Bullock v. BankChampaign, N.A.

In 1978, Randy Bullock’s (debtor) father established a trust for the benefit of his five children and made Randy the trustee. The single trust asset was a life-insurance policy on the father’s life. The trust instrument permitted Randy to borrow funds from the insurer against the policy’s value. Randy borrowed money from the trust in 1981, 1984, and 1990 and used the money for various purposes including purchasing property with and for his mother. Randy always repaid the borrowed money to the trust, plus interest. In 1999, Randy’s brothers sued Randy in Illinois state court, alleging that Randy had breached his fiduciary duties as trustee. The state court ruled in the brothers’ favor, holding that even though Randy had not borrowed money from the trust with a malicious motive, Randy had been involved in self-dealing. The court ordered Randy to pay the trust the benefits he had received from his breaches of fiduciary duty, imposed constructive trusts on Randy’s interests in the trust and the property he had purchased with borrowed money, and appointed BankChampaign, N.A. trustee of the constructive trusts. Randy subsequently filed for bankruptcy and attempted to obtain discharge of his state-court-imposed debts to the trust, but BankChampaign objected to the discharge. The bankruptcy court agreed with BankChampaign, finding that the debts were nondischargeable because they fell within the discharge exception in 11 U.S.C. § 523(a)(4) as debts for “defalcation while acting in a fiduciary capacity.” The district court and court of appeals affirmed. The court of appeals held that defalcation required an objectively reckless breach of fiduciary duty and that Randy’s conduct met that standard. The United States Supreme Court granted certiorari to determine the requisite mental state for defalcation for purposes of the Bankruptcy Code.