Last week I
published a blog post on the US Supreme Court's unanimous decision in Bullock
v. BankChampaign, N.A., No. 11-1518 (May 13, 2013) (pdf)
[an enhanced version of this opinion is available to lexis.com subscribers],
that focused on the Court's application of the noscitur a sociis canon
to the bankruptcy nondischargeability statute dealing with "defalcation in
a fiduciary capacity."
I write this second blog post discussing Bullock because
I think the case will prove especially noteworthy for those who deal with the concept
of "recklessness" in their civil practice.
Professor Ann Morales Olazábal authored an article
Recklessness: Doctrinal Approach to Deterrence of Secondary Market
Securities Fraud, 2010 Wis. L. Rev. 1415, in which she looked at
attempts to define "recklessness" in tort, criminal, patent,
securities, and employment law (among others) and concluded that "the
single common thread among the recklessness standards employed in this mixed
bag of legal inquiries may be their opacity and lack of susceptibility to any
kind of uniform application." Id. at 1422. In the
federal securities context, she writes, "[a]s in other legal arenas,
recklessness in the 10(b) context has nowhere been defined serviceably or with
any real consistency." Id. at 1424.
Is Securities Fraud?, 61 Duke L.J. 511, 534-36 (2011), Professor Sam
Buell wrote that courts in the securities law context differ on whether
recklessness should be defined by a "conscious disregard" or a
Scienter is a confusing word because its
most natural meaning--and the one often associated with it--is knowledge. But
the term is used, at least in the area of securities fraud, to mean simply
level of fault. A statement like "scienter is required for liability" often is
meant to do no more than rule out strict liability. In this form, scienter
stands for a full menu of choices on the matter of awareness: knowledge,
knowledge plus willful blindness, recklessness, gross negligence, or
Which level to choose is a function of the conception of
fraud one wishes to pursue.... A regime centered on culpability and
blameworthiness--in its focus on responsibility for acts of deception--is
likely to require not only some scienter but a high level of awareness....
Whatever level of fault is chosen, it must be clearly
specified. Specifying the level of fault is especially important with regard to
recklessness because the law of fraud has often been unclear as to whether
reckless fraud exists or should exist.
The most precise and demanding definition of
recklessness, and the one most often used in criminal law, is the one found in
the Model Penal Code: the conscious disregard of a substantial
and unjustifiable risk--provided that the actor's disregard of that risk
grossly deviates from how a reasonable person would act in the same
circumstances. Under this definition, recklessness is a form of knowledge. The
actor is actually aware of the risk that inheres in the situation, as opposed
to, in the case of a full knowledge requirement, having the practical certainty
that it inheres. I call this the "conscious-disregard" form of recklessness.
As is well known, other formulations of recklessness
treat it as a heightened form of negligence. In these formulations,
recklessness does not generally require the actual, subjective disregard of a
risk. As with negligence, the actor must have failed to advert to and act upon
a risk--the difference from negligence being that the actor's failure
represents more than a lack of due care. The failure demonstrates a high level
of social deviance. That deviance relates to the degree of the risk, the nature
of the risk, or a combination of the two. I call this the "super-negligence"
form of recklessness. (Emphasis added).
Perhaps, then, Bullock points a way out of this
legal morass in regards to what constitutes reckless misconduct. As noted in my
earlier post, in deciding what mental state would be required
under Bankruptcy Code section 523(a)(4) for a debt owed by an individual
debtor to be excepted from discharge because of the debtor's "defalcation
while acting in a fiduciary capacity," the Court ultimately sided with the
First and Second Circuits and adopted a scienter that embraces an "extreme
recklessness" standard. (Op. at 9). In so doing, the Court agreed with the
Second Circuit that adopting the scienter standard in the nondischargeability
context "has the virtue of ease of application since the courts and
litigants have reference to a robust body of securities law examining what
these terms mean." (Op. at 9) (quoting In re Hyman, 502
F.3d 61, 69 (2d Cir. 2007) [enhanced version]).
What is most significant in the Court's opinion for
purposes of this blog post was the Court's specifically tying actionable
recklessness to "the kind set forth in the Model Penal Code ... [where]
the fiduciary 'consciously disregards' (or is willfully blind to) 'a
substantial and unjustifiable risk' that his conduct will turn out to violate a
fiduciary duty." (Op. at 6). "That risk," the Court held,
" 'must be of such a nature and degree that, considering the nature and
purpose of the actor's conduct and the circumstances known to him, its
disregard involves a gross deviation from the standard of conduct that a
law-abiding person would observe in the actor's situation.' "
(Op. at 6) (quoting ALI, Model Penal Code §2.02(2)(c)) (emphasis
in opinion). Significantly, the Court then closed this discussion of
actionable recklessness by cross-referencing Ernst & Ernst v.
Hochfelder, 425 U.S. 185 (1976) [enhanced version], where the Court defined scienter
for securities law purposes as "a mental state embracing intent to
deceive, manipulate, or defraud." Id. at 194 n.12. (Op. at 6).
The Court's juxtaposition of the Model Penal Code's
"gross deviation" standard of recklessness with scienter under the
federal securities laws has not been embraced by the case law. My quick
research in Section 10(b) cases found this connection between recklessness and
the Section 2.02 of the Model Penal Code only twice since Hochfelder was
decided in 1976. See In re Comshare Inc. Securities Litigation, 183 F.3d
542, 550 n.6 (6th Cir. 1999) [enhanced version]; and In re Baesa Securities
Litigation, 969 F. Supp. 238, 241 (S.D.N.Y. 1997) [enhanced version].
Bullock's defining scienter
as including recklessness only under what Professor Buell calls "the most
precise and demanding definition of recklessness ... found in the Model Penal
Code" should prove to be an important development not only in the context
of the federal securities law, but in the context of all other federal civil
laws where liability is based on one's recklessness.
Thanks for reading!
To read more items by Steve Jakubowski, visit the
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