13 May 2013

Law in Plain English: Bullock v. BankChampaign, N.A.

This is one in a series of posts designed to describe court decisions in plain English. For more detail and background on the legal issues, see the link to the case below. For similar posts, click here.

Bullock v. BankChampaign, N.A.

Randy Bullock's father established a trust (based on his insurance policy) for the benefit of his children and made Randy the trustee. Bullock then borrowed money from the insurance company against the policy's value on three occasions (once at his father's request, and consistent with the trust's borrowing policy). His brothers then sued him, alleging a breach of fiduciary duty. The court found for the brothers and ordered Bullock to pay the trust the benefits he received from the breach of fiduciary duty by means of a constructive trust (to be administered by BankChampaign). He then filed for bankruptcy after being unable to obtain the funds to make the payment. BankChampaign opposed the bankruptcy discharge on the grounds that the debts fell under the "defalcation" exception and thus not dischargeable. The Bankruptcy Court agreed and ruled for Bank BankChampaign. The District Court and the 11th Circuit Court of Appeals affirmed. The question before the Court was whether “defalcation” applies in the absence of any specific finding of ill intent or evidence of an ultimate loss of trust principal. In a unanimous decision, the Supreme Court ruled “defalcation” in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior. As a result, Bullock's debt is dischargeable under bankruptcy law. The practical impact of this decision is that a finding of defalcation will require knowledge or gross reckless as it relates to the trustee's fiduciary duty.
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