates and requires a culpable state of mind such that the conduct at issue involves either knowledge of, or reckless disregard for, the wrongful nature of the fiduciary behavior. The Court went on to explain that if the conduct at issue is not immoral or does not otherwise involve bad faith, the term requires an intent to engage in conduct that the fiduciary knows is improper or in reckless conduct "of the kind that the criminal law often treats as the equivalent." Id. at 1759.

         Applying the Supreme Court's definition of "defalcation," the court in Adas v. Rutkowski, No. 13 C 2517, 2013 WL 6865417 (N.D. Ill. filed Dec. 30, 2013), held:

          This evidence reflects a conscious effort to obfuscate his actions and demonstrates a conscious disregard or willful blindness to a substantial and unjustifiable risk that his conduct would violate his fiduciary duty to Rutkowski. Indeed, the bankruptcy court correctly found that Adas's conduct was "willful and reckless." This Court therefore finds no reason to upset the bankruptcy court's decision that Adas's actions constituted defalcation, even in light of the new standard set forth by the Supreme Court in Bullock.

    Id. at *9; see also Catrambone v. Adams, 498 B.R. 839, 850 (N.D. Ill. 2013) (defalcation is no
    longer distinguishable from fraud, in the sense that both require a showing of wrongful intent).

    Topics: legal research, bankruptcy, defalcation, Bullock v. BankChampaign, definition, requires wrongful intent, U.S. Supreme court, Anne Hemenway

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