Defalcation. The word does not trip lightly off the lips, as Thomas Byrne, a partner at Sutherland Asbill & Brennan in Atlanta, has learned in recent months. He said it often enough that "it was beginning to bother my friends."
But Byrne’s focus on the word, which describes a form of misconduct by a fiduciary, paid off. On May 13 the Supreme Court handed Byrne a 9-0 win in the first case he argued there, Bullock v. BankChampaign, which was all about defalcation.
Byrne represented Randy Bullock, the trustee of his father’s trust, established in 1978 for the benefit of his five children. Following loans Randy Bullock made and repaid from the trust, his brothers sued him in Illinois, claiming he had violated his fiduciary duty. The state court agreed and ordered him to make payments for fees and interest to the trust, even though it found that Bullock did not have a "malicious motive."
Bullock filed for bankruptcy in Alabama and sought a discharge of the court-imposed payments. BankChampaign, the new trustee, opposed the request and the Bankruptcy Court sided with the bank. The court found that the disputed funds were a "debt for defalcation" under bankruptcy law and could not be discharged. That ruling was upheld by the district court and the U.S. Court of Appeals for the 11th Circuit, which held that Bullock’s actions were a "known breach" of duty and "objectively reckless," and met the definition of defalcation.
The student-run Emory Law School Supreme Court Advocacy Clinic spotted the 11th Circuit decision and contacted Bullock’s Alabama lawyer, who welcomed help in appealing the loss to the Supreme Court. It was a good fit for the clinic, said founder Kedar Bhatia, in part because Emory publishes the only student-run bankruptcy journal, called the Emory Bankruptcy Developments Journal.
Unlike other Supreme Court clinics, Emory’s is not affiliated with a single law firm. It went to Sutherland and Byrne because of his expertise in bankruptcy litigation. The firm took on the case pro bono, and Byrne wrote the petition for certiorari, asking the high court to resolve a dispute among appeals courts over whether the definition of defalcation includes "ill intent."
"It was a little bit unusual as a pro bono case – not your usual immigration or Guantanamo case," said Byrne. "But we felt the client had been roughly treated by the legal system."
Before and after the court granted review, Byrne immersed himself in historical texts and casebooks to discern the meaning of the archaic term defalcation, which has roots in the Latin words for "lopping off." It was first included in a bankruptcy law in 1841. "I had heard of the word," said Byrne, because its meaning had been disputed "for a long time." It most often arises in cases involving actions by insurance agents, he said.
How did he prepare for his first argument at the court? "By overpreparing," Byrne replied – reading old bankruptcy cases and rounding up colleagues for moot court sessions. Emory students helped with the research. "We chased a lot of rabbits," Byrne said.
Byrne fielded rough questions at oral argument as he asserted that "extreme recklessness" was required to prove defalcation —#8212; a definition that would leave Bullock on the innocent side of the law. Some bankruptcy commentators came away predicting the court would rule against Bullock.
But the terse nine-page decision on May 15 by Justice Stephen Breyer came quickly and pleasantly for Byrne and the clinic students – some of who learned of the ruling while attending commencement ceremonies.
In the ruling, Breyer surveyed the dictionary meanings and judicial interpretations of defalcation, and found they were all over the lot. He gave Byrne what he asked for: a narrower definition of defalcation that requires intent and knowledge of wrongdoing. "Where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term requires an intentional wrong," wrote Breyer, adding that the standard would help "nonprofessional trustees, perhaps administering small family trusts."
The decision did not end the dispute, instead sending Bullock’s case back to the 11th Circuit with instructions to determine whether the heightened standard for proving defalcation was met by Bullock’s conduct. But Byrne says he is "very happy" with the ruling, which could encourage the bank to settle or to allow Bullock the discharge.
Byrne wants to argue at the high court again. "I certainly enjoyed the process, and hope it made me a better lawyer."
Tony Mauro can be contacted at firstname.lastname@example.org.