What is Defalcation?

Defalcation refers to the illegal use, theft or misappropriation of funds by an individual in whose care the fund is kept. The act of theft, misuse or mismanagement of money by an official or a trustee that is in possession of the money. When an executive, a high official or a trustee misallocates funds which they are responsible for or fails to give appropriate account on the fund, defalcation has occurred Defalcation is also a form of embezzlement of money. However, embezzlement is used when it involves a lower-level employee who is entrusted with the funds, Defalcation on the other hand, is used when the act is perpetrated by a high-level official, executive or trustee.

How Does Defalcation Work?

Defalcation is commonly used by the United States Bankruptcy Code to describe theft, misappropriation and mismanagement of funds carried out by a high-ranking public official with whom the fund is entrusted. As addressed in 2013 by the Supreme Court in the United States, before an individual can be charged for defalcation, the individual must be guilty of the crime and there must be proof incautious act of the official in handling the funds he is entrusted with. This means that there must be an evident intention backing up the illegal act. Defalcation can also result from either culpability or negligence of the high-ranking official, trustee or executive involved.

Real World Example

It is important to note that actions relating to theft, misuse, misappropriation and mismanagement of funds that are perpetrated by executives or high may be considered to be defalcation. Any of these actions is however called embezzlement when committed by lower-level employees or functionaries. Below is a real world example of defalcation; A case on defalcation was filed in the U.S between Randy Bullock vs Bank Champaign in 1999. In this case, Bullock was sued for the defalcation of their fathers trust by the brothers. This was as a result of Bullock taking loans from the trust which he was made the trustee without the knowledge of the beneficiaries. In 2009 however, Randy Bullock filed for bankruptcy discharge a judgment debt from the 1999 lawsuit.

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