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Supreme Court clarifies when debt can be discharged in bankruptcy case

The US Supreme Court [official website] ruled Monday in Bullock v. BankChampaign, NA [SCOTUSblog backgrounder; JURIST report] on the meaning of the term "defalcation" [definition] in the bankruptcy code. Under section 523(a)(4) of the Bankruptcy Code [text], an individual cannot obtain a bankruptcy discharge from a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." Writing for the unanimous court, Justice Stephen Breyer held that the term, "includes a culpable state of mind requirement akin to that which accompanies application of the other terms in the same statutory phrase. We describe that state of mind as one involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior."

In this case, Randy Curtis Bullock was the trustee of his father's trust. He breached his fiduciary duty and received a judgment against him. Judgments are normally dischargeable in a bankruptcy, and Bullock attempted to file Chapter 7 to liquidate his debt. However, the US Court of Appeals for the Eleventh Circuit found such a debt was not dischargeable [opinion] since it was created by a trustee acting improperly, although in this case they found he had acted negligently, not maliciously. The Supreme Court vacated and remanded the Eleventh Circuit's decision.

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