Bankruptcy Court Discharges Trustee’s Liability for Breach


Antonia Quevillon, then age 70 and in poor health, consulted attorney Carl Baylis about her estate plan. Mr. Baylis prepared a living trust for her, and arranged transfer of apartment buildings she owned into the trust’s name. The trust named Mr. Baylis himself as co-trustee—to serve along with Ms. Quevillon’s daughter Estelle Ballard.

Ms. Quevillon died shortly after the trust was executed. For the next twenty years Mr. Baylis and Ms. Ballard acted as co-trustees, managing the trust’s property.

A dispute arose between the trustees and the beneficiaries (other than Ms. Ballard) over whether the apartment buildings should be sold. Ms. Ballard resisted efforts to sell the buildings, probably at least partly because she lived in one of the apartments rent-free, and most of her living expenses were paid by the trust.

Although Ms. Ballard eventually agreed to sale of the properties, she did not cooperate with actual sales. Finally the other beneficiaries sued both trutees for breach of their fiduciary duties. The lawsuit ultimately resulted in a judgment against Mr. Baylis personally for almost $1 million; in addition, Mr. Baylis was ordered to repay the trust $27,000 he had used to defend and settle an earlier lawsuit against him by the beneficiaries.

Mr. Baylis responded to the judgment by filing bankruptcy. If successful, the bankruptcy proceedings would result in discharge of all his debts, including those owed to the beneficiaries of Ms. Quevillon’s trust.

Bankruptcy rules, however, permit the court to refuse to discharge debts for breach of fiduciary duty—without specifying precisely how to apply the exception. Mr. Baylis argued that his behavior was not a “defalcation,” the term actually used by the bankruptcy code, and the Bankruptcy Court agreed. It permitted his debt to the trust to be discharged.

The Massachusetts Federal District Court next heard the case, and it reversed the Bankruptcy Court determination, thereby denying Mr. Baylis relief from his debt to the trust and its beneficiaries. Mr. Baylis appealed again, and the First Circuit Court of Appeals permitted most of the debt to be discharged.

The appellate court distinguishes between non-dischargeable debts based on bad acts by the debtor (like embezzlement, or injuries from driving while drunk) and those based on public policy (like taxes and student loans). Finding that defalcation as a fiduciary is more like the former category, the court looked for evidence of either specific intent or recklessness on the part of Mr. Baylis. Finding none, it authorized discharge of most of his debt. Mr. Baylis, however, must still repay the $27,000 spent in defending the lawsuit against him. In re: Baylis, December 10, 2002.

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