Bullock v. BankChampaign, N. A.

(Slip Opinion) OCTOBER TERM, 2012 1

Syllabus

NOTE: Where it is feasible, a syllabus (headnote) will be released, as is

being done in connection with this case, at the time the opinion is issued.

The syllabus constitutes no part of the opinion of the Court but has been

prepared by the Reporter of Decisions for the convenience of the reader.

See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.

SUPREME COURT OF THE UNITED STATES

Syllabus

BULLOCK v. BANKCHAMPAIGN, N. A.

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE ELEVENTH CIRCUIT

No. 11–1518. Argued March 18, 2013 —Decided May 13, 2013

Petitioner’s father established a trust for the benefit of petitioner and

his siblings, and made petitioner the (nonprofessional) trustee. The

trust’s sole asset was the father’s life insurance policy. Petitioner

borrowed funds from the trust three times; all borrowed funds were

repaid with interest. His siblings obtained a judgment against him

in state court for breach of fiduciary duty, though the court found no

apparent malicious motive. The court imposed constructive trusts on

certain of petitioner’s interests—including his interest in the original

trust—in order to secure petitioner’s payment of the judgment, with

respondent serving as trustee for all of the trusts. Petitioner filed for

bankruptcy. Respondent opposed discharge of petitioner’s state-

court-imposed debts to the trust, and the Bankruptcy Court granted

respondent summary judgment, holding that petitioner’s debts were

not dischargeable pursuant to 11 U. S. C. §523(a)(4), which provides

that an individual cannot obtain a bankruptcy discharge from a debt

“for fraud or defalcation while acting in a fiduciary capacity, embez-

zlement, or larceny.” The Federal District Court and the Eleventh

Circuit affirmed. The latter court reasoned that “defalcation requires

a known breach of fiduciary duty, such that the conduct can be char-

acterized as objectively reckless.”

Held: The term “defalcation” in the Bankruptcy Code includes a culpa-

ble state of mind requirement involving knowledge of, or gross reck-

lessness in respect to, the improper nature of the fiduciary behavior.

Pp. 4−9.

(a) While “defalcation” has been an exception to discharge in a

bankruptcy statute since 1867, legal authorities have long disagreed

about its meaning. Broad definitions of the term in modern and older

dictionaries are unhelpful, and courts of appeals have disagreed

2 BULLOCK v. BANKCHAMPAIGN, N. A.

Syllabus

about what mental state must accompany defalcation’s definition.

Pp. 4−5.

(b) In Neal v. Clark, 95 U. S. 704, this Court interpreted the term

“fraud” in the Bankruptcy Code’s exceptions to discharge to mean

“positive fraud, or fraud in fact, involving moral turpitude or inten-

tional wrong, as does embezzlement; and not implied fraud, or fraud

in law, which may exist without the imputation of bad faith or immo-

rality.” Id., at 709. The term “defalcation” should be treated similar-

ly. Thus, where the conduct at issue does not involve bad faith, mor-

al turpitude, or other immoral conduct, “defalcation” requires an

intentional wrong. An intentional wrong includes 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. Where ac-

tual knowledge of wrongdoing is lacking, conduct is considered as

equivalent if, as set forth in the Model Penal Code, the fiduciary “con-

sciously disregards,” or is willfully blind to, “a substantial and unjusti-

fiable risk” that his conduct will violate a fiduciary duty. Pp. 5−7.

(c) Several considerations support this interpretation. First, statu-

tory context strongly favors it. The canon noscitur a sociis argues for

interpreting “defalcation” as similar to its linguistic neighbors “em-

bezzlement,” “larceny,” and “fraud,” which all require a showing of

wrongful or felonious intent. See, e.g., Neal, supra, at 709. Second,

the interpretation does not make the word identical to its statutory

neighbors. “Embezzlement” requires conversion, “larceny” requires

taking and carrying away another’s property, and “fraud” typically

requires a false statement or omission; while “defalcation” can en-

compass a breach of fiduciary obligation that involves neither conver-

sion, nor taking and carrying away another’s property, nor falsity.

Third, the interpretation is consistent with the longstanding princi-

ple that “exceptions to discharge ‘should be confined to those plainly

expressed.’ ” Kawaauhau v. Geiger, 523 U. S. 57, 62. It is also con-

sistent with statutory exceptions to discharge 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). Fourth, some Circuits have interpreted the

statute similarly for many years without administrative or other dif-

ficulties. Finally, it is important to have a uniform interpretation of

federal law, the choices are limited, and neither the parties nor the

Government has presented strong considerations favoring a different

interpretation. Pp. 7−9.

670 F. 3d 1160, vacated and remanded.

BREYER, J., delivered the opinion for a unanimous Court.

Cite as: 569 U. S. ____ (2013) 1

Opinion of the Court

NOTICE: This opinion is subject to formal revision before publication in the

preliminary print of the United States Reports. Readers are requested to

notify the Reporter of Decisions, Supreme Court of the United States, Wash-

ington, D. C. 20543, of any typographical or other formal errors, in order

that corrections may be made before the preliminary print goes to press.

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 pro-

vides that an individual cannot obtain a bankruptcy dis-

charge 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 appli-

cation 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 estab-

lished a trust for the benefit of his five children. He made

petitioner the (nonprofessional) trustee; and he trans-

ferred 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-

2 BULLOCK v. BANKCHAMPAIGN, N. A.

Opinion of the Court

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 com-

mitted a breach of fiduciary duty. It explained that peti-

tioner “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 attor-

ney’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 judg-

ment, 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

Cite as: 569 U. S. ____ (2013) 3

Opinion of the Court

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 character-

ized 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 evi-

dence 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.

4 BULLOCK v. BANKCHAMPAIGN, N. A.

Opinion of the Court

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 defini-

tions 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) (“misappropria-

tion 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 crimi-

nal negligence as admits of no excuse.” G. Bicknell, Com-

mentary on the Bankrupt Law of 1841, Showing Its

Operation and Effect 12 (2d ed. 1842). Modern dictionaries

Cite as: 569 U. S. ____ (2013) 5

Opinion of the Court

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. Gar-

ner, 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 negli-

gence 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 Bank-

ruptcy Code laying out exceptions to discharge. Justice

6 BULLOCK v. BANKCHAMPAIGN, N. A.

Opinion of the Court

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 con-

clusion 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 ex-

ist 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 reck-

less 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

Cite as: 569 U. S. ____ (2013) 7

Opinion of the Court

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 linguis-

tic 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 embezzle-

ment “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 “felo-

nious 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 statu-

tory 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

8 BULLOCK v. BANKCHAMPAIGN, N. A.

Opinion of the Court

pretenses). “Defalcation,” as commonly used (hence as

Congress might have understood it), can encompass a

breach of fiduciary obligation that involves neither conver-

sion, 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

Cite as: 569 U. S. ____ (2013) 9

Opinion of the Court

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 Govern-

ment has pointed to the fact that in 1970 Congress

rewrote the statute, eliminating the word “misappropria-

tion” 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 require-

ment. 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,” “embez-

zlement,” 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.