D.N.J. Bankruptcy Court Notes Split Re Mental State for Defalcation under Bankruptcy Code

Per In re Tamis, 398 B.R. 124 (Bkrtcy.D.N.J. Dec. 17, 2008):

Chase seeks a judgment determining that its “entire debt” is nondischargeable under § 523(a)(4) of the Bankruptcy Code “because Defendants committed defalcation while acting in a fiduciary capacity.”

Section 524(a)(4) provides, inter alia, that an individual debtor may not be discharged from a debt that arises from a fraud or defalcation while acting in a fiduciary capacity. . . . Like the phrase “fiduciary capacity,” the meaning of the term “defalcation” is a matter of federal law. Carlisle Cashway, Inc. v. Johnson (In re Johnson), 691 F.2d 249, 254 (6th Cir.1982)(“Federal, not state law controls our determination because it is the intent of Congress in using the word ‘defalcation’ that we seek to discover.”) Unfortunately, ascertaining the meaning of defalcation in § 523(a)(4) is hampered by the fact that the term is not defined in the Bankruptcy Code and there is no legislative history that illuminates its intended meaning. As a result of this lack of statutory guidance, the courts, including the Circuit Courts of Appeal, are split on the mental state required to establish defalcation or whether wrongful conduct is a necessary element.