Bullock v. BankChampaign, N.A.

• Citation: 185 L.Ed.2d 922,569 U.S. 267,133 S.Ct. 1754
• Decision Date: 13 May 2013
• Docket Number: No. 11–1518.,11–1518.
• Parties: Randy Curtis BULLOCK, Petitioner v. BANKCHAMPAIGN, N.A.
• Court: United States Supreme Court

569 U.S. 267

133 S.Ct. 1754

185 L.Ed.2d 922

Randy Curtis BULLOCK, Petitioner

v.BANKCHAMPAIGN, N.A.

No. 11–1518.

Supreme Court of the United States

Argued March 18, 2013.

Decided May 13, 2013.

Thomas M. Byrne, Atlanta, GA, for Petitioner.

Bill D. Bensinger, Birmingham, AL, for Respondent.

Curtis E. Gannon, for the United States as amicus curiae, by special leave of the Court, supporting the Respondent.

James R. Engelthaler, Thigpen, Behel, Engelthaler & Scott, Florence, AL, Sarah M. Shalf, Atlanta, GA, Thomas M. Byrne, Counsel of Record, Sutherland Asbill & Brennan LLP, Atlanta, GA, for Petitioner.

Justice BREYER delivered the opinion of the Court.

Section 523(a)(4) of the Federal Bankruptcy Code provides that an individual cannot obtain a bankruptcy discharge from a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. § 523(a)(4). We here consider the scope of the term " defalcation." We hold that it includes a culpable state of mind requirement akin to that which accompanies application of the other terms in the same statutory phrase. We describe that state of mind as one involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior.

I

In 1978, the father of petitioner Randy Bullock established a trust for the benefit of his five children. He made petitioner the (nonprofessional) trustee; and he transferred to the trust a single asset, an insurance policy on his life. 670 F.3d 1160, 1162 (C.A.11 2012) ; App. to Pet. for Cert. 33a. The trust instrument permitted the trustee to borrow funds from the insurer against the policy's value (which, in practice, was available at an insurance-company-determined 6% interest rate). Id ., at 17a, 34a, 50a.

In 1981, petitioner, at his father's request, borrowed money from the trust, paying the funds to his mother who used them to repay a debt to the father's business. In 1984, petitioner again borrowed funds from the trust, this time using the funds to pay for certificates of deposit, which he and his mother used to buy a mill. In 1990, petitioner once again borrowed funds, this time using the money to buy real property for himself and his mother. 670 F.3d, at 1162. Petitioner saw that all of the borrowed funds were repaid to the trust along with 6% interest. App. to Pet. for Cert. 17a, 45a, 50a; Brief for Petitioner 3; Brief for Respondent 2.

In 1999, petitioner's brothers sued petitioner in Illinois state court. The state court held that petitioner had committed a breach of fiduciary duty. It explained that petitioner "does not appear to have had a malicious motive in borrowing funds from the trust" but nonetheless "was clearly involved in self-dealing." App. to Pet. for Cert. 45a, 52a. It ordered petitioner to pay the trust "the benefits he received from his breaches" (along with costs and attorney's fees). Id ., at 47a. The court imposed constructive trusts on petitioner's interests in the mill and the original trust, in order to secure petitioner's payment of its judgment, with respondent BankChampaign serving as trustee for all of the trusts. 670 F.3d, at 1162; App. to Pet. for Cert. 47a–48a. After petitioner tried unsuccessfully to liquidate his interests in the mill and other constructive trust assets to obtain funds to make the court-ordered payment, petitioner filed for bankruptcy in federal court. Id ., at 27a, 30a.

BankChampaign opposed petitioner's efforts to obtain a bankruptcy discharge of his state-court-imposed debts to the trust.

And the Bankruptcy Court granted summary judgment in the bank's favor. It held that the debts fell within § 523(a)(4)'s exception "as a debt for defalcation while acting in a fiduciary capacity." Id ., at 40a–41a. Hence, they were not dischargeable.

The Federal District Court reviewed the Bankruptcy Court's determination. It said that it was "convinced" that BankChampaign was "abusing its position of trust by failing to liquidate the assets," but it nonetheless affirmed the Bankruptcy Court's decision. Id ., at 27a–28a.

In turn, the Court of Appeals affirmed the District Court. It wrote that "defalcation requires a known breach of a fiduciary duty, such that the conduct can be characterized as objectively reckless." 670 F.3d, at 1166. And it found that petitioner's conduct satisfied this standard. Ibid.

Petitioner sought certiorari. In effect he has asked us to decide whether the bankruptcy term "defalcation" applies "in the absence of any specific finding of ill intent or evidence of an ultimate loss of trust principal." Brief for United States as Amicus Curiae 1. See also Pet. for Cert. i. The lower courts have long disagreed about whether "defalcation" includes a scienter requirement and, if so, what kind of scienter it requires. Compare In re Sherman, 658 F.3d 1009, 1017 (C.A.9 2011) ("defalcation" includes "even innocent acts of failure to fully account for money received in trust" (internal quotation marks and brackets omitted)), with In re Uwimana, 274 F.3d 806, 811 (C.A.4 2001) (defalcation occurs when "negligence or even an innocent mistake ... results in misappropriation"), with 670 F.3d, at 1166 ("defalcation requires ... conduct [that] can be characterized as objectively reckless"), and with In re Baylis, 313 F.3d 9, 20 (C.A.1 2002) ("defalcation requires something close to a showing of extreme recklessness"). In light of that disagreement, we granted the petition.

II

A

Congress first included the term "defalcation" as an exception to discharge in a federal bankruptcy statute in 1867. See id ., at 17. And legal authorities have disagreed about its meaning almost ever since. Dictionary definitions of "defalcation" are not particularly helpful. On the one hand, a law dictionary in use in 1867 defines the word "defalcation" as "the act of a defaulter," which, in turn, it defines broadly as one "who is deficient in his accounts, or fails in making his accounts correct." 1 J. Bouvier, Law Dictionary 387, 388 (4th ed. 1852). See also 4 Oxford English Dictionary 369 (2d ed. 1989) (quoting an 1846 definition that defines the term as " ‘a breach of trust by one who has charge or management of money’ "). Modern dictionaries contain similarly broad definitional language. Black's Law Dictionary, for example, defines "defalcation" first as " EMBEZZLEMENT ," but, second, as "[l]oosely, the failure to meet an obligation; a nonfraudulent default." Black's Law Dictionary 479 (9th ed. 2009) (hereinafter Black's). See also American Heritage Dictionary 474 (5th ed. 2011) ("To misuse funds; embezzle"); 4 Oxford English Dictionary, supra, at 369 ("monetary deficiency through breach of trust by one who has the management or charge of funds; a fraudulent deficiency in money matters"); Webster's New International Dictionary 686 (2d ed. 1954) ("An abstraction or misappropriation of money by one, esp. an officer or agent, having it in trust"); Webster's Third New International Dictionary 590 (1986) ("misappropriation of money in one's keeping").

On the other hand, an 1842 bankruptcy treatise warns that fiduciaries "are not supposed to commit defalcation in the matter of their trust, without ... at least such criminal negligence as admits of no excuse." G. Bicknell, Commentary on the Bankrupt Law of 1841, Showing Its Operation and Effect 12 (2d ed. 1842). Modern dictionaries often accompany their broad definitions with illustrative terms such as "embezzle," American Heritage Dictionary, supra, at 474, or "fraudulent deficiency," 4 Oxford English Dictionary, supra, at 369. And the editor of Black's Law Dictionary has written that the term should be read as limited to deficiencies that are "fraudulent" and which are "the fault of someone put in trust of the money." B. Garner, Modern American Usage 232 (3d ed. 2009) (emphasis added).

Similarly, courts of appeals have long disagreed about the mental state that must accompany the bankruptcy-related definition of "defalcation." Many years ago Judge Augustus Hand wrote that "the misappropriation must be due to a known breach of the duty, and not to mere negligence or mistake." In re Bernard, 87 F.2d 705, 707 (C.A.2 1937).

But Judge Learned Hand suggested that the term "may have included innocent defaults." Central Hanover Bank & Trust Co. v. Herbst, 93 F.2d 510, 511 (C.A.2 1937) (emphasis added). A more modern treatise on trusts ends its discussion of the subject with a question mark. 4 A. Scott, W. Fratcher, & M. Ascher, Scott and Ascher on Trusts § 24.26 p. 1797 (5th ed. 2007).

In resolving these differences, we note that this longstanding disagreement concerns state of mind, not whether "defalcation" can cover a trustee's failure (as here) to make a trust more than whole. We consequently shall assume without deciding that the statutory term is broad enough to cover the latter type of conduct and answer only the "state of mind" question.

B

We base our approach and our answer upon one of this Court's precedents. In 1878, this Court interpreted the related statutory term "fraud" in the portion of the Bankruptcy Code laying out exceptions to discharge. Justice Harlan wrote for the Court:

"[D]ebts created by ‘fraud’ are associated directly with debts created by ‘embezzlement.’ Such association justifies, if it does not imperatively require, the conclusion that the ‘fraud’ referred to in that section means positive fraud, or fraud in fact, involving moral turpitude or intentional wrong, as does embezzlement; and not implied fraud, or fraud in law, which may exist without the imputation of bad faith or immorality." Neal v. Clark, 95 U.S. 704, 709, 24 L.Ed. 586 (1878).

We believe that the statutory term "defalcation" should be treated similarly.

Thus, where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term requires an intentional wrong. We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law...