By: Jessica McCorvey
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In In re McKenzie, the United States Court of Appeals for the Sixth Circuit held that a chapter 7 trustee was entitled to quasi-judicial immunity because his actions, even if wrongful or improper, “[did] not equate to a transgression of his authority.”[1] Kenneth Still (“Still”) was appointed as the chapter 7 trustee for Steve A. McKenzie’s bankruptcy case.[2] Still initiated an adversary proceeding against Grant, Konvalinka & Harrison (“GKH”), seeking the turnover of documents and records alleged to be a part of the debtor’s estate.[3] GKH successfully moved to dismiss Still’s avoidance action.[4] GKH then filed two adversary proceedings against Still and his attorneys, alleging malicious prosecution and abuse of process for initiating the suit against GKH.[5] GKH also moved for leave to file an action in state court based on the same grounds as the adversary proceedings.[6] The bankruptcy court dismissed the action against the trustee and denied the motion to file a state law complaint,[7] finding that Still was protected by quasi-judicial immunity.[8] The district court affirmed each of the bankruptcy court’s decisions in all respects.[9] GKH again appealed to the Sixth Circuit, arguing that Still was not protected by quasi-judicial immunity because (1) his actions were ultra vires and (2) that he acted without prior bankruptcy court approval.[10] The Sixth Circuit disagreed and held that Still acted within the scope of his authority and acted with prior bankruptcy approval by initiating an adversary proceeding against GKH.[11] The Sixth Circuit also disagreed with GKH’s assertion that Still’s actions were ultra vires since Still’s lawsuits were filed in an attempt to seize property that was not an asset of the estate[12] because the court found that Still was not attempting to seize the property without first obtaining a court order.[13]
It has long been established that a chapter 7 trustee is an officer of the appointing court, and therefore, a chapter 7 trustee is entitled to a form of quasi-judicial immunity from liability for actions carried within the scope of his official duties.[14] Indeed, courts have found that a chapter 7 trustee will only be personally liable for taking actions that were (1) willfully and deliberately taken in violation of his fiduciary duties, (2) negligently taken within his official capacity, or (3) ultra virus.[15]A chapter 7 trustee, however, will not be personally liable for breach of his fiduciary duties or negligence if he obtains court approval before taking any actions within the scope of his official duties.[16] In cases where a chapter 7 trustee’s actions were allegedly ultra vires,a court will examine whether the trustee acted outside of his official capacity or scope of his authority.[17] Thus far, courts have only applied the ultra vires exception to situations where a chapter 7 trustee has actually, and wrongfully, seized of property that is found not to be property of the estate without first obtaining a court order.[18]
McKenzie supports the principle that a chapter 7 trustee will be shielded from liability if he brings a turnover action on behalf of the estate. In questionable cases, the chapter 7 trustee may shield himself from personal liability for wrongful acts by obtaining a court order prior to engaging in the act.[19] Currently, nothing in the Bankruptcy Code establishes the standard of culpability necessary to find a chapter 7 trustee personally liable for misconduct.[20] As McKenzie demonstrates, chapter 7 trustees enjoy broad quasi-judicial immunity. As such, the only circumstance in which a chapter 7 trustee will be liable is when the trustee seizes physical property without a court order.[21] Therefore, if a chapter 7 trustee seeks a court order directing the third party to turn over property that is allegedly property of the estate, the trustee will enjoy the protections of quasi-judicial immunity, even if the turnover action is ultimately unsuccessful.
[1] In re McKenzie, 716 F.3d 404, 420 (6th Cir. 2013), quoting In re Cutright, 2012 WL 1945703 (Bkrtcy E.D.Va., 2012) at *8; Satterfield v. Malloy, 700 F.3d 1231, 1236 (2012).
[2] Id. at 409.
[3] Id.
[4] Id. at 410.
[5] Id. at 411.
[6] In re McKenzie, 497 B.R. 514, 517 (E.D. Tenn., 2013).
[7] Id. at 518; In re McKenize, 716 F.3d at 410 (finding Bankruptcy Court Judge Shelly Rucker also denied GKH’s motion to alter, amend, or set aside their motion for leave to state court to account for GKH’s later determination that Debtor sould be included as “indespensible party”).
[8] In re McKenzie, 497 B.R. at 523 (holding there was no indication that the chapter 7 trustee acted outside his authority and chapter 7 trustee was therefore entitled to quasi-judicial immunity).
[9] In re McKenize, 716 F.3d at 411.
[10] Id. at 413 (stating ultra vires occurs when chapter 7 trustee acts outside of authority).
[11] Id at 414.
[12] Id.
[13] Id. (referring to holding in Leonard v. Vrooman, 383 F.2d 556, 560 (9th Cir. 1967), where court explained proper course of action for chapter 7 trustee who wants to seize property is to go to court and obtain turnover order directing delivery of property not part of bankruptcy estate asset).
[14] In re Kashani, 190 B.R. 875, 883 (9th Cir. 1995) (providing chapter 7 trustee is entitled to immunity only if chapter 7 trustee is acting within scope of authority conferred on chapter 7 trustee by appropriate statute or the court); citing Bennett v. Williams, 892 F.2d 822, 823 (9th Cir. 1989); Mullis v. United States Bankruptcy Court for Dist. of Nev., 828 F.2d 1385, 1390-91 (9th Cir. 1987).
[15] Sherr v. Winkler, 552 F.2d 1367, 1375 (10th Cir. 1983) (describing two major areas where chapter 7 trustees have been found personally liable; breach of fudiciary duty and negligence).
[16] In re McKenzie, 716 F.3d at 414.
[17] Id.
[18] Id. at 415 (stating chapter 7 trustees have been most commonly found to have acted outside of their authority in seizing property found not to be property of estate).
[19] See, Theresa Pully Waldman, Chapter 7 Trustee in Trouble: Holding Bankruptcy Chapter 7 Trustees Personally Liable for Professional Negligence, 35 Conn. L. Rev. 525, 553 (Winter, 2003).
[20] Id. at 529.
[21] In re Mckenzie 716 F.3d at 417 (stating “trustee sued by third parties for actions taken in his official capacity on behalf of the estate and whithin the scope of [] authority granted by statute or court order, is entitled to quasi-judicial immunity”).
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