Document Type

Article

Publication Date

Spring 2023

First Page

135

Volume

97

Issue

1

Source Publication Abbreviation

Am. Bankr. L.J.

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.

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