Bullock v. BankChampaign, N. A.
133 S. Ct. 1754
| SCOTUS | 2013Background
- In 1978, the father established a trust for five children and named Bullock as nonprofessional trustee; the trust’s sole asset was the father’s life insurance policy.
- The trustee borrowed funds from the trust in 1981, 1984, and 1990; each loan was repaid with 6% interest and used for family-related purposes.
- In 1999, Bullock’s brothers sued for breach of fiduciary duty; the Illinois court found self-dealing but no malicious motive and ordered Bullock to repay benefits with constructive trusts imposed on his interests, BankChampaign serving as trustee.
- Bullock filed for federal bankruptcy protection; BankChampaign opposed discharge of the state court debts to the trust, and the Bankruptcy Court granted summary judgment that the debts were non-dischargeable under §523(a)(4).
- The District Court and Eleventh Circuit affirmed, adopting a rule that defalcation requires a known breach or objective recklessness; the case then went to the Supreme Court for interpretation of defalcation.
- The Court vacated the Eleventh Circuit’s judgment and remanded for further proceedings consistent with its clarified standard that defalcation requires a culpable state of mind, i.e., knowledge of or gross recklessness regarding the improper fiduciary conduct.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| What mental state is required for defalcation under §523(a)(4)? | Bullock contends defalcation can apply without conscious wrongdoing. | BankChampaign (and amici) advocates a culpable standard—intentional wrong or recklessness. | Defalcation requires knowledge of wrongful conduct or gross recklessness. |
| Should Neal v. Clark guidance apply to defalcation similarly to fraud? | Neal’s interpretation of fraud supports a broader defalcation standard. | Defalcation should be interpreted with a comparable culpable mental state. | Yes; defalcation is interpreted with a culpable mental state akin to fraud/embezzlement. |
| Does the decision require remand to apply a heightened standard to the facts? | N/A | N/A | Remanded to apply the Court’s heightened cognizable standard. |
Key Cases Cited
- Neal v. Clark, 95 U. S. 704 (1878) (fraud requires positive fraud; defalcation treated similarly)
- Kawaauhau v. Geiger, 523 U. S. 57 (1998) (exceptions to discharge should be narrowly construed with fault required)
- Ernst & Ernst v. Hochfelder, 425 U. S. 185 (1976) (defines scienter for fraud-related claims as a mental state of intent to deceive or defraud)
- In re Baylis, 313 F.3d 9 (1st Cir. 2002) (courts have recognized a recklessness standard for defalcation)
- Central Hanover Bank & Trust Co. v. Herbst, 93 F.2d 510 (2d Cir. 1937) (early precedent recognizing moral culpability questions in fiduciary defalcation)