10/29/2012 11:29:12 AM EST
U.S. Supreme Court Agrees To Hear ‘Defalcation’ Bankruptcy Case
WASHINGTON, D.C. - (Mealey's) The U.S.
Supreme Court on Oct. 29 agreed to hear a case to determine whether a defalcation
was committed by a debtor who, prior to filing for bankruptcy, had been
appointed the trustee of his father's life insurance trust and took out three
loans from the trust he managed (Randy Curtis Bullock v. BankChampaign,
No. 11-1518, Chapter 7, U.S. Sup.).
Randy Curtis Bullock filed for Chapter 7 bankruptcy in
the U.S. Bankruptcy Court for the Northern District of Alabama.
Prior to his bankruptcy, Bullock had been appointed the
trustee of his father's life insurance trust. In 1998, Bullock resigned as
trustee at the request of some of the beneficiaries; however, before he
resigned, Bullock had taken out three loans from the trust he managed.
Despite the fact that the loans were all repaid with
interest, Bullock's two brothers - two of the five beneficiaries of the trust -
sued Bullock in the Vermilion County, Ill., Circuit Court alleging breach of
The Circuit Court did not find that Bullock committed a
knowing or deliberate breach of fiduciary duty, but it granted summary judgment
in favor of Bullock's brothers because the fully repaid loans were deemed
self-dealing transactions and, thus, breaches of fiduciary duty under Illinois law.
11 U.S. Code Section 523
Bullock filed his bankruptcy petition shortly after that
ruling, and BankChampaign, as successor trustee, filed an adversary proceeding
in the Bankruptcy Court, seeking a ruling that Bullock's obligations under the
Illinois judgment were nondischargeable under 11 U.S. Code Section 523(a)(4).
The Bankruptcy Court granted BankChampaign's motion for
summary judgment dismissal, and Bullock appealed to the U.S. District Court for
the Northern District of Alabama, which affirmed. Bullock appealed to the
11th Circuit U.S. Court of Appeals, which affirmed yet conceded that among the
Circuit Courts there is a split regarding the definition of "defalcation."
Federal Court Split
Bullock appealed to the Supreme Court, arguing that the
high court needs to rule on the case to resolve the split among the federal
In its brief filed Sept. 26, BankChampaign contends that
under any view of what constitutes a "defalcation" by a fiduciary, no trustee
of an express trust may take action in disregard of express limitations on the
authority of the trustee by the terms of the trust instrument and then, when
held liable for damages caused by such disregard of a trust instrument's express
limitation, discharge that liability in bankruptcy.
BankChampaign is represented by Ben D. Bensinger of Baker
Donelson Bearman Caldwell & Berkowitz in Birmingham, Ala.
Bullock is represented by Thomas M. Byrne of Sutherland Asbill & Brennan in
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