Opinion ID: 506588
Heading Depth: 1
Heading Rank: 2

Heading: threshold defenses

Text: 11 Rodriguez raises two threshold arguments for overturning the district court's judgment, which we consider before delving into Rodriguez's specific complaints about the twelve surcharged items. 12
13 Rodriguez argues that Lopez, the nominal plaintiff in this case, lacks standing to sue Rodriguez for most, if not all, of the damages assessed. His standing argument has two components. First Rodriguez asserts that Lopez can only sue him for harms actually suffered by the estate, not harms suffered by nonparty creditors. Second, and presumably alternatively, Rodriguez argues that Lopez lacks statutory authority to assert any claims against Rodriguez because Rodriguez's potential liability was not property of the estate at the time bankruptcy proceedings began. We agree, in part, with Rodriguez's first argument, but we reject his second. 14 There is no question that the governing law in this case is Mosser v. Darrow, 341 U.S. 267, 71 S.Ct. 680, 95 L.Ed. 927 (1951), and its progeny. In Mosser, the Supreme Court established the general proposition that bankruptcy trustees may be held personally liable for breaches of fiduciary duty. The defendant trustee in Mosser allowed two employees to trade on inside information and was surcharged for the profits they made. In affirming, the Court said, trusteeship is serious business and is not to be undertaken lightly or so discharged. The most effective sanction for good administration is personal liability for the consequences of forbidden acts. Id. at 274, 71 S.Ct. at 683. Following Mosser, federal courts including this one have uniformly held that bankruptcy trustees are subject to personal liability for the willful and deliberate violation of their fiduciary duties. Connecticut General, 838 F.2d at 621 (citing In re Gorski, 766 F.2d 723, 727 (2d Cir.1985); In re Cochise College Park, Inc., 703 F.2d 1339, 1357 (9th Cir.1983); Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 461 (6th Cir.1982); Sherr v. Winkler, 552 F.2d 1367, 1375 (10th Cir.1977)). 5 Such liability may be imposed either for the benefit of the estate in the form of a surcharge, or for the benefit of a creditor in the form of damages in a direct action against the trustee. Compare Mosser, 341 U.S. 267, 71 S.Ct. 680 (surcharge payable to estate) with Connecticut General, 838 F.2d at 621-22 (liability to creditor) and In re Rigden, 795 F.2d 727 (9th Cir.1986) (liability to creditor). 15 This statement of the law, we believe, itself effectively refutes Rodriguez's second standing argument. The Supreme Court in Mosser broadly construed federal courts' equitable powers to surcharge trustees for forbidden acts. It did not require a special statutory provision authorizing a successor trustee to file claims against his predecessor. In Mosser, the trustee's wrongdoing was actually called to the bankruptcy court's attention by the Securities and Exchange Commission, an arm of the federal government. 341 U.S. at 270, 71 S.Ct. at 681-82. Here, too, it is the United States (through Lopez) that has pursued Rodriguez, and we think it would be plainly inconsistent with Mosser to dismiss the action altogether for lack of standing. 6 16 Returning to Rodriguez's first standing argument (no harm to the estate), it is interesting to note that the defendant in Mosser also argued in his defense that the estate suffered no loss as a result of his actions. 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. At the same time, however, the degree of loss or harm has not been made irrelevant under Mosser. As the Second Circuit has noted, the purpose of a Mosser surcharge is not to punish a trustee, it is to benefit creditors who have been injured by the trustee's acts. Gorski, 766 F.2d at 727-28 (rejecting the use of a civil fine payable to the United States as a form of trustee surcharge). 17 In order to insure that creditors are made whole without also having courts engage in open-ended punishment-by-surcharge, we think that some assessment of harm must be the guiding principle underlying Mosser liability. Where an exact amount of loss to the estate can be determined, that amount is the correct measure of damages. See Matter of Combined Metals Reduction Co., 557 F.2d 179, 197 (9th Cir.1977) (When a trustee has breached his trust, an equity court may hold him liable for any loss or depreciation in the value of the estate resulting from the wrongful act or omission.). Where the fact of harm can be determined but not the exact extent thereof, the estimated amount of harm to the estate should be surcharged. In Mosser, the Court essentially estimated damages by assuming that any profit made by the trustee's employees was to the estate's detriment. See also Combined Metals, 557 F.2d at 197 (In addition, an unfaithful trustee may be held responsible for any lost profit which would have accrued to the estate but for the breach of trust.). Other forms of estimates might be equally acceptable. Moreover, a similar analysis of damages necessarily follows for direct actions by creditors against trustees: the exact or estimated amount of loss should be the amount of liability imposed. 18 A natural corollary to this approach to Mosser liability is that a party may only assert against a trustee the harm it has directly suffered. Where the assets of the estate have been diminished by the trustee's actions, the representative of the estate is the proper party to assert claims against the trustee. Conversely, where the estate itself has suffered no loss but the actions of the trustee have directly harmed a creditor, it should be the creditor, not the estate, that sues. See Gorski, 766 F.2d at 727 (In the usual case, a surcharge is imposed on the fiduciary in the amount of the actual or estimated harm suffered by either the creditors or the estate and is payable accordingly.) (emphasis added). Were we to rule otherwise, trustees would be subject to inconsistent and multiple liability for their actions in suits by the estate and by the creditors. 19 As set out more fully below, it is apparent that in this case the district court assessed against Rodriguez and in favor of the estate some damages suffered by the estate and some damages suffered only by third party creditors. Lopez argues that we should uphold the judgment in toto, but we disagree. 7 The fact that Rodriguez caused some harm to the estate does not mean that the estate can also be awarded damages for harms suffered by creditors of the estate. The creditors themselves must sue for those harms and, as we recognized in Connecticut General, they have an avenue for doing so. 8
20 Rodriguez moved twice before trial to dismiss this action on the ground that it was time-barred under the applicable statute of limitations. Both motions were denied without opinion. On appeal, Rodriguez renews this argument, focusing particularly on the one year Puerto Rico statute of limitations generally applicable to tort actions. See P.R.Laws Ann. tit. 31, Sec. 5298. We find Rodriguez's argument unpersuasive for at least two reasons. 21 First, even if a one year statute of limitations did apply, Lopez's action was timely. As Rodriguez himself concedes, the available time for filing against him could not have begun to run until Lopez knew or had reason to know of the injury which is the basis for this action. Brief of Defendant-Appellant at 20. Lopez did not even replace Rodriguez as trustee until September of 1983. 9 Moreover, as the district court found based on Lopez's testimony, Rodriguez delayed turning over the hotel records until January of 1984, and, when he did, the records were incomplete and in disarray, requiring until June of 1984 to organize and to determine what was missing. 71 B.R. at 426. Throughout this period, the court found that Rodriguez attempted to conceal material information from Lopez, the bankruptcy court and the creditors. Rodriguez has provided no basis, and we have found none, for overturning these factual findings by the district court. The May 1985 filing date of this action thus falls only eleven months after the earliest possible date at which Lopez could reasonably be said to have had knowledge of Rodriguez's alleged wrongdoing. 22 Second, for the reasons that follow, we reject Rodriguez's contention that personal liability actions against a bankruptcy trustee can be time-barred before the trustee has presented a final account to the bankruptcy court and been discharged. In the present case, Rodriguez did not file his final report, styled an Application for Final Compensation, until June 10, 1986, more than a year after this action was instituted. See Appendix B to the district court's opinion, 71 B.R. at 442-45. At the time of this appeal, the application still had not been approved nor Rodriguez discharged. 23 There is no explicit provision in the Bankruptcy Code prescribing a period of limitations for actions against trustees in their personal capacity. A fair reading of the code as a whole, however, leaves no doubt that a trustee cannot be released from liability before discharge. To begin with, section 704 of the code, in setting out the duties of a trustee, provides that they shall ... make a final report and file a final account of the administration of the estate with the court. 11 U.S.C. Sec. 704(9). In practice, this provision means: 24 The trustee must file an itemized statement of property received and disposed of. The purpose of all expenditures must likewise be stated. In the case of private sales of property the trustee is also required to keep an accurate and itemized account of all property sold, of the price received therefor and to whom sold. His account should deal only in dollars and cents and his report should be a running summary of the details of the administration.... The trustee's reports and accounts should be filed with the Bankruptcy Judge and with the United States Trustee in those districts incorporated into the United States trustee system. The reports and accounts are then submitted to creditors at the final meeting of creditors, and, if passed by them, are approved, and the trustee accordingly discharged of his trust by court order.... Where the trustee has filed his final report and account for settlement, and after due notice, the report and account is approved and the trustee discharged, the bankruptcy court has no further jurisdiction to enter an order against him surcharging him for money not distributed to a creditor. 25 4 Collier on Bankruptcy p 704.12, at 704-26.1 to 28 (L. King 15th ed. 1988); see also 2 Collier, supra, p 350.02, at 350-6 (When there has been full administration, the trustee should be discharged and the case closed under section 350(a).). The very purpose of a final accounting is to insure that trustees disclose and be held accountable for their handling of the estate. Therefore only after having done so can they be absolved of liability. 26 This understanding of a trustee's obligations is confirmed by section 322(d) of the code, which provides that a proceeding on a trustee's bond may not be commenced after two years after the date on which such trustee was discharged. Lopez contends that we should apply this provision directly to Rodriguez in order that Rodriguez not benefit from the fact that he failed to post bond. Rodriguez, on the other hand, distinguishes section 322(d) on the ground that it applies only to actions against the insurance company acting as surety, not to actions against the trustee personally. We can see merit in the arguments of both sides, but we do not feel compelled to reach the issue of whether section 322(d) applies to trustees at this time. Rather, we think it is sufficient to note that section 322(d), like the provisions cited above, focuses on discharge as the point at which the period of limitations begins to run. Having never been discharged, Rodriguez's financial accountability as a trustee cannot have ceased. 27 Rodriguez argues that by adopting this rule we will discourage qualified persons from becoming bankruptcy trustees. Pointing to the fact that he still has not received a judicial discharge although his term as trustee ended in 1983, Rodriguez claims that trustees will be exposed to lawsuits for excessively prolonged and indefinite periods. But in Mosser the Supreme Court has already answered this contention, noting that the way for trustees to avoid uncertainty about personal liability is to seek instructions from the bankruptcy court on difficult questions of judgment and to file periodic accounts with the court. 341 U.S. at 274-75, 71 S.Ct. at 683-84; see also 11 U.S.C. Sec. 704(8) (if the business of the debtor is authorized to be operated, [the trustee shall] file with the court ... periodic reports and summaries of the operation of such business, including a statement of receipts and disbursements, and such other information as ... the court requires). Once there has been candid disclosure to the court and creditors, and the court approves the action, the trustee will be immunized from personal liability. Mosser, 341 U.S. at 274, 71 S.Ct. at 683. 28