Source: https://law.justia.com/cases/federal/appellate-courts/F3/101/272/596459/
Timestamp: 2020-02-24 06:23:40
Document Index: 550013822

Matched Legal Cases: ['§ 1146', '§ 1146', '§ 1146', '§ 1146', '§ 505', '§ 1146', '§ 959', '§ 959', '§ 959']

In Re Lehal Realty Associates, Debtor.george Lebovits, a Principal and Equity Holder of Lehalrealty Associates, Debtor-appellant, v. John F. Scheffel, As Trustee of Lehal Realty Associates,trustee-appellee, 101 F.3d 272 (2d Cir. 1996) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Second Circuit › 1996 › In Re Lehal Realty Associates, Debtor.george Lebovits, a Principal and Equity Holder of Lehalrealty...
In Re Lehal Realty Associates, Debtor.george Lebovits, a Principal and Equity Holder of Lehalrealty Associates, Debtor-appellant, v. John F. Scheffel, As Trustee of Lehal Realty Associates,trustee-appellee, 101 F.3d 272 (2d Cir. 1996)
U.S. Court of Appeals for the Second Circuit - 101 F.3d 272 (2d Cir. 1996) Argued Sept. 5, 1996. Decided Nov. 27, 1996
In July 1990, in an unrelated case, Bankruptcy Judge Tina L. Brozman of the Southern District held that a debtor's sale of real property pursuant to an approved plan of reorganization was exempt from the Gains Tax as a "stamp tax or similar tax" under § 1146(c) of the Bankruptcy Code. 11 U.S.C. § 1146(c).1 In re 995 Fifth Ave. Assoc., L.P., 116 B.R. 384 (Bankr.S.D.N.Y. 1990).
The State rejected the claim in a letter dated May 13, 1991. The State disagreed with the Trustee's interpretation of § 1146(c), and relied on an earlier bankruptcy court decision for the proposition that the Gains Tax was not a stamp tax or similar tax under § 1146(c). In re Jacoby-Bender, Inc., 40 B.R. 10 (Bankr.E.D.N.Y. 1984), aff'd. 758 F.2d 840 (2d Cir. 1985). The State's letter stated:
The Trustee's complaint in the adversary proceeding contained two causes of action: the first raised the stamp tax exemption argument, and the second the basis argument. In October 1991, Bankruptcy Judge Schwartzberg concluded that he had the authority to determine the amount or legality of the Gains Tax pursuant to 11 U.S.C. § 505, but had no authority to compel the State to refund any portion of the tax because the State had not waived its Eleventh Amendment right of sovereign immunity. In re Lehal Realty Associates, 133 B.R. 9 (Bankr.S.D.N.Y. 1991). On this view, the bankruptcy judge did not reach the merits of the Trustee's basis argument.
In December 1991, the Trustee filed an administrative tax appeal with the State from its denial in May 1991 of his refund claim. The Trustee and the State thereafter stipulated to adjourn the administrative appeal until this court decided an already argued appeal growing out of Bankruptcy Judge Brozman's decision in 995 Fifth Avenue.2 Our opinion in that case was issued in April 1992. We held that the Gains Tax is not a stamp tax or similar tax for purposes of 11 U.S.C. § 1146(c), and that a trustee in bankruptcy therefore must pay it. 963 F.2d 503. Certiorari in 995 Fifth Ave. was denied in October 1992. 506 U.S. 947, 113 S. Ct. 395, 121 L. Ed. 2d 302.
Lebovits argues in general terms that a bankruptcy trustee owes a fiduciary duty to all parties in interest and that such a trustee can be held personally responsible for breach of that duty. The Trustee concedes the former proposition, but argues that because he was acting within his authority and was administering and liquidating the estate rather than carrying out its business, he cannot be held personally liable. As will be seen below, the Trustee's argument overstates his case in light of In re Gorski, 766 F.2d 723 (2d Cir. 1985).
Also, both Lebovits and the Trustee discuss the distinction in bankruptcy cases between core and non-core proceedings as though that were determinative here. But, as Judge Wisdom has pointed out in Matter of Wood, 825 F.2d 90, 91 (5th Cir. 1987), that distinction was designed to deal with the problem of vesting "Article III judicial power in Article I judges," and is of fairly recent origin.5 On the other hand, there is a long history of cases dealing with attempts to hold a bankruptcy trustee personally liable for breach of duty.
A trustee in bankruptcy is an officer of the court that appoints him. In re Beck Industries, Inc., 725 F.2d 880, 888 (2d Cir. 1984). We have held that there is "no question that a trustee in bankruptcy may be held personally liable for breach of his fiduciary duties." In re Gorski, 766 F.2d at 727 (citing Mosser v. Darrow, 341 U.S. 267, 71 S. Ct. 680, 95 L. Ed. 927 (1951)). In Gorski, we noted that in "the usual case, a surcharge is imposed [by the bankruptcy court] on the fiduciary in the amount of the actual or estimated financial harm suffered by either the creditors or the estate and is payable accordingly." 766 F.2d at 727. At the same time, the court that appointed the trustee has a strong interest in protecting him from unjustified personal liability for acts taken within the scope of his official duties. A well-recognized line of cases starting with Barton v. Barbour, 104 U.S. 126, 26 L. Ed. 672 (1881), extends such protection by requiring leave of the appointing court before a suit may go forward in another court against the trustee. See, e.g., Vass v. Conron Bros. Co., 59 F.2d 969 (2d Cir. 1932) (L. Hand, J.); In re DeLorean Motor Co., 991 F.2d 1236 (6th Cir. 1993); In re Baptist Medical Center of New York, 80 B.R. 637, 643 (Bankr.E.D.N.Y. 1987); Lawrence P. King et al., 2 Collier on Bankruptcy p 323.02 at 323-10 to 323-11 (15th Ed.1996).
These precedents provide the context for our review of Judge Brieant's order reversing in part the decision of Bankruptcy Judge Connelly. "An order of a district court functioning in its capacity as an appellate court in a bankruptcy case is subject to plenary review. Thus, we 'independently review the factual determinations and legal conclusions of the bankruptcy court.' " In re Momentum Mfg. Corp., 25 F.3d 1132, 1136 (2d Cir. 1994) (quoting In re PCH Assoc., 949 F.2d 585, 597 (2d Cir. 1991)). We review the bankruptcy court's legal conclusions de novo, and its findings of fact are subject to a clearly erroneous standard. Id. Finally, we review its exercise of discretion for abuse.
Lebovits argues that there is a statutory exception to the Barton line of cases, which allows " [t]rustees ... [to] 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." 28 U.S.C. § 959(a); see also In re DeLorean, 991 F.2d at 1240-41. Lebovits claims that the Trustee's actions in selling the debtor's real estate, and paying and appealing the Gains Tax, constituted "carrying on business" for purposes of § 959.
We agree with Judge Brieant that § 959 does not apply where, as here, a trustee acting in his official capacity conducts no business connected with the property other than to perform administrative tasks necessarily incident to the consolidation, preservation, and liquidation of assets in the debtor's estate. See, e.g., Vass v. Conron Bros., 59 F.2d at 971; In re DeLorean Motor Co., 991 F.2d at 1240-41; Matter of Campbell, 13 B.R. 974 (Bankr.D. Idaho 1981); Maguire v. Puente, 120 Misc.2d 871, 466 N.Y.S.2d 934 (N.Y.Sup.Ct.1983). Accordingly, under the Barton line of cases, Lebovits was required to obtain the permission of the bankruptcy court before bringing the State Court Action.
In addition, the core of the State Court Action is that the Trustee was negligent in not pursuing the basis argument for a tax refund. But even if that were so, all of the equities of the situation had to be taken into account. Judge Brieant did not regard the merits of the basis argument as very substantial, a view apparently shared by the Trustee. It is true that the Trustee apparently raised the claim with the State before the Gains Tax was paid, but Bankruptcy Judge Schwartzberg approved payment of the full tax in an amount up to $760,000. Thereafter, a claim for a refund was not filed for about nine months, and then only after Bankruptcy Judge Brozman issued her decision (later reversed), which completely exempted a sale pursuant to an approved plan of reorganization from the Gains Tax. The Trustee's claim for a refund then relied on that argument, and it does not appear that the basis argument was also raised. While all of this was going on under the aegis of the bankruptcy court, Lebovits presumably knew or should have known, as the principal partner of the debtor, that the basis claim was being pushed weakly, if at all. Certainly Lebovits not only had the incentive to keep informed but also was intensely involved in other proceedings in the bankruptcy court. E.g., Lebovits v. Halpern, 112 B.R. 601 (Bankr.S.D.N.Y. 1990). The basis claim was clearly raised by the Trustee in his adversary complaint against the State brought in June 1991 in the bankruptcy court after his claim for refund had been rejected. And, that complaint had attached to it the State's May 1991 letter rejecting the Trustee's claim for a refund, which contained the 90-day notice for administrative appeal. But even then, well within the 90-day period, nothing in the record before us indicates that Lebovits pointed out to the bankruptcy court or to the Trustee that an administrative tax appeal should be pursued instead, or simultaneously, either on the exemption claim (which seemed to be a winning argument at that time) or on the basis argument. In short, under all the circumstances, we cannot say that Judge Brieant erred in enjoining the State Court Action.
Years of effort to reform the bankruptcy laws culminated with the enactment of the Bankruptcy Reform Act of 1978. As part of its overall goal to create a more efficient procedure for administering bankruptcies, the 1978 Act vested broad powers in the bankruptcy courts. This reform was shortlived. In 1982 the Supreme Court decided Northern Pipeline v. Marathon, [458 U.S. 50, 102 S. Ct. 2858, 73 L. Ed. 2d 598 (1982) ]. The Court declared the jurisdictional provision of the 1978 Act unconstitutional because, in short, it vested Article III judicial power in Article I judges. Courts were left to their own devices while Congress deliberated a response to Marathon. With prompting from bench, bar, and law professors with expertise in bankruptcy, Congress responded with the Bankruptcy Amendments and Federal Judgeship Act of 1984. Essentially, Congress reenacted the 1978 Act, but divided its jurisdictional grant into "core" proceedings, over which the bankruptcy courts exercise full judicial power--and "otherwise related" or "non-core" proceedings--over which the bankruptcy courts exercise only limited power.