Linton, Matter of

• Decision Date: 17 March 1998
• Docket Number: No. 97-2214,97-2214
• Citation: 136 F.3d 544
• Parties: 39 Collier Bankr.Cas.2d 521, 32 Bankr.Ct.Dec. 177, Bankr. L. Rep. P 77,636 In the MATTER OF Betty A. LINTON, also known as Betty A. Lasiter, Debtor. APPEAL OF Betty A. LASITER and Richard L. Scharpf.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 544

136 F.3d 544

39 Collier Bankr.Cas.2d 521, 32 Bankr.Ct.Dec. 177,

Bankr. L. Rep. P 77,636

In the MATTER OF Betty A. LINTON, also known as Betty A. Lasiter, Debtor APPEAL OF Betty A. LASITER and Richard L. Scharpf.

No. 97-2214.

United States Court of Appeals Seventh Circuit.

Argued Jan. 6, 1998.

Decided Feb. 18, 1998.

Rehearing Denied March 17, 1998.

Carolyn A. Hallanger (argued), Plymouth, MI, for Appellant.

John B. Drummy (argued), Peter A. Velde, Kightlinger & Gray, Indianapolis, IN, for Appellee.

Betty A. Linton, Greenwood, IN, for Debtor.

Before POSNER, Chief Judge, and EASTERBROOK and EVANS, Circuit Judges.

POSNER, Chief Judge.

We are asked to decide in what circumstances a trustee in bankruptcy may be sued in state court for actions that he undertook in his role as trustee. Betty Lasiter filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code in the bankruptcy court in Indianapolis in 1993, and the court appointed Paul Gresk as trustee. Shortly after his appointment he filed an adversary action against Lasiter, her sons, and Richard Scharpf, claiming that a chain of transactions in which Lasiter had in 1989 sold her home to a trust for the sons and leased it back from the trust to live in, and had three years later married Scharpf who shortly afterward bought the home from the trust, constituted a fraudulent conveyance. The trustee hoped by the adversary action to recover the house for the debtor's estate. In 1994, however, he dropped the action. The bankruptcy proceeding was closed in June of the following year.

Eleven months later, Lasiter and Scharpf moved the bankruptcy court for leave to file a suit for malicious prosecution against Gresk in an Indiana state court, contending that Gresk had known from the outset that the adversary proceeding had no merit. Lasiter and Scharpf had already filed the suit, without waiting for leave to do so from the bankruptcy court; it has lain dormant pending final action on the motion for leave. The bankruptcy court denied the motion, the district court affirmed, and Lasiter and Scharpf appeal to us, arguing that leave to file is not required when the bankruptcy proceeding has ended, because then creditors can't be affected by the suit, but that if leave is required the bankruptcy court should have granted it.

The Bankruptcy Code nowhere states that someone wanting to sue a trustee in bankruptcy concerning actions taken by him in the course of his trusteeship must obtain the permission of the bankruptcy court. The requirement is assumed, however, in a provision of the Judicial Code, 28 U.S.C. § 959(a); see Thompson v. Texas Mexican Ry., 328 U.S. 134, 138, 66 S.Ct. 937, 941, 90 L.Ed. 1132 (1946); In re Lehal Realty Associates, 101 F.3d 272, 276 (2d Cir.1996); In re DeLorean Motor Co., 991 F.2d 1236, 1240-41 (6th Cir.1993); Austrian v. Williams, 216 F.2d 278, 285 (2d Cir.1954), waiving the requirement in circumstances not applicable to this case. Vass v. Conron Bros. Co., 59 F.2d 969 (2d Cir.1932) (L.Hand, J.). An unbroken line of cases, including Judge Hand's Vass decision, has imposed the requirement as a matter of federal common law. E.g., McNulta v. Lochridge, 141 U.S. 327, 330, 12 S.Ct. 11, 12, 35 L.Ed. 796 (1891) (railroad receivership); In re Lehal Realty Associates, supra, 101 F.3d at 276; In re DeLorean Motor Co., supra, 991 F.2d at 1240; In re Beck Industries, Inc., 725 F.2d 880, 886-87 (2d Cir.1984) (Friendly, J.). When the interpretation of federal statutes fails to yield specific answers to procedural issues, federal courts have implicit authority to supply the answers. The trustee in bankruptcy is a statutory successor to the equity receiver, and it had long been established that a receiver could not be sued without leave of the court that appointed him. Barton v. Barbour, 104 U.S. 126, 128-29, 26 L.Ed. 672 (1881); Chicago Title & Trust Co. v. Fox Theatres Corp., 69 F.2d 60, 62 (2d Cir.1934). McNulta, a railroad bankruptcy case, involved an equity receivership rather than a bankruptcy trustee, and there is no relevant difference between the two types of officer. Just like an equity receiver, a trustee in bankruptcy is working in effect for the court that appointed or approved him, administering property that has come under the court's control by virtue of the Bankruptcy Code. If he is burdened with having to defend against suits by litigants disappointed by his actions on the court's behalf, his work for the court will be impeded.

This concern is most acute when suit is brought against the trustee while the bankruptcy proceeding is still going on. The threat of his being distracted or intimidated is then very great, and some of the cases we have cited stress this. In this case, the suit and the motion for leave to file it came after the bankruptcy had been wound up. We cannot find any federal appellate court rulings on whether leave is required in such a case. But we think that it is. Without the requirement, trusteeship will become a more irksome duty, and so it will be harder for courts to find competent people to appoint as trustees. Trustees will have to pay higher malpractice premiums, and this will make the administration of the bankruptcy laws more expensive (and the expense of bankruptcy is already a source of considerable concern). Furthermore, requiring that leave to sue be sought enables bankruptcy judges to monitor the work of the trustees more effectively. It does this by compelling suits growing out of that work to be as it were prefiled before the bankruptcy judge that made the appointment; this helps the judge decide whether to approve this trustee in a subsequent case.

Yet these reasons alone might not be sufficient to warrant the extension (if that is how it should be regarded) of the leave-to-file requirement to suits filed after the winding up of the bankruptcy. For we are mindful of the Supreme Court's refusal in Ferri v. Ackerman, 444 U.S. 193, 100 S.Ct. 402, 62 L.Ed.2d 355 (1979), to grant appointed counsel in federal criminal cases immunity from malpractice suits by their clients, in the face of arguments similar to those in the preceding paragraph. See id. at 204-05, 100 S.Ct. at 409-10. At stake in the present case, however, is a concern that has no counterpart in Ferri, concern with the integrity of the bankruptcy jurisdiction. If debtors, creditors, defendants in adversary proceedings, and other parties to a bankruptcy proceeding could sue the trustee in state court for damages arising out of the conduct of the proceeding, that court would have the practical power to turn bankruptcy losers into bankruptcy winners, and vice versa. A creditor who had gotten nothing in the bankruptcy proceeding might sue the trustee for negligence in failing to maximize the assets available to creditors, or to the particular creditor. A debtor who had failed to obtain a discharge might through a suit against the trustee obtain the funds necessary to pay the debt that had not been discharged.

Of course principles of res judicata and the good faith of state courts would head off the worst consequences of the kind of divided jurisdiction over bankruptcy matters that we have just described. But...