Bullock v. BankChampaign, N.A., No. 11-1518, 2013 U.S. LEXIS 3521 (U.S. May 13, 2013)

Issue Addressed: This U.S. Supreme Court opinion considered whether a director found liable for a breach of fiduciary duty could discharge his debts related to that breach in Bankruptcy Court pursuant to 11 U.S.C. § 523(a)(4) of the Bankruptcy Code. The specific question presented to the Supreme Court was: whether “[t]he term ‘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.”

Brief Discussion: Section 523(a)(4) prohibits an individual debtor from discharging debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny,” in personal bankruptcy proceedings. Section 523 has been amended several times and interpreted by many courts; however, courts are split as to whether “defalcation,” like the other enumerated items in (a)(4) has a scienter requirement. In this decision, Bullock v. BankChampaign, N.A., the U.S. Supreme Court conclusively held that debt for defalcation, where the fiduciary acted with knowledge or with gross recklessness, cannot be discharged under the Bankruptcy Code. No. 11-1518, 2013 U.S. LEXIS 3521 (U.S. May 13, 2013).

Prior to the Bullock decision, the Bankruptcy Court in Delaware had ruled that a director that had been found liable for a breach of fiduciary duty where there was some level of culpability, was not permitted to discharge debts related to that breach in a subsequent bankruptcy proceeding. See, e.g., Crowe v. Moran, 413 B.R. 168, 189 (Bankr. D. Del. 2009). The exact level of culpability had never been directly addressed by the Delaware courts. Thus, Bullock resolves the circuit split concerning the level of culpability required to prevent discharge, as explained in the following quote:

[W]here the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, [defalcation or breach of fiduciary duty] requires an intentional wrong. We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Thus we include reckless conduct of the kind set forth in the Model Penal Code.

We appreciate an associate at Eckert Seamans preparing this post.