Opinion ID: 693409
Heading Depth: 3
Heading Rank: 2

Heading: The Proceeds and the Trustee's Duty.

Text: 21 We return, then, to the centerpiece of Northwestern's argument: it cannot be liable because the funds really came from GACC's assets. But the Bankruptcy Code charges trustees with broader duties than Northwestern's argument would allow. Trustees are required to be accountable for all property received. 11 U.S.C. Secs. 704(2) and 1106(a)(3). In addition, to be qualified as a trustee, the trustee must take out a bond which is conditioned on [his] faithful performance of ... official duties. 11 U.S.C. Sec. 322(a). As we have said, Northwestern's bond ensured that the trustee would faithfully and truly account for all the moneys, assets and effects of the estate ... which shall come into his hands and possession, and shall [in] all respects faithfully perform all his official duties as said [trustee].Not surprisingly, courts have often held that trustees' duties extend beyond tending the undisputed assets of the estate. See, e.g., In re Sierra Trading Corp., 486 F.2d 191, 193 (10th Cir.1973) (per curiam) (trustee was required to account for amounts earned from investment of money belonging to third parties in an adversary proceeding by those parties); In re San Juan Hotel Corp., 847 F.2d 931, 936-38 (1st Cir.1988) (there is a broad power to surcharge trustees for forbidden acts which injure the estate or profit the trustee at the estate's expense); In re Reich, 54 B.R. 995, 1003, 1008-09 (Bankr.E.D.Mich.1985) (trustee's surety will be held liable where trustee had actual possession of the property; whether an asset was technically in or out of an estate was immaterial). In the instant case the GACC vehicles auctioned off were in the possession of Duck. Because he was trustee, he accessed them and sold them in an auction. Then he recognized that he held the assets for the estate and subject to the bankruptcy court orders. But he deposited the money into his commingled trustee account and finally misappropriated the funds to his own personal use. Northwestern does not really dispute this, and it is fatal to Northwestern's argument. 22 San Juan, from which Northwestern seeks solace, put its finger on the principle at stake here. As it said, citing Mosser v. Darrow, 341 U.S. 267, 274, 71 S.Ct. 680, 683, 95 L.Ed. 927 (1951), the Supreme Court has established the general proposition that bankruptcy trustees may be held personally liable for breaches of fiduciary duty.... 'The most effective sanction for good administration is personal liability for the consequences of forbidden acts.'  847 F.2d at 937 (citations omitted). 23 Here, as in San Juan and Mosser, a defense is being mounted in which it is argued on behalf of Duck (and his surety) that no loss has been suffered by the estate. But as the First Circuit, in discussing the Supreme Court's reaction to that argument, said: 24 To that, the Court responded by noting that determining the amount of damage the trustee caused, if any, was difficult; the Court then added: But equity has sought to limit difficult and delicate fact-finding tasks concerning its own trustee by precluding such transactions for the reason that their effect is often difficult to trace, and the prohibition is not merely against injuring the estate--it is against profiting out of the position of trust. Mosser, 341 U.S. at 273, 71 S.Ct. at 683. With this passage, we think, the Court clearly rejected the idea that a proven, quantifiable loss to the estate is a prerequisite to personal liability for trustees. 25 Id. at 937. 26 Ah, says Northwestern, but in San Juan the court also decided that if the faithless trustee did not injure the estate but only injured third party creditors of the estate, there could be no recovery on the estate's behalf. Id. at 938. The court expressed a concern that faithless trustees might otherwise be subjected to litigation by the estate and by the creditors. Id. We need not consider whether the court should have had that concern because even were we to accept it, the outcome would be no different here. In San Juan, the court was referring to a situation where the creditors suffered a direct harm and the estate suffered no harm at all. Here it cannot be said that a direct injury has been perpetrated upon creditors, nor can it be said that there could be no harm to the estate. Ferrante guaranteed the obligations of GACC and to the extent that those were not discharged there could be a claim against the estate itself. The taking of funds from GACC could not, therefore, be ignored. If, as Northwestern argues, Wells Fargo has given up all of its rights, that surely does not mean that the peculated funds should not be returned to the estate's trustee, especially since the estate itself is the sole shareholder of GACC. Whether GACC should or can be liquidated or whether it could or will sue the estate is not the point. In San Juan, the items which were disallowed were such things as union dues which went unpaid. At least in the short run, that benefited the estate by increasing its assets. Id. at 940-54. But here the actions of Duck did not benefit the estate at all. Had he simply retained the GACC funds in the estate it might have been so. He did not, and now he must return them, as must his surety. 27 In sum, when Duck's tenure ended he was accountable for funds that came into his hands as trustee of the estate. He was obligated to turn over those funds to the new trustee. When he failed so to do he and his surety became liable. Whether the estate will be able to retain the funds or will have to relinquish them in whole or in part is no business of Duck or his surety. That determination must be made in later proceedings. What is clear is that the funds must be turned over. 28