1. Misappropriation of money or funds held by an official, trustee, or other fiduciary
2. The sum misappropriated
This word dates to the late 15th century from Middle Latin defalcationem from the past participle stem of defalcare, which is a combination of de + falx/falcem ("sickle, scythe, pruning hook").
This term is specifically used in the United States Bankruptcy Code to describe certain bad acts connected to a debt that make that debt stand, even if bankruptcy is declared. Those 'bad acts' usually involve behaving recklessly with other peoples' money (while acting in a fiduciary capacity). Defalcation is also used in some legal proceedings to mean "embezzlement," particularly in the context of title insurance.
|This guy's not involved (source)|