Last week I published a blog post on the US Supreme Court’s unanimous decision in Bullock v. BankChampaign, N.A., No. 11-1518 (May 13, 2013) (pdf), that focused on the Court’s application of the noscitur a sociis canon to the bankruptcy nondischargeability statute dealing with “defalcation in a fiduciary capacity.”
I write this second blog post discussing Bullock because I think the case will prove especially noteworthy for those who deal with the concept of “recklessness” in their civil practice.
Professor Ann Morales Olazábal authored an article entitled Defining Recklessness: Doctrinal Approach to Deterrence of Secondary Market Securities Fraud, 2010 Wis. L. Rev. 1415, in which she looked at attempts to define “recklessness” in tort, criminal, patent, securities, and employment law (among others) and concluded that “the single common thread among the recklessness standards employed in this mixed bag of legal inquiries may be their opacity and lack of susceptibility to any kind of uniform application.” Id. at 1422. In the federal securities context, she writes, “[a]s in other legal arenas, recklessness in the 10(b) context has nowhere been defined serviceably or with any real consistency.” Id. at 1424.
In What Is Securities Fraud?, 61 Duke L.J. 511, 534-36 (2011), Professor Sam Buell wrote that courts in the securities law context differ on whether recklessness should be defined by a “conscious disregard” or a “super-negligence” standard:
Scienter is a confusing word because its most natural meaning–and the one often associated with it–is knowledge. But the term is used, at least in the area of securities fraud, to mean simply level of fault. A statement like “scienter is required for liability” often is meant to do no more than rule out strict liability. In this form, scienter stands for a full menu of choices on the matter of awareness: knowledge, knowledge plus willful blindness, recklessness, gross negligence, or negligence.
Which level to choose is a function of the conception of fraud one wishes to pursue…. A regime centered on culpability and blameworthiness–in its focus on responsibility for acts of deception–is likely to require not only some scienter but a high level of awareness….
Whatever level of fault is chosen, it must be clearly specified. Specifying the level of fault is especially important with regard to recklessness because the law of fraud has often been unclear as to whether reckless fraud exists or should exist.
The most precise and demanding definition of recklessness, and the one most often used in criminal law, is the one found in the Model Penal Code: the conscious disregard of a substantial and unjustifiable risk–provided that the actor’s disregard of that risk grossly deviates from how a reasonable person would act in the same circumstances. Under this definition, recklessness is a form of knowledge. The actor is actually aware of the risk that inheres in the situation, as opposed to, in the case of a full knowledge requirement, having the practical certainty that it inheres. I call this the “conscious-disregard” form of recklessness.
As is well known, other formulations of recklessness treat it as a heightened form of negligence. In these formulations, recklessness does not generally require the actual, subjective disregard of a risk. As with negligence, the actor must have failed to advert to and act upon a risk–the difference from negligence being that the actor’s failure represents more than a lack of due care. The failure demonstrates a high level of social deviance. That deviance relates to the degree of the risk, the nature of the risk, or a combination of the two. I call this the “super-negligence” form of recklessness. (Emphasis added).
Perhaps, then, Bullock points a way out of this legal morass in regards to what constitutes reckless misconduct. As noted in my earlier post, in deciding what mental state would be required under Bankruptcy Code section 523(a)(4) for a debt owed by an individual debtor to be excepted from discharge because of the debtor’s “defalcation while acting in a fiduciary capacity,” the Court ultimately sided with the First and Second Circuits and adopted a scienter that embraces an “extreme recklessness” standard. (Op. at 9). In so doing, the Court agreed with the Second Circuit that adopting the scienter standard in the nondischargeability context “has the virtue of ease of application since the courts and litigants have reference to a robust body of securities law examining what these terms mean.” (Op. at 9) (quoting In re Hyman, 502 F.3d 61, 69 (2d Cir. 2007)).
What is most significant in the Court’s opinion for purposes of this blog post was the Court’s specifically tying actionable recklessness to “the kind set forth in the Model Penal Code … [where] the fiduciary ‘consciously disregards’ (or is willfully blind to) ‘a substantial and unjustifiable risk’ that his conduct will turn out to violate a fiduciary duty.” (Op. at 6). “That risk,” the Court held, ” ‘must be of such a nature and degree that, considering the nature and purpose of the actor’s conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor’s situation.’ ” (Op. at 6) (quoting ALI, Model Penal Code §2.02(2)(c)) (emphasis in opinion). Significantly, the Court then closed this discussion of actionable recklessness by cross-referencing Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), where the Court defined scienter for securities law purposes as “a mental state embracing intent to deceive, manipulate, or defraud.” Id. at 194 n.12. (Op. at 6).
>The Court’s juxtaposition of the Model Penal Code’s “gross deviation” standard of recklessness with scienter under the federal securities laws has not been embraced by the case law. My quick research in Section 10(b) cases found this connection between recklessness and the Section 2.02 of the Model Penal Code only twice since Hochfelder was decided in 1976. See In re Comshare Inc. Securities Litigation, 183 F.3d 542, 550 n.6 (6th Cir. 1999); and In re Baesa Securities Litigation, 969 F. Supp. 238, 241 (S.D.N.Y. 1997).
Bullock‘s defining scienter as including recklessness only under what Professor Buell calls “the most precise and demanding definition of recklessness … found in the Model Penal Code” should prove to be an important development not only in the context of the federal securities law, but in the context of all other federal civil laws where liability is based on one’s recklessness.
Thanks for reading!
© Steve Jakubowski 2013