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Borrowing Trouble

An update on the Bullock case

We first reported on this case a few months ago, following an appellate decision.  Here’s the update.  What began years ago in Illinois as a dispute among siblings over the administration of a trust created by their father and funded by his life insurance policy culminated recently in an opinion from the U.S. Supreme Court in Bullock v. BankChampaign,1 with serious implications for trustees everywhere.

Randy Bullock’s father created a trust in 1978 for the benefit of Randy and his four brothers.  The trust was funded with a single asset: the father’s life insurance policy.  Randy was named as trustee, although he himself didn’t find that out right away.  In fact, he and his brothers didn’t learn of the trust’s existence until years later.  The first that Randy heard about the trust was when his father approached him in 1981 about a loan from the trust.  The trust agreement was drafted such that it allowed the trustee to borrow funds from the insurance carrier against the life insurance policy’s value.  The insurer made such loans subject to a 6 percent interest rate. 

At his father’s request, Randy borrowed money from the trust to give to his mother to use in repaying a debt.  A few years later, he borrowed additional funds to purchase a mill with his mother.  And then he loaned himself and his mother money on a third occasion to buy a piece of real property.  As required by the insurance carrier, Randy repaid all of the money he borrowed with 6 percent interest.

But his brothers weren’t pleased.  Two of his brothers sued him in Illinois state court, alleging that he breached the fiduciary duties he owed to the trust as trustee and seeking to recoup all profits that Randy and his mother had made off of the borrowed funds. 


Trial Court Finds Self-Dealing

The trial court held that the loans were clear self-dealing and that Randy had breached his fiduciary duties to the trust even though he didn’t appear to have had a malicious motive in borrowing the money.  Although the trial court found it difficult to determine the actual monetary benefit to Randy from the loans, it entered a judgment against Randy requiring him to pay $250,000 to the trust and $25,000 to his brothers to cover their attorney’s fees.


Bankruptcy Proceedings

Unable to pay the judgment, Randy filed for bankruptcy.  In the bankruptcy proceedings, the new trustee opposed the discharge of Randy’s debt to the trust.  The bankruptcy court held that the debt wasn’t dischargeable based on a provision in the Federal Bankruptcy Code that prohibits an individual from getting a bankruptcy discharge of a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”2


U.S. Supreme Court Rules on Defalcation

Randy appealed the bankruptcy court’s decision. He eventually sought certiorari from the U.S. Supreme Court, asking the Court to decide whether defalcation applies in the absence of a finding of ill intent on the part of the fiduciary or evidence that there was an ultimate loss of trust principal as a result of the fiduciary’s actions.

As it turns out, what constitutes “defalcation” was a long unanswered question.  Although defalcation has been included as an exception to discharge under federal bankruptcy law since 1867, there’s never been a consensus as to what the term means.

In Bullock v. BankChampaign, the U.S. Supreme Court held that the requirements for a finding of defalcation should be similar to those for showing fraud.  As such, “where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term requires an intentional wrong.” And even when there’s no actual knowledge of wrongdoing, there can still be intentional wrongdoing if the trustee willfully ignores or disregards a substantial and unjustifiable risk.  Essentially, defalcation requires a knowing or reckless breach.


Lessons for Fiduciaries

What does this mean for fiduciaries?  Consider how the U.S. Supreme Court’s decision played out for Randy.  While each court along the road to the U.S. Supreme Court had noted that Randy didn’t borrow money from the trust with any malicious motive, the 11th Circuit had concluded, like the courts below it, that Randy was objectively reckless in ignoring the substantial and unjustifiable risk of engaging in self-dealing.  As such, the 11th Circuit held that judgment against him as a result of his breaches of fiduciary duty wasn’t dischargeable.  

The U.S. Supreme Court vacated that judgment and remanded for a determination as to whether Randy’s actions met the heightened standard of recklessness required for defalcation.  In doing so, the Court recognized that in the absence of fault, it would be hard to justify a broader exception to discharge, at least with respect to nonprofessional trustees like Randy, who administer small family trusts amid intra-family disputes.



1.Bullock v. BankChampaign, 133 S. Ct. 1754 (May 13, 2013)

2. 11 U.S.C. Section 523(a)(4). 

3. Bullock, 133 S. Ct. at 1759. 




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