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Supreme Court Decides Meaning of Defalcation

Published June 25, 2013 by Sasser Law Firm

The US Supreme Court has decided the meaning of defalcation for purposes of dischargeability actions filed under section 523(a)(4) of the bankruptcy code. A dischargeability action must be brought by adversary proceeding by a creditor within 60 days of the initial setting of the 341 meeting of creditors unless the deadline is extended by the bankruptcy court. In addition to the exception to discharge for defalcation of fiduciary duty, fraud and willful and/or malicious injury are other common claims that may survive bankruptcy if a timely adversary proceeding is commenced and ultimately successful. Writing for a unanimous Court, Justice Stephen Breyer held “that defalcation 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.” So for a creditor to prevail on a 523(a)(4) cause of action it will have to prove a more serious than a technical or accidental breach of the fiduciary duty.

Most debtors who file for bankruptcy do not have adversary proceedings commenced against them related to discharge and/or dischargeability. Sasser Law Firm represents both creditors and debtors in adversary proceedings regarding discharge and/or dischargeability.

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