Defalcation happens when an agent with fudiciary duties misappropriates money. To clarify, a fiduciary duty is a relationship that involves handling of either money or property. The agent to whom the funds are entrusted acts in a fudiciary capacity. This agent may be a bank’s trust department or a company specializing in corporate trust.

By entrusting funds or property to this agent, the owner of these assets has to trust that the other party will act in his interests. A relationship of good faith and confidence must be maintained between both parties. Since defalcation is committed by either public or corporate officers who take advantage of their access to the owner’s funds for personal gain, such an act destroys this confidence.

Defalcation often occurs in the title in the title insurance industry. Closing an insurance transaction requires funds to be placed in escrow. The act of defalcation takes place when the title agent embezzles the aforementioned funds. More specifically, if funds placed in escrow are not used to pay off a loan according to escrow instructions, then this can be considered defalcation.

Defalcation may come about as a result of deliberate acts or recklessness. If a trustee makes careless or poorly informed investment decisions which result in the loss of funds, this can be considered defalcation, as well.

The classification of situations under criminal defalcation may vary from one country to another.