In a victory for honest but unfortunate debtors, the US Supreme Court adopted a higher standard for the antiquated term “defalcation” in Bullock v. BankChampaign.  Creditors can object to a debt being discharged in bankruptcy if the debt arises from defalcation while acting in a fiduciary capacity, under 11 U.S.C. § 523(a)(4).  Many courts and scholars have disagreed about what defalcation actually means.  It is important for people considering bankruptcy, because both Chapter 7 and Chapter 13 discharges do not include debts under § 523(a)(4).

The Supreme Court has finally settled the issue in deciding that defalcation requires a culpable (bad) state of mind.  This includes actions that the person knows are wrong or that are reckless.  The Court found it important that the other types of debts under § 523(a)(4), fraud, embezzlement, and larceny, all involve an intentional wrong, moral turpitude, or bad faith conduct.  Furthermore, the Court confirmed that exceptions to discharge should be construed narrowly.

Many every day Americans can find themselves in a legal dispute over the handling of an estate of a loved one or a trust set up by a family member.  Unsophisticated individuals may unknowingly violate the terms of the estate or the trust, as is what occurred in the Bullock case, and be slapped with a lawsuit.  At least now, if a bankruptcy is needed, these honest people can still obtain a fresh start.