In the only bankruptcy case pending before it this term, a unanimous Supreme Court has ruled that the archaic term "defalcation" used in 11 U.S.C. Sec. 523(a)(4) requires knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behaviorcomplained of. Bullock v. BankChampaign, No. 11-1518 (5/13/13), Slip Op., p.1, which can be found here. While the case represents a setback for the creditor in the specific case, the judicial hairsplitting engaged in by the Court ensures that trial courts will continue to struggle with the meaning of "defalcation."
In 1978, a father established a trust for the benefit of his five children and named his son Randy as trustee. The trust allowed the trustee to borrow money against the asset of the trust, which was an insurance policy. On three occasions, Randy borrowed against the policy to make loans to himself and his mother. The first loan was made at the father's request. All of the loans were repaid with interest.