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Eleventh Circuit Affirms That Judgment Against Trustee for Malfeasance Is Not Dischargeable - Bullock v. BankChampaign NA

February 21, 2012

Vincent Howard and our team of Ontario consumer bankruptcy lawyers have written several warnings on this blog about the fact that debts are not dischargeable when they are acquired through fraud. This includes legal judgments against the debtor that stem from fraud. Because most of these legal judgments make the debtor quite unsympathetic, however, we rarely see a case like Bullock v. BankChampaign NA, in which Randy Curtis Bullock lost the original lawsuit on what could be called a technical violation. Bullock, as a former trustee, violated the terms of his father's trust by lending money to his mother and taking out business loans; all were repaid. However, his brothers successfully sued him for self-dealing as trustee, leading to the bankruptcy. The Eleventh Circuit affirmed that this debt was not dischargeable.

Starting in 1978, Bullock was trustee of a trust holding only his father's life insurance policy, with Bullock and his four siblings as beneficiaries. The terms of the trust allowed him as trustee to withdraw money only to pay premiums on the policy or make payments to a beneficiary. Nonetheless, Bullock borrowed from it, first at his father's request, to lend money to his mother. He later borrowed to make investments leading to the purchase of a business and to allow him and his mother to buy real estate. All three debts were repaid. However, when his brothers learned of the trust, they sued Bullock for breach of fiduciary duty. In a 2002 ruling, the Illinois state court found Bullock liable despite lack of apparent malfeasance and awarded $285,000 in combined damages and attorney fees.

It also put constructive trusts on the property he had purchased and on his interest in the trust, and awarded them to BankChampaign. That bank has not allowed Bullock to sell his property to satisfy the judgment debt, Bullock said. Thus, he filed for Chapter 7 bankruptcy in an attempt to discharge the debt. The bank filed an adversary proceeding to find the debt non-dischargeable, and the bankruptcy court agreed. In an appeal, the district court said it was "convinced" that the bank was abusing its position of authority, but advised Bullock that an Illinois state court, rather than bankruptcy court, is the proper venue to argue trustee malfeasance.

Bullock's appeal to the Eleventh U.S. Circuit Court of Appeals argued that the bankruptcy court should have found the debt dischargeable, and that the bank had acted wrongfully. The court ultimately rejected both arguments. Under the bankruptcy code, it said, Bullock's actions do indeed constitute defalcation that would make the debt non-dischargeable. There is a split in the circuits on whether an innocent act can constitute defalcation; the Eleventh sided with those circuits requiring a show of recklessness. It then found that Bullock was reckless because he knew the loans were self-dealing. Thus, it upheld the finding of non-dischargeability. It also declined Bullock's argument that the bank had unclean hands due to its wrongful conduct with his property, and thus should not benefit from a non-dischargeability finding. Though it agreed with the district court that the bank's conduct was wrongful, it also agreed that Illinois state court is the correct forum. Thus, it upheld the lower courts.

The Fountain Valley personal bankruptcy attorneys at Howard Law, P.C., see cases of banks abusing their power quite often. Normally, however, this is in the context of a foreclosure, where a loan servicer does everything it can to confuse and delay any loan modification in order to drive the borrower into a lucrative-for-it foreclosure. Given that experience, and given the strong words used by the district court in this case, we suspect that this bank stands to profit more from holding up the judgment indefinitely than it does from allowing Bullock to pay the judgment and move on. In general, many types of legal judgments can be discharged in bankruptcy. As this case shows, there are exceptions, including judgments created by wrongdoing as well as judgments for things like income taxes and child support. To get the best possible advice on your situation, you should talk to Vincent Howard and our Vista individual bankruptcy lawyers for help.

If you're overwhelmed by debt and you're considering bankruptcy as a way to deal with it, Vincent Howard and the team at Howard Law can help. For a consultation, send us an email or call today at 1-800-872-5925.

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