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Defalcation Defined

By Thomas M. Byrne
June 21, 2013

Section 523(a)(4) of the Bankruptcy Code excepts from discharge debts “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny ' .”

Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (May 13, 2013), at last resolves the long-standing uncertainty over the meaning of “defalcation.” Bullock holds that defalcation requires a culpable state of mind involving knowledge of, or gross recklessness in respect to, the improper nature of fiduciary behavior. It means that all prior lower court decisions addressing the mental state requirement for defalcation have little or no precedential value. Litigants hoping to preserve the bankruptcy option for errant fiduciaries or avoid the risk of bankruptcy discharge of debts owed by them should study the decision carefully.

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