Defalcation
Encyclopedia
A defalcation is an amount of funds misappropriated by a person trusted with its charge; also, the act of misappropriation, or an instance thereof. The term is more specifically used by the United States Bankruptcy Code to describe a category of bad acts that taint a particular debt
such that it cannot be discharged in bankruptcy
.
Defalcation occurs when a debtor commits a bad act while acting in a fiduciary capacity. The classic example of defalcation is when a trustee recklessly invests trust funds and loses the money. If the beneficiary successfully wins a judgment against the trustee, and the trustee files for bankruptcy, the debt (the judgment) cannot be discharged in bankruptcy because the debt was the result of a defalcation.
Defalcation only applies when a debtor is acting in a fiduciary capacity. To constitute a defalcation, the conduct involves a degree of culpability that is greater than negligence, but the act does not need to rise to the level of a "fraud" under common law. Defalcation requires a showing of conscious behavior or extreme recklessness.
The term is used in legal proceedings other than bankruptcy to refer more generally to embezzlement
; it is often used in the context of the title insurance
business. A title agent who misuses funds intended to be used to close insured transactions is said to be involved in a defalcation. Many title insurers have their own "defalcation units."
"sickle" + -tion "act of", hence literally "cutting off with a sickle". There is also a verb form, "defalcate" – see Wiktionary for further details.
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
such that it cannot be discharged in bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
.
Defalcation occurs when a debtor commits a bad act while acting in a fiduciary capacity. The classic example of defalcation is when a trustee recklessly invests trust funds and loses the money. If the beneficiary successfully wins a judgment against the trustee, and the trustee files for bankruptcy, the debt (the judgment) cannot be discharged in bankruptcy because the debt was the result of a defalcation.
Defalcation only applies when a debtor is acting in a fiduciary capacity. To constitute a defalcation, the conduct involves a degree of culpability that is greater than negligence, but the act does not need to rise to the level of a "fraud" under common law. Defalcation requires a showing of conscious behavior or extreme recklessness.
The term is used in legal proceedings other than bankruptcy to refer more generally to embezzlement
Embezzlement
Embezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted....
; it is often used in the context of the title insurance
Title insurance
Title insurance is a form of indemnity insurance predominantly found in the United States which insures against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. Title insurance is principally a product developed and sold in the...
business. A title agent who misuses funds intended to be used to close insured transactions is said to be involved in a defalcation. Many title insurers have their own "defalcation units."
Etymology
The term is from Latin, and is analyzed as de- "off" + falxFalx
Falx is a Latin word originally meaning sickle, but was later used to mean any of a number of tools that had a curved blade that was sharp on the inside edge such as a scythe...
"sickle" + -tion "act of", hence literally "cutting off with a sickle". There is also a verb form, "defalcate" – see Wiktionary for further details.