A defalcation is an amount of funds misappropriated by a person trusted with its charge; also, the act of misappropriation, or an instance thereof. The term is more specifically used by the United States Bankruptcy Code to describe a category of bad acts that taint a particular debt such that it cannot be discharged in bankruptcy. The United States Supreme Court addressed the issue in 2013, holding that "defalcation" in the context of the U.S. Bankruptcy Code 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."
In Accounting terminology, especially with respect to the area of Audit, Defalcation means a misappropriation of assets or theft of assets by employees or officers of a corporation.
Defalcation occurs when a debtor commits a bad act while acting in a fiduciary capacity. The classic example of defalcation is when a trustee recklessly invests trust funds and loses the money. If the beneficiary wins a judgment against the trustee, and the trustee files for bankruptcy, the debt (the judgment) cannot be discharged in bankruptcy because the debt was the result of a defalcation.
Defalcation, for example, applies when a debtor is acting in a fiduciary capacity. 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. Defalcation requires a showing of conscious behavior or extreme recklessness.
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. Many title insurers have their own "defalcation units."
The Collaborative International Dictionary
Defalcation \De`fal*ca"tion\, n. [LL. defalcatio: cf. F. d['e]falcation.]
A lopping off; a diminution; abatement; deficit. Specifically: Reduction of a claim by deducting a counterclaim; set- off.
That which is lopped off, diminished, or abated.
An abstraction of money, etc., by an officer or agent having it in trust; an embezzlement.
Douglas Harper's Etymology Dictionary
n. 1 (context legal English) The act of cancelling part of a claim by deducting a smaller claim which the claimant owes to the defendant. 2 embezzlement
Usage examples of "defalcation".
He had exactly the same feeling, differently polarized, that an amateur criminal must have who has committed his first defalcation and then realized that he has made a fatal slip and that he must be found out and that it will only be a matter of time before they come for him, that he has changed the whole course of his life in a blithe moment and now the machinery has got him and there is nothing he can do about it.
There would have been silence and mystery over the whole scandal, until the defalcations could be made good, but for Whadcoat's letter to the coroner and his dying words: 'The letter.
It all worked right, and I knew that I could make my defalcations good at the bank very soon.
There would have been silence and mystery over the whole scandal, until the defalcations could be made good, but for Whadcoat's letter to the coroner and his dying words: 'The letter .
He wants to go over all the Church accounts - in case of defalcations - that was the word he used.
Larkin is likely to figure once more in the courts about some very ugly defalcations in the cash of the Penningstal Mining Company, and that this time the persecutions of that eminent Christian are likely to take a different turn, and, as Tom said, with a gloomy shrewdness, to end in 'ten years penal.
He had been empowered to bring in outside accountants for surprise audits to nip any defalcations in the bud.
I sometimes wonder, as I open my morning paper, if nothing did happen in the twenty-four hours except crimes, accidents, defalcations, deaths of unknown loafers, robberies, monstrous births,--say about the level of police-court news.
He knew that grave misapplications had occurred, but he could not easily penetrate to the specific defalcation, and until he could do so, he had no case, and he knew it.
He felt sure that Pennington, perhaps by now in a desperate position, was going to try and obtain signatures from her which would cover his own defalcations.