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- Title
DEBTOR EMBEZZLEMENT OF COLLATERAL.
- Authors
Byington, Jonathon S.
- Abstract
This Article is about collateral and the "embezzlement" exception to discharge under § 523(a)(4) of the Bankruptcy Code. Under the Uniform Commercial Code, collateral is property subject to a security interest. The "embezzlement" exception to discharge requires a debtor fraudulently appropriate entrusted property. A debtor fraudulently appropriates a security interest when the debtor, in conjunction with circumstances indicating fraud, transfers collateral or proceeds of collateral to a transferee who takes free of the security interest. A secured party "entrusts" its security interest to a debtor in situations where a debtor has power or control over collateral. There is a split among bankruptcy courts on whether a security interest can satisfy the "property" requirement of embezzlement. Some courts hold that it does. Others conclude that when a debtor appropriates collateral, the security interest is merely a lien and is therefore insufficient to support a claim of embezzlement. The rationale is that the debtor is the owner of the collateral and a debtor cannot embezzle the debtor's own property. This Article challenges that premise by evaluating the history and nature of a Uniform Commercial Code security interest. It argues that a security interest satisfies the "property" requirement of embezzlement because it embodies the fundamental property interests of the right to transfer, the right to control, and the right to use. A debtor can embezzle a security interest. Debt related to such embezzlement should not be discharged.
- Subjects
COLLATERAL security; EMBEZZLEMENT; BANKRUPTCY; UNIFORM Commercial Code; DEBTOR &; creditor
- Publication
American Bankruptcy Law Journal, 2023, Vol 97, Issue 1, p135
- ISSN
0027-9048
- Publication type
Article