The Collaborative International Dictionary of English v.0.48:

Defalcation \De`fal*ca"tion\, n. [LL. defalcatio: cf. F.
   d['e]falcation.]
   1. A lopping off; a diminution; abatement; deficit.
      Specifically: Reduction of a claim by deducting a
      counterclaim; set- off. --Abbott.
      [1913 Webster]

   2. That which is lopped off, diminished, or abated.
      [1913 Webster]

   3. An abstraction of money, etc., by an officer or agent
      having it in trust; an embezzlement.
      [1913 Webster]

WordNet (r) 3.0 (2006):

defalcation
    n 1: the sum of money that is misappropriated
    2: the fraudulent appropriation of funds or property entrusted
       to your care but actually owned by someone else [syn:
       embezzlement, peculation, defalcation,
       misapplication, misappropriation]

Moby Thesaurus II by Grady Ward, 1.0:

79 Moby Thesaurus words for "defalcation":
   abuse, abuse of office, arrear, arrearage, arrears, befoulment,
   break, conversion, corrupt administration, debasement, decline,
   default, defect, defectiveness, deficiency, deficit, defilement,
   delinquency, desecration, discontinuity, diversion, embezzlement,
   failing, failure, falling short, fault, fouling, gap, hiatus,
   imperfection, inadequacy, inferiority, insufficiency, interval,
   lack, lacuna, laxness, maladministration, malfeasance, malpractice,
   malversation, misapplication, misappropriation, misconduct,
   misemployment, misfeasance, mishandling, mismanagement,
   missing link, misusage, misuse, need, negligence, omission, outage,
   paucity, peculation, perversion, pilfering, pollution,
   poor stewardship, poverty, profanation, prostitution, remissness,
   scant, scantiness, scarceness, short measure, shortage,
   shortcoming, shortfall, slackness, slump, ullage, underage,
   violation, want, wantage



Bouvier's Law Dictionary, Revised 6th Ed (1856):

DEFALCATION, practice, contracts. The reduction of the claim of one of the
contracting parties against the other, by deducting from it a smaller claim
due from the former to the latter.
     2. The law operates this reduction, in certain cases, for, if the
parties die or are insolvent, the balance between them is the only claim;
but if they are solvent and alive, the defendant may or may not defalcate at
his choice. See Set off. For the etymology of this word, see Bracken. Law
Misc. 186; 1 Rawle's R. 291; 3 Binn. R. 135.
     3. Defalcation also signifies the act of a defaulter. The bankrupt act
of August 19, 1841, (now repealed), declares that a person who owes debts
which have been created in consequence of a defalcation as a public officer,
or as executor, administrator, guardian or trustee, or while acting in any
other fiduciary capacity, shall not have the benefit of that law.