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24 Am. Bankr. Inst. L. Rev. 1 (2016)

handle is hein.journals/abilr24 and id is 1 raw text is: FIDUCIARY CAPACITY AND THE BANKRUPTCY DISCHARGE* JONATHON S. BYINGTON** ABSTRACT Bankruptcy law has fiercely competing policies. A primary one is the debtor's fresh start. Another is that discharge of debt is a selectively conferred privilege rather than an unlimited right. This latter policy is manifested in part by the Bankruptcy Code's exceptions to discharge. One exception involves a debt for... defalcation while acting in a fiduciary capacity.' In 2013, the Supreme Court addressed the meaning of the term defalcation and established a new, heightened mental standard based on the Model Penal Code's definition of recklessly.2 The meaning of the term fiduciary capacity is not clear. This Article makes three contributions. First, it compiles and evaluates the Supreme Court's jurisprudence on the meaning of fiduciary capacity in the bankruptcy setting. The most recent opinion on that term was issued in 1934 and provided limited guidance that was obscure and primarily in a negative form.3 Since the time of that decision, circuit and bankruptcy courts throughout the country have struggled to apply a consistent framework for determining whether modern legal relationships amount to a fiduciary capacity. The second contribution is the categorization of the circuit split into four separate approaches. The final contribution is an assessment of the adequacy of the current judicial approaches and the proposal of a new framework for determining if a relationship is a fiduciary capacity for purposes of the exception to discharge. This is done by exploring the methods used to identify a fiduciary relationship under non-bankruptcy law, examining the problems with using those methods in a bankruptcy context, and suggesting the Supreme Court's 2013 opinion on defalcation justifies a rebalancing of the judicial construction of the statutory terms defalcation and fiduciary capacity. 4 * C 2016 Jonathon S. Byington. I am grateful for the insightful comments and suggestions from Pippa Browde, Michelle Bryan, Larry Howell, Anthony Johnstone, Kristen Juras, Andrew King-Ries, Arthur Laby, Paul Miller, Samuel Panarella, Irma Russell, D. Gordon Smith, and Julian Velasco. I thank Samir Aarab for his research. I also thank the American Bankruptcy Institute Law Review editors and staff for their insight and editing help. ** Associate Professor, Alexander Blewett III School of Law at the University of Montana. 111 U.S.C. § 523(a)(4) (2012). 2 See Bullock v. BankChampaign, N.A., 133 S. Ct. 1754, 1759 (2013) (We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Thus, we include reckless conduct of the kind set forth in the Model Penal Code.). 3 See Davis v. Aetna Acceptance Co., 293 U.S. 328, 333 (1934) (providing that a fiduciary capacity cannot come from a debtor becoming chargeable ex maleficio). 4 See Bullock, 133 S. Ct. at 1759 61 (construing defalcation to entail intentional or reckless conduct).

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