Trust Updates Archive
(Jan. 18, 2013 --Chicago, IL) -- Holding trust property "hostage" is not the question before the U.S. Supreme Court in Bullock v. BankChampaign. Nevertheless, federal courts agree with the trust beneficiary's assertion that the bank's refusal to sell trust property is the driving force behind this case. While federal courts agreed that the bank's position is questionable, they continue to rule against the beneficiary because the lawsuit turns on a different issue. They do, however, suggest that the beneficiary should sue the trustee in state court.
The issue in Bullock v. BankChampaign is: What degree of misconduct by a trustee constitutes "defalcation" under § 523(a)(4) of the Bankruptcy Code? According to federal court sources, the definition of the defalcation "has never been entirely clear."
Legal sources say the U.S. Supreme Court is expected to use the case as an opportunity to "uniform" the definition of fiduciary defalcation across all federal laws, including securities laws.
BankChampaign, located in Champaign, Illinois, most likely never thought its denial of a beneficiary's request would lead to a federal lawsuit, let alone one in which the U.S. Supreme Court could establish a uniform definition of defalcation across all federal laws.
The bank declined to comment on the case.
Federal courts have not minced words, however, regarding the bank's conduct.
Bullock asserts that the bank has denied his repeated requests to sell property it holds in trust for him. Proceeds from the sale would satisfy a state court judgment against the beneficiary. A state court found that Bullock improperly made loans from his father's trust when Bullock served as trustee. The loans were repaid prior to the filing of state litigation. Both state and federal courts agreed that the loans were self-dealing, but they also concluded that Bullock did not act maliciously or recklessly.
Without the proceeds from assets held in trust, Bullock contends he cannot satisfy the judgment against him. Therefore he filed for bankruptcy.
A federal district court in Alabama questioned the propriety of the bank's actions, noting that "holding collateral hostage in perpetuity is impermissible." However, the district court recognized the propriety of the bank's actions was not a basis for finding that the judgment debt could not be discharged under federal law. As a result, the district court concluded that while it was "convinced the bank is abusing its position of trust by failing to liquidate the property, this issue is not properly before this court, but rather should be brought by Bullock in an action in Illinois to consider the malfeasance of the [bank] trustee."
The Eleventh Circuit Court of Appeals agreed with the district court.
Bullock v. BankChampaign, No. 11-1518 (cert. granted, Oct. 29, 2012); No. 11-11686 (11th Cir. Feb. 14, 2012).
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