When Can a Fiduciary Duty Be Discharged In a Bankruptcy Proceeding?

Recently, the Supreme Court has decided when the fiduciary duty can be released during a bankruptcy proceeding. Chris Bullock was the trustee of his father’s trust. The trust provisions did not allow the family from borrowing from the trust. Despite the provision, Chris made a loan to his mother to reimburse a debt. In addition, he made a loan to himself. As a result, Chris made several improper loans.  All of the improper loans were made at the same interest rate the trust was earning.  

 In Bullock v. BankChampaign, the Supreme Court determined the definition of “defalcation” within Section 523(a)(4) of the Bankruptcy Code. The court held that “defalcation” means a state of consciousness “as one involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior.”  The court rationalized its decision by including scienter as a requirement. In effect, a fiduciary will still be held accountable for a breach of his duty where the standard is simple negligence.

See Luke Lantta, Defalcation, Bankrupcy, And Fiduciary Litigation, Bryan Cave Fiduciary Litigation, May 20, 2013.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.