Tuesday, May 14, 2013

bankruptcy - fraud, defalcation


                                    SUPREME COURT OF THE UNITED STATES


No. 11–1518. Argued March 18, 2013—Decided May 13, 2013

Petitioner’s father established a trust for the benefit of petitioner andhis siblings, and made petitioner the (nonprofessional) trustee. The trust’s sole asset was the father’s life insurance policy. Petitioner borrowed funds from the trust three times; all borrowed funds were repaid with interest. His siblings obtained a judgment against himin state court for breach of fiduciary duty, though the court found noapparent malicious motive. The court imposed constructive trusts on certain of petitioner’s interests—including his interest in the original trust—in order to secure petitioner’s payment of the judgment, with respondent serving as trustee for all of the trusts. Petitioner filed for bankruptcy. Respondent opposed discharge of petitioner’s state­court-imposed debts to the trust, and the Bankruptcy Court granted respondent summary judgment, holding that petitioner’s debts were not dischargeable pursuant to 11 U. S. C. §523(a)(4), which providesthat an individual cannot obtain a bankruptcy discharge from a debt“for fraud or defalcation while acting in a fiduciary capacity, embez­zlement, or larceny.” The Federal District Court and the Eleventh Circuit affirmed. The latter court reasoned that “defalcation requires a known breach of fiduciary duty, such that the conduct can be char­acterized as objectively reckless.”

Held: The 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. Pp. 4−9.

(a) While “defalcation” has been an exception to discharge in abankruptcy statute since 1867, legal authorities have long disagreed about its meaning. Broad definitions of the term in modern and older dictionaries are unhelpful, and courts of appeals have disagreed  about what mental state must accompany defalcation’s definition. Pp. 4−5.

(b) In Neal v. Clark, 95 U. S. 704, this Court interpreted the term “fraud” in the Bankruptcy Code’s exceptions to discharge to mean“positive fraud, or fraud in fact, involving moral turpitude or inten­tional wrong, as does embezzlement; and not implied fraud, or fraud in law, which may exist without the imputation of bad faith or immo­rality.” Id., at 709. The term “defalcation” should be treated similar­ly. Thus, where the conduct at issue does not involve bad faith, mor­al turpitude, or other immoral conduct, “defalcation” requires an intentional wrong. An intentional wrong includes 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. Where ac­tual knowledge of wrongdoing is lacking, conduct is considered as equivalent if, as set forth in the Model Penal Code, the fiduciary “con­sciously disregards,” or is willfully blind to, “a substantial and unjusti­fiable risk” that his conduct will violate a fiduciary duty. Pp. 5−7.

(c) Several considerations support this interpretation. First, statu­tory context strongly favors it. The canon noscitur a sociis argues for interpreting “defalcation” as similar to its linguistic neighbors “em­bezzlement,” “larceny,” and “fraud,” which all require a showing of wrongful or felonious intent. See, e.g., Neal, supra, at 709. Second, the interpretation does not make the word identical to its statutory neighbors. “Embezzlement” requires conversion, “larceny” requires taking and carrying away another’s property, and “fraud” typicallyrequires a false statement or omission; while “defalcation” can en­compass a breach of fiduciary obligation that involves neither conver­sion, nor taking and carrying away another’s property, nor falsity.Third, the interpretation is consistent with the longstanding princi­ple that “exceptions to discharge ‘should be confined to those plainly expressed.’ ” Kawaauhau v. Geiger, 523 U. S. 57, 62. It is also con­sistent with statutory exceptions to discharge that Congress normally confines to circumstances where strong, special policy considerations,such as the presence of fault, argue for preserving the debt, thereby benefiting, for example, a typically more honest creditor. See, e.g., 11  U. S. C. §523(a)(2)(A). Fourth, some Circuits have interpreted the statute similarly for many years without administrative or other dif­ficulties. Finally, it is important to have a uniform interpretation of federal law, the choices are limited, and neither the parties nor the Government has presented strong considerations favoring a different interpretation. Pp. 7−9.

 670 F. 3d 1160, vacated and remanded.

BREYER, J., delivered the opinion for a unanimous Court