Source: https://bernsteinlaw.com/publications-list/to-fraud-or-not-to-fraud-that-is-the-question/
Timestamp: 2019-04-22 06:07:09+00:00

Document:
By Kirk B. Burkley, Esq.
Published by the American Bankruptcy Institute’s “ABI Journal.” To view the printed article, CLICK HERE.
In early 2017, the U.S. Bankruptcy Court for the District of Massachusetts issued a lengthy opinion regarding this standard. Post-Bullock, courts have analyzed various subjective and objective elements to apply the Bullock test to determine whether the nondischargeability standard was met. This article vets the opposing views regarding whether the “reckless” standard is, in fact, the appropriate standard.
Although “fraud or defalcation while acting in a fiduciary capacity” precedes embezzlement and larceny in § 523 (a)(4), to impute a specific intent requirement would render other portions of § 523 — namely, § 523 (a)(2)(A) — superfluous. Section 523 (a)(2)(A) includes “actual fraud” as one of the grounds for declaring a debt nondischargeable. For a debt resulting from actual fraud to be nondischargeable, the underlying conduct must involve moral turpitude or an intentional wrong,9 which is why most courts have refused to recognize constructive fraud as a ground for denying discharge of a debt.
A fiduciary is a person who is required to act for the benefit of another person on all matters within the scope of their relationship, one who owes another the duties of good faith, trust, confidence and candor.10 Fiduciaries are often vested with broad powers and entrusted to make sound decisions that will benefit the constituents. It is clear that Congress intended to hold fiduciaries to a higher standard because of this special status. It would be nonsensical for Congress to have intended the phrase “fraud or defalcation” to require the same culpability as actual fraud. This would be akin to suggesting that a surgeon who recklessly injures a patient while attempting to perform a complex surgery while impaired is not responsible for the injury, because the surgeon never intended to injure the patient. Since debts incurred through larceny or embezzlement (i.e., actual fraud) are nondischargeable regardless of whether a fiduciary relationship existed, it would serve no real purpose for Congress to require the same culpability requirement in § 523 (a)(4).
When reading § 523 in its entirety, it is readily apparent that Congress did not intend for the same level of culpability to apply for §§ 523 (a)(2)(A) and 523 (a)(4). Had that been its intent, Congress would not have separated “actual fraud” in § 523 (a)(2)(A) from “fraud or defalcation while acting in a fiduciary capacity” in § 523 (a)(4). These are the exact reasons why the Supreme Court and Judge Bailey got it right when rendering their decisions in Bullock and Whittaker, et al. v. Whittaker, respectively, and other courts should follow suit when faced with similar facts.
Reprinted with permission from the ABI Journal, Vol. XXXVII, No. 1, January 2018.
To view the Consumer Counterpoint article associated with this feature, CLICK HERE.
4 RadLAX Gateway Hotel LLC v. Amalgamated Bank, 566 U.S. 639, 645, 132 S. Ct. 2065, 2070-71 (2012) (citing Kawaauhau v. Geiger, 523 U.S. 57, 62, 118 S. Ct. 974, 140 L. Ed. 2d 90 (1998), for its proposition that the Supreme Court is hesitant to adopt an interpretation of a congressional enactment that renders superfluous another portion of the same law).
5 Hamilton v. Lanning, 560 U.S. 505, 518, 130 S. Ct. 2464, 2474 (2010) (discussing canon of statutory interpretation that specific governs general) (other citations omitted).
6 569 U.S. 267, 133 S. Ct. 1754 (2013) (“Bullock”).
7 Doc. No. 132 Adv. Pro. No. 14-1017, Bankr. No. 13-15310 (Bankr. D. Mass. Jan. 17, 2017).
8 Bullock, 133 S. Ct. at 1759.
9 Husky Int’l Elecs. Inc. v. Ritz, 136 S. Ct. 1581, 1586 (2016) (citation omitted).
10 See Black’s Law Dictionary 524 (8th ed. abridged 2005).

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