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Embezzlement in Massachusetts Bankruptcy Doesn’t Pay

In a well written decision by former Supreme Court Justice, David Souter, sitting by designation on the First Circuit Court of Appeals in Boston, Massachusetts, the Court held that Alexander Sherman, who filed bankruptcy after bilking investors out of $983,000, met the test for embezzlement and that therefore the debt to the victims could not be discharged.

The Court used common law for the definition of embezzlement: “the fraudulent conversion of the property of another by one who is already in lawful possession of it.” The decision helps us explain to Boston bankruptcy clients how the courts will interpret the meaning of Section 523, which lists all personal bankruptcy exceptions.
The decision is interesting reading as it discusses the common law notion of using entrusted property for unauthorized purposes making the Robin Hood analogy: ” not even Robin Hood could have found [Sherman’s company] Whitehorne, Sherman and the three luckless investors more deserving than the victims whom chance, or their own prudence, had spared from Whitehorne’s bad bet.” The Court found that Sherman “knowingly” violated the “terms of his authorization to use the property of another.”