Monday, May 17, 2010

Section 523(a)(4): Fraud or defalcation while acting in a fiduciary capacity

Section 523(a)(4) provides an exception to the general discharge provisions. Pursuant to §523(a)(4), a discharge under Section 727 does not discharge an individual debtor from any debt for fraud or defalcation while acting in a fiduciary capacity. An objecting creditor must plead and prove the following to except debts from discharge: (1) debtor acted in a fiduciary relationship when the alleged wrongful acts giving rise to the objecting creditor’s claim occurred; and (2) debtor committed fraud or defalcation.

Defalcation requires a showing of conscious misbehavior or extreme recklessness. Such a standard ensures that the term defalcation complements but does not dilute the other terms of the provision --- fraud, embezzlement, and larceny –-- of which require a showing of actual wrongful intent.

Accordingly, this standard does not reach fiduciaries who may have failed to account for funds or property for which they were responsible only as a consequence of negligence, inadvertence or similar conduct not shown to be sufficiently culpable. With respect to the kind of conducts that constitute defalcation, bankruptcy courts have generally held that commingling, failing to account for, or misdirecting funds may suffice.
Warmest Regards,

Bob Schaller

Your Bankruptcy Advisor

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