In financial and legal usage, defalcation may involve

misappropriation In law, misappropriation is the unauthorized use of another's name, likeness, identity, property, discoveries, inventions, etc. without that person's permission, resulting in harm to that person. Another use of the word refers to intentional a ...

of funds by a person trusted with their charge; also, the act of misappropriation, or an instance thereof. A common example of defalcation would be skimming. The United States Bankruptcy Code specifically uses the term defalcation to describe a category of acts that taint a particular

debt Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...

such that it cannot be discharged in

bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...

. The

United States Supreme Court The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that turn on question ...

addressed the issue in 2013, holding that "defalcation" in the context of the U.S. Bankruptcy Code requires proof of "a culpable state of mind… involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior." In

accounting Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...

terminology, especially with respect to the area of

audit An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon." Auditing al ...

, defalcation means a misappropriation of assets or theft of assets by employees or officers of a

corporation A corporation or body corporate is an individual or a group of people, such as an association or company, that has been authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law as ...

. Defalcation occurs when a debtor commits a bad act while acting in a

fiduciary A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (legal person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, ...

capacity. The classic example of defalcation occurs when a

trustee Trustee (or the holding of a trusteeship) is a legal term which, in its broadest sense, refers to anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility for the ...

recklessly invests in trust funds and loses the money. If the beneficiary wins a judgment against the trustee, and the trustee files for

, the debt (the judgment) cannot be discharged in bankruptcy because the debt was the result of a defalcation. Defalcation also 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 In law, fraud is intent (law), intentional deception to deprive a victim of a legal right or to gain from a victim unlawfully or unfairly. Fraud can violate Civil law (common law), civil law (e.g., a fraud victim may sue the fraud perpetrato ...

" under common law. Defalcation requires showing of conscious behavior or extreme recklessness.''In re Hyman'', 502 F.3d 61 (2d. Cir. 2007) The term is used in legal proceedings other than bankruptcy to refer more generally to

embezzlement Embezzlement (from Anglo-Norman, from Old French ''besillier'' ("to torment, etc."), of unknown origin) is a type of financial crime, usually involving theft of money from a business or employer. It often involves a trusted individual taking ...

; it is often used in the context of the

title insurance Title insurance is a form of indemnity insurance, predominantly found in the United States and Canada, that insures against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage loans. Unlik ...

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". Sometimes defalcation has been pronounced for very small amounts, as under 2 £ and cents, even if it was claimed to be an error in handling change.

Etymology

The term is from Latin, and is analyzed as ''de-'' "off" + ''

falx The was a weapon with a curved blade that was sharp on the inside edge used by the Thracians and Dacians. The name was later applied to a siege hook used by the Romans. Etymology is a Latin word originally meaning 'sickle' but was later used ...

'' "sickle" + ''-atio'' "act of", hence literally "cutting off with a sickle". There is also a verb form, "defalcate".

References

{{Authority control United States bankruptcy law Legal terminology

Etymology

Further reading

References