Defalcation

A defalcation is an amount of funds misappropriated by a person trusted with its charge; also, the act of misappropriation, or an instance thereof. The term is more specifically used by the United States Bankruptcy Code to describe a category of bad acts that taint a particular debt such that it cannot be discharged in bankruptcy. The United States Supreme Court addressed the issue in 2013, holding that "defalcation" in the context of the U.S. Bankruptcy Code 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."