Randy Curtis Bullock v. Bankchampaign, NA
67 Collier Bankr. Cas. 2d 7
11th Cir.2012Background
- Bullock, as trustee of his father’s trust, borrowed from the trust in 1981, 1984, and 1990 for family-related needs; loans were secured by the policy’s cash value and were eventually repaid.
- Illinois state court held Bullock breached fiduciary duty via self-dealing and awarded damages based on the benefit Bullock received, plus attorneys’ fees; imposed constructive trusts on an Ohio mill and Bullock’s interest in the trust.
- BankChampaign, as successor trustee, obtained constructive trusts on the mill and Bullock’s beneficial interest to secure the Illinois judgment.
- Bullock filed for Chapter 7 bankruptcy in 2009; Bank sought non-dischargeability under § 523(a)(4); bankruptcy court granted summary judgment.
- District court affirmed, agreeing that Bullock’s conduct constituted defalcation under § 523(a)(4) and that collateral disposition issues were not properly before the court; Bullock appeals.
- The court notes the possibility that Illinois proceedings could address the Bank’s handling of collateral to potentially reduce or eliminate the debt.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Illinois judgment is non-dischargeable under § 523(a)(4). | Bank asserts defalcation; collateral estoppel binds; debt not dischargeable. | Bullock acknowledges fiduciary duty breach but challenges defalcation standard and relief. | Yes; the judgment is non-dischargeable due to defalcation. |
| What standard governs defalcation under § 523(a)(4)? | Defalcation may encompass recklessness or greater misconduct per Central Hanover and Quaif. | Some circuits require extreme recklessness or more; standard is unsettled. | Recklessness with known breach; defalcation requires more than mere negligence. |
| Whether Bullock's unclean-hands/ Bank's conduct affects dischargeability. | Bank’s equivocal handling of collateral is inequitable and could defeat discharge. | Equitable conduct of creditor not a basis to discharge non-dischargeability. | Unclean hands not a basis to discharge; issue belongs to Illinois proceedings. |
Key Cases Cited
- Central Hanover Bank & Trust Co. v. Herbst, 93 F.2d 510 (2d Cir. 1937) (defalcation may include more than fraud; knowledge of possible reversal can create defalcation)
- Quaif v. Johnson, 4 F.3d 950 (11th Cir. 1993) (defalcation does not require fraud; purposeful misaccounting or recklessness suffices)
- In re Uwimana, 274 F.3d 806 (4th Cir. 2001) (defalcation can include innocent acts resulting in misappropriation)
- In re Hyman, 502 F.3d 61 (2d Cir. 2007) (defalcation requires extreme recklessness or conscious misbehavior)
- In re Baylis, 313 F.3d 9 (1st Cir. 2002) (defalcation requires near-extreme recklessness)
- In re Patel, 565 F.3d 963 (6th Cir. 2009) (defalcation requires more than negligence; objective recklessness)
- In re Fernandez-Rocha, 451 F.3d 813 (11th Cir. 2006) (defalcation meaning and scope in § 523(a)(4))