Defalcation

[1] The United States Supreme Court addressed the issue in 2013,[2] holding that "defalcation" in the context of the U.S. Bankruptcy Code [3] 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.

[5] The classic example of defalcation occurs when a trustee recklessly invests in trust funds and loses the money.

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.

[6] 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.