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.

Life Insurance

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 fiduciary duty.

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 appellate courts.

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 Atlanta.

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