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Supreme Court: Money Misuse, Defalcation and Discharge

Categories: Bankruptcy & Civil Litigation

It’s amazing to me to see so many bankruptcy cases winding their way to the Supreme Court these days.  It’s no wonder this is happening because the changes to the Bankruptcy Code in 2005, known as the BAPCPA have made no sense to many bankruptcy practitioners.  Recently, the Supreme Court cleared up a definition for us where the appeals courts were split on its meaning.

Namely, In the recent decision of Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (May 13, 2013), the United States Supreme Court: (i) resolved a prior split among the Circuits concerning whether a “culpable state of mind” was required in order to come within the “defalcation” exception as set forth in § 523(a)(4) of the Bankruptcy Code and (ii) determined that such a state of mind was required in order to fall within this exception. In a unanimous decision, the Court held that “where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term requires an intentional wrong.” Bullock, 133 S. Ct. at 1759. It added that defalcation could also occur with a conscious disregard for, or willful blindness to, “a substantial and unjustifiable risk” involving “a gross deviation from the standard of conduct that a law-abiding person would observe.” Id. at 1759–60 (emphasis in original).

The Court concluded that the term “defalcation” must require a similar showing. Id. The Court also buttressed its decision by noting that exceptions to discharge must be “confined to those plainly expressed.” Id. (citations omitted). The Supreme Court did not apply its newly settled standard to the facts before it; instead, it vacated the decision of the Eleventh Circuit Court of Appeals and remanded the case for a determination consistent with its findings. Id. at 1761.  You can read a more in depth case analysis here.

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