Defalcation is the misuse of money held in trust by a fiduciary. A fiduciary holds money of people in their bank accounts. The money does not belong to the fiduciary but is intended to be used for specific purposes. For instance, nowadays, you hear many ads on TV and radio of people who say that they will negotiate and settle your debts for a fraction of the outstanding balance. You are then asked to pay them a monthly amount that will be used to pay your creditors. These people are fiduciaries because when you pay them the monthly amount, that money belongs to you but it goes into their checking account to be used to pay your creditors. So, when they close shop and run away with your money, they have defalcated your funds. You will note that “Defalcation” has an “L”. Without the “L”, there is no fiduciary involved. You can tell your dog not to defacate inside your house. You do not tell your dog not to defalcate inside your house. You tell the fiduciary you are paying to settle your accounts not to defalcate with your money. §523)(a)(4) of the Bankruptcy code states “A discharge under section 727, 1141…does not discharge an individual debtor from any debt for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” The question that presents itself in this situation is whether or not the simple non-payment of claim by debtor fiduciary exempts the claim from discharge.

In Re Barksdale, the debtors were a father and son who owned a contracting business. The father owned six acres of land on which he had each of his sons build a model home. The idea was that building these model houses would give his sons experience in building houses. The finished houses would serve as samples for the development of the rest of the land. While the model homes were under construction, Mr. & Mrs. Simmons hired the father to build a house for them. They paid him $153,000. A lumber company supplied lumber and building materials for the model homes and the Simmons project. None of the money paid by the Simmons was used to pay the lumber company. Prior to the bankruptcy filing, the lumber company sued debtors for the unpaid bills. The son paid $35,000 to settle the lawsuit and signed a confession of judgment. A default judgment was entered against the father for $87,000. The lumber company then filed an adversarial complaint asserting that its claim was excepted from discharge by §523(a)(4) arguing that debtors held money paid to them by the Simmons for the construction projects in trust for the payment of labor and materials that the lumber company supplied.

《楊清泉律師專欄》DEFALCATION REQUIRES CONSCIOUS MISBEHAVIOR TO BE EXCEPTED(PART II)