LeBlanc v. Salem

• Court: Court of Appeals for the First Circuit
• Decided: November 2, 1999
• Docket: 99-1170
• Status: Published

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No. 99-1170



            IN RE MAILMAN STEAM CARPET CLEANING CORP.,



                             Debtor.

                       ____________________



                         GARY R. LEBLANC,



                            Appellant,



                                v.



                 RICHARD P. SALEM, TRUSTEE, ETC.,



                            Appellee.


APPEAL FROM THE UNITED STATES DISTRICT COURT



                FOR THE DISTRICT OF MASSACHUSETTS



         [Hon. Edward F. Harrington, U.S. District Judge]


Before



                      Selya, Circuit Judge,

                                

                 Bownes, Senior Circuit Judge,

                                

                   and Lipez, Circuit Judge.


Gary L. LeBlanc, pro se ipso, for appellant.

     Jon C. Cowen, with whom George A. Berman and Posternak,

Blankstein & Lund, L.L.P. were on brief, for appellee.


November 2, 1999


SELYA, Circuit Judge.  Acting in his capacity as a

bankruptcy trustee, Richard P. Salem sought and received court

approval to abandon certain property of the bankruptcy estate.  A

disgruntled creditor, Attorney Gary R. LeBlanc, filed an adversary

proceeding against Salem, alleging negligence and breach of

fiduciary duty.  The bankruptcy court converted Salem's ensuing

motion to dismiss into a motion for summary judgment and granted it

on the ground that Salem could not be held personally liable

because he had acted pursuant to a court order.  On appeal, the

district court endorsed this ruling.  LeBlanc presses forward.  We

reject Salem's suggestion that the lower courts lacked jurisdiction

to entertain LeBlanc's quest, but we agree that Salem's actions are

entitled to protection under the doctrine of derived judicial

immunity.  Consequently, we affirm.

I.  BACKGROUND

  Following conventional practice, we assay the facts in

the light most favorable to the party opposing brevis disposition

(here, LeBlanc) and draw all reasonable inferences in his favor. 

See Desmond v. Varrasso (In re Varrasso), 37 F.3d 760, 762-63 (1st

Cir. 1994) (holding that Fed. R. Bankr. P. 7056, which makes Fed.

R. Civ. P. 56 applicable to bankruptcy proceedings, requires the

application of traditional summary judgment principles in

bankruptcy proceedings).  We do not give credence to empty

rhetoric, however, but credit only those assertions that are

supported by materials of evidentiary quality.  See Medina-Munoz v.

R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990) (warning

that a party opposing summary judgment cannot rely on "conclusory

allegations, improbable inferences, and unsupported speculation"). 

Here, the record on appeal lacks crucial documents, so in many

instances we simply present the parties' contradictory positions. 

For the same reason, we use round numbers throughout, conscious

that they are approximations.

  In October 1990, Mailman Steam Carpet Cleaning Corp.

(Mailman), represented by LeBlanc, won a judgment in excess of

$450,000 against Alfred C. Lizotte and, to secure it, attached a

parcel of commercial real estate owned by Lizotte.  At the time, a

corporation controlled by Lizotte (the Corporation) operated a

service station on the premises as a franchisee of Gulf Oil, Inc.

(Gulf).  LeBlanc had represented Mailman on a contingent fee basis

in the original litigation, and both the judgment and the fee

remained uncollected when, on March 15, 1993, Mailman filed a

voluntary bankruptcy petition under Chapter 7, 11 U.S.C.  701-766

(1994).  Salem was appointed trustee and he embarked upon the

administration of the estate. 

  On September 18, 1995, Salem filed a notice of intention

to settle the claim against Lizotte for $100,000 and sought court

approval of the plan.  LeBlanc, qua creditor, filed an objection in

his own right.  The court held a hearing on October 19, during

which Salem introduced an appraisal that estimated the fair market

value of the real estate, including the fixtures and equipment

associated with the Corporation's business, at $390,000.  In an

apparent effort to segregate the value of the property attached,

the appraiser carved out $175,000 of this total and assigned it to

the "[l]and, buildings and installations" owned personally by

Lizotte.  Even this reduced amount was not free and clear, for the

real estate was encumbered by a prior first mortgage that secured

$100,000 in debt.

  These figures proved controversial.  LeBlanc maintained

that the real estate was worth much more (say, $500,000), but he

offered no concrete evidentiary support for this claim.  No other

creditor objected to the proposed settlement, and the bankruptcy

court eventually approved it, subject to the following proviso:

    If the gas station is sold within two years

  from [Oct. 19, 1995], the trustee may move for

  revocation of this approval.  Depending on the

  facts of the sale, the court will then either

  confirm or revoke its approval.



The court denied LeBlanc's subsequent motion to alter or amend and

ordered Salem to deliver an executed discharge of the lien, to be

held in escrow pending payment of $100,000 to the estate.

  In May 1996 (roughly seven months after the court's

conditional approval of the settlement), Lizotte and the

Corporation sold the property for some $560,000.  The substance of

the transaction is in dispute, and the record on appeal is devoid

of any satisfactory evidence of its terms.  We do know, however,

that $100,000 went to the bankruptcy estate to complete the

settlement and that a like amount went to the first mortgagee to

discharge the prior lien.  Salem asserts that the balance

represented business assets of the Corporation and was paid out

accordingly.  LeBlanc contends that this allocation was a sham and

that Lizotte fraudulently diverted $360,000 that should have been

available to his creditors (including Mailman and, derivatively,

LeBlanc himself).

  Shortly after the sale, LeBlanc moved to revoke the

approval order and to compel Salem to seek its revocation.  While

these motions were pending, the bankruptcy court granted LeBlanc

permission under Fed. R. Bankr. P. 2004 to examine Lizotte, Gulf,

and the Corporation, limited, however, to information concerning

the terms of the sale and to whom the proceeds went.  The court

later rebuffed LeBlanc's attempt to examine the buyer, Peterborough

Oil Co.  The permitted discovery was not completed until the winter

of 1997-1998.

  In March 1998, Salem notified Mailman's creditors that he

intended to abandon the reserved right to seek revocation of the

Lizotte settlement.  LeBlanc   and LeBlanc alone   opposed

abandonment.  At a hearing held on April 15, 1998, LeBlanc again

accused Lizotte of chicanery and described the results of his

investigation.  He made three main points:  (1) at the Rule 2004

examination, Lizotte could recall no specific business assets that

were exchanged for the $560,000 purchase price; (2) neither the

purchase-and-sale agreement nor the recorded deed mentioned any

assets other than the improved real estate; and (3) the deed listed

the sale price of the real estate at $300,000.  LeBlanc failed to

persuade, and the bankruptcy court overruled his objection and

authorized Salem to abandon the right to seek revocation.

  That same day, LeBlanc filed an adversary proceeding

against Salem, alleging negligence and breach of fiduciary duty

stemming from Salem's failure to seek revocation of the settlement. 

Salem moved to dismiss the complaint on the ground that it failed

to state an actionable claim.  The bankruptcy court treated the

motion as one for summary judgment and granted it on the ground

that the complaint constituted an unfair attempt to hold Salem

personally liable for taking an action that the court had

sanctioned.  The district court upheld the ruling and this appeal

followed.

II.  THE JURISDICTIONAL ISSUE

  Salem questions the bankruptcy court's subject matter

jurisdiction over this adversary proceeding.  Because it would be

inappropriate for this court to address the merits in the absence

of a genuine case or controversy, see Steel Co. v. Citizens For a

Better Env't, 523 U.S. 83, 93-94 (1998), we cannot ignore this

challenge.

  LeBlanc's complaint premises his right to sue on 28

U.S.C.  959(a), which provides in relevant part:

    Trustees, receivers or managers of any

  property, including debtors in possession, may

  be sued, without leave of the court appointing

  them, with respect to any of their acts or

  transactions in carrying on business connected

  with such property.



Salem correctly observes that the abandonment at issue here did not

arise in the course of "carrying on business" by the trustee and

thus suggests that LeBlanc's failure to obtain leave from the

bankruptcy court before instituting his adversary proceeding

renders that proceeding a nullity.  This approach relies on two

faulty premises, namely, (1) that section 959(a) is the exclusive

source of jurisdiction for such a proceeding, and (2) that, in all

events, LeBlanc's misplaced reliance on section 959(a) forecloses

consideration of any other jurisdictional source.

                                A

  The first premise rests on the view that by allowing a

certain category of suits to proceed without prior leave from the

appointing court, section 959(a) negatively implies that leave is

required in all other cases.  But this view throws out the baby

with the bath water.  Over a century ago, the Supreme Court as a

matter of federal common law barred suits against receivers in

courts other than the court charged with administration of the

estate, explaining that leaving litigants free to sue receivers in

other courts would effectively "take the property of the trust from

[the receiver's] hands and apply it to the payment of the

plaintiff's claim, without regard to the rights of other creditors

or the orders of the court which is administering the trust

property."  Barton v. Barbour, 104 U.S. 126, 129 (1881); see also

Vass v. Conron Bros. Co., 59 F.2d 969, 970 (2d Cir. 1932) (L. Hand,

J.) (holding Barton applicable to bankruptcy trustees).  Congress

responded by passing the predecessor of the present section 959(a)

to suspend the approval requirement for suits arising in the course

of carrying out business connected with trust property.  Subject to

this exception, a long line of cases has required leave from the

bankruptcy court before allowing an action against the trustee to

proceed in another tribunal.  See, e.g., In re Linton, 136 F.3d

544, 545 (7th Cir. 1998) (collecting cases); cf. Unsecured

Creditors Comm. of Debtor STN Enters. v. Noyes (In re STN Enters.),

779 F.2d 901, 904 (2d Cir. 1985) (requiring bankruptcy court

approval for creditors to pursue an adversary proceeding against a

third party).

  Neither these precedents nor the rationale that

undergirds them have any application to proceedings in the court

that is overseeing administration of the bankruptcy estate. 

Congress enacted section 959(a) to carve out an exception to the

Barton rule, not to expand the leave requirement to a new category

of cases.  See McNulta v. Lochridge, 141 U.S. 327, 330 (1891) ("The

act does not deprive any one of the right to sue where such right

previously existed, but gives such right in certain cases . . .

.").  We hold, therefore, that any negative implication which can

be extracted from the language of section 959(a) runs only to cases

brought in courts other than the bankruptcy court.  Accord Estate

of Reich v. Burke (In re Reich), 54 B.R. 995, 997-98 (Bankr. E.D.

Mich. 1985) (holding that prior approval by the bankruptcy court is

not a prerequisite for filing a creditor action against the trustee

in that court).

  Of course, sidestepping this obstacle does not

necessarily leave a clear path for LeBlanc.  As the proponent of

the suit, he still bears the onus of establishing subject matter

jurisdiction.  See Viqueira v. First Bank, 140 F.3d 12, 16 (1st

Cir. 1998).  Here, however, jurisdiction exists.  Bankruptcy

trustees have the capacity to sue and be sued, see 11 U.S.C. 

323(b); federal district courts have original jurisdiction over all

civil proceedings related to bankruptcy cases, see 28 U.S.C. 

1334(b); and the Massachusetts federal district court, acting

pursuant to 28 U.S.C.  157(a), has delegated such matters to

bankruptcy courts, see D. Mass. R. 201.  Because LeBlanc's claim

obviously relates to the underlying bankruptcy case   he says that

Salem breached his duty under 11 U.S.C.  704   the question

becomes whether LeBlanc is a proper party to pursue the cause of

action.  We think that he is.

  The Bankruptcy Code provides that "[a] party in interest,

including . . . a creditor . . ., may raise and may appear and be

heard on any issue in a case under this chapter."  11 U.S.C. 

1109(b).  Chapter 7 includes no comparable provision, but in

practice bankruptcy courts routinely entertain adversary

proceedings against Chapter 7 trustees.  See, e.g., Yadkin Valley

Bank & Trust Co. v. McGee, 819 F.2d 74 (4th Cir. 1987); Kowalski-

Schmidt v. Forsch (In re Giordano), 212 B.R. 617 (B.A.P. 9th Cir.

1997); United States ex rel. George Schumann Tire & Battery Co. v.

Grant (In re George Schumann Tire & Battery Co.), 145 B.R. 104

(Bankr. M.D. Fla. 1992); White County Bank v. Leavell (In re

Leavell), 141 B.R. 393 (Bankr. S.D. Ill. 1992).  In light of the

structure and purposes of the Bankruptcy Code, we agree with these

courts that the right to be heard applies in the liquidation

context.

                                B

  This brings us to the second premise of the

jurisdictional challenge:  the idea that, since LeBlanc's complaint

incorrectly predicates jurisdiction on section 959(a), his

adversary proceeding must be dismissed.  This is pettifoggery, pure

and simple, and we need not linger over it.

  Affirmative pleading of the precise statutory basis for

federal subject matter jurisdiction is not required as long as a

complaint alleges sufficient facts to establish jurisdiction.  See

Brock v. Superior Care, Inc., 840 F.2d 1054, 1063-64 (2d Cir.

1988); Fristoe v. Reynolds Metals Co., 615 F.2d 1209, 1212 (9th

Cir. 1980); 2 James Wm. Moore et al., Moore's Federal Practice 

8.03[3] (3d ed. 1999).  In this vein, we have recognized that

federal subject matter jurisdiction may be established by reading

a complaint holistically, "even though the jurisdiction expressly

asserted was improper."  Massachusetts v. United States Veterans

Admin., 541 F.2d 119, 122 (1st Cir. 1976); cf. Viqueira, 140 F.3d

at 18-19 (considering and rejecting on the merits a possible source

of jurisdiction not explicitly referenced in the complaint).  These

general principles apply in the bankruptcy context.  See Fed. R.

Bankr. P. 7008 (incorporating Fed. R. Civ. P. 8).

  Here, LeBlanc's complaint identified his creditor status

and charged that Salem breached his fiduciary duty as a Chapter 7

trustee.  These averments, coupled with the statutory provisions

alluded to above, satisfy us that LeBlanc's complaint, on its face,

alleged sufficient facts to support jurisdiction, notwithstanding

its mistaken reference to section 959(a).  See J. Baranello & Sons

v. Baharestani (In re J. Baranello & Sons), 149 B.R. 19, 27 (Bankr.

E.D.N.Y. 1992).

III.  THE MERITS

  We next consider the bankruptcy court's dismissal of the

adversary proceeding.  We again divide our discussion into two

segments.

                                A

  As mentioned above, the bankruptcy court converted

Salem's motion to dismiss for failure to state a claim into a

motion for summary judgment.  Applicable procedural rules authorize

such a step under certain circumstances, see Fed. R. Bankr. P.

7012(b) (making applicable Fed. R. Civ. P. 12(b)), and LeBlanc does

not contest the use of the device here.  We mention conversion,

however, because the bankruptcy court, by not acting on the motion

to dismiss simpliciter, impliedly held that LeBlanc's complaint  

which omitted any reference to court approval of the abandonment  

stated a valid cause of action.  We examine this premise.

  The Bankruptcy Code provides that a Chapter 7 trustee

shall, inter alia, "collect and reduce to money the property of the

estate for which such trustee serves, and close such estate as

expeditiously as is compatible with the best interests of parties

in interest."  11 U.S.C.  704(1).  LeBlanc's complaint alleges in

substance that Salem negligently failed to conduct an adequate

investigation and acquiesced in a settlement incompatible with the

best interests of creditors, thereby violating his fiduciary duty. 

So stated, the claim derives solely from the trustee's statutorily-

inspired duty of care.  See infra note 4.  Hence, its validity

depends, in the first instance, on whether an action for negligence

lies against a bankruptcy trustee in his individual capacity.

  The exact parameters of a trustee's fiduciary duties and

the potential penalties for breach thereof are not fixed by the

Bankruptcy Code, and the case law is somewhat murky at the edges. 

It is settled, however, that a bankruptcy trustee may be held

personally liable for breach of the duty of loyalty.  See Mosser v.

Darrow, 341 U.S. 267, 271, 274 (1951).  The Mosser Court surcharged

a bankruptcy trustee for expressly permitting two employees to

profit by selling securities to the estate, declaring in

unqualified terms that "[e]quity tolerates in bankruptcy trustees

no interest adverse to the trust."  Id. at 271.

  Following Mosser, the courts of appeals have split almost

evenly on the question of whether a bankruptcy trustee can be held

personally liable for negligence (as opposed to deliberate

misconduct).  Compare In re Gorski, 766 F.2d 723, 727 (2d Cir.

1985) (responding in the affirmative), Red Carpet Corp. v. Miller,

708 F.2d 1576, 1578 (11th Cir. 1983) (per curiam) (same), and Hall

v. Perry (In re Cochise College Park, Inc.), 703 F.2d 1339, 1357

(9th Cir. 1983) (same), with Yadkin Valley, 819 F.2d at 76

(responding in the negative), In re Chicago Pac. Corp., 773 F.2d

909, 915 (7th Cir. 1985) (dictum) (same), Ford Motor Credit Co. v.

Weaver, 680 F.2d 451, 461-62 (6th Cir. 1982) (same), and Sherr v.

Winkler, 552 F.2d 1367, 1375 (10th Cir. 1977) (same).  We

heretofore have left the question open.  See Lopez-Stubbe v.

Rodriguez-Estrada (In re San Juan Hotel Corp.), 847 F.2d 931, 937

& n.5 (1st Cir. 1988); Connecticut Gen. Life Ins. Co. v. Universal

Ins. Co., 838 F.2d 612, 621 (1st Cir. 1988).

  In our view, Mosser, properly construed, strongly

indicates that parties interested in the administration of a

bankruptcy estate can seek to surcharge the trustee for negligence. 

While Mosser itself involved "a willful and deliberate setting up

of an interest in employees adverse to that of the trust," the

Court took pains to clarify that "[t]he liability here is not

created by a failure to detect defalcations, in which case

negligence might be required to surcharge the trustee . . . ."  341

U.S. at 272.  The unmistakable implication of this observation is

that, in the absence of deliberate misconduct, negligence suffices

for surcharge.  Indeed, even the courts of appeals that decline to

impose personal liability for negligence draw this inference.  See,

e.g., Sherr, 552 F.2d at 1375 ("A trustee in bankruptcy may be held

liable in his official capacity and thus surcharged if he fails to

exercise that degree of care required of an ordinarily prudent

person serving in such capacity, taking into consideration the

discretion allowed.").  These courts, however, differentiate

between surcharges and personal liability, presumably relying on

the Mosser Court's statement that "[t]he most effective sanction

for good administration is personal liability for the consequences

of forbidden acts."  341 U.S. at 274.  Because only willful

misconduct is "forbidden," the argument goes, negligence does not

trigger personal liability.

  This reasoning is tautological:  whether or not negligent

conduct is "forbidden" is the question, not part of the answer. 

More importantly, the reasoning depends on a misunderstanding of

the word "surcharge," which is most fittingly defined as "[t]he

imposition of personal liability on a fiduciary for wilful or

negligent misconduct in the administration of his fiduciary

duties."  Black's Law Dictionary 1441 (6th ed. 1990).  Given this

definition, there is simply no principled way after Mosser to avoid

the conclusion that a bankruptcy trustee can be personally liable

for negligent breach of fiduciary duty.  It follows inexorably that

LeBlanc's pleading, taken in isolation, states a cause of action

upon which relief can be granted.

                                B

  Of course, we, like the lower courts, cannot take

LeBlanc's complaint in isolation.  The bankruptcy court

appropriately took judicial notice of its own docket, see Fed. R.

Evid. 201 (discussed supra note 2), and ruled that its order

approving abandonment of the right to seek revocation of the

Lizotte settlement shielded the trustee from personal liability for

effecting the abandonment.  The district court endorsed this

ruling.  We now turn to its merits, affording de novo review.  See

Garside v. Osco Drug, Inc., 895 F.2d 46, 48 (1st Cir. 1990).

  Once again, the starting point for our analysis is

Mosser.  In that case, the Court outlined a mechanism through which

a bankruptcy trustee may avoid personal liability:

    The practice is well established by which

  trustees seek instructions from the court,

  given upon notice to creditors and interested

  parties, as to matters which involve difficult

  questions of judgment. . . .  [If the

  challenged arrangement] was of advantage to

  the trust, this might have been fully

  disclosed to the court and the creditors cited

  to show cause why it should not have been

  openly authorized.



Mosser, 341 U.S. at 274.  Following Mosser, this court has

explained that a trustee acting with the explicit approval of a

bankruptcy court is entitled to absolute immunity, as long as there

has been full and frank disclosure to creditors and the court.  See

Lopez-Stubbe, 847 F.2d at 942 (citing Mosser, 341 U.S. at 274). 

This view has found near-universal favor elsewhere.  See, e.g.,

Yadkin Valley, 819 F.2d at 76; Lonneker Farms, Inc. v. Klobucher,

804 F.2d 1096, 1097 (9th Cir. 1986); Boullion v. McClanahan, 639

F.2d 213, 214 (5th Cir. Unit A Mar. 1981) (per curiam).  Only if a

trustee prevaricates or otherwise acts in bad faith does he doff

the cloak of derived judicial immunity.  See Kowalski-Schmidt, 212

B.R. at 624.

  We believe that derived judicial immunity in this context

is essential to the orderly administration of bankruptcy

proceedings.  Allowing suits against trustees for executing

explicit court orders would run an unacceptably high risk of

turning trustees into "lightning rod[s] for harassing litigation

aimed at judicial orders" and would create counterproductive

tension between bankruptcy judges and trustees.  Kermit Constr.

Corp. v. Banco Credito y Ahorro Ponceno, 547 F.2d 1, 3 (1st Cir.

1976); see also Valdez v. City of Denver, 878 F.2d 1285, 1289 (10th

Cir. 1989) (warning that, without immunity, "[o]fficials employed

to implement facially valid court orders could choose:  They may

disregard the judge's orders and face discharge, or worse yet

criminal contempt, or they may fulfill their duty and risk being

haled into court").

  The case at hand provides a vivid illustration.  The

merits of the Lizotte settlement have been debated in the Mailman

bankruptcy case for years.  Recognizing the contentiousness of the

issue, Salem wisely sought judicial approval before relinquishing

his right to move for revocation of the settlement.  After a

hearing at which all interested parties (including LeBlanc) were

allowed to participate, the bankruptcy court expressly approved

Salem's recommendation.  Salem is thus entitled to immunity unless

there is reason to believe that he acted in bad faith or that the

notice of disclosure he provided was deficient.

  The record reveals nothing of this sort.  No one

questions Salem's good faith.  As to disclosure, Salem gave all

parties in interest timely notice, and there is no basis for a

suggestion that he was anything but forthcoming in his statements

to the court and the creditors.  Indeed, LeBlanc, for all his

animadversions, makes no allegations to the contrary.  Rather, he

maintains that Salem ignored compelling evidence of fraud and

failed to conduct an adequate investigation.

  We do not gainsay LeBlanc's success in casting a cloud of

suspicion over the real estate transaction.  But a trustee's

obligation to disclose requires only an honest and relatively

complete accounting of what he knows, not an account that is letter

perfect or born of omniscience.  After all, disgruntled parties

always will be able, ex post, to dig up information that was not

available to the court.  To prevent a bankruptcy case from becoming

Jarndyce and Jarndyce, see Charles Dickens, Bleak House (1853), the

trustee at some point must decide that the costs of gathering more

information outweigh the potential benefits.  As long as he makes

that decision in good faith and reveals the substance of what he

knows, no more is exigible.

  In this instance, Salem reached such a conclusion and

acted upon it.  In turn, the bankruptcy court was satisfied that it

had enough information before it to approve abandonment.  If a

mistake has been made, LeBlanc's exclusive remedy is via direct

appeal of the court order approving the abandonment.  See supra

note 1.

IV.  CONCLUSION

  We need go no further.  Although the bankruptcy court

properly exercised jurisdiction over this adversary proceeding and

the complaint stated a facially valid cause of action, the

trustee's derived judicial immunity warranted the entry of summary

judgment in his favor.



Affirmed.