In Bullock v. BankChampaign, N.A., the U.S. Supreme Court agreed with our client’s interpretation of the term “defalcation” found among the exceptions to bankruptcy discharge. In ruling for our client, the Court rejected the holdings of all of the lower courts and the contrary arguments of, among others, the U.S. Solicitor General.
Our client Randy Bullock had been the trustee of a life insurance trust established by his father. Initially, at the direction of his father, Randy made loans from the trust to his mother and to a business in which Randy had an interest, and he made similar loans later, all of which were repaid to the trust with interest. Other beneficiaries of the trust contended, however, that these loans constituted self-dealing. A state court in Illinois agreed, entering a judgment against Randy for breach of fiduciary duty for more than $250,000.
Years later, Randy sought to discharge this debt through a Chapter 7 bankruptcy filing in Alabama. But the bankruptcy judge ruled that no discharge was available because the self-dealing constituted “defalcation,” an exception to discharge under the Bankruptcy Code. The district court and the U.S. Court of Appeals for the Eleventh Circuit, noting a circuit split on the definition of defalcation, agreed and affirmed.
The case was brought to us by the Emory Law School Supreme Court Advocacy Program after the Eleventh Circuit’s decision. Working with Emory students, we prepared and filed a petition for certiorari, which the U.S. Supreme Court granted. The case became even more challenging when the Solicitor General of the United States weighed in to support BankChampaign, the successor trustee, arguing that the defalcation exception to discharge should apply. To that point, the Solicitor General had been on the winning side of 13 consecutive bankruptcy cases in the Supreme Court. Fourteen bankruptcy professors also filed a brief in support of the Bank’s position. The briefing featured case law and historical background going back to the 1830s. After oral argument, the Supreme Court ultimately ruled 9-0 in our client’s favor, holding that the undefined term “defalcation” in the Bankruptcy Code, like the terms “larceny” and “embezzlement,” which appear close beside it, includes a culpable state of mind requirement. The Court remanded for further proceedings, and the case was resolved on remand with Randy obtaining his discharge.