Defalcation

Defalcation

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.[1]

Defalcation occurs when a debtor commits a bad act while acting in a fiduciary capacity.[2] 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.[3]

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."

Etymology

Defalcation literally means "cutting off (with a falx "sickle").

The term is from Latin, and is analyzed as de- "off" + falx "sickle" + -tion "act of", hence literally "cutting off with a sickle". There is also a verb form, "defalcate" – see Wiktionary for further details.

References

  1. ^ US Bankruptcy Code, section 523(a)(4)
  2. ^ Collier on Bankruptcy, 523.10 (15th ed. rev. 2007)
  3. ^ In re Hyman, 502 F.3d 61 (2d. Cir. 2007)

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Look at other dictionaries:

  • défalcation — [ defalkasjɔ̃ ] n. f. • 1307; lat. médiév. defalcatio, de defalcare ♦ Action de défalquer. ⇒ décompte, déduction. Défalcation faite des frais, il vous reste tant. ● défalcation nom féminin (latin médiéval defalcatio, onis) Action de défalquer ;… …   Encyclopédie Universelle

  • defalcation — de·fal·ca·tion /ˌdē ˌfal kā shən, ˌfȯl , di ; ˌde fəl kā shən/ n [earlier, deduction, lessening, shortcoming, from Medieval Latin defalcatio discounting of debt, from defalcare to cut down, deduct, from Latin de away from + falc , falx sickle] 1 …   Law dictionary

  • defalcation — de‧fal‧ca‧tion [ˌdiːfælˈkeɪʆn ǁ ˌdɪːfælˈkeɪʆn, ˌdefl ] noun [uncountable] LAW when someone who has been trusted to take care of money steals it or uses it dishonestly * * * defalcation UK US /ˌdiːfælˈkeɪʃən/ noun [U] ► LAW the taking or… …   Financial and business terms

  • défalcation — DÉFALCATION. s. f. Déduction, retranchement. Sur le produit de cette terre, il faut faire la défalcation des faux frais …   Dictionnaire de l'Académie Française 1798

  • Defalcation — De fal*ca tion, n. [LL. defalcatio: cf. F. d[ e]falcation.] 1. A lopping off; a diminution; abatement; deficit. Specifically: Reduction of a claim by deducting a counterclaim; set off. Abbott. [1913 Webster] 2. That which is lopped off,… …   The Collaborative International Dictionary of English

  • Defalcation — Defalcation, lat., Abschneiden, Abziehen, Verkürzen; Verb: defalciren …   Herders Conversations-Lexikon

  • defalcation — mid 15c., from M.L. defalcationem (nom. defalcatio), from pp. stem of defalcare, from DE (Cf. de ) + L. falx, falcem sickle, scythe, pruning hook …   Etymology dictionary

  • defalcation — [dē΄fal kā′shən, dē΄fôlkā′shən] n. [ML defalcatio: see DEFALCATE] 1. embezzlement 2. the amount embezzled …   English World dictionary

  • defalcation — Including embezzlement and misappropriation but a broader term than either. Re Butts (DC NY) 120 F 966, 970. As used in the provision of the bankruptcy act excepting debts created by defalcation from the effect of a discharge, defalcation was… …   Ballentine's law dictionary

  • Defalcation — 1. Combining two or more debts to create one total debt. Defalcation can be legally carried out upon request or in death of one of the parties. 2. Theft or misuse of funds which were under the control of the defalcator but not owned by them.… …   Investment dictionary

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