Embezzlement, Theft or Breach of Fiduciary Duty
Any debt for embezzlement, theft, conversion, fraud or misuse of funds by a fiduciary can not be discharged in a Chapter 7, 11 or 13 case.
Conversion: Commonly defined as an unauthorized act that deprives an owner of personal property of the use, possession and/or enjoyment of the property without his consent. A conversion of property is purely a civil wrong, as opposed to theft, which is similar, but involves only criminal penalties. The elements of proof necessary to establish an unlawful conversion of property are:
Fiduciary Duty: A fiduciary duty is an obligation to act in the best interest of another party. For instance, a corporation’s board member has a fiduciary duty to its shareholders, a trustee has a fiduciary duty to the trust’s beneficiaries, and an attorney has a fiduciary duty to a client. A fiduciary obligation exists whenever the relationship with the client involves a special trust, confidence, and reliance on the fiduciary to exercise his discretion or expertise in acting for the client. The fiduciary must knowingly accept that trust and confidence to exercise his expertise and discretion to act on the client’s behalf. When a person agrees to act as a fiduciary for another, the law forbids the fiduciary from acting in any manner adverse or contrary to the interests of the client, or from acting for his own benefit in relation to the subject matter. The client is entitled to the best efforts of the fiduciary and the fiduciary must exercise all of the skill, care and diligence at his disposal when acting on behalf of the client. A person acting in a fiduciary capacity is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client.
Embezzlement: Commonly defined as the fraudulent conversion of another’s property by a person who is in a position of trust, such as an agent or employee.
Example. P.I. Joe is a personal injury lawyer. He settles a $50,000 personal injury claim for Client. He is in financial difficulty when he settles the case and uses the settlement funds to pay his personal bills. Unfortunately, P.I. Joe’s financial problems get worse. He contemplates filing for bankruptcy. P.I. Joe is guilty of converting (stealing) Client’s settlement funds. He can not discharge the $50,000 debt owed to Client in any bankruptcy case (Chapter 7, 11 or 13).