Source Publication Abbreviation
Am. Bankr. L.J.
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
Byington, Jonathon S., "Debtor Embezzlement of Collateral" (2023). Faculty Law Review Articles. 209.