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Defalcation Defined By SCOTUS; FAA Doesn't Preempt Your Tow Truck

By William Peacock, Esq. | Last updated on

Earlier this week, we took a look at the Monsanto case, which had major implications for patent law and our nation’s farming industry. We also hinted at the outcome of the Court’s two other unanimous decisions for this week, one dealing with bankruptcy and defalcation, and the other dealing with a shady tow truck lot and the limits of federal law preemption.

Defalcation Defined

It is undisputed that Randy Bullock was not acting in bad faith when he violated his fiduciary duty as trustee to family life insurance trust. On three occasions, he borrowed funds from the trust, and each time, he paid the trust back — with interest. Nonetheless, his brothers sued and won a judgment against him. He sought to discharge that debt in bankruptcy. The code, however, prevents discharge of debts resulting from defalcation.

Defalcation has been an exception to discharge in the Bankruptcy Code since 1867, yet we still have no clear idea what the term actually means. Obviously, it involves a breach of fiduciary duty, but does it require a culpable state of mind?

Justice Breyer's opinion traces the 146 years of confusion, including conflicting interpretations of the term, both issued in 1937, by Second Circuit Judges Augustus Noble Hand and his more famous cousin, Billings Learned Hand. Augustus wrote that "the misappropriation must be due to a known breach of the duty, and not to mere negligence or mistake." Learned hinted that the term "may have included innocent defaults."

We have conflicting cousin Hands here people. This is serious!

Consider the problem solved. The court first looked back to 1878, when they held that another discharge exemption, fraud, required a culpable state of mind. They also looked at the context of the statute, which includes embezzlement, fraud, and larceny. Each requires a culpable state of mind. Plus, if defalcation is limited to those with malicious intent or recklessness (as defined by the Model Penal Code), there still won't be overlap between the four terms.

The defalcation exemption, therefore, should not include innocent cases. Only intentionally wrongful conduct or reckless conduct where the fiduciary "consciously disregards (or is willfully blind to) a substantial and unjustifiable risk that his conduct will turn out to violate a fiduciary duty" will trigger the exemption.

Preempt That Truck!

The third case released this week involved a shady towing company that towed a man's car, then traded the car off without compensating the owner (and despite the owner's expressed desire to reclaim his car). The tow yard argued that the Federal Aviation Administration Authorization Act of 1994, specifically, 49 U. S. C. §14501(c)(1) preempted state consumer protection laws.

Though the FAAAA does preempt state carrier regulations, it is limited by the qualifier, "with respect to the transportation of property." The car owner's claims relate to the storage and disposal of his vehicle, not the actual transportation via towing. And though the statute defines transportation as "'services related to th[e] movement' of property, 'including arranging for ... storage [and] handling...,'"  the definition is limited to movement, arrangement, storage, and handling in the transportation context, not post-towing treatment of the property.

The case sounds quite limited (it's a freaking tow truck), but SCOTUSblog's Deepak Gupta argues that it could have a massive impact on the trucking and airline industry's cases dealing with consumer, employment, labor, and environmental laws.

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