Breach Of Fiduciary Duty Makes Debts Nondischargeable In Bankruptcy

In the Chapter 7 bankruptcy of a debtor who served as the President and CEO of a company, the bankruptcy court ruled that the debtor could not discharge debt incurred after recklessly taking out loans from the company.

The details of the bankruptcy case:

The debtor in this case took out 75 loans from the company which he managed over the course of several years. These loans exceeded $200,000 and were used for his personal benefit.  Although there were strict regulations in place at the company governing the terms under which an employee (or manager) could borrow money from the company, the bankruptcy debtor flagrantly disregarded the rules according to the findings of the bankruptcy court.

Also, the bankruptcy court found that the debtor only made intermittent payments on loan interest and sometimes took out new loans from the company to pay the interest on previous loans.  The bankruptcy court concluded that the debtor’s excessive borrowing, violation of the company’s lending rules and his failure to repay the debt in a timely manner was a breach of his fiduciary duty.

The bankruptcy court also mentioned that since the debtor in this case had extensive experience in the banking industry, he understood the negative impact his behavior could have on the company.  Despite this knowledge, the bankruptcy debtor continued to excessively borrow from the company and willfully neglect to fairly repay the loans.

If a bankruptcy debtor incurs debt because he willfully failed to carry out his fiduciary duty, that debt cannot be discharged in bankruptcy.

(source: )