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

The court agreed with the lumber company that the father had a fiduciary duty as to the Simmon’s house, but ruled that the lumber company did not prove that he had committed a defalcation. In the 2nd Circuit, defalcation under §523(a)(4) requires a showing of conscious misbehavior or extreme recklessness. “By requiring courts to make appropriate findings of conscious misbehavior or recklessness in the course of dischargeability litigation, the standard we adopt today insures that the harsh sanction of non-dischargeability is reserved for those who exhibit some portion of misconduct. The 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 now shown to be sufficiently culpable,” the court said. Here, the plaintiff lumber company proved nothing more than the fact that debtor failed to pay plaintiff’s claim and failed to account for the money held in trust.

What would constitute conscious misbehavior or recklessness? If debtor had used the money to gamble in Atlantic City or had used the money to build his own house or had spent the money for traveling around the world, there would clearly be conscious misbehavior or recklessness, exempting the claim from discharge.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.