Quasi-Judicial Immunity Shields Trustee from Personal Liability

 By Barry Z. Bazian

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Smith v. Silverman (In re Smith),[1] the Second Circuit held that a bankruptcy trustee could not be held personally liable for deciding not to pursue the estate’s only potential sources of recovery. In Smith, the debtor, a former president of Meadow Mechanical Corp., filed two suits in 1990: a dissolution action against the corporation’s shareholders and an action to recover on a promissory note against the corporation.[2] These actions were unresolved and had been left dormant for several years when Smith filed for bankruptcy in 1997.[3] A trustee was appointed in the case, but he decided not to prosecute the actions.[4] The debtor moved to have the Bankruptcy Court compel the trustee to pursue the claims, but the court denied the motion based on the trustee’s assertion that litigating the claims would not be worth the expense.[5] Subsequently, the bankruptcy case was closed and the trustee was discharged.[6] Over a year later, the debtor brought a motion to re-open the bankruptcy case to pursue a cause of action against the trustee, alleging that the trustee breached his fiduciary duties by negligently failing to pursue the actions.[7] The Bankruptcy Court denied the motion, and the District Court affirmed.[8]

On appeal, the Second Circuit concluded that the Bankruptcy Court “was well within its discretion” in denying the debtor’s motion to re-open.[9] The court explained that a “bankruptcy trustee is immune from suit for personal liability for acts taken as a matter of business judgment in acting in accordance with a statutory or other duty or pursuant to a court order.”[10] The court agreed with both lower courts that the trustee exercised sound business judgment in refusing to assume the expense of pursuing the claims.[11] Furthermore, the Court ordered the debtor and his counsel to show cause why they should not be sanctioned for pursuing their “meritless appeal.”[12]

Courts have explained that because trustees’ duties are likened to those of a judge, they enjoy quasi-judicial immunity.[13] Smith is an interesting case because it illustrates the extent of this immunity. Even if the trustee declines to pursue all of a debtor’s claims, and even if they are the trustee’s only potential source of recovery, that decision will be upheld as long as it was made as a matter of reasonable business judgment. This rule encourages competent individuals to serve as trustees because it permits them to “take risks and it provides dynamic leadership without fear of judicial hindsight.”[14] After all, if such immunity was not available, debtors could sue the trustee for any decision they questioned.

[14]  In re Dalen, 259 B.R. 586, 610 (Bankr. W.D. Mich. 2001) (citing In re Consumers Power Co. Derivative Litigation, 132 F.R.D. 455, 464 (E.D.Mich.1990). See also FDIC v. Castetter,184 F.3d 1040, 1044 (9th Cir. 1999)).