In a corporate system based in part on the separation of ownership and control, the relationship between principals and agents is riddled with agency problems: Among them are potential conflicts of interest where agents may abuse their fiduciary position for their own benefit as opposed to the benefit of the principals to whom they are obligated. Delineating the agents’ fiduciary duties is thus a central focus of corporate law, and the dereliction of those duties often comes under scrutiny in the bankruptcy context.
Agents who incur debts through wrongdoing sometimes seek refuge in bankruptcy, hoping to avail themselves of the Bankruptcy Code’s provisions for discharge. To mitigate this potential abuse, Congress passed Section 523(a) of the Bankruptcy Code. That section excludes from bankruptcy discharge, inter alia, debts arising from certain breaches of fiduciary duty. However, the degree of culpability required to trigger nondischargeability of a debt is not defined in the statute, and thus has been left to the courts to construct. This lack of definition has led to a three-way circuit split regarding the types of behavior specifically the degree of wrongful intent that will result in a denial of discharge.
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