WASHINGTON, D.C.- The U.S. Supreme Court today heard oral
arguments in a case involving a bank's claim that a debtor who had acted as
trustee for his father's insurance trust acted recklessly and was guilty of
defalcation for making loans to himself during the time he had control of the
trust (Randy Curtis Bullock v. BankChampaign, No. 11-1518, Chapter
7, U.S. Sup.) (lexis.com subscribers may access Supreme Court briefs for this case).
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,
and during the time he held that position, Bullock took out three loans from
the trust. 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
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).
11 U.S. Code Section 523
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
Bullock appealed to the Supreme Court, arguing that the
high court needs to rule on the case to resolve the split among the federal
Bullock's attorney, Thomas M. Byrne, argued that the case
at hand "presents one of the most confounding questions of bankruptcy law,"in
that it seeks to determine the meaning of "defalcation," which is found in 11
U.S. Code Section 523(a)(4).
Byrne contended that "defalcation" is an undefined term
in the Bankruptcy Code, which contains more than 100 defined terms, and that
there is no plain contemporary, ordinary meaning that the parties can resort to
with respect to interpretation because "defalcation" is not in common use.
Byrne argued that a showing of extreme recklessness at
least is required as to the charges that Bullock engaged in self-dealing. There
is uncontradicted evidence that Bullock did not know that making a loan to his
mother at his father's request would somehow run afoul of the law, Byrne
Justice Ruth Bader Ginsburg asked Byrne about the other
loans that Bullock made to himself, to which Byrne replied: "These are two
loans that went into the business created by the father and the mother, the
garage building business. That's where the proceeds went. And so it would have
been a surprise, we say, to the average person to learn that there was a legal
problem with those loans."
Arguing for BankChampaign, Ben D. Bensinger said
Bullock's actions constituted self-dealing that was a reckless breach of his
fiduciary duty of loyalty; therefore, it was a defalcation.
Bensinger maintained that the moment Bullock made those
loans, there was "an absolute certainty" that there would be a conflict of
interest, and a reasonable person would not have made those loans because the
risk was so high.
Moreover, Bensinger argued that a finding of embezzlement
requires some sort of specific mental intent, an intent to deceive or to
defraud. Defalcation, however, does not require that same mental intent, and
that is borne out by the historyof the Bankruptcy Act, Bensinger added.
Defalcation was first added to the Bankruptcy Act in
1841, and it was simply an exception to discharge for defalcation, Bensinger
said. There was no mention of fraud, there was no mention of embezzlementand
there was no mention of larceny, he added.
It wasn't until the enactment of the Bankruptcy Act of
1867 that Congress added an exception to discharge for embezzlement and for
fraud, Bensinger said.
Justices Steven G. Breyer and Antonin Scalia challenged
Bensinger's contention that Bullock acted recklessly.Justice Sonya Sotomayor
pressed further, saying that if the trust received all of its money back,she
wondered how anyone could argue that there was a case of defalcation or
Byrne is with Sutherland Asbill & Brennan in Atlanta. Bensinger is
with Baker Donelson Bearman Caldwell & Berkowitz in Birmingham, Ala.
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