Bankruptcy – Defalcation

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Bankruptcy – Defalcation

The term “defalcation” in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior.

Several considerations support this interpretation. First, statutory context strongly favors it. The canon noscitur a sociis argues for interpreting “defalcation” as similar to its linguistic neighbors “embezzlement,” “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 encompass a breach of fiduciary obligation that involves neither conversion, nor taking and carrying away another’s property, nor falsity. Third, the interpretation is consistent with the longstanding principle that “exceptions to discharge ‘should be confined to those plainly expressed.’ ” Kawaauhau v. Geiger, 523 U. S. 57, 62. It is also consistent 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 difficulties. 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.

670 F. 3d 1160, vacated and remanded.

11-1518 Bullock v. BankChampaign, N.A.

Breyer, J.

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