The Doctrine of Immunity as Applied to Bankruptcy Trustees

In Kirk v. Hendon (In re Heinsohn), the bankruptcy court addressed state law claims of malicious prosecution and defamation that the trustee defendant had removed to the bankruptcy court. 231 B.R. 48, 50 (Bankr. E.D. Tenn. 1999). The bankruptcy court reviewed the plaintiff’s motion for remand or abstention and the defendant trustee’s motion to dismiss. It granted the trustee’s motion to dismiss and denied the plaintiff’s motions. Id. The plaintiff alleged that the trustee initiated a criminal action against him for an improper purpose and without probable cause. Id. He sued the trustee for malicious prosecution following his acquittal from criminal charges of bankruptcy fraud and conspiracy to commit bankruptcy fraud.

After determining that it had jurisdiction over the plaintiff’s claims and that they constituted core proceedings, the bankruptcy court concluded that the trustee had absolute judicial immunity for his actions in making the criminal referral relating to the plaintiff. In a detailed and well-reasoned opinion, the bankruptcy court reviewed the evolution of absolute immunity for trustees acting within the scope of their duties as defined by the Bankruptcy Code. The bankruptcy court concluded that the trustee’s duty to report possible violations of federal law was analogous to a prosecutor, and he was entitled to immunity for such actions. In re Heinsohn, 231 B.R. at 62. The court explained:

. . . the reasoning which supports full immunity from malicious prosecution actions for prosecutors applies equally to trustees:

The risk of injury to the judicial process from a rule permitting malicious prosecution suits against prosecutors is real. There is no one to sue the prosecutor for an erroneous decision not to prosecute. If suits for malicious prosecution were permitted, the prosecutor’s incentive would always be not to bring charges.

Similarly, if trustees are subject to suit and liability for their actions in reporting possible criminal violations to the prosecuting authorities, no trustee would ever make a referral. No trustee would run the risk of damages being assessed against him for making a referral based on often incomplete information which produces no monetary benefit to the trustee since a trustee’s primary obligation is to collect and liquidate assets of the estate, not report crimes. Yet a trustee is in a unique position to discover possible bankruptcy crimes since his duties require him “to investigate the financial affairs of the debtor.” To expose a trustee to potential liability for complying with his obligations under 18 U.S.C. § 3057 would emasculate an important public function which a trustee is in a distinct position to fulfill.

In re Heinsohn, 231 B.R. at 63 (quoting Imbler v. Pachtman, 424 U.S. 409, 438, 96 S.Ct. 984 (1976) and 11 U.S.C. § 704(4)).

The bankruptcy court further acknowledged that other safeguards existed to protect against prosecutorial abuses, including “an investigation and independent review by the United States attorney” that serve to “lessen the possibility that an innocent party will be harmed by a misguided or even malicious trustee.” Id. at 63. After reviewing the landscape of analogous cases, the court concluded that:

[b]ased on the foregoing analysis that the function performed by a bankruptcy trustee in reporting possible criminal violations to the United States attorney is judicial in nature, that there are adequate safeguards to reduce the possibility of harm to an innocent party, and that subjecting a trustee to liability in this instance would deter the trustee from complying with his obligations under 18 U.S.C. § 3057, this court concludes that the defendant is protected by absolute immunity from the plaintiff’s malicious prosecution action.

In re Heinsohn, 231 B.R. at 64.

The court distinguished the case concerning a malicious prosecution claim involving a third party nonbeneficiary from a suit by a beneficiary of the bankruptcy trust involving a breach of the trustee’s fiduciary duty. Id. at 65-66.

The district court affirmed the bankruptcy court’s decision in Kirk v. Hendon (In re Heinsohn), 247 B.R. 237 (E.D. Tenn. 2000). The district court explained:

[t]he Court agrees with the bankruptcy court the trustee’s obligation to report perceived violations of federal law to the United States attorney and to cooperate with any ensuing investigation and prosecution is a task integral to the judicial process which must be immune from suits for money damages. Government officials must be free to execute their duties without the threat of lawsuits. If lawsuits, in particular malicious prosecution and defamation actions such as in this case, are allowed against trustees for making criminal referrals, trustees will be less inclined to perform these duties and will hesitate in the future to do so, thereby lessening the impact and defeating the purpose of the criminal referral statute.

Id. at 245.

In Lowenbraun v. Canary (In re Lowenbraun), the Sixth Circuit reviewed whether a trustee was protected by immunity from claims of libel, slander, abuse of process, wrongful use of civil proceedings and the tort of outrage brought against him by the debtor’s wife. 453 F.3d 314, 319 (6th Cir. 2006). The debtor’s wife initiated suit against the trustee defendant in state court, and the trustee removed the case to bankruptcy court. The plaintiff moved for remand or abstention, and the bankruptcy court denied the motion. It then granted summary judgment to the trustee on immunity grounds. The district court affirmed the bankruptcy court decision, and the plaintiff appealed.

Id. The Sixth Circuit reviewed cases pertaining to trustee immunity, including In re Heinsohn, and held that the trustee was entitled to immunity for both his judicial and extra-judicial statements regarding missing funds. Id. at 322-23. The Court noted:

[The trustee’s attorney’s] role as counsel for the trustee permitted him to investigate [the debtor’s wife’s] transfer and to recover assets properly belonging to the bankruptcy estate. [The trustee’s attorney’s] actions, moreover, benefitted the estate. . . . Any statements made in the course of [the trustee’s attorney’s] investigation and recovery effort were thus within the privilege. [The trustee’s attorney] is therefore entitled to immunity for his judicial statements.

Id. at 323.

The Sixth Circuit and courts within this Circuit have consistently presumed that the trustee is acting within the scope of his authority as a trustee. For example, in In re Heinsohn, the district court, in affirming the bankruptcy court’s opinion, noted that “[t]he Court presumes such acts were part of the trustee’s duties unless Plaintiff initially alleges at the outset facts demonstrating otherwise.” 247 B.R. at 246. In considering the district court’s presumption, the Sixth Circuit noted in In re Lowenbraun:

This presumption strikes us as persuasive. Congress intended for the Bankruptcy Code to be comprehensive and for the federal courts to have exclusive jurisdiction over bankruptcy matters. A presumption in favor of the trustee, counsel, or other bankruptcy official that they were acting within the scope of their duties prevents a plaintiff . . . from making unsupported allegations in an attempt to defeat Congress’s goal of providing exclusive federal jurisdiction over bankruptcy matters.

453 F.3d at 322. See also, Unencumbered Assets Trust v. Hampton-Stein (In re National Century Fin. Enterpr., Inc.), 426 B.R. 282, 292 (Bankr. S.D. Ohio 2010).

Courts in other jurisdictions have also determined that bankruptcy trustees are entitled to immunity when performing duties outlined for them in the Bankruptcy Code. For example in Traina v. Blanchard, the district court concluded that:

[c]ourt appointed bankruptcy trustees are among those who play a fundamental role in the administration of the judicial process and therefore are entitled to immunity. “Judicial immunity not only protects judges against suit for acts done within their jurisdiction, but also spreads outward to shield related public servants, including . . . trustees in bankruptcy . . . .” Judicial employees enjoy absolute immunity for quasi-judicial acts done in the course of their employment. Quasi-judicial acts include those which play a fundamental role to the judicial process. . . . The role of a Chapter 7 bankruptcy trustee, appointed by a bankruptcy judge, is fundamental to the administration of the estate. A Chapter 7 trustee performing the required functions established by the Bankruptcy Code, [the trustee] is cloaked with the protection given to judicial employees carrying out duties in the scope of their employment.

No. 97-0348, 1998 WL 483485, at * 2 (E.D. La. Aug. 13, 1998).

In Picard v. Chais et al. (In re Bernard L. Madoff Investment Securities, LLC), the bankruptcy court addressed the trustee’s motion to dismiss counterclaims of tortious interference with contract, tortious interference with a business relationship, conversion, and a Fifth Amendment claim asserted by the defendants. 440 B.R. 282, 286 (Bankr. S.D.N.Y. 2010). The bankruptcy court concluded that the counterclaims “must be dismissed because the Trustee sent the Letter [warning of possible violations of the automatic stay] in good faith within the scope of his duties, and is therefore immune from liability.” Id. at 290. In its analysis, the bankruptcy court noted that “[i]n the Second Circuit, a bankruptcy trustee is a quasi-judicial official `immune from suit for personal liability for acts taken as a matter of business judgment in acting in accordance with statutory or other duty or pursuant to court order.'” Id. (quoting Lebovits v. Scheffel (In re Lehal Realty Assoc.), 101 F.3d 272, 276 (2d Cir. 1996)). In addressing whether the trustee was only protected by qualified immunity pursuant to an exception to the immunity doctrine in the Second Circuit, the bankruptcy court explained the policy behind trustee immunity. In re Bernard L. Madoff Investment Securities, LLC, 440 B.R. at 292. It noted:

. . . sound policy counsels in favor of providing immunity for trustees in cases such as this one. A trustee should be shielded from liability for his lawful exercises of judgment and discretion, even if, in hindsight, such interpretations of law were incorrect. If immunity applied only to decisions that turned out to be proper, there would be no need for the doctrine of immunity. Here, a determination that the Trustee can be held liable would deter future trustees for fear they could be held liable for every discretionary decision. . . . The Court cannot impose liability on the Trustee for carrying out his duties in good faith and based on his business judgment.

Id. at 292-93 (emphasis added).

See also, Weissman v. Hassett, 47 B.R. 462, 467 (D.C.N.Y. 1985) (noting that trustee report “furthered an important public purpose and should not render him subject to suit, particularly since he acted pursuant to court order and statutory authorization”); Walton v. Watts (In the Matter of Swift), 185 B.R. 963, 970 (Bankr. N.D. Ga. 1995) (concluding that “case law has firmly established that, as an arm of the bankruptcy court, the Trustee merits . . . quasi-judicial immunity. Accordingly, the law will absolutely immunize the Trustee for his conduct, unless he has acted in the clear absence of any authority regarding this matter”).

In Weissman the plaintiffs sought a finding of personal liability of the trustee for more than $25 million in damages. Weissman, 47 B.R. at 467. The district court determined that the trustee was immune from personal liability and noted that “[e]ven a remote prospect of personal liability of such a magnitude could not help but lessen the vigor with which future reorganization trustees will pursue their obligations to uncover wrongdoing and report on potential claims held by a bankrupt estate.” Id. The court also noted that the Bankruptcy Code contained several safeguards to prevent a trustee’s abuse of his authority. Id. (citing 11 U.S.C. § 107(b)(2); 11 U.S.C. § 326; 11 U.S.C. § 324). As one bankruptcy court has noted, “[s]uits against trustees and their counsel should not be a substitute for Rule 9011, and indeed such lawsuits would usually impose an unnecessary and unwarranted burden in cases in which a meritorious Rule 9011 motion could be brought.” In re Kids Creek Partners, L.P.,248 B.R. 554, 564 (Bankr. N.D. Ill. 2000).

Extension of Doctrine of Trustee Immunity to Counsel for Trustee

In In re Heinsohn the bankruptcy court explained that the reasoning behind extending immunity to U.S. trustees, “`is easily extended to the front-line bankruptcy trustee.'” In re Heinsohn, 231 B.R. at 63 (quoting Ralph C. McCullough, Trustee Liability: Is There Enough Protection For These “Arms of the Court?” 103 COM. L.J. 123, 138 (Summer 1998)). Indeed, the Sixth Circuit has held that status as counsel for a trustee does not alter immunity analysis: “so long as `they act at the direction of the trustee and for the purpose of administering the estate or protecting its assets,’ counsel and other court-appointed officers who represent the estate `are the functional equivalent of the trustee.'” In re Lowenbraun,453 F.3d at 322 (quoting Allard v. Weitzman (In re DeLorean), 991 F.2d 1236, 1241 (6th Cir. 1993)).