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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.
