Grant, Konvalinka & Harrison, PC v. Banks

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 13a0148p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
X
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In re: STEVE A. MCKENZIE,
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Debtor.
_____________________________________ -
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Nos. 12-5874/5875/5876
GRANT, KONVALINKA & HARRISON, PC,
,
>
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Appellant,
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v.
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RICHARD L. BANKS, ANDREW B. MORGAN,
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and RICHARD BANKS & ASSOC., P.C. (12-
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5874); STEVE A. MCKENZIE and C. KENNETH
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STILL (12-5874 & 12-5875); F. SCOTT
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LEROY, d/b/a LeRoy & Bickerstaff, LEROY
& BICKERSTAFF, PLLC, and LEROY, HURST -
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N
& BICKERSTAFF, PLLC, (12-5874 & 12-
5876),
Appellees.
Appeal from the United States District Court
for the Eastern District of Tennessee of Chattanooga.
Nos. 1:11-cv-00258; 1:11-cv-00320; 1:11-cv-00346.
Curtis L. Collier, Chief District Judge.
Argued: May 2, 2013
Decided and Filed: May 24, 2013
Before: MARTIN, GUY, and McKEAGUE, Circuit Judges.
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COUNSEL
ARGUED: John P. Konvalinka, GRANT, KONVALINKA & HARRISON, P.C.,
Chattanooga, Tennessee, for Appellant. Jerrold D. Farinash, KENNEDY, KOONTZ &
FARINASH, Chattanooga, Tennessee, for Still Appellees in 12-5874 and 12-5875.
Clinton P. Sanko, BAKER DONELSON, BEARMAN, CALDWELL & BERKOWITZ,
PC, Chattanooga, Tennessee, for LeRoy Appellees in 12-5874 and 12-5876.
ON BRIEF: John P. Konvalinka, Harry R. Cash, GRANT, KONVALINKA &
HARRISON, P.C., Chattanooga, Tennessee, for Appellant. Jerrold D. Farinash, Andrea
Hayduk, KENNEDY, KOONTZ & FARINASH, Chattanooga, Tennessee, for Still
Appellees in 12-5874 and 12-5875. Clinton P. Sanko, Joshua A. Powers, BAKER
DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PC, Chattanooga,
1
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 2
Tennessee, for LeRoy Appellees in 12-5874 and 12-5876. M. Andrew Pippenger,
LEITNER, WILLIAMS, DOOLEY & NAPOLITAN PLLC, Chattanooga, Tennessee,
for Banks Appellees in 12-5874.
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OPINION
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RALPH B. GUY, JR., Circuit Judge. Grant, Konvalinka & Harrison, P.C.,
(GKH) appeals from the district court’s order affirming the bankruptcy court’s decisions
dismissing the two complaints it filed in bankruptcy court, and denying it leave to file
a third complaint in state court, each of which alleged malicious prosecution and abuse
of process against Bankruptcy Trustee C. Kenneth Still, individually, and the attorneys
who represented him. See In re McKenzie, 476 B.R. 515 (E.D. Tenn. 2012). GKH, a
law firm representing itself here and in all the proceedings, alleged that the Trustee and
his attorneys filed and pursued three separate actions against GKH on behalf of the
bankruptcy estate of the Debtor Steve “Toby” McKenzie that were meritless, without
foundation, and brought for purposes of annoyance or harassment.1
GKH insists that the bankruptcy court erred in dismissing GKH’s two adversary
complaints on grounds of quasi-judicial immunity and/or failure to state a claim upon
which relief may be granted. See Grant, Konvalinka & Harrison, PC (GKH) v. Banks
et al. (In re McKenzie), No. 11-ap-1016, 2011 WL 3585622 (Bankr. E.D. Tenn. Aug 12,
2011); GKH v. F. Scott LeRoy, d/b/a LeRoy & Bickerstaff, et al. (In re McKenzie), No.
11-ap-1110, 2011 WL 4600407 (Bankr. E.D. Tenn. Sept. 30, 2011). GKH also contends
that the bankruptcy court abused its discretion in denying GKH’s motions for leave to
file its third complaint in state court, and to alter, amend, or set aside that order. See In
re McKenzie, No. 08-16378, 2011 WL 3439081 (Bankr. E.D. Tenn. Aug. 5, 2011); In
1
The attorneys sued by GKH included: (1) F. Scott LeRoy, Esq., general counsel for the Trustee,
and the firms F. Scott Leroy d/b/a Leroy & Bickerstaff, PLLC; LeRoy and Bickerstaff, PLLC; and Hurst
and Bickerstaff, PLLC (LeRoy Defendants); and (2) Richard Banks, Esq., special litigation counsel to the
Trustee; Andrew Morgan, Esq.; and Richard Banks & Assocs., PC (Banks Defendants). Shortly before
oral argument, a partial settlement was reached and GKH dismissed the appeal as to the Banks Defendants.
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 3
re McKenzie, No. 08-16378, 2011 WL 4481234 (Bankr. E.D. Tenn. Sept. 27, 2011). For
the reasons that follow, we affirm.2
I.
The bankruptcy case began as an involuntary petition brought by a group of
McKenzie’s creditors on November 20, 2008, and was consolidated with the voluntary
Chapter 11 petition filed by McKenzie on December 20, 2008. C. Kenneth Still was
appointed Chapter 11 Trustee on February 20, 2009, and continued as trustee after the
case was converted to a Chapter 7 proceeding on June 14, 2010 (although a notice of the
appointment was not filed by the United States Trustee until December 27, 2012). The
Trustee, through counsel appointed by the bankruptcy court, brought three actions
against GKH over a two-week period in late July and early August 2010.
After the last of those three actions was resolved in early 2011, GKH began
pursuing its own claims against the Trustee and his attorneys culminating in the appeals
at issue here. GKH unsuccessfully sought leave to file each of its complaints against the
Trustee and his attorneys in state court, but has only appealed from the denial of leave
with respect to the third complaint. Without repeating the procedural background and
related proceedings fully detailed in the bankruptcy court’s orders, a brief summary is
necessary to the discussion of the issues before us.3
On July 23, 2010, the Trustee filed an adversary proceeding in bankruptcy court
against GKH, only, seeking the turnover of documents and records alleged to constitute
property of the estate pursuant to 11 U.S.C. § 542. That complaint, referred to here as
the Turnover Action, alleged that GKH was the primary law firm representing McKenzie
and sought records pertaining to more than 50 entities in which McKenzie allegedly had
an interest. GKH expressed willingness to make some records available for inspection
2
The parties’ motions to supplement the record in 12-5875, and to either strike the reply or allow
a sur-reply in 12-5875 and 12-5876, are denied.
3
GKH is also a creditor in the bankruptcy case, having filed a claim allegedly secured by the
Debtor’s pledge of his equity interests in a number of entities. That claim has been disputed and remains
unresolved.
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 4
and copying, but also resisted demands for turnover of records pertaining to entities in
which the Debtor was alleged to have only a partial interest. After a pretrial hearing held
October 28, 2010, the Trustee and GKH entered into an agreed protective order and
stipulated to dismissal of the Turnover Action without prejudice. The dismissal followed
on November 5, 2010.
The Trustee’s other two actions, filed on August 5, and 6, 2010, both arose from
the same post-petition transfer of a 50-acre parcel of land from the Cleveland Auto Mall
LLC (CAM) (an entity in which McKenzie had a 50% interest) to a newly formed entity
called Exit 20 Auto Mall LLC (Exit 20) (an entity in which McKenzie had no interest).
The “50-Acre Transfer” occurred on December 10, 2008—between the filing of the
involuntary and voluntary petitions in bankruptcy—and stripped CAM’s only remaining
significant asset. It was alleged that McKenzie conveyed his interest in the property
while his cognitive abilities were impaired by a serious medical condition. What
actually happened is not clear from the record, but it is also not material to the issues on
appeal.4
Specifically, the Trustee filed the Avoidance Action as an adversary proceeding
in bankruptcy court, alleging a violation of the automatic stay (11 U.S.C. § 362(k));
seeking avoidance on the grounds of preferential and/or fraudulent transfer (11 U.S.C.
§§ 547(b) and 544(g)); and making claims for equitable subordination and against
insiders with respect to the 50-Acre Transfer (11 U.S.C. § 510(c)). Attached to the
complaint was the warranty deed dated December 10, 2008, signed by McKenzie as
managing member of CAM, which stated that it had been prepared by and was to be
returned to GKH. An affidavit signed by Bowers represented the value of the property
to be $4 million.
GKH and the other defendants successfully moved to dismiss the Trustee’s
Avoidance Action. Bankruptcy Court Judge John Cook found that, despite the dubious
4
These two actions were brought against not only GKH, but also Nelson Bowers II, McKenzie’s
business partner in CAM (and other entities); John Anderson, one of GKH’s attorneys; and the Exit 20
LLC, in which Bowers, Anderson and others were members. A lender of $3.8 million secured by the
property was also named as a defendant in one action.
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 5
circumstances allegedly surrounding the transfer, the Trustee could not establish any of
his claims because he failed to allege a transfer of property of the estate, property of the
debtor, or an interest in property of the debtor. Judge Cook explained that, under
Tennessee law and notwithstanding the prior administrative dissolution of CAM, CAM
continued to exist as a separate legal entity such that the 50-acre parcel remained the
separate property of CAM. Therefore, although the Debtor’s interest in CAM became
part of the bankruptcy estate, the real property owned by CAM did not. This distinction
is at the heart of GKH’s claims of malicious prosecution and abuse of process by the
Trustee. Defendants’ motions to dismiss were granted on December 16, 2010, and no
appeal was filed. The Trustee subsequently filed a motion for relief from judgment
under Fed. R. Civ. P. 60(b) (incorporated by Fed. R. Bankr. P. 9024), which was
denied.5
Finally, the third complaint filed in the Chancery Court for Bradley County,
Tennessee, by the Trustee, together with the Debtor, asserted “non-core” claims of
breach of fiduciary duty, assisting the breach of fiduciary duty, and civil conspiracy to
commit fraud in connection with McKenzie’s transfer of the 50-acre parcel (Bradley
County Complaint). GKH was alleged to have represented McKenzie under a conflict
of interest and to have drafted the documents involved in the 50-Acre Transfer. The
defendants’ filed several motions to dismiss, relying on the one-year statute of
limitations for some claims; denying that Bowers owed McKenzie any fiduciary duty;
and arguing that there could be no conspiracy because there was no violation of the stay,
or any fraudulent transfer, fraudulent misrepresentation, or fraudulent concealment. The
defendants also argued that dismissal of the Avoidance Action on December 16, 2010,
should bar this action as well. Several of the Trustee’s claims were dismissed on statute
of limitations grounds in January 2011, and a stipulated order stating that the dismissal
was final as to all defendants and all counts was entered in March 2011. No appeal was
filed.
5
GKH points to the filing of the Rule 60(b) motion in support of its abuse of process claim, but
has failed to acknowledge that the Trustee was seeking relief with respect to Bowers and not GKH in
connection with the late discovery of an undocumented post-petition transaction involving CAM.
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 6
GKH then brought three actions of its own against the Trustee and his attorneys
alleging malicious prosecution and abuse of process for having initiated and pursued
each of the three lawsuits against GKH. GKH requested leave to file those suits in state
court under the common law Barton doctrine, which limits jurisdiction over certain
claims to bankruptcy court. See Allard v. Weitzman (In re Delorean Motor Co.),
991 F.2d 1236, 1240 (6th Cir. 1993) (discussing Barton v. Barbour, 104 U.S. 126, 127
(1881)).
The district court consolidated the appeals from four detailed orders entered in
GKH’s three actions during August and September 2011. In those four orders,
Bankruptcy Court Judge Shelley Rucker: (1) dismissed GKH’s adversary proceeding
alleging claims related to the Avoidance Action as barred by quasi-judicial immunity;
(2) dismissed GKH’s adversary proceeding alleging claims based on the Turnover
Action on alternative grounds of quasi-judicial immunity and failure to state a claim; (3)
denied GKH’s motion for leave to file its third complaint in state court asserting claims
based on the Bradley County Complaint; and (4) denied GKH’s motion to alter, amend,
or set aside that order to account for GKH’s later determination that the Debtor should
be included as an “indispensable party.” The district court affirmed the bankruptcy
court’s decisions in all respects, and these appeals followed.
II.
On appeal following the district court’s review of the bankruptcy court’s
decisions, we review the bankruptcy court’s orders directly rather than the intermediate
decision of the district court. Lowenbraun v. Canary (In re Lowenbraun), 453 F.3d 314,
319 (6th Cir. 2006). We review the legal conclusions de novo and any factual findings
for clear error. Id.; Heavrin v. J. Baxter Schilling (In re Triple S Restaurants, Inc.),
519 F.3d 575, 578 (6th Cir. 2008). To the extent that GKH has argued error by the
district court, we construe the arguments as challenging the bankruptcy court’s decisions
directly.
Before turning to those arguments, however, it is important to note that GKH’s
appeals, both in the district court and here, have not challenged the bankruptcy court’s
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 7
application of the same standards to the Trustee and his attorneys. “[A]s a matter of law,
counsel for trustee, court appointed officers who represent the estate, are the functional
equivalent of a trustee, [when] they act at the direction of the trustee and for the purpose
of administering the estate or protecting its assets.” Allard, 991 F.2d at 1241; see also
Lowenbraun, 453 F.3d at 321; Benton v. Cory, No. 10:-cv-00907, 2010 WL 5056018.
at *5-6 (D. Nev. Dec. 3, 2010), aff’d 474 F. App’x 622 (9th Cir. 2012), cert. denied,
133 S. Ct. 1637 (2013). Any argument to the contrary is considered waived because it
was not raised in the district court or on appeal to this court. See City of Columbus v.
Hotels.com, L.P., 693 F.3d 642, 652 (6th Cir. 2012).
III.
We review the bankruptcy court’s decisions granting the defendants’ motions to
dismiss de novo, and apply the same standards whether the motion sought dismissal
under Fed. R. Civ. P. 12(b)(6), or judgment on the pleadings under Fed. R. Civ. P. 12(c)
(both incorporated by Fed. R. Bankr. P. 7012(b)). See Roth v. Guzman, 650 F.3d 603,
605 (6th Cir. 2011); Kottmyer v. Maas, 436 F.3d 684, 689 (6th Cir. 2006). To survive
a motion to dismiss, the complaint must “contain sufficient factual matter, accepted as
true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A
motion to dismiss may be granted on the basis of an affirmative defense if the facts
conclusively establish the defense as a matter of law. Hensley Mfg. v. ProPride, Inc.,
579 F.3d 603, 613 (6th Cir. 2009). Despite GKH’s arguments to the contrary, we find
no error in the bankruptcy court’s determination that the claims of malicious prosecution
and abuse of process in connection with the Trustee’s Avoidance and Turnover Actions
were barred by quasi-judicial immunity. As such, we need not consider the alternative
grounds for dismissal on the merits.
A. Quasi-Judicial Immunity
Judges enjoy absolute immunity from suit for money damages for actions taken
in their judicial capacity, except when taken in the complete absence of jurisdiction.
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 8
Bush v. Rauch, 38 F.3d 842, 847 (6th Cir. 1994). Extension of such immunity to
officials performing quasi-judicial duties has been recognized for “those persons
performing tasks so integral or intertwined with the judicial process that these persons
are considered an arm of the judicial officer who is immune.” Id. (extending immunity
to probate court administrator). This determination is made using a “functional”
approach, under which courts look to the nature of the function being performed rather
than the identity of the actor performing it. Id.; see also Forrester v. White, 484 U.S.
219, 229 (1988). Also considered is “the effect that exposure to particular forms of
liability would likely have on the appropriate exercise of those functions.” Forrester,
484 U.S. at 224. Bankruptcy trustees serve in a variety of functions and may be immune
for some but not all of those functions. Weissman v. Hassett, 47 B.R. 462, 466
(S.D.N.Y. 1985).
Case law governing personal liability for trustees has been described by several
courts as confusing and sometimes contradictory. See, e.g., Kirk v. Hendon (In re
Heinsohn), 231 B.R. 48, 64 (Bankr. E.D. Tenn. 1999), aff’d 247 B.R. 237 (E.D. Tenn.
2000); Schechter v. State of Ill. (In re Markos Gurnee P’ship), 182 B.R. 211, 215
(Bankr. N.D. Ill. 1995), aff’d 195 B.R. 380 (N.D. Ill. 1996). A considered attempt to sort
out the law is found in the bankruptcy court’s decision in Heinsohn, which was relied
upon by the bankruptcy court here. See also In re Cutright, No. 08-70160-SCS, 2012
WL 1945703, at *12-13 (Bankr. E.D. Va. May 30, 2012) (distinguishing between
beneficiary claims for breach of fiduciary duty and non-beneficiary claims that may be
barred by quasi-judicial immunity).
It is generally accepted, albeit under varying rationales, that quasi-judicial
immunity does not extend to claims against a trustee by beneficiaries of the estate for
breach of fiduciary duty. See In re Heinsohn, 231 B.R. at 65; Schechter, 182 B.R. at
218-19. Although there is disagreement among the circuits concerning the applicable
standard of proof, this court has held that: “A bankruptcy trustee is liable personally
only for acts willfully and deliberately in violation of his fiduciary duties.” Ford Motor
Credit Co. v. Weaver, 680 F.2d 451, 462 (6th Cir. 1982); see also In re Heinsohn, 231
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 9
B.R. at 65 n.10 (describing split over whether trustee may incur personal liability for
negligent or only willful breach of fiduciary duty). Here, GKH did not allege claims for
breach of fiduciary duty by the Trustee or his attorneys.
Further, as GKH concedes, a bankruptcy trustee is ordinarily entitled to quasi-
judicial (or derivative) immunity from suit by third parties for actions taken in his
official capacity. See, e.g., Kashani v. Fulton (In re Kashani), 190 B.R. 875, 883 (BAP
9th Cir. 1995); Schechter, 182 B.R. at 216-17; Weissman, 47 B.R. at 466 (“trustees and
receivers acting as officers of the court to conserve the bankrupt estate’s assets are
immune from suit”). For example, in Heinsohn, the district court affirmed the
determination that the trustee was entitled to quasi-judicial immunity from suit for
malicious prosecution in connection with having reported possible criminal violations
discovered in the course of the bankruptcy proceedings. Also, this court concluded in
Lowenbraun that counsel for the trustee was entitled to absolute immunity with respect
to state law claims brought by the non-debtor wife arising out of a contempt motion filed
against her in bankruptcy court. 453 F.3d 322-23. We emphasized that the defendant’s
“role as counsel for the trustee permitted him to investigate [the non-debtor wife’s]
transfer and to recover assets properly belonging to the bankruptcy estate.” Id. at 323.
Here, GKH urges us to find that quasi-judicial immunity did not apply to bar its
claims because (1) the Trustee’s actions were ultra vires (or outside the scope of his
authority); and (2) the Trustee acted without prior bankruptcy court approval. These are
the same arguments that were made to and rejected by the bankruptcy court. See GKH
v. Banks, 2011 WL 3585622, at *10-13; GKH v. LeRoy, 2011 WL 4600407, at *14-16.
1. Prior Court Approval
Taking the latter contention first, GKH relies almost entirely on the highlighted
language from the following discussion in Kashani:
As an officer of the court, the trustee is entitled to a form of derivative
judicial immunity from liability for actions carried out within the scope
of the trustee’s official duties. A trustee is entitled to such immunity
only if the trustee is acting within the scope of authority conferred upon
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 10
the trustee by the appropriate statute(s) or the court. While a trustee is
allowed to make reasonable mistakes where discretion is allowed, a
trustee may be sued for intentional or negligent actions which amount to
violations of the duties imposed upon the trustee by law. The trustee has
a duty to preserve assets of the estate while exercising the care and
diligence of an ordinarily prudent person under similar circumstances.
Although there appears to be a conflict between the concept of
judicial immunity and the ability to sue the trustee, the courts have
established certain standards and instructions whereby the trustees can
protect themselves by complying with these standards and, thus, gain
judicial immunity. Those instructions include: the trustee should give
notice to the debtor and obtain prior court approval of the proposed act;
the disclosure by the trustee to the court in furtherance of the requested
approval must be candid; and the act must be within the trustee’s official
duties.
Kashani, 190 B.R. at 883-84 (citations omitted) (emphasis added). Reading this passage
as a whole, it explains that a trustee may shield himself from personal liability for breach
of his fiduciary duties by obtaining prior approval for acts within the scope of his official
duties. It does not support GKH’s assertion that prior court approval is always required.
Indeed, nothing in Kashani, or any other case, can be understood to require prior
court approval for his actions in order for a bankruptcy trustee to invoke quasi-judicial
immunity for claims other than for breach of fiduciary duty. See, e.g., In re Heinsohn,
231 B.R. at 65 (suggesting that trustee is immune from suit for breach of fiduciary duty
by beneficiaries of the estate only when “acting pursuant to specific instructions from
the court”); Schechter, 182 B.R. at 219-20 (describing the judicial immunity a trustee
might secure by obtaining prior court approval as protection against claims for breach
of bankruptcy-related fiduciary duties). As the bankruptcy court in Schechter explained:
The general personal immunity of bankruptcy trustees—which applies
to claims other than for breach of bankruptcy-related fiduciary duties,
arising out of the operation of the estate—renders the estate rather than
the trustee liable without the need for notice or a court order of any kind.
182 B.R. at 220. As one court explained, although the trustee has “immunity vis-a-vis
third parties for actions within the scope of his official duties, that immunity neither
extends to ultra vires acts, nor protects the trustee against claims for breach of fiduciary
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 11
duty.” LeBanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.), 196 F.3d 1, 7
n.4 (1st Cir. 1999) (citations omitted). We conclude that a trustee is not required to
obtain prior court approval in order to invoke quasi-judicial immunity from suit by a
third party for actions taken by the trustee on behalf of the estate and within the scope
of his authority. That brings us to GKH’s contention that the Trustee acted outside the
scope of his authority so as to defeat quasi-judicial immunity.
2. Ultra Vires Exception
Whether a bankruptcy trustee’s actions were ultra vires is a question that courts
most often addressed in the related context of determining whether jurisdiction is
restricted to the bankruptcy court under the common-law Barton doctrine. See Heavrin,
519 F.3d at 578 (citing Barton, 104 U.S. at 127). Under the Barton rule, leave of the
bankruptcy court “must be obtained by any party wishing to institute an action in
[another] forum against a trustee, for acts done in the trustee’s official capacity and
within the trustee’s authority as an officer of the court.” Allard, 991 F.2d at 1240(discussing Barton); see also Satterfield v. Malloy, 700 F.3d 1231, 1234 (10th Cir. 2012)
(listing cases applying Barton). In other words, the question in such cases is whether the
trustee was acting in his official capacity and within the scope of his authority.
In Heavrin, for example, we held that the bankruptcy court had properly
exercised jurisdiction over a claim brought against the Chapter 7 trustee alleging
intentional infliction of emotional distress resulting from the trustee’s threat to refer the
debtor’s former general counsel for criminal investigation unless he entered into a
settlement for the benefit of the bankruptcy estate. 519 F.3d at 578. This court
explained, in part, that the trustee had acted within his authority because the negotiations
pertained to an effort to recover assets for the estate. Id. In determining whether actions
were taken within the trustee’s authority, this court has adopted a presumption that
actions taken in a trustee’s official capacity “‘were a part of the trustee’s duties’” unless
facts demonstrating otherwise were alleged at the outset. Lowenbraun, 453 F.3d at 322(quoting In re Heinsohn, 247 B.R. at 246).
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 12
“The situation in which trustees have been most commonly found to have acted
outside of their authority is in seizing property which is found not to be property of the
estate.” Schechter, 182 B.R. at 217 (citations omitted); see Barton, 104 U.S. at 134(stating “if, by mistake or wrongfully, the receiver takes possession of property
belonging to another, such person may bring suit therefor against him personally as a
matter of right; for in such case the receiver would be acting ultra vires”). In fact, thus
far, courts have only applied the ultra vires exception to the actual wrongful seizure of
property by a trustee or receiver. GKH urges this court to find the Trustee’s actions here
were similarly ultra vires because the Trustee’s lawsuits were filed in an attempt to seize
property that was not an asset of the estate. This analogy falls short for reasons that are
apparent from the cases that GKH itself relies upon.
For example, in Teton Millwork Sales v. Schlossberg, 311 F. App’x 145 (10th
Cir. 2009), the court-appointed receiver in a divorce action wrongfully seized the assets
of Teton Millwork, a corporation in which the husband was only a 25% shareholder.
GKH emphasizes that Teton involved assets of a corporate entity in which the husband-
debtor had only a partial interest. However, the court in Teton made clear that it was the
wrongful physical seizure of corporate assets that caused the receiver’s action to come
within the ultra vires exception. Id. at 148. In fact, the Tenth Circuit has since
distinguished Teton from claims for retaliatory mismanagement of the estate by the
trustee specifically because the debtor did not allege that the trustee had wrongfully
seized the assets of another. Satterfield, 700 F.3d at 1235-36. Relying on this court’s
decisions in Heavrin and Lowenbraun, the court in Satterfield adopted a broad
interpretation of Barton and held that “claims based on acts that are related to the official
duties of the trustee are barred by the Barton doctrine even if the debtor alleges such acts
were taken with improper motives.” Id. at 1236.
Similarly, in Leonard v. Vrooman, 383 F.2d 556, 560 (9th Cir. 1967), the court
held that “a trustee wrongfully possessing property which is not an asset of the estate
may be sued for damages arising out of his illegal occupation in a state court without
leave of [the bankruptcy] court.” The court in Leonard, often cited for the ultra vires
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exception, specifically identified the trustee’s ultra vires acts as the wrongful physical
seizure and continued possession of property that was not an asset of the bankruptcy
estate. The court also explained, however, that the proper course of action would have
been for the trustee to go to court and obtain a turnover order directing the delivery of
the property that was an asset of the bankruptcy estate. Id. at 560-61. Here, the Trustee
did just what Leonard advises trustees to do by filing the adversary actions to determine
the rights and interest of the estate. Schechter, 182 B.R. at 217-18 (“Since the
bankruptcy laws do not permit trustees, on their own authority, to seize estate property
in the possession of a nondebtor, they are personally liable for seizing such property that
does not actually belong to the debtor.”). Thus, GKH’s reliance on these cases is
misplaced.
B. Scope of Authority
Finally, GKH insists that the Trustee exceeded the scope of his authority here
because, in essence, the complaints were so frivolous and meritless that the actions taken
in filing and pursuing the adversary proceedings were ultra vires. It is important to keep
clear that the issue is whether the acts were within the scope of the trustee’s official
duties—not whether they were meritless, without foundation, or brought for ulterior
purposes.
A trustee, as the representative of the bankruptcy estate with the statutory
“capacity to sue and be sued,” is authorized to commence and prosecute an action on
behalf of the estate with or without court approval. 11 U.S.C. § 323; see also FED. R.
BANKR. P. 6009. Further, a Chapter 7 trustee is obligated to, among other things,
“collect and reduce to money the property of the estate for which such trustee serves,”
“investigate the financial affairs of the debtor,” and, “if a purpose would be served,
examine proofs of claims and object to the allowances of any claim that is improper.”
11 U.S.C. § 704(a)(1), (4)-(5). In short, a bankruptcy trustee is appointed to “take
charge of the debtor’s estate, collect assets, bring suit on the debtor’s claims against
other persons, defend actions against the estate, and otherwise administer the estate.”
Lawrence v. Jahn (In re Lawrence), 219 B.R. 786, 801 (E.D. Tenn. 1998). There can
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be little doubt that a Chapter 7 trustee’s filing of an adversary proceeding against a third
party on behalf of the bankruptcy estate is a function generally performed in his official
capacity and within the scope of his authority. As we explain below, GKH did not allege
facts in either adversary proceeding demonstrating that the Trustee exceeded the scope
of that authority.6
1. Complaint Based on Avoidance Action (No. 12-5874)
GKH maintained that the Trustee’s Avoidance Action was filed (and not
voluntarily dismissed) either (1) without conducting the most basic research on the
threshold issue of whether the 50-acre parcel belonged to the debtor or the bankruptcy
estate; or (2) in willful disregard of the law in an effort to extort a settlement from GKH
unrelated to the merits or for ulterior purposes. GKH attached to its complaint copies
of the Avoidance Action, the order of dismissal, and the transcript reflecting Judge
Cook’s ruling that the Trustee could not establish any of his claims because the property
in question did not belong to the debtor or the bankruptcy estate. Review of the record
demonstrates that the bankruptcy court neither erred nor impermissibly weighed the
evidence in finding that the Trustee’s actions were taken in his official capacity and
within the scope of his authority.
In dismissing GKH’s complaint as barred by quasi-judicial immunity, the
bankruptcy court explained:
Here, by filing the Trustee’s [Avoidance Action] Complaint, the
Defendants sought to pursue a claim relating to collecting property of the
bankruptcy estate and investigating the financial affairs of the Debtor,
two of the Trustee’s essential duties outlined in 11 U.S.C. § 704(a). The
Defendants sought to avoid the 50 Acre Transfer because it appeared
substantially to diminish the value of the Debtor’s membership interest,
6
GKH asserts in reply that the Trustee was without any authority to act because no “order of
appointment” was filed in the Chapter 7 proceeding until December 27, 2012. Not only has GKH
acknowledged that Still continued as Trustee after the conversion to Chapter 7, but the record showed that
the creditors received notice that Still would continue as interim Chapter 7 Trustee. Moreover, as the
bankruptcy court explained, the United States Trustee actually makes an appointment of an interim Chapter
7 Trustee. GKH v. LeRoy, 2011 WL 4600407, at *1, n.2. In fact, the document GKH relies upon was the
United States Trustee’s Notice of Appointment stating that Still was appointed interim Chapter 7 Trustee
“as of June 14, 2010.” (No. 08-bk-16378, Doc. 1800.) GKH offered no authority to suggest that failure
to file that notice earlier deprived Still of the authority to act as Chapter 7 Trustee.
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and consequently the value of the estate. The Trustee and his counsel
were not engaged in conducting business of the estate that required the
use of business judgment that would benefit from a court order
authorizing them to proceed with a particular business strategy.
GKH v. Banks, 2011 WL 3585622, at *13. The bankruptcy court also explained that the
dismissal for failure to state a claim would not alone establish a lack of probable cause,
and that the circumstances of the transaction here could have led the Trustee to
reasonably suspect a fraudulent conveyance. Id. at *14-15 (discussing Matter of Linton,
136 F.3d 544, 545-47 (7th Cir. 1998)).
It was in comparing this case to Linton, that GKH argues the bankruptcy court
made impermissible factual findings or failed to draw all reasonable inferences in its
favor. Specifically, GKH points to the following highlighted reasoning:
As In the Matter of Linton, in this action, the facts as alleged in
the Trustee’s Complaint, may have caused a light bulb to flash in the
Trustee’s mind regarding devaluation of the Debtor’s estate. As
explained, supra, the Trustee has the duty and obligation to collect assets
of the estate. See 11 U.S.C. § 704(a)(1). The December 10, 2008 50
Acre Transfer may have decreased the value of the Debtor’s estate. Such
a diminishment of the estate, coupled with allegations of questionable
conduct by individuals owing a fiduciary duty to the Debtor may have
caused the Defendants to consider their obligation to maximize the value
of the estate. Otherwise, the Defendants may have been accused by
creditors of being derelict in their duties. Although, as Judge Cook held,
the 50 Acre transfer did not directly involve property of the estate, it may
have served to impact the estate negatively during the gap period
between the filing of the involuntary bankruptcy petition and the
voluntary bankruptcy petition.
Id. at *15 (emphasis added). This reasoning does not represent a failure to accept
GKH’s factual allegations as true, but involves the legal conclusion that a decision to
pursue an action with respect to the 50-Acre Transfer would not be without any
reasonable basis. In further support of that conclusion, the bankruptcy court identified
other court decisions that considered whether post-petition transfers of property that did
not belong to the estate, but reduced the value of the estate, could violate the automatic
stay provisions. Id. at *15-16 (discussing cases). It is immaterial whether a
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diminishment theory would have succeeded, as the question (again) is whether the
Trustee was acting outside the scope of his authority in seeking to avoid the challenged
transfer.
Nor did the bankruptcy court’s statements regarding the policy reasons for
recognizing quasi-judicial immunity represent a failure to adhere to the standards for
evaluating motions to dismiss. The bankruptcy court emphasized: (1) that immunity
should apply “‘even if, in hindsight, such interpretations of law were incorrect’”; (2) that
leeway is appropriate so that trustees “need not ‘fear they could be held liable for every
discretionary decision’”; and (3) that denying immunity would discourage the filing of
adversary proceedings “when an adversary proceeding is precisely the manner in which
the Bankruptcy Code seeks to have such questions as whether the debtor transferred
property of the estate addressed.” Id. at *16-17 (quoting Picard v. Chais et al. (In re
Bernard Madoff Inv. Secs, LLC), 440 B.R. 282, 292 (Bankr. S.D.N.Y. 2010)). Also, the
bankruptcy court has “other ways of sanctioning wayward trustees.” Id. at *17 (citing
FED. R. BANKR. P. 9011(c)). The bankruptcy court did not err in considering these
policy reasons in refusing to punish the defendants for seeking to maximize the assets
of the estate when the circumstances surrounding the 50-Acre Transfer were bound to
result in “‘light bulbs’ flashing through their heads.” Id. at *16. Further, GKH’s
argument that the bankruptcy court erred by failing to weigh the burden to third parties
who must defend such meritless litigation misses the point of absolute immunity. A
trustee sued by third parties for actions taken in his official capacity on behalf of the
estate and within the scope of the authority granted by statute or court order, is entitled
to quasi-judicial immunity.
Finally, the bankruptcy court concluded that “subjecting the Defendants to
discovery in this proceeding will serve as a distraction during the ongoing main
bankruptcy matter and may preclude them from fully focusing on their duties relating
to administration of the Debtor’s estate.” Id. at *17 (citing Matter of Linton, 136 F.3d
at 545). Despite GKH’s assertion to the contrary, that was not an impermissible fact
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 17
finding but the statement of a policy reason for recognizing immunity as early as it may
be established.
The bankruptcy court did not err in finding as a matter of law that the Trustee and
his attorneys are entitled to quasi-judicial immunity from GKH’s claims of malicious
prosecution and abuse of process for bringing the Avoidance Action. The function,
filing suit on behalf of the estate in seeking to avoid a potentially fraudulent transfer, is
authorized by statute, and exposure to potential liability for doing so would have a
negative effect on the appropriate exercise of that function. Heinsohn, 231 B.R. at 62(quoting Forrester, 484 U.S. at 224)).
2. Complaint Based on Turnover Action (No. 12-5876)
GKH similarly alleged malicious prosecution and abuse of process by the Trustee
in filing and pursuing the Turnover Action either (1) without having conducted the most
basic research regarding whether the records and documents in GKH’s possession were
property of the estate, or (2) in willful disregard of the law and for ulterior purposes.
The numerous exhibits attached to GKH’s complaint included the complaint in the
Turnover Action, emails and correspondence between counsel, and several transcripts
relating to the turnover issue. There can be no doubt that the exhibits GKH attached to
and referenced in its complaint were properly considered in deciding the motions to
dismiss. See Bassett v. NCAA, 528 F.3d 426, 430 (6th Cir. 2008).
Briefly, those records showed that GKH conveyed its position to be: (1) that the
Debtor should already have duplicates of any records being sought; (2) that records of
entities in which the Debtor was a member (but not 100% owner) were not property of
the estate; and (3) that GKH was willing to make such records available for inspection
and copying (but not turnover). Despite the Trustee’s demands, GKH continued to resist
the turnover of documents belonging to entities in which the Debtor had only a partial
interest, questioned the Trustee on the issue during his deposition, and represented at the
pretrial conference that the only issue in dispute was whether those records were
property of the estate. The day after the conference, an agreed protective order was
stipulated to and the Trustee agreed to voluntarily dismiss the Turnover Action without
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 18
prejudice. That dismissal came approximately three months after the action was filed,
and more than a month prior to Judge Cook’s ruling that the 50-Acre Transfer did not
involve property of the debtor or the debtor’s estate.
A trustee’s duties include investigating the financial affairs of the debtor, 11
U.S.C. § 704(a)(4), and a trustee has statutory authority to bring a turnover action in
order to determine whether certain property belongs to the bankruptcy estate, 11 U.S.C.
§ 542. See GKH v. LeRoy, 2011 WL 4600407, at *6 (citing In re Matter of Perkins, 902
F.2d 1254, 1258 (7th Cir. 1990) (“the determination of whether certain property belongs
to the estate should not be made outside of a specific controversy, such as a turnover
action”)). In this case, the bankruptcy court found that:
GKH’s exhibits indicate that the parties were engaged in a legal debate
regarding whether GKH’s records pertaining to the Debtor’s membership
interests in several LLCs constituted property of the estate. The Trustee
felt that he needed a court order to compel turnover of what he contended
was property of the estate; therefore, a turnover adversary proceeding
was the natural way to proceed pursuant to Fed. R. Bankr. P. 7001(1).
Id. at *6. It was not error to conclude that the Trustee acted within his authority by
bringing the action to secure a determination as to what records constituted property of
the Debtor or the bankruptcy estate.
Even if that were not the case, 11 U.S.C. § 542(e) provides that “the court may
order an attorney, accountant, or other person that holds recorded information, including
books, documents, records, and papers, relating to the debtor’s property or financial
affairs, to turn over or disclose such recorded information to the trustee.” (Emphasis
added.) That is, an action for turnover under § 542(e) does not require that the
information be property of the estate. GKH v. Leroy, 2011 WL 4600407, at *6-7
(quoting Am. Metrocomm Corp. v. Duane Morris & Heckscher LLP (In re Am.
Metrocomm Corp.), 274 B.R. 641, 652 (Bankr. D. Del. 2002)). Without denying that the
Trustee could have relied on § 542(e), GKH argued that the Turnover Action sought
relief only under § 542(a) and not under § 542(e).
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Under Fed. R. Civ. P. 8, made applicable by Fed. R. Bankr. P. 7008, only a short
and plain statement of a claim is required. The Turnover Action itself alleged that the
Debtor “owned or controlled several entities which were created by the attorneys at
[GKH],” and that GKH “maintains and controls the files, records and documents related
to the entities, which also constitutes property of the Debtor . . . or the estate under 11
U.S.C. § 541.” Indeed, the Trustee sought to compel GKH to “turnover all records of
the Debtor, including, but not limited to, those listed on Exhibit A,” and alleged that
he is entitled to immediate turnover of these files and records pursuant
to 11 U.S.C. § 542. Additionally, [the Trustee] alleges he is entitled to
records or a copy of any records related to funds or property of the
Debtor that may have been deposited or transferred through any trust or
escrow account of [GKH].
(Emphasis added.) It was not error for the bankruptcy court to recognize that § 542(e)
authorized the relief sought.
Further, as the bankruptcy court also found, “the Trustee was not entirely
unsuccessful in [his] efforts to obtain some property of the estate by filing the Turnover
Complaint.” GKH v. LeRoy, 2011 WL 4600407, at *18. Specifically, correspondence
attached to another pleading in the main bankruptcy case confirmed that shortly before
the voluntary dismissal, GKH agreed to turn over personal records belonging to the
Debtor as well as records pertaining to entities that were owned 100% by the Debtor.
Id. As such, the Trustee was “successful in obtaining at least a subset of the records they
had previously requested without success.” Id. Moreover, as the record also established,
a “highly detailed” agreed protective order was also entered governing the use and
disclosure of records obtained from GKH. Id.Taking the factual allegations as true and drawing all reasonable inferences in
favor of GKH, the bankruptcy court did not err in finding as a matter of law that the
Trustee’s actions in filing and pursuing the Turnover Action against the Debtor’s law
firm were taken in his official capacity on behalf of the bankruptcy estate and within the
scope of his statutory duties to investigate, collect assets and property of the estate, and
seek turnover of materials relating to the Debtor’s financial affairs and interests.
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C. Conclusion
The essence of GKH’s contention that the Trustee acted ultra vires or outside the
scope of his authority is that the Trustee acted improperly or even wrongfully in filing
the Avoidance and Turnover Actions without a reasonable legal basis. However, a
showing that the Trustee’s actions were wrongful or improper “does not equate to a
transgression of his authority.” Cutright, 2012 WL 1945703, at *8; see also McDaniel
v. Blust, 668 F.3d 153, 157 (4th Cir. 2012) (holding Barton applied to claims that
counsel for the trustee sought court orders to obtain irrelevant personal income tax
records because the actions even if wrongful were taken in the context of attempting to
prove the adversary action); Satterfield, 700 F.3d at 1236 (refusing to recognize a
general tort exception to the Barton doctrine). The bankruptcy court did not err in
dismissing GKH’s two adversary proceedings on grounds that the Trustee and his
attorneys were entitled to quasi-judicial immunity from suit.
IV.
GKH’s remaining appeal is from the denial of leave to sue the Trustee and his
attorneys in state court for malicious prosecution and abuse of process for filing and
pursuing the Bradley County Complaint. GKH argues: (1) that Barton did not apply
because the Trustee’s actions were ultra vires; (2) that, even if the Trustee acted within
the scope of his authority, leave should nonetheless have been granted in light of the
factors identified in Kashani; and (3) that the motion to alter or amend should have been
granted on account of GKH’s late decision to also assert claims against McKenzie over
which the bankruptcy court would not have jurisdiction. Before turning to these
arguments, the first question to resolve is whether this appeal is moot.
A. Mootness
Without waiting for a decision on its motion for leave to sue in state court, GKH
filed its third complaint—which included claims against the Debtor—in both state court
(from which it was removed) and bankruptcy court (where the cases were consolidated).
Although currently on appeal in the district court, Judge Rucker has entered orders in the
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 21
consolidated action: (1) dismissing the claims against the Trustee and his attorneys on
the grounds of quasi-judicial immunity; (2) abstaining and remanding to state court the
claims against the Debtor and counsel (to the extent that they represented the Debtor);
and (3) declaring GKH in contempt for filing its third complaint in state court without
first obtaining leave to do so. See In re McKenzie, 471 B.R. 884 (Bankr. E.D. Tenn.
Mar. 30, 2012) (abstention and remand); In re McKenzie, 472 B.R. 455 (Bankr. E.D.
Tenn. Mar. 30, 2012) (dismissing claims against Trustee); In re McKenzie, No. 08-
16378, 2012 WL 1115981 (Bankr. E.D. Tenn. Mar. 30, 2012) (contempt). The Trustee
asserts (without development or citation to any authority) that the dismissal of GKH’s
claims on the merits makes this appeal moot because res judicata would bar relitigation
of those claims if we were to remand.
“The ‘case-or-controversy requirement subsists through all stages of federal
judicial proceedings, trial and appellate.’” Chafin v. Chafin, 133 S. Ct. 1017, 1023
(2013) (citation omitted); see also Alvarez v. Smith, 558 U.S. 87, 92 (2009). A suit
“‘becomes moot only when it is impossible for a court to grant any effectual relief
whatever to the prevailing party.’” Chafin, 133 S. Ct. at 1023 (citation omitted).
However, to say a claim is barred by res judicata is to say it is without merit, and the
Court in Chafin cautioned that care must be taken not to confuse mootness with the
merits. Chafin, 133 S. Ct. at 1023. Absent a showing that the relief sought would make
no difference to the legal interests of the parties, we cannot conclude that the appeal
should be dismissed as moot. See McPherson v. Mich. High Sch. Athletics Ass’n, Inc.,
119 F.3d 453, 458 (6th Cir. 1997).
B. Denial of Leave to Sue in State Court
The Barton doctrine requires that, apart from a narrow exception not at issue
here, permission must be obtained before bringing suit against the trustee in another
forum “for acts done in the trustee’s official capacity and within the trustee’s authority
as an officer of the court.” Allard, 991 F.2d at 1240. There can be no doubt that the
limited exception under 28 U.S.C. § 959(a) for suits against trustees for actions taken in
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 22
“carrying on business” does not apply here. Id. at 1241; Satterfield, 700 F.3d at 1237-
38; Muratore v. Darr, 375 F.3d 140, 144-45 (1st Cir. 2004).7
1. Ultra Vires Exception
Rather, GKH maintains that Barton does not apply (and leave should not have
been required) because the Trustee exceeded the scope of his authority. To the extent
that GKH again argues that the Trustee’s actions were equivalent to the physical seizure
of property found to be ultra vires in Leonard and Teton Millworks, that claim is even
less persuasive in this case as the claims asserted in the Bradley County Complaint
sought actual and punitive damages against GKH for its alleged breach of fiduciary duty
in representing the Debtor in connection with the 50-Acre Transfer. Because the
Trustee’s actions cannot be equated to a trustee’s physical seizure of property not
belonging to the estate, reliance on those cases is misplaced.
GKH also makes the now familiar argument that the Trustee exceeded his
authority because he knew or should have known that the 50-Acre Transfer did not
involve property of the bankruptcy estate either before filing suit or at least when Judge
Cook so ruled in December 2010. GKH also argues that the Trustee knew that the
claims would be found to be time barred, but a successful statute-of-limitations defense
would not cause the Trustee’s pursuit of the claims to fall outside the scope of his
authority. Neither a dismissal on the merits, nor an allegation that the claims were
brought for ulterior purposes, equates to a transgression of the authority to assert claims
to property on behalf of the estate. See Cutright, 2012 WL 1945703, at *8; McDaniel,
668 F.3d at 157; Satterfield, 700 F.3d at 1236-37; Muratore, 375 F.3d at 144 (rejecting
expanded exception to Barton doctrine for torts committed by the trustee).
The bankruptcy trustee has authority, as the representative of the estate, to
commence and prosecute any action or proceeding on behalf of the estate with or
without court approval under 11 U.S.C. § 323(a) and Fed. Bankr. R. P. 6009. See In re
7
28 U.S.C. § 959(a) provides, in pertinent part, that: “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.”
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 23
McKenzie, 2011 WL 3439081 at *10 (citing Hays and Co. v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 885 F.2d 1149, 1154 n.6 (3d Cir. 1989)). Moreover, the
bankruptcy estate includes not only “all legal or equitable interests of the debtor,”
11 U.S.C. § 541(a)(1), but also causes of action arising after commencement of the
bankruptcy case. Id. at *10 (citing cases). Consistent with this authority, the Trustee’s
actions in filing and pursuing the Bradley County Complaint were taken in pursuit of
possible assets of the estate and fell within the broad scope of the Trustee’s duties and
obligations under 11 U.S.C. § 704. Id. at *8; see also id. at *11. GKH has not
demonstrated that the Trustee acted outside the scope of his authority so as to obviate
the need to seek permission to file its third complaint in state court.
2. Exercise of Discretion
We review the bankruptcy court’s decision whether to grant leave to sue the
trustee in state court for abuse of discretion. Matter of Linton, 136 F.3d at 546; see also
Kashani v. Fulton (In re Kashani), 190 B.R. 875, 886 (BAP 9th Cir. 1995). Although
this court has not yet endorsed any particular considerations to be taken into account, the
bankruptcy court looked to the analysis articulated in Kashani for guidance. In re
McKenzie, 2011 WL 3439081, at * 9-12. Other courts also have relied on Kashani in
varying degrees. Compare Beck v. Fort James Corp. (In re Crown Vantage), 421 F.3d
963, 976-77 (9th Cir. 2005); In re VistaCare Group, LLC, 678 F.3d 218, 232-33 (3d Cir.
2012); Cutright, 2012 WL 1945703, at *10-11; Strand v. Loveridge, No. 2:07-cv-576,
2008 WL 893004, at *3-4 (D. Utah Mar. 28, 2008); In re Eerie World Ent., LLC, 2006
WL 1288578 (Bankr. S.D.N.Y. Apr. 28, 2006).
a. Prima Facie Case
GKH devotes a substantial portion of its opening brief to the argument that it
alleged sufficient facts to establish a prima facie case of malicious prosecution and abuse
of process, but acknowledges that no findings were made by the bankruptcy court in that
regard. The court in Kashani explained that, even when a prima facie case has been
alleged against the trustee, the bankruptcy court may nonetheless conclude that the suit
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would be more properly maintained in bankruptcy court. In re Kashani, 190 B.R. at 886.
Here, the bankruptcy court acknowledged GKH’s arguments, assumed that a prima facie
showing could be made, and relied on the extensive record submitted in support of the
motion for leave in analyzing the other Kashani factors. In re McKenzie, 2011 WL
3439081, at *14. Since the decision rested on other considerations, we also assume
without deciding that GKH’s subsequently filed complaint alleged a prima facie case of
malicious prosecution or abuse of process in connection with the Bradley County
Complaint.
b. Kashani Factors
Five questions were identified in Kashani as being relevant to whether the
bankruptcy court should retain jurisdiction:
1. Whether the acts or transactions relate to the carrying on of the
business connected with the property of the bankruptcy estate. If the
proceeding is under 28 U.S.C. § 959(a), then no court approval is
necessary. . . .
2. If approval from the appointing court appears necessary, do the
claims pertain to actions of the trustee while administering the estate?
By asking this question, the court may determine whether the proceeding
is a core proceeding or a proceeding which is related to a case or
proceeding under Title 11. . . .
3. Do the claims involve the individual acting within the scope of
his or her authority under the statute or orders of the bankruptcy court,
so that the trustee is entitled to quasi-judicial or derived judicial
immunity?
4. Are the movants or proposed plaintiffs seeking to surcharge the
trustee; that is, seeking a judgment against the trustee personally?
5. Do the claims involve the trustee’s breaching her fiduciary duty
either through negligent or willful misconduct?
Kashani, 190 B.R. at 886-87. The existence of “one or more of these factors may be a
basis for the bankruptcy court to retain jurisdiction over the claims.” Id. at 887; see also
In re Crown Vantage, 421 F.3d at 976 (discussing Kashani). Here, the bankruptcy court
addressed each factor and found that they militated in favor of retaining jurisdiction.
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 25
Without repeating those findings, we are satisfied that GKH has not established an abuse
of discretion in the bankruptcy court’s denial of its motion for leave to sue in state court.
GKH’s arguments to the contrary are briefly addressed.
First. As already discussed, the § 959(a) exception to the Barton doctrine does
not apply. GKH misapprehends this factor by focusing on Judge Cook’s ruling that the
50-acre parcel was not property of the bankruptcy estate.
Second. As discussed above, the bankruptcy court did not err in finding that the
Trustee’s actions in filing and pursuing the Bradley County Complaint were taken within
the scope of his authority to administer the bankruptcy estate. Nor is it relevant that the
Trustee filed his “non-core” claims in state court. As the bankruptcy court explained:
The categorization of an action as “core” or “non core” for purposes of
bankruptcy court jurisdiction may be determinative of what forum the
trustee must use to obtain jurisdiction over the party from whom he is
seeking the recovery. It is not determinative of whether the filing of that
suit is inside or outside the scope of the trustee’s duties.
In re McKenzie, 2011 WL 3439081, at *9. The bankruptcy court did not err in finding
that this factor weighed in favor of retaining jurisdiction. Further, as is discussed below,
the late addition of claims against the Debtor and the attorneys (to the extent that they
represented him) did not require a different result.
Third and Fourth. GKH contends that the need for bankruptcy court oversight
may be less when the claims against the trustee are personal capacity claims that do not
implicate the bankruptcy estate directly. That is not the case, however, when the trustee
is entitled to immunity. Here, the bankruptcy court observed that similar questions of
the Trustee’s immunity were already being considered in GKH’s related adversary
proceedings. It was not an abuse of discretion to conclude that because there was a
strong possibility that the Trustee would be entitled to immunity in this case, these
factors weighed in favor of retaining jurisdiction over the claims against the Trustee.
Indeed, the bankruptcy court has since dismissed the claims against the Trustee and his
attorneys on the grounds of quasi-judicial immunity.
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 26
Fifth. The bankruptcy court acknowledged that GKH’s claims did not allege
breach of any fiduciary duty owed to it as a creditor, but found that GKH’s tort claims
were better suited to be heard in bankruptcy court both because the claims were
“intertwined with the Trustee’s duties pursuant to 11 U.S.C. § 704” and because GKH
was already pursuing a similar adversary proceeding based on the same operative facts.
Id. at *12. We have already rejected GKH’s argument that the Trustee exceeded the
scope of his authority under § 704.
c. Policy Considerations
Finally, the bankruptcy court identified several policy reasons supporting the
decision to deny the motion and recognized that the decision “should include the
balancing of the interests of all parties involved.” Kashani, 190 B.R. at 886. Briefly,
those reasons included the determination that “resolution of GKH’s tort claims may have
an impact on the administration of the estate since [the Bradley County Complaint]
related directly to the Trustee’s attempts to administer that estate through its powers of
investigation and its duty to collect assets of the estate.” In re McKenzie, 2011 WL
3439081, at *12. Further, “‘[t]he leave-to-sue requirement also protects trustees from
excessive interference in the execution of their duties resulting from [the] need to defend
themselves in lawsuits filed by parties upset by their treatment in the trustee’s
bankruptcy proceeding[.]’” Id. at *13 (quoting In re Kids Creek Partners, 248 B.R. 554,
559 (Bankr. N.D. Ill. 2000)).
Further, the bankruptcy court expressed concern that granting leave to do so in
another court could distract from the ongoing bankruptcy case. More importantly,
however, granting leave could result in a tremendous waste of judicial resources given
the similarity to the related adversary proceeding, the bankruptcy court’s familiarity with
the underlying and related litigation, and the burden that this “highly complicated and
heavily litigated matter” could present to the state court. Id. at *14. Although GKH
disputes that the matter is particularly complex and argues that leave should be granted
because the Trustee’s underlying lawsuit was filed in state court, there can be no
question that the issues of immunity and the scope of the trustee’s authority are better
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 27
adjudicated in bankruptcy court. Finally, GKH contends that the bankruptcy court failed
to equally consider its interests in pursuing claims for having been subjected to
unnecessary and legally unsupportable lawsuits. However, GKH has been able to
litigate the claims asserted in its third complaint—just not in state court. We find no
abuse of discretion in denying the motion for leave to file this action in state court.
C. Motion to Alter or Amend
GKH filed a motion to alter, amend, or set aside the order denying leave to sue
the Trustee in state court pursuant to Fed. R. Bankr. P. 9023 and 9024 (incorporating
Fed. R. Civ. P. 59(e) and 60(b)). GKH explained that it sought relief on the grounds that
it had come to believe that the Debtor was an indispensable party whose addition to the
suit would create serious jurisdictional problems for the bankruptcy court. Although not
expressly articulated, GKH’s argument seems to be that because the claims against the
Debtor could not be heard in bankruptcy court, leave should have been granted so that
claims against the Trustee, the Debtor, and their attorneys could be litigated in a single
action.
As the bankruptcy court concluded, Debtor’s involvement in the underlying
lawsuit was not newly discovered evidence; GKH’s attempt to relitigate its motion for
leave under a new theory was not a proper basis for reconsideration; and no attempt was
made to establish other grounds for reconsideration under Rule 59(e) or relief from
judgment under Rule 60(b). The bankruptcy court did not abuse its discretion in finding
that this was not a proper basis for relief. Hamerly v. Fifth Third Mortg. Co. (In re J&M
Salupo Dev. Co.), 388 B.R. 795, 801, 805 (BAP 6th Cir. 2008).
Moreover, any error would be harmless because the bankruptcy court recognized
that the same arguments had been made in GKH’s pending motion to remand these same
claims to state court. The question of whether the Debtor was an indispensable party and
the impact that the addition of the Debtor would have on the bankruptcy court’s
jurisdiction was reserved for decision in GKH’s actual adversary proceeding. Those
issues have been decided, are on appeal before the district court, and will not be
considered in this appeal.
Nos. 12-5874/5875/5876 Grant, Konvalinka & Harrison v. Banks, et al. Page 28
V.
The district court’s decision affirming the bankruptcy court’s orders in these
consolidated appeals is AFFIRMED.