U.S. Supreme Court Resolves Circuit Split In Bullock v. BankChampaign, N.A.

One of the primary purposes of bankruptcy is to provide for the discharge of certain debts in order to enable a debtor to obtain a "fresh start" post-bankruptcy. Notwithstanding this specific purpose, section 523 of Title 11 of the United States Code, 11 U.S.C. § 101 et seq. (the "Bankruptcy Code"), provides that certain debts may not be discharged, including debts incurred by "fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny." 11 U.S.C. § 523(a)(4).

In the recent decision of Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (May 13, 2013), the United States Supreme Court: (i) resolved a prior split among the Circuits1 concerning whether a "culpable state of mind" was required in order to come within the "defalcation" exception as set forth in § 523(a)(4) of the Bankruptcy Code and (ii) determined that such a state of mind was required in order to fall within this exception. In a unanimous decision, the Court held that "where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term requires an intentional wrong." Bullock, 133 S. Ct. at 1759. It added that defalcation could also occur with a conscious disregard for, or willful blindness to, "a substantial and unjustifiable risk" involving "a gross deviation from the standard of conduct that a law-abiding person would observe." Id. at 1759-60 (emphasis in original).

In the Bullock case, the petitioner ("Bullock") was the trustee of a single trust (the "Life Insurance Trust"), created by his father for the benefit of Bullock and his four siblings. The Life Insurance Trust's only asset was a life insurance policy for the father's life. The terms of the Life Insurance Trust permitted Bullock, as trustee, to borrow funds, but only for certain limited purposes.

On three separate occasions from 1981 to 1990, Bullock borrowed money from the Life Insurance Trust. On one occasion, he borrowed money to repay a debt that was due and owed by the father's business—something the father specifically requested of Bullock. The second occasion involved Bullock's borrowing money from the Life Insurance Trust to purchase a mill with his mother, while the third occasion involved Bullock's borrowing money to buy real property for himself and his mother. On all three occasions, Bullock repaid the loans with interest.

Notwithstanding the fact that the trust had been repaid in full, in 1999, Bullock's brothers sued Bullock in Illinois state...