Discharging Fiduciary Debts

Abstract

Under section 523(a)(4) of the Bankruptcy Code, a debt is not dischargeable if it results from “fraud or defalcation” while the debtor is acting in a “fiduciary capacity.” Although this provision has existed in various incarnations in the bankruptcy law since 1841, the meaning of both the terms “defalcation” and “fiduciary capacity” is subject to confusion and disagreement among the courts. This piece explores the meaning of these terms from the nineteenth century for today, and demonstrates that the best meaning of “defalcation” while acting in a “fiduciary capacity” is the failure of one who holds the funds of another in a trust-like situation to account for those funds. A split of authority among the circuit courts has existed for years regarding these issues, but the Supreme Court has recently granted certiorari to decide these issues in the case of Bullock v. Bankchampaign.

Keywords: bankruptcy, defalcation, fiduciary, discharge, Bullock v. Bankchampaign, Chapman v. Forsyth