Editing Defalcation (section)

{{Short description|Misappropriation of funds by an entrusted  person}}
{{distinguish|defecation}}
In financial and legal usage, '''defalcation''' may involve [[misappropriation]] of funds by a person trusted with their charge; also, the act of misappropriation, or an instance thereof. A common example of defalcation would be [[Skimming (fraud)|skimming]]. 

The [[United States Bankruptcy Code]] specifically uses the term defalcation to describe a category of acts that taint a particular [[debt]] such that it cannot be discharged in [[bankruptcy]].<ref>US Bankruptcy Code, section 523(a)(4) (11 U.S.C. §523(a)(4)</ref> The [[Supreme Court of the United States |United States Supreme Court]] addressed the issue in 2013,<ref>Bullock v. BankChampaign, N.A. 133 S. Ct 1754 (2013)</ref> holding that "defalcation" in the context of the U.S. Bankruptcy Code <ref>Title 11 of the United States Code (11 U.S.C. §523(a)(4)</ref> requires proof of "a culpable state of mind… involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior."<ref>Bullock v. BankChampaign, N.A. 133 S. Ct 1754, at p. 1757 (2013)</ref>

In [[accounting]] terminology, especially with respect to the area of [[audit]], defalcation means a misappropriation of assets or theft of assets by employees or officers of a [[corporation]].

Defalcation occurs when a debtor commits a bad act while acting in a [[fiduciary]] capacity.<ref>''Collier on Bankruptcy'', 523.10 (15th ed. rev. 2007)</ref> The classic example of defalcation occurs when a [[trustee]] recklessly invests in trust funds and loses the money. If the beneficiary wins a judgment against the trustee, and the trustee files for [[bankruptcy]], the debt (the judgment) cannot be discharged in bankruptcy because the debt was the result of a defalcation.

Defalcation also applies when a debtor is acting in a fiduciary capacity. To constitute a defalcation, the conduct involves a degree of culpability that is greater than negligence, but the act does not need to rise to the level of a "[[fraud]]" under common law. Defalcation requires showing of conscious behavior or extreme recklessness.<ref>''In re Hyman'', 502 F.3d 61 (2d. Cir. 2007)</ref>

The term is used in legal proceedings other than bankruptcy to refer more generally to [[embezzlement]]; it is often used in the context of the [[title insurance]] business. A title agent who misuses funds intended to be used to close insured transactions is said to be involved in a defalcation. Many{{cn|date=July 2023}} title insurers have their own "defalcation units".

Sometimes defalcation has been pronounced for very small amounts, as under 2 £ and cents, even if it was claimed to be an error in handling change.