In re Kids Creek Partners, LP
| Citation | 248 BR 554 |
| Decision Date | 19 May 2000 |
| Docket Number | Bankruptcy No. 94 B 23947. |
| Parties | In re KIDS CREEK PARTNERS, L.P., Debtor. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
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David R. Herzog, Chicago, IL, for Movant or Plaintiff.
Janet S. Baer, Bryan R. Sup, Chicago, IL, Neal L. Wolf, Los Angeles, CA, for Respondent or Defendant
David A. Belofsky, Douglas M. Belofsky, Steve Shamash, Chicago, IL, Trustees.
This dispute arises from an agreement between David R. Herzog ("Trustee"), as Chapter 7 Trustee for the estate of Kids Creek Partners, L.P. ("Debtor"), and Leighton Holdings, Ltd. ("Leighton"), and from the subsequent filing by Trustee of an adversary proceeding against Leighton and Cecil McNab ("McNab") (an unsecured creditor and principal of Leighton).
Without obtaining prior leave of this Court, Leighton and McNab ("Plaintiffs") filed suit against Trustee and Trustee's counsel, Belofsky & Belofsky, P.C. ("Trustee's Special Counsel for the Leighton litigation") in the United States District Court for this District, alleging willful and deliberate breaches of fiduciary duty by those Defendants and malicious prosecution of their adversary suit against Leighton and McNab. Plaintiffs subsequently brought the present motion for leave of this Court to continue with their District Court action against Trustee and Special Counsel. For reasons discussed below, is has been found that Plaintiffs did not plead a prima facie case against Trustee and Special Counsel, and that policy considerations militate against exercise of discretion to permit such suit. Therefore, Plaintiffs' motion for leave to proceed in their suit against Trustee and Special Counsel is by separate order denied and they will be ordered to dismiss that unpermitted suit.
The extensive history leading up to the present motion has been reported in several opinions issued herein, and by reviewing District Judges and a panel of the Seventh Circuit Court of Appeals throughout a litany of litigation.1
From the history set forth in prior rulings, only those facts relevant to Plaintiffs motion for leave to proceed in their suit need be repeated here.
On December 5, 1994, an involuntary petition for bankruptcy relief was filed against Debtor under Chapter 7 of the United States Bankruptcy Code, Title 11 U.S.C. The order for relief was entered December 30, 1994. When the bankruptcy petition was filed, Debtor was involved in negotiations for sale of property to which Debtor held an option to purchase. At that time, to secure Debtor's obligations, Leighton was a lender that held a security interest in Debtor's rights in that property. Debtor was then in default to Leighton. On December 12, 1994, Munson Health Care and Grand Traverse County ("Purchasers"), the parties with whom Debtor was contracting to sell the land encumbered by Leighton's mortgage, moved for appointment of an interim trustee who could consummate the land sale contract. That motion was granted and David R. Herzog was appointed as interim trustee (later the Chapter 7 Trustee).
To complete the sale agreement, Purchasers demanded that Debtor obtain a release of Leighton's security interest in the property. Trustee negotiated a release of Leighton's lien on the property in exchange for (1) a lien on proceeds of the sale; and (2) Trustee's consent to an agreed order providing a superpriority administrative claim for any and all costs incurred by Leighton in the event that Trustee brought a contemplated adversary proceeding against Leighton in which Leighton prevailed. The agreed order memorializing these terms was entered by this court on December 30, 1994.
On February 15, 1995, Trustee filed an adversary complaint on behalf of the estate suing Leighton for equitable subordination and lender liability. On August 21, 1995, appointment of Special Counsel was approved herein for litigation of the adversary proceeding against Leighton.
Leighton obtained judgment in its favor on October 1, 1997. Herzog v. Leighton Holdings (In re Kids Creek Partners, L.P.), 212 B.R. 898 (Bankr.N.D.Ill.1997). Soon, thereafter, on October 14, 1997, Trustee filed a notice of appeal from this court's decision in the adversary proceeding. A portion of the appeal was dismissed by District Court order on March 17, 1999 and Leighton obtained affirmance in its favor on remaining appeal issues, September 9, 1999. Herzog v. Leighton Holdings, Ltd., 239 B.R. 497 (N.D.Ill.1999).
On September 10, 1997, Leighton filed its superpriority administrative claim. Despite the agreed order, Trustee opposed Leighton's claim. On May 18, 1998, this Court entered a judgment order allowing Leighton's superpriority claim and providing for its immediate payment. Trustee appealed first to the District Court and then to the Seventh Federal Circuit Court of Appeals, losing at each level. Herzog v. Leighton Holdings, Ltd. (In re Kids Creek Partners, L.P.), 233 B.R. 409 (N.D.Ill. 1999); In re Kids Creek Partners, L.P., 200 F.3d 1070 (7th Cir.2000).
Plaintiffs now seek leave to proceed in their pending District Court Case No. 99 C 6438 against Trustee and Special Counsel to recover from them personally (not from the estate) for asserted willful and deliberate breaches of fiduciary duties, and malicious prosecution.
Jurisdiction over this matter lies under 28 U.S.C. § 1334, and the matter is referred here by Local District Court General Rule 2.33(A). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(F), and venue lies under 28 U.S.C. § 1409.
Under the Barton Doctrine2, as applied by recent Seventh Circuit authority to bankruptcy matters, a party must seek leave of the bankruptcy court to file suit against a bankruptcy trustee seeking personal recovery from that person. In re Linton, 136 F.3d 544, 545 (7th Cir.1998). Before leave to sue a trustee can be obtained, the claimant must be able to plead a prima facie case against the trustee. In re Berry Publishing Services, Inc., 231 B.R. 676 (Bankr.N.D.Ill.1999) citing In re Kashani, 190 B.R. 875 (9th Cir. BAP 1995).
As an officer of the court, a trustee's exposure to personal liability is limited. A trustee "cannot be held personally liable unless he acted outside the scope of his authority as trustee, i.e. ultra vires, or breached a fiduciary duty that he owed as the trustee to some claimant fee." See In re Schechter, 195 B.R. 380, 384 (N.D.Ill.1996); and In re Weisser Eyecare, Inc., 245 B.R. 844 (Bankr.N.D.Ill.2000), and cases cited. In this Circuit, a trustee's personal liability for a breach of fiduciary duty extends only to "a willful and deliberate violation of his fiduciary duties." In re Chicago Pacific Corp., 773 F.2d 909, 915 (7th Cir.1985) citing Mosser v. Darrow, 341 U.S. 267, 272, 71 S.Ct. 680, 95 L.Ed. 927 (1951).
After filing their District Court suit, Plaintiffs have brought the present motion for leave to proceed with that suit against Trustee and Special Counsel. Prospective plaintiffs should obtain leave of the court in which the trustee was appointed before they may sue a bankruptcy trustee and his or her counsel in a nonappointing forum. See In re Linton, 136 F.3d 544, 545 (7th Cir.1998) and In re Weisser Eyecare, Inc., 245 B.R. 844 (Bankr.N.D.Ill.2000). Plaintiffs failed to petition this court for leave to sue prior to filing their pending suit, and filed the present motion after Trustee had moved the District Court to dismiss Plaintiffs' complaint. Their counsel explained that they risked tolling of applicable limitations, but that hardly justifies failure to apply here first in time for consideration before the tolling. Failure to follow the prescribed procedure requiring advance permission is itself grounds to deny the present motion. However, several other grounds are found to warrant denial, and it is appropriate to discuss them.
Because bankruptcy trustees serve an important function as officers of the court in the administration of bankruptcy cases, they are afforded limited personal immunity when operating pursuant to their authority and absolute personal immunity if operating directly in obedience to a court order. See Boullion v. McClanahan, 639 F.2d 213 (5th Cir.1981); Ziegler v. Pitney, 139 F.2d 595 (2nd Cir.1943). These Defendants were acting pursuant to their authority to pursue the litigation and defenses complained of, but were never ordered and required by this Court to do so. Therefore, they can assert only limited personal immunity under recognized standards now to be discussed.
A Seventh Circuit panel has held that a trustee may be "personally liable only for a willful and deliberate violation of his fiduciary duties," In re Chicago Pacific Corp., 773 F.2d 909, 915 (7th Cir.1985) citing Mosser v. Darrow, 341 U.S. 267, 272, 71 S.Ct. 680, 95 L.Ed. 927 (1951). Further, a trustee will generally not be held personally liable for mistakes in judgment where discretion is allowed to the trustee. In re Markos Gurnee Partnership, 182 B.R. 211, 219 (Bkrtcy.N.D.Ill. 1995) citing In re Hutchinson, 5 F.3d 750, 753 (4th Cir.1993).
The leave-to-sue requirement also protects trustees from excessive interference in the execution of their duties resulting from need to defend themselves in lawsuits filed by parties upset by their treatment in the trustee's bankruptcy...
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In re Morris Senior Living, LLC, 12–05364.
...Inc. 155 B.R. 180, 187 (Bankr.N.D.Ill.1993) citing In re Melenyzer, 140 B.R. 143 (Bankr.W.D.Tex.1992). As the court noted in In re Kids Creek Partners, L.P., it is not as clear “as to the extent these duties are owed by Special Counsel for the Trustee, but for purposes of this discussion it......