Defalcation of Trustee: 11th Circuit Establishes Legal Standard

In Re Bullock 2012 U.S. App LEXIS 2908(11th Cir. Feb 14, 2012) affirmed the judgment in an adversary complaint objecting to the dischargeability of a debt pursuant to Section 523(a)(4). Debtor who was trustee of a life insurance trust self-dealed by using the life insurance as collateral for loans. Bank later was appointed as replacement trustee and obtained a money judgment against the debtor. State court also awarded bank as collateral property the debtor had obtained from the self dealing, but Bank refused to liquidate the assets. Bullock files Chapter 7. Bank filed adversary complaint.

11th Cir reviewed substantial split between circuits as to what constitutes defalcation. The 11th Circuit In Bullock concludes “defalcation requires a known breach of a fiduciary duty, such that the conduct can be characterized as objectively reckless”. The Court also holds that uncleans hands is not an affirmative defense. The Debtor can go back to state court to attempt to force the Bank to liquidate the collateral to help satisfy the state court judgment.

This cases summarized the substantial split in the legal standard accross the country, and for those of you outside of the 11th Circuit, this case does identify the different standards. As a Fort Lauderdale bankruptcy attorney, Bullock will set the starting point for analyzing the dischargeability of a debt by a trustee or other fiduciary.

For non-attorneys, you should be aware that creditors can file objections to getting rid of your debt based on certain types of conduct set forth in the bankruptcy statute. Improper conduct as a trustee, personal representative, or other type of fiduciary or trust relationship can be a basis to deny eliminating the debt created by this conduct.

Leave a Reply

Your email address will not be published. Required fields are marked *