Though many unsecured debts may be discharged in a federal bankruptcy proceeding, some obligations, such as child support, student loans and certain tax debts, are difficult or impossible to discharge. Debts brought about by embezzlement or breach of fiduciary duty are also often among those that cannot be discharged. A recent opinion by the U.S. Supreme Court has provided some clarity as to when violation of fiduciary duty prohibits the discharge of a debt in bankruptcy.
In Bullock v. Bankchampaign, NA, (2013), the Supreme Court justices ruled that, for breach of fiduciary duty to prevent the discharge of debt, it must be shown that the debtor must have either known that his or her behavior was a violation of a fiduciary duty, or must have acted with gross recklessness as to whether or not the behavior was improper.
In the Bullock case, the party who sought to discharge the debt was the trustee of a trust created by his father. Over a period of years, he borrowed money against an insurance policy in the trust, using it for his own benefit. However, he always repaid the loans with interest. Nonetheless, he was sued by his brothers, who were beneficiaries of the trust, and was found liable for self-dealing. The jury rendered a verdict in favor of his brothers, and granted them a monetary award. The debtor could not pay the judgment and filed for bankruptcy protection.
In its ruling, the Supreme Court of the United States concluded that the debtor had been held to the wrong standard—that breach of fiduciary duty requires a knowledge of or reckless disregard for whether the loans were a breach of fiduciary duty. They found no evidence that the debtor had either.
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