RESPONDENT: BankChampaign, N.A.
DOCKET NO.: 11-1518
DECIDED BY: Roberts Court (2010-2016)
LOWER COURT: United States Court of Appeals for the Eleventh Circuit
CITATION: 569 US (2013)
GRANTED: Oct 29, 2012
ARGUED: Mar 18, 2013
DECIDED: May 13, 2013
Bill D. Bensinger - for the respondent
Curtis E. Gannon - Assistant to the Solicitor General , Department of Justice, for the United States as amicus curiae supporting the respondent
Thomas M. Byrne - for the petitioner
Facts of the case
In 1978, Randy Curtis Bullock became the trustee of his father's trust. The trust's only asset was his father's life insurance policy, and Bullock and his four siblings were the trust's only beneficiaries. As trustee, Bullock was only allowed to borrow from the trust to pay the life insurance premiums and to satisfy a withdrawal request from another trustee. Despite these restrictions, Bullock borrowed from the trust three times: to satisfy a debt on his father's business, to allow him and his mother to purchase certificates of deposit, and to allow him and his mother to purchase real estate. All of the loans were fully repaid.
When Bullock's two brothers learned of the existence of the trust and their brother's actions, they sued him in Illinois state court. They claimed that Bullock had breached his fiduciary duty by taking loans that violated the guidelines of the trust. The brothers moved for summary judgment and the court granted it. The court ordered Bullock to pay $250,000 in damages for the benefits he received from his dealings with the trust, $35,000 in attorneys' fees, and placed the property Bullock purchased—a mill in Ohio—in a constructive trust. The constructive trust was awarded to BankChampaign, which replaced Bullock as the trustee of his father's trust. Bullock was unable to sell the mill to satisfy the Illinois judgment.
In 2009, Bullock filed for bankruptcy under Chapter 7 to discharge his debt from the Illinois judgment. The bank started an adversary proceeding in bankruptcy court where it argued that debts arising out of "fraud or defalcation while acting in a fiduciary capacity" are not dischargeable by bankruptcy. The bank moved for summary judgment and the bankruptcy court granted the motion. Bullock appealed the bankruptcy court's judgment to district court, and the district court affirmed. The district court recognized that the only way for Bullock to satisfy the judgment debt was to sell the mill, and the bank could not hold it in perpetuity, so the district court concluded that the bank was abusing its power; however, it still affirmed the decision of the bankruptcy court. The U.S. Court of Appeals for the Eleventh Circuit affirmed the judgment of the bankruptcy court and held that Bullock's conduct met the standard for defalcation because it was objectively reckless and constituted a known breach of a fiduciary duty.
Are debts arising out of fraud or defalcation in a fiduciary capacity dischargeable in a Chapter 7 bankruptcy proceeding?
Media for Bullock v. BankChampaignAudio Transcription for Oral Argument - March 18, 2013 in Bullock v. BankChampaign
Audio Transcription for Opinion Announcement - May 13, 2013 in Bullock v. BankChampaign
John G. Roberts, Jr.:
Justice Breyer has our opinion this morning in case 11-1518, Bullock v. BankChampaign.
Stephen G. Breyer:
In 1978, the father of the petitioner, the petitioner Mr. Randy Bullock, but his father created a family trust that had a single asset.
A life insurance policy on the father's life, Randy was the trustee and Randy and his four siblings were the beneficiaries.
Now, the policy and the trust instrument permitted the trustee, namely Randy, to borrow money against the policy's value and Randy did that.
Once he did it because his father asked him to get some money to give it to his mother who used it for the family business, once he did it to help his mother and Randy himself by a mill and once he did it to allow his mother and again Randy himself to buy other real property.
Now, Randy saw that all of the money was eventually paid back to the trust along with 6% interest.
In 1999, Randy's brothers claimed that Randy had violated his fiduciary obligations and they sued him in state court and the state court said, “Randy does not appear to have had a malicious motive in borrowing funds from the trust, but given self-dealing, which it certainly was, nonetheless, the Court required him to pay the trust back money that he had made from his borrowings.”
The Court imposed constructive trust on various assets to make sure Randy did pay those debts to the trust, the money he made out of to borrow.
Randy asked the new trustee, there was a new trustee by then, the BankChampaign to allow him to liquidate some of the assets so he would have money to pay back.
BankChampaign inexplicably wouldn't let him do that and Randy then said, “I'm bankrupt,” then he went into federal court.
Now with all that, it sort of been interesting story, we're now at the legal issue in the case, a question of federal law.
Can Randy discharge in bankruptcy his debts to the trust?
Well, the Bankruptcy Code says that an individual cannot obtain a discharge in bankruptcy from a debt “for fraud or defalcation while acting in a fiduciary capacity embezzlement or larceny.”
Are the underlying debts here debts for defalcation?
Oh, that's the question and that depends upon the meaning of defalcation.
In here, in particular, it depends upon we think that the state of mind that accompanied Randy, the trustees' actions, that gave rise to the debt for his breach of fiduciary duty.
What is the state of mind that's necessary?
Ever since 1867 when the word defalcation first found its way into the Bankruptcy Codes exception from discharge provision, dictionary, editors, treatise writers, and judges have disagreed about the state of mind question.
Many years ago, for example, Judge Augustus Hand wrote that the relevant “misappropriation must be due to a known breach of the duty and not mere negligence or a mistake.”
The judge learned at hand suggested the terms “may have included innocent default.”
Some modern courts have included innocent acts within the scope of the term, other insisted on conduct that is objectively reckless, still others have said there has to be extreme recklessness, when treatise ends its discussion of the topic with a question mark.
Now, we have to answer the question mark and we base our answer in an old case called Neal versus Clark written for the Court by the first Justice Harlan in 1878.
He was thinking about the meaning of the word fraud and he said, “That's created by fraud,” or those who are reading the statute, they're right next to embezzlement.
And such association, he said, “Justifies, although it doesn't imperatively require, the conclusion that the fraud means positive fraud or fraud in fact involving moral turpitude, that's a little easier to understand, or intentional wrong as does embezzlement and not implied fraud or fraud in law which may exist without bad faith or immorality.”
We think the statutory term defalcation should be treated exactly really pretty much the same way.
So, if the conduct that issued does not involve bad faith, moral turpitude or immoral conduct, then it requires an intentional wrong.
Justices require for the statutory neighbors, embezzlement, larceny, and fiduciary fraud.
We include its intentional here, not only conduct that fiduciary knows is wrong, but also reckless conduct of the kind the criminal law often treats as the equivalent of intentional conduct or actual knowledge of wrong doing is missing.
The conduct is still the same if a fiduciary can consciously disregard or is willfully belong to a substantial and unjustifiable risk that his conduct will turn out to violate a fiduciary duty.