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SUPREME COURT OF THE UNITED STATES
_________________
No. 11–1518
_________________
RANDY CURTIS BULLOCK, PETITIONER
v.
BANKCHAMPAIGN, N. A.
on writ of certiorari to the united states
court of appeals for the eleventh circuit
[May 13, 2013]
Justice Breyer delivered the opinion of the
Court.
Section 523(a)(4) of the Federal Bankruptcy Code
provides that an individual cannot obtain a bankruptcy discharge
from a debt “for fraud or defalcation while acting in a fiduciary
capacity, embezzlement, or larceny.” 11 U. S. C.
§523(a)(4). We here consider the scope of the term “defalcation.”
We hold that it includes a culpable state of mind requirement akin
to that which accompanies application of the other terms in the
same statutory phrase. We describe that state of mind as one
involving knowledge of, or gross recklessness in respect to, the
improper nature of the relevant fiduciary behavior.
I
In 1978, the father of petitioner Randy
Bullock established a trust for the benefit of his five children.
He made petitioner the (nonprofessional) trustee; and he
transferred to the trust a single asset, an insurance policy on his
life. 670 F.3d 1160, 1162 (CA11 2012); App. to Pet. for Cert. 33a.
The trust instrument permitted the trustee to borrow funds from the
insurer against the policy’s value (which, in practice, was
available at an insurance-company-determined 6% interest rate).
Id., at 17a, 34a, 50a.
In 1981, petitioner, at his father’s request,
borrowed money from the trust, paying the funds to his mother who
used them to repay a debt to the father’s business. In 1984,
petitioner again borrowed funds from the trust, this time using the
funds to pay for certificates of deposit, which he and his mother
used to buy a mill. In 1990, petitioner once again borrowed funds,
this time using the money to buy real property for himself and his
mother. 670 F. 3d, at 1162. Petitioner saw that all of the
borrowed funds were repaid to the trust along with 6% interest.
App. to Pet. for Cert. 17a, 45a, 50a; Brief for Petitioner 3; Brief
for Respondent 2.
In 1999, petitioner’s brothers sued petitioner
in Illinois state court. The state court held that petitioner had
committed a breach of fiduciary duty. It explained that petitioner
“does not appear to have had a malicious motive in borrowing funds
from the trust” but nonetheless “was clearly involved in
self-dealing.” App. to Pet. for Cert. 45a, 52a. It ordered
petitioner to pay the trust “the benefits he received from his
breaches” (along with costs and attorney’s fees).
Id., at
47a. The court imposed constructive trusts on petitioner’s
interests in the mill and the original trust, in order to secure
petitioner’s payment of its judgment, with respondent BankChampaign
serving as trustee for all of the trusts. 670 F. 3d, at 1162;
App. to Pet. for Cert. 47a–48a. After petitioner tried
unsuccessfully to liquidate his interests in the mill and other
constructive trust assets to obtain funds to make the court-ordered
payment, petitioner filed for bankruptcy in federal court.
Id., at 27a, 30a.
BankChampaign opposed petitioner’s efforts to
obtain a bankruptcy discharge of his state-court-imposed debts to
the trust. And the Bankruptcy Court granted summary judgment in the
bank’s favor. It held that the debts fell within §523(a)(4)’s
exception “as a debt for defalcation while acting in a fiduciary
capacity.”
Id., at 40a–41a. Hence, they were not
dischargeable.
The Federal District Court reviewed the
Bankruptcy Court’s determination. It said that it was “convinced”
that BankChampaign was “abusing its position of trust by fail- ing
to liquidate the assets,” but it nonetheless affirmed the
Bankruptcy Court’s decision.
Id., at 27a–28a.
In turn, the Court of Appeals affirmed the
District Court. It wrote that “defalcation requires a known breach
of a fiduciary duty, such that the conduct can be characterized as
objectively reckless.” 670 F. 3d, at 1166. And it found that
petitioner’s conduct satisfied this standard.
Ibid.
Petitioner sought certiorari. In effect he has
asked us to decide whether the bankruptcy term “defalcation”
applies “in the absence of any specific finding of ill intent or
evidence of an ultimate loss of trust principal.” Brief for United
States as
Amicus Curiae 1. See also Pet. for Cert. i. The
lower courts have long disagreed about whether “defalcation”
includes a scienter requirement and, if so, what kind of scienter
it requires. Compare
In re Sherman, 658 F.3d 1009, 1017
(CA9 2011) (“defalcation” includes “even innocent acts of failure
to fully account for money received in trust” (internal quotation
marks and brackets omitted)), with
In re Uwimana,
274 F.3d 806, 811 (CA4 2001) (defalcation occurs when
“negligence or even an in- nocent mistake . . . results
in misappropriation”), with 670 F. 3d, at 1166 (“defalcation
requires . . . conduct [that] can be characterized as
objectively reckless”), and with
In re Baylis,
313
F.3d 9, 20 (CA1 2002) (“defalcation requires something close to
a showing of extreme recklessness”). In light of that disagreement,
we granted the petition.
II
A
Congress first included the term “defalcation”
as an exception to discharge in a federal bankruptcy statute in
1867. See
id., at 17. And legal authorities have disagreed
about its meaning almost ever since. Dictionary definitions of
“defalcation” are not particularly helpful. On the one hand, a law
dictionary in use in 1867 defines the word “defalcation” as “the
act of a defaulter,” which, in turn, it defines broadly as one “who
is deficient in his accounts, or fails in making his accounts
correct.” 1 J. Bouvier, Law Dictionary 387, 388 (4th ed. 1852). See
also 4 Oxford English Dictionary 369 (2d ed. 1989) (quoting an 1846
definition that defines the term as “ ‘a breach of trust by
one who has charge or management of money’ ”). Modern
dictionaries contain similarly broad definitional language. Black’s
Law Dictionary, for example, defines “defalcation” first as
“Embezzlement,” but, second, as “[l]oosely, the failure to meet an
obligation; a nonfraudulent default.” Black’s Law Dictionary 479
(9th ed. 2009) (hereinafter Black’s). See also American Heritage
Dictionary 474 (5th ed. 2011) (“To misuse funds; embezzle”); 4
Oxford English Dictionary,
supra, at 369 (“monetary
deficiency through breach of trust by one who has the management or
charge of funds; a fraudulent deficiency in money matters”);
Webster’s New International Dictionary 686 (2d ed. 1954) (“An
abstraction or misappropriation of money by one, esp. an officer or
agent, having it in trust”); Webster’s Third New International
Dictionary 590 (1986) (“misappropriation of money in one’s
keeping”).
On the other hand, an 1842 bankruptcy treatise
warns that fiduciaries “are not supposed to commit defalcation in
the matter of their trust, without . . . at least such
criminal negligence as admits of no excuse.” G. Bicknell,
Commentary on the Bankrupt Law of 1841, Showing Its Operation and
Effect 12 (2d ed. 1842). Modern dictionaries often accompany their
broad definitions with illustrative terms such as “embezzle,”
American Heritage Dictionary,
supra, at 474, or “fraudulent
deficiency,” 4 Oxford English Dictionary,
supra, at 369. And
the editor of Black’s Law Dictionary has written that the term
should be read as limited to deficiencies that are “fraudulent” and
which are “
the fault of someone put in trust of the money.”
B. Garner, Modern American Usage 232 (3d ed. 2009) (emphasis
added).
Similarly, courts of appeals have long disagreed
about the mental state that must accompany the bankruptcy-related
definition of “defalcation.” Many years ago Judge Augustus Hand
wrote that “the misappropriation must be due to a known breach of
the duty, and not to mere negligence or mistake.”
In re
Bernard, 87 F.2d 705, 707 (CA2 1937). But Judge Learned Hand
suggested that the term “
may have included innocent
defaults.”
Central Hanover Bank & Trust Co. v.
Herbst, 93 F.2d 510, 511 (CA2 1937) (emphasis added). A more
modern treatise on trusts ends its discussion of the subject with a
question mark. 4 A. Scott, W. Fratcher, & M. Ascher, Scott and
Ascher on Trusts §24.26 P. 1797 (5th ed. 2007).
In resolving these differences, we note that
this long- standing disagreement concerns state of mind, not
whether “defalcation” can cover a trustee’s failure (as here) to
make a trust more than whole. We consequently shall assume without
deciding that the statutory term is broad enough to cover the
latter type of conduct and answer only the “state of mind”
question.
B
1
We base our approach and our answer upon one
of this Court’s precedents. In 1878, this Court interpreted the
related statutory term “fraud” in the portion of the Bankruptcy
Code laying out exceptions to discharge. Justice Harlan wrote for
the Court:
“[D]ebts created by ‘fraud’ are associated
directly with debts created by ‘embezzlement.’ Such association
justifies, if it does not imperatively require, the conclusion that
the ‘fraud’ referred to in that section means positive fraud, or
fraud in fact, involving moral turpitude or intentional wrong, as
does embezzlement; and not implied fraud, or fraud in law, which
may exist without the imputation of bad faith or immorality.”
Neal v.
Clark,
95 U.S.
704, 709 (1878).
We believe that the statutory term “defalcation”
should be treated similarly.
Thus, where the conduct at issue does not
involve bad faith, moral turpitude, or other immoral conduct, the
term requires an intentional wrong. We include as intentional not
only conduct that the fiduciary knows is improper but also reckless
conduct of the kind that the criminal law often treats as the
equivalent. Thus, we include reckless conduct of the kind set forth
in the Model Penal Code. Where actual knowledge of wrongdoing is
lacking, we consider conduct as equivalent if 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. ALI, Model Penal Code §2.02(2)(c), p. 226 (1985).
See
id., §2.02 Comment 9, at 248 (explaining that the Model
Penal Code’s definition of “knowledge” was designed to include
“ ‘wilful blindness’ ”). That risk “must be of such a
nature and degree that, considering the nature and purpose of the
actor’s conduct and the cir- cumstances 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.”
Id., §2.02(2)(c), at 226 (emphasis added). Cf.
Ernst
& Ernst v.
Hochfelder,
425 U.S.
185, 194, n. 12 (1976) (defining scienter for securities
law purposes as “a mental state embracing intent to deceive,
manipulate, or defraud”).
2
Several considerations lead us to interpret
the statutory term “defalcation” in this way. First, as Justice
Harlan pointed out in
Neal, statutory context strongly
favors this interpretation. Applying the canon of interpretation
noscitur a sociis, the Court there looked to fraud’s
linguistic neighbor, “embezzlement.” It found that both terms refer
to different forms of generally similar conduct. It wrote that both
are “ ‘
ejusdem generis,’ ” of the same kind, and
that both are “ ‘referable to the same subject-matter.’ ”
95 U. S., at 709. Moreover, embezzlement requires a showing of
wrongful intent.
Ibid. (noting that embezzlement “involv[es]
moral turpitude or intentional wrong”). See
Moore v.
United States,
160 U.S.
268, 269–270 (1895) (describing embezzlement and larceny as
requiring “felonious intent”). See also,
e.g., W. LaFave,
Criminal Law §19.6(a), p. 995 (5th ed. 2010) (“intent to deprive”
is part of embezzlement). Hence, the Court concluded, “fraud” must
require an equivalent showing.
Neal,
supra, at 709.
Neal has been the law for more than a century. And here, the
additional neighbors (“larceny” and, as defined in
Neal,
“fraud”) mean that the canon
noscitur a sociis argues even
more strongly for similarly interpreting the similar statutory term
“defalcation.”
Second, this interpretation does not make the
word identical to its statutory neighbors. See
Babbitt v.
Sweet Home Chapter, Communities for Great Ore.,
515 U.S.
687, 698 (1995) (noting “[a] reluctance to treat statutory
terms as surplusage”). As commonly used, “embezzlement” requires
conversion, and “larceny” requires taking and carrying away
another’s property. See LaFave, Criminal Law §§19.2, 19.5
(larceny);
id., §19.6 (embezzlement). “Fraud” typically
requires a false statement or omission. See
id., §19.7
(discussing fraud in the context of false pretenses).
“Defalcation,” as commonly used (hence as Congress might have
understood it), can encompass a breach of fiduciary obligation that
involves neither conversion, nor taking and carrying away another’s
property, nor falsity. Black’s 479. See,
e.g., In re
Frankel, 77 B.R. 401 (Bkrtcy. Ct. WDNY 1987) (finding a breach
of fiduciary duty and defalcation based on an unreasonable sale of
assets).
Nor are embezzlement, larceny, and fiduciary
fraud simply special cases of defalcation as so defined. The
statutory provision makes clear that the first two terms apply
outside of the fiduciary context; and “defalcation,” unlike
“fraud,” may be used to refer to
nonfraudulent breaches of
fiduciary duty. Black’s 479.
Third, the interpretation is consistent with the
long-standing principle that “exceptions to discharge ‘should be
confined to those plainly expressed.’ ”
Kawaauhau v.
Geiger,
523 U.S.
57, 62 (1998) (quoting
Gleason v.
Thaw,
236 U.S.
558,
562
(1915)). See
Local Loan Co. v.
Hunt,
292 U.S.
234, 244 (1934);
Neal,
supra, at 709. It is also
consistent with a set of statutory exceptions that Congress
normally confines to circumstances where strong, special policy
considerations, such as the presence of fault, argue for preserving
the debt, thereby benefiting, for example, a typically more honest
creditor. See,
e.g., 11 U. S. C. §§523(a)(2)(A),
(a)(2)(B), (a)(6), (a)(9) (fault). See also,
e.g.,
§§523(a)(1), (a)(7), (a)(14), (a)(14A) (taxes); §523(a)(8)
(educational loans); §523(a)(15) (spousal and child support). In
the absence of fault, it is difficult to find strong policy reasons
favoring a broader exception here, at least in respect to those
whom a scienter requirement will most likely help, namely
nonprofessional trustees, perhaps administering small family
trusts potentially immersed in intrafamily arguments that are
difficult to evaluate in terms of comparative fault.
Fourth, as far as the briefs before us reveal,
at least some Circuits have interpreted the statute similarly for
many years without administrative, or other practical,
difficulties.
Baylis,
313 F.3d 9. See also
In re Hyman, 502 F.3d 61, 69
(CA2 2007) (“This [scienter] standard . . . also 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”).
Finally, it is important to have a uniform
interpreta- tion of federal law, the choices are limited, and
neither the parties nor the Government has presented us with strong
considerations favoring a different interpretation. In addition to
those we have already discussed, the Government has pointed to the
fact that in 1970 Congress rewrote the statute, eliminating the
word “misappropriation” and placing the term “defalcation”
(previously in a different exemption provision) alongside its
present three neighbors. See Brief for United States as
Amicus
Curiae 16–17. The Government believes that these changes
support reading “defalcation” without a scienter requirement. But
one might argue, with equal plausibility, that the changes reflect
a decision to make certain that courts would read in similar ways
“defalcation,” “fraud,” “embezzlement,” and “larceny.” In fact, we
believe the 1970 changes are inconclusive.
III
In this case the Court of Appeals applied a
standard of “objectiv[e] reckless[ness]” to facts presented at
summary judgment. 670 F. 3d, at 1166. We consequently remand
the case to permit the court to determine whether further
proceedings are needed and, if so, to apply the heightened standard
that we have set forth. For these reasons we vacate the judgment of
the Court of Appeals and remand the case for further proceedings
consistent with this opinion.
It is so ordered.