Articles Posted in U.S. Supreme Court

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Petitioner’s father established a trust for the benefit of petitioner and his siblings, and made petitioner the nonprofessional trustee. The trust’s sole asset was the father’s life insurance policy. Petitioner borrowed funds from the trust three times; all borrowed funds were repaid with interest. His siblings obtained a state court judgment for breach of fiduciary duty, though the court found no apparent malicious motive. The court imposed constructive trusts on petitioner’s interests, including his interest in the original trust, to secure payment of the judgment, with respondent serving as trustee for all of the trusts. Petitioner filed for bankruptcy. Respondent opposed discharge of debts to the trust. The Bankruptcy Court held that petitioner’s debts were not dischargeable under 11 U. S. C. 523(a)(4), which provides that an individual cannot obtain a bankruptcy discharge from a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” The district court and the Eleventh Circuit affirmed. The Supreme Court vacated. The term “defalcation” in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior. The Court previously interpreted the term “fraud” in the exceptions to mean “positive fraud, or fraud in fact, involving moral turpitude or intentional wrong.” The term “defalcation” should be treated similarly. Where the conduct does not involve bad faith, moral turpitude, or other immoral conduct, “defalcation” requires an intentional wrong. An intentional wrong includes not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Where actual knowledge of wrongdoing is lacking, conduct is considered as equivalent if, as set forth in the Model Penal Code, the fiduciary “consciously disregards,” or is willfully blind to, “a substantial and unjustifiable risk” that his conduct will violate a fiduciary duty. View "Bullock v. BankChampaign, N. A." on Justia Law

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This case stemmed from the long-running dispute between Vickie Lynn Marshall and E. Pierce Marshall over the fortune of J. Howard Marshall II, a man believed to have been one of the richest people in Texas. Vickie married J. Howard, Pierce's father, approximately a year before his death. Shortly before J. Howard died, Vickie filed a suit against Pierce in Texas state court asserting that J. Howard meant to provide for Vickie through a trust, and Pierce tortiously interfered with that gift. The litigation worked its way through state and federal courts in Louisiana, Texas, and California, and two of those courts, a Texas state probate court and the Bankruptcy Court for the Central District of California, reached contrary decisions on its merits. The Court of Appeals subsequently held that the Texas state decision controlled after concluding that the Bankruptcy Court lacked the authority to enter final judgment on a counterclaim that Vickie brought against Pierce in her bankruptcy proceeding. At issue was whether the Bankruptcy Court Judge, who did not enjoy tenure and salary protections pursuant to Article III of the Constitution, had the statutory authority under 28 U.S.C. 157(b) to issue a final judgment on Vickie's counterclaims and, if so, whether conferring that authority on the Bankruptcy Court was constitutional. The Court held that the Bankruptcy Court had the statutory authority to enter judgment on Vickie's counterclaim as a core proceeding under section 157(b)(2)(C). The Court held, however, that the Bankruptcy Court lacked the constitutional authority under Article III to enter final judgment on a state law counterclaim that was not resolved in the process of ruling on a creditor's proof claim. Accordingly, the judgment of the Court of Appeals was affirmed.

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The Jicarilla Apache Nation's ("Tribe") reservation contained natural resources that were developed pursuant to statutes administered by the Interior Department and proceeds from these resources were held by the United States in trust for the Tribe. The Tribe filed a breach-of-trust action in the Court of Federal Claims ("CFC") seeking monetary damages for the Government's alleged mismanagement of the Tribe's trust funds in violation of 25 U.S.C. 161-162a and other laws. During discovery, the Tribe moved to compel production of certain documents and the Government agreed to the release of some documents but asserted that others were protected by, inter alia, the attorney-client privilege. At issue was whether the fiduciary exception to the attorney-client privilege applied to the general trust relationship between the United States and Indian tribes. The Court held that the fiduciary exception did not apply where the trust obligations of the United States to the Indian tribes were established and governed by statute rather than the common law and, in fulfilling its statutory duties, the Government acted not as a private trustee but pursuant to its sovereign interest in the execution of federal law. The reasons for the fiduciary exception, that the trustee had no independent interest in trust administration, and that the trustee was subject to a general common-law duty of disclosure, did not apply in this context. Accordingly, the Court reversed and remanded for further proceedings.