By Lawrence Hurley
WASHINGTON (Reuters) - For the first time since the
bankruptcy code's introduction in 1841 the U.S. Supreme Court
will decide the meaning of the word "defalcation," which can
refer to embezzlement but also, more generally, to misuse of
The court is considering whether Randy Bullock, an Illinois
man who is filing for bankruptcy, can write off money he owes
for his role overseeing his father's life insurance trust.
Bullock used money from the trust to make investments for
himself and other family members. He eventually paid the money
back with interest.
The case reached the high court over the question of whether
Bullock's actions, which did not deprive the trust of any money,
fitted within the legal definition of defalcation, which would
mean that, under federal bankruptcy law, he would be barred from
seeking bankruptcy relief.
Based on oral arguments on Monday, the justices appeared to
be leaning toward finding that defalcation could be used to
describe Bullock's actions.
Several justices indicated that they did not think that
Bullock's failure to realize that what he was doing was wrong
let him off the hook.
"It looks as if you don't need to know that what you're
doing is against the law, where you commit defalcation," said
Justice Stephen Breyer.
Justice Sonia Sotomayor had a similar reaction.
"If you're a fiduciary, why should an excuse of ignorance of
the law ever save you when you are required to exercise the
highest protection of the trust?" she said.
That view echoes the position taken by the Obama
administration, which intervened in support of the trust, saying
in court papers that the law does not require "intentional
wrongdoing" for a debtor to be barred from discharging a debt.
'LIKE A BANK ROBBER'
The precise meaning of defalcation has never been determined
by the Supreme Court, despite it being part of the bankruptcy
code since 1841. Thomas Byrne, Bullock's lawyer, told the
justices, "there is no plain contemporary, ordinary meaning that
we can resort to with respect to interpretation of the word
because it is not in common use."
The justices also delved into the question of whether the
fact that there was no overall loss of funds made any
Chief Justice John Roberts pointed out that whether or not
there was a loss depends on which day the account balance was
"It's like a bank robber giving back the money," he said.
"There is no loss to the bank, but it's still a crime."
Bullock was the sole trustee of his father's life insurance
trust from 1978 to 1998.
The trust's only asset was the life insurance policy, which
featured a $1 million benefit upon Bullock's father's death.
Bullock and his four siblings were the beneficiaries. On three
occasions during that period, he used the trust funds to issue
loans, two of which he benefited from financially.
Although he paid back the money with interest, his two
brothers sued him for breaching his duty as the trustee. A state
court ordered him to pay the trust $250,000 plus $35,000 in
attorney's fees and other costs.
Bullock, now seeking bankruptcy relief, unsuccessfully asked
a federal bankruptcy court in Alabama to discharge the debt to
the trust, which is now overseen by BankChampaign.
The Atlanta-based 11th U.S. Circuit Court of Appeals upheld
the lower court rulings in favor of the trust.
The case is Bullock v. BankChampaign, U.S. Supreme Court,
For petitioner: Thomas Byrne of Sutherland Asbill & Brennan.
For respondent: Bill Bensinger of Baker Donelson.
For United States, amicus in support of respondent: Curtis
Gannon, Assistant to the Solicitor General, Department of
Follow us on Twitter @ReutersLegal | Like us on Facebook