Herrera et al v. Gonzales et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
ANTONIA MARIE HERRERA,
Debtor. No. 7-05-15578 SA
ANTONIA MARIE HERRERA,
VALERIE NIETO,
MARY LUCERO,
Plaintiffs,
v. Adv. No. 11-1011 S
YVETTE J. GONZALES,
YVETTE GONZALES, Trustee of
Antonia Marie Herrera Bankruptcy
Estate and YVETTE J. GONZALES, LLC,
Defendants.
MEMORANDUM OPINION AND ORDER
REQUIRING BARTON MOTION TO BE FILED
AND PERMITTING AMENDMENT OF COMPLAINT
Plaintiffs’ complaint seeks to hold the chapter 7 case
trustee (“Trustee”) personally liable for damages for an alleged
loss of proceeds from a class action. Adversary Proceeding
(“AP”) doc 1. Trustee has moved to dismiss (“Motion”) (AP doc	1
4), which Plaintiffs oppose (AP doc 7). The Court finds the
Motion well taken and will dismiss, subject to Plaintiffs having
the opportunity to amend the complaint and attach it to a motion
seeking permission to pursue the claims against the Trustee.2
Because most of the record references are to docket	1
entries in the underlying chapter 7 case, the Court uses “doc _”
to refer to docket entries in the chapter 7 case and “AP doc _”
to refer to docket entries in this adversary proceeding.
The Court has subject matter and personal jurisdiction	2
pursuant to 28 U.S.C. §§1334 and 157(b); this is a core
proceeding pursuant to 28 U.S.C. §157(b)(2)(A) and (O); and these
are findings of fact and conclusions of law as may be required by
(continued...)
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Background
Plaintiffs are the daughters of Debtor Antonia Herrera.
Debtor died December 1, 2009, and Plaintiffs are Debtor’s only
heirs.
On July 8, 2005, Debtor filed a chapter 7 bankruptcy
petition. Doc 1. Neither the schedules nor the Statement of
Financial Affairs made any mention of a class action pending in
the state of Alabama against Family Dollar Stores, Inc. from
which Debtor was allegedly entitled to share in a recovery. Doc
1. Trustee issued a No Distribution Report (doc 7) and the case
was closed on October 31, 2005. Doc 9. On April 6, 2006,
Trustee moved to reopen the case, asserting that a creditor
informed Trustee that Debtor had a claim for back wages from the
Family Dollar Store class action. Doc 10. Apparently it was
discovered by some party involved in the Alabama action, after
judgment, that certain class members had filed bankruptcy
petitions but had not disclosed the bankruptcy filings to the
Alabama court. The Court entered the order reopening the case
the next day. Doc 11. Trustee then promptly withdrew the No
Distribution Report (doc 12), issued a notice of assets (doc 13)
and obtained a claims filing deadline of July 13, 2007 (doc 14).
She also hired her own law firm to assist in the prosecution of a
(...continued)	2
Rule 7052 F.R.B.P.
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lawsuit against Family Dollar Stores, Inc., and to hire and
oversee special counsel (motion - doc 16; order - doc 17). And
she obtained the employment of other law firms as special counsel
to assist the Trustee in the recovery of damages. (Motion - doc
21; order - doc 24). In the meantime, presumably pursuant to the
notice of possible dividend, three proofs of claim were timely
filed in the total amount of $14,141.29.3
Exactly what happened after that is a bit murky, and those
events are of course at the heart of the complaint. What is
clear from an examination of this Court’s docket is that the
Trustee filed an interim report on September 28, 2006 (doc 26)
and another interim report on September 27, 2007 (doc 27). Six
days later on October 3, 2007 the Trustee filed a text entry of
No Distribution and Abandonment of Assets. The next day, October
4, a final decree was entered and the case reclosed. Doc 28.
Approximately 26 months later Debtor died, apparently having
taken no action while she was still alive to realize any
distribution from the Alabama action.
Plaintiffs mistakenly assert that no proofs of claim	3
were filed. AP Doc 1, at paragraph 27. The three claims filed
were from GMAC in the amount of $5,318.18, Hyundai Motor Finance
Company in the amount of $6,183.96, and New Mexico Educators
Federal Credit Union in the amount of $2,639.15. All the claims
were filed as unsecured. Debtor listed a total of 16,214 of
Schedule F claims, the bulk of them being the three represented
by proofs of claim. No claims were listed in Schedules D and E.
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A little over a year after Debtor’s death, and over three
years after the chapter 7 case had been reclosed, Plaintiffs
filed this adversary proceeding. Trustee promptly filed her
Motion to Dismiss (doc 3), to which Plaintiffs filed their
Plaintiffs’ Response to Motion to Dismiss (doc 7), to which
Trustee filed her Reply on Motion to Dismiss (doc 8).
Claims
Plaintiffs make three claims in the complaint: that
Trustee’s law firm (Yvette Gonzales, LLC) committed malpractice
(Count I), that the Trustee owed a fiduciary duty to Plaintiffs
and breached it by failing to adequately monitor the attorneys
the estate had hired (Count II), and that the estate’s attorneys
and the Trustee made misrepresentations to the Trustee [sic]
(Count III). Based on those claims, Plaintiffs ask for
compensatory, treble and punitive damages. For the reasons set	4
forth below, the Court rules that the complaint in its present
state fails to state a claim for which relief can be granted.
Analysis5
Standing
The complaint also asks for punitive damages and an award	4
of attorney fees against “Insurer”. AP Doc 1, at paragraph 56
and decretal paragraph D. The Court takes these references as
typographical errors.
In analyzing the complaint, the Court has adopted the	5
terminology that Plaintiffs used.
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Trustee challenges Plaintiffs’ standing to bring this action
against her. The Court must address standing to the extent the
issue arises at any point. Warth v. Seldin, 422 U.S. 490, 498
(1975) (the existence of a case or controversy is the threshold
question in every federal case).
In Board of County Commissioners of Sweetwater County v.
Geringer, 297 F.3d 1108, 1111-12 (10 Cir. 2002), the Court of	th
Appeals for the Tenth Circuit described the requirements of
standing in considerable detail:
“The standing inquiry requires us to consider
‘both constitutional limits on federal-court
jurisdiction and prudential limitations on its
exercise.’ ” Sac & Fox Nation of Mo. v. Pierce, 213
F.3d 566, 573 (10th Cir.2000) (quoting Warth v. Seldin,
422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343
(1975)). Constitutional standing derives from Article
III of the U.S. Constitution, which restricts federal
courts' jurisdiction to suits involving an actual case
or controversy. Schaffer v. Clinton, 240 F.3d 878, 882
(10th Cir.2001) (citing Allen v. Wright, 468 U.S. 737,
750, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984)). To
satisfy constitutional standing requirements, a
plaintiff must demonstrate the presence of three
elements:
(1) “injury in fact”-meaning “the invasion of a
legally protected interest that is (a) concrete
and particularized, and (b) actual or imminent,
not conjectural or hypothetical”; (2) “a causal
relationship between the injury and the challenged
conduct”-meaning that the “injury fairly can be
traced to the challenged action of the defendant”;
and (3) “a likelihood that the injury will be
redressed by a favorable decision”-meaning that
the “prospect of obtaining relief from ... a
favorable ruling is not too speculative.”
Buchwald [v. University of New Mexico School of
Medicine], 159 F.3d [487] at 493 (10 Cir. 1998)	th
(quoting Northeastern Fla. Chapter of the Associated
Gen. Contractors of Am. v. City of Jacksonville, 508
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U.S. 656, 663-64, 113 S.Ct. 2297, 124 L.Ed.2d 586
(1993)); see also Bennett v. Spear, 520 U.S. 154, 163,
117 S.Ct. 1154, 137 L.Ed.2d 281 (1997) (“To satisfy the
‘case’ or ‘controversy’ requirement of Article III,
which is the ‘irreducible constitutional minimum’ of
standing, a plaintiff must, generally speaking,
demonstrate that he has suffered ‘injury in fact,’ that
the injury is ‘fairly traceable’ to the actions of the
defendant, and that the injury will likely be redressed
by a favorable decision.”) (quoting, inter alia, Lujan
v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112
S.Ct. 2130, 119 L.Ed.2d 351 (1992)). At its core, we
have explained, constitutional standing requires a
court “to ask not only whether an injury has occurred,
but whether the injury that has occurred may serve as
the basis for a legal remedy in the federal courts.”
Schaffer, 240 F.3d at 883.
In addition to satisfying the prerequisites for
constitutional standing, a plaintiff must also meet,
generally speaking, the requirements of prudential
standing, a judicially-created set of principles that,
like constitutional standing, places “limits on the
class of persons who may invoke the courts' decisional
and remedial powers.” Warth, 422 U.S. at 499, 95 S.Ct.
2197; see also Allen, 468 U.S. at 751, 104 S.Ct. 3315
(describing prudential standing as “judicially
self-imposed limits on the exercise of federal
jurisdiction”). Under a prudential standing inquiry, a
party that has satisfied the requirements of
constitutional standing may nonetheless be barred from
invoking a federal court's jurisdiction. Bennett, 520
U.S. at 163, 117 S.Ct. 1154; Warth, 422 U.S. at 499, 95
S.Ct. 2197. Like its constitutional counterpart,
prudential standing establishes three conditions a
party must overcome before invoking federal court
jurisdiction. First, a plaintiff must assert his “own
rights, rather than those belonging to third parties.”
Sac & Fox Nation, 213 F.3d at 573; see also Warth, 422
U.S. at 499, 95 S.Ct. 2197 (explaining that a plaintiff
“cannot rest his claim to relief on the legal rights or
interests of third parties”). Second, the plaintiff's
claim must not be “a ‘generalized grievance’ shared in
substantially equal measure by all or a large class of
citizens.” Warth, 422 U.S. at 499, 95 S.Ct. 2197; see
also Allen, 468 U.S. at 751, 104 S.Ct. 3315 (explaining
that generalized grievances should normally be directed
to the legislative, as opposed to judicial, branches of
government). Third, prudential standing requires that
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“a plaintiff's grievance must arguably fall within the
zone of interests protected or regulated by the
statutory provision or constitutional guarantee invoked
in the suit.” Bennett, 520 U.S. at 163, 117 S.Ct.
1154.
When ruling on a motion to dismiss for want of standing, the
Court must accept as true all material allegations of the
complaint and must construe the complaint in favor of the
complaining party. Warth, 422 U.S. at 501.
Taking as true the factual allegations of the complaint and
construing them most favorably to Plaintiffs, the Court
nevertheless finds that Plaintiffs have not alleged sufficient
facts to bestow standing upon themselves with respect to any of
the counts of the complaint. Count I does not allege malpractice
on the part of the Trustee. Rather, it alleges that the law
firm, Yvette Gonzales, LLC, malpracticed. Count III is in part
similar to Count I in that it charges counsel for the estate with
violations of the New Mexico Unfair Practices Act (“UPA”).
Plaintiffs are thus alleging that they have standing to sue
professionals that have been hired by the Trustee and are
supposed to report to her.
Only the Trustee, as the representative of the estate, has
the authority to bring an action against the professionals that
are supposed to report to her. 11 U.S.C. § 323. Creditors of
the estate (if such these be), who have only suffered a general
injury common to all creditors and derivative of injury to the
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estate, have no such standing. See Geringer, 297 F.3d at 1111-12
(citing Warth, 422 U.S. at 499); Stoll v. Quintanar (In re
Stoll), 252 B.R. 492, 495 (9 Cir. BAP 2000). That is because	th
the claim for the alleged malpractice is a claim against the
estate, and it is the trustee, not any random creditor, that has
the sole authority to sue on behalf of the estate as its
representative. 11 U.S.C. § 323.
Count II alleges that the Trustee as such breached a
fiduciary duty that she owed the estate. The alleged breach is
that she failed to (adequately) monitor the counsel that she had
hired for the estate. Count III alleges that, in addition to her
law firm, the Trustee violated the New Mexico Unfair Practices
Act. While these allegations might well provide the basis for
standing for a creditor, they do not do so for (the heirs of) a
debtor. Ordinarily a debtor has no standing to argue about the
size of the estate because the debtor has no pecuniary interest
in the estate which could be injured by the actions of a trustee.
Stoll, id. at n.4, citing in re Thompson, 965 F.2d 1136, 1144
(1 Cir. 1992).	st
First of all, it is necessary to differentiate
between the “person aggrieved” standard for standing
which is applicable to bankruptcy appeals and the
constitutional case or controversy standing by which
this Court must measure its authority to adjudicate a
matter. “The ‘person aggrieved’ test is meant to be a
limitation on appellate standing in order to avoid
‘endless appeals brought by a myriad of parties who are
indirectly affected by every bankruptcy court order.’ ”
Lopez v. Behles ( In re American Ready Mix, Inc.), 14
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F.3d 1497, 1500 (10th Cir.1994) (quoting Holmes v.
Silver Wings Aviation, Inc., 881 F.2d 939, 940 (10th
Cir. 1989)).
Under the “person aggrieved” standard, only those
parties whose “rights or interests are directly and
adversely affected pecuniarily by the decree or order
of the bankruptcy court” are permitted to prosecute an
appeal of that order. Holmes, 881 F.2d at 940. Thus,
the “person aggrieved” test, which focuses on whether
or not the appellant has been financially affected by a
bankruptcy court order, is a prudential doctrine meant
to limit bankruptcy appeals and sets a somewhat higher
standard than the Article III cases or controversies
standard that serves as a constitutional limitation on
federal jurisdiction in the first instance. Nintendo
Co., Ltd. v. Patten ( In re Alpex Computer Corp.), 71
F.3d 353, 357 n. 6 (10th Cir. 1995).
Ebel v. King (In re Ebel), 338 B.R. 862, 868 (Bankr. D. Colo.
2005) (debtor had no pecuniary interest in estate subject to
injury and therefore no standing to contest trustee’s actions
taken on behalf of estate).
Nothing in the complaint states what collection might be had
from the Family Dollar litigation, nor what distributions Trustee
might have to make for administrative claims and general
unsecured claims, in the process of determining what if anything
might have been left over for Debtor. Even construing the	6
Debtor’s amended schedule B lists the claim in the amount	6
of $66,532, of which Debtor claimed, in amended Schedule C, a
total of $8,379 exempt. Doc 23. These figures are not recited
in the complaint, so that it is not clear if Plaintiffs adopt
this number, or are even aware of it. Were Trustee to have
received funds excess of what was needed to pay all the
administrative claims (all the allowed professional fees plus the
allowed trustee fees), 11 U.S.C. §726(a)(1), plus the filed
unsecured claims (with interest), §726(a)(5), she would then
presumably file a notice of surplus to give unpaid creditors the
(continued...)
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complaint most favorably for Plaintiffs, there is no suggestion
in the complaint of any standing to pursue the relief they want.
Thus, the complaint must be dismissed on the grounds of standing,
but the Court will allow Plaintiffs to file an amended complaint
to particularize the facts to state the basis for their standing.
See Warth, 422 U.S. at 501-02.
Failure to State a Claim
In 2007, the United States Supreme Court recast the standard
by which the sufficiency of complaints is judged. In Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 562-63, the court stated
in part:
We could go on, but there is no need to pile up further
citations to show that Conley's “no set of facts”
language has been questioned, criticized, and explained
away long enough. To be fair to the Conley Court, the
passage should be understood in light of the opinion's
preceding summary of the complaint's concrete
allegations, which the Court quite reasonably
understood as amply stating a claim for relief. But
the passage so often quoted fails to mention this
understanding on the part of the Court, and after
puzzling the profession for 50 years, this famous
observation has earned its retirement. The phrase is
best forgotten as an incomplete, negative gloss on an
accepted pleading standard: once a claim has been
stated adequately, it may be supported by showing any
set of facts consistent with the allegations in the
complaint. See Sanjuan [v. American Bd. of Psychiatry
and Neurology, Inc.], 40 F.3d [247], at 251 [(7 Cir.	th
1994)] (once a claim for relief has been stated, a
plaintiff “receives the benefit of imagination, so long
(...continued)	6
chance to be paid (including interest). §726(a)(3). These
payments would all be made before any distribution to Debtor
(other, of course, than her exemptions).
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as the hypotheses are consistent with the complaint”);
accord, Swierkiewicz [v. Sorema N.A.], 534 U.S. [506],
at 514, 122 S.Ct. 992 [(2002)]; National Organization
for Women, Inc. v. Scheidler, 510 U.S. 249, 256, 114
S.Ct. 798, 127 L.Ed.2d 99 (1994); H.J. Inc. v.
Northwestern Bell Telephone Co., 492 U.S. 229, 249-250,
109 S.Ct. 2893, 106 L.Ed.2d 195 (1989); Hishon v. King
& Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d
59 (1984). Conley, then, described the breadth of
opportunity to prove what an adequate complaint claims,
not the minimum standard of adequate pleading to govern
a complaint's survival.
Under the new standard of Twombly a plaintiff’s claim must be
“plausible on its face” in order to survive a motion to dismiss.
Twombly, 550 U.S. at 570 (“[W]e do not require heightened fact
pleading of specifics, but only enough facts to state a claim to
relief that is plausible on its face.”) “The concept of
‘plausibility’ at the dismissal stage refers not to whether the
allegations are likely to be true; the court must assume them to
be true. The question is whether, if the allegations are true,
it is plausible and not merely possible that the plaintiff is
entitled to relief under the relevant law.” Christy Sports, LLC
v. Deer Valley Resort Co., Ltd., 555 F.3d 1188, 1191-92 (10th
Cir. 2009) (citing Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th
Cir. 2008)).
The Supreme Court elucidated the Twombley standards in
Ashcroft v. Iqbal, 556 U.S. 662 (2009), in which it analyzed
Twombley to require that a well pleaded complaint allege activity
which nudges the claims from conceivable to plausible and which
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is not more consistent with lawful behavior rather than unlawful
or otherwise improper behavior.
To survive a motion to dismiss, a complaint must
contain sufficient factual matter, accepted as true, to
“state a claim to relief that is plausible on its
face.” [Twombley], at 570, 127 S.Ct. 1955. A claim has
facial plausibility when the plaintiff pleads factual
content that allows the court to draw the reasonable
inference that the defendant is liable for the
misconduct alleged. Id., at 556, 127 S.Ct. 1955. The
plausibility standard is not akin to a “probability
requirement,” but it asks for more than a sheer
possibility that a defendant has acted unlawfully.
Ibid. Where a complaint pleads facts that are “merely
consistent with” a defendant's liability, it “stops
short of the line between possibility and plausibility
of ‘entitlement to relief.’ ” Id., at 557, 127 S.Ct.
1955 (brackets omitted).
...
Our decision in Twombly illustrates the
two-pronged approach. There, we considered the
sufficiency of a complaint alleging that incumbent
telecommunications providers had entered an agreement
not to compete and to forestall competitive entry, in
violation of the Sherman Act, 15 U.S.C. § 1.
Recognizing that § 1 enjoins only anticompetitive
conduct “effected by a contract, combination, or
conspiracy,” Copperweld Corp. v. Independence Tube
Corp., 467 U.S. 752, 775, 104 S.Ct. 2731, 81 L.Ed.2d
628 (1984), the plaintiffs in Twombly flatly pleaded
that the defendants “ha[d] entered into a contract,
combination or conspiracy to prevent competitive entry
... and ha[d] agreed not to compete with one another.”
550 U.S., at 551, 127 S.Ct. 1955 (internal quotation
marks omitted). The complaint also alleged that the
defendants' “parallel course of conduct ... to prevent
competition” and inflate prices was indicative of the
unlawful agreement alleged. Ibid. (internal quotation
marks omitted).
The Court held the plaintiffs' complaint deficient
under Rule 8. In doing so it first noted that the
plaintiffs' assertion of an unlawful agreement was a “
‘legal conclusion’ ” and, as such, was not entitled to
the assumption of truth. Id., at 555, 127 S.Ct. 1955.
Had the Court simply credited the allegation of a
conspiracy, the plaintiffs would have stated a claim
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for relief and been entitled to proceed perforce. The
Court next addressed the “nub” of the plaintiffs'
complaint—the well-pleaded, nonconclusory factual
allegation of parallel behavior—to determine whether it
gave rise to a “plausible suggestion of conspiracy.”
Id., at 565–566, 127 S.Ct. 1955. Acknowledging that
parallel conduct was consistent with an unlawful
agreement, the Court nevertheless concluded that it did
not plausibly suggest an illicit accord because it was
not only compatible with, but indeed was more likely
explained by, lawful, unchoreographed free-market
behavior. Id., at 567, 127 S.Ct. 1955. Because the
well-pleaded fact of parallel conduct, accepted as
true, did not plausibly suggest an unlawful agreement,
the Court held the plaintiffs' complaint must be
dismissed. Id., at 570, 127 S.Ct. 1955.
Under Twombly 's construction of Rule 8, we
conclude that respondent's complaint has not “nudged
[his] claims” of invidious discrimination “across the
line from conceivable to plausible.” Ibid.
Id. at 678-680. Iqbal also states:
Determining whether a complaint states a plausible
claim for relief will, as the Court of Appeals
observed, be a context-specific task that requires the
reviewing court to draw on its judicial experience and
common sense. [Iqbal v. Hasty,] 490 F.3d [143], at
157–158 [(2 Cir. 2007)].	nd
Id. at 679.
Utilizing this Court’s judicial experience and common sense
in this context-specific task results in scenarios in which
Trustee’s actions are permissible, and perhaps even required.
The complaint says nothing about why the case was closed without
a distribution. The obvious question presents itself of whether
the Trustee, having lined up counsel to help her collect from the
Family Dollar litigation, found that she was too late. There is
nothing in the complaint which even says that the Trustee was not
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already time-barred from obtaining the funds when she reopened
the case to investigate the newly disclosed asset.
Another obvious question is whether, in the exercise of her
reasonable judgment, the Trustee determined that the amount to be
collected from the Family Dollar litigation was simply too small
to justify the outlay of time and expense to recover it. That	7
is, even assuming that the amount to be recovered was a gross
figure of about $66,000 (a figure which, as already pointed out,
does not appear in the complaint but in the amended schedules B
and C), the Trustee would incur significant costs and
disbursements before and after obtaining the funds:
– class action counsel at a 33 1/3% contingency rate, which
would be taken out before the deduction for costs (doc 24)
(approximately $22,000, without taking into account any costs);
- Yvette Gonzales, LLC at $175 per hour plus tax and costs
(doc 17);
- the Trustee’s fee provided for by 11 U.S.C. §326(a)
(approximately $6,550);
- the cost for an accountant to file a tax return for the
estate; and
The following analysis goes significantly beyond	7
construing the complaint most favorably to Plaintiffs; it is
almost instead the equivalent of rewriting the complaint.
Nevertheless, the Court has engaged in the analysis to explain
fully to Plaintiffs how to take into account the bankruptcy
process in deciding whether they have a claim, or a claim that is
worth pursuing.
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- the Debtor’s exemption (claimed at $8,379).
Assuming ten hours of attorney time for the Trustee’s firm
($1,750), not accounting for any costs or taxes from any firm,
nor any costs for an accountant to prepare tax returns (and
assuming no taxes due), the cost of obtaining the $66,532 would
be $38,679, for a net to the estate of $27,853, a figure which,
given the assumptions above, is almost demonstrably too
optimistic. Depending on what considerations were at play, it	8
is conceivable that the Trustee had a valid business reason for
not pursuing the recovery but instead closing the estate.9
Further, it is important that Count II is framed in terms of
the Trustee’s failure to monitor her counsel. Parsing the
complaint as rigorously as did the court in Iqbal, one is
reasonably left wondering what exactly counsel did or did not do
that the Trustee failed to watch out for. In any event, the
To carry the analysis a step further, assuming that the	8
filed claims in the amount of $14,141.29 were paid, but without
taking into account interest or any tardily filed claims, the
remainder to be distributed to Debtor would have been
approximately $13,712. Again, this number is overstated due to
the factors listed above that are not accounted for; it could
easily be a four digit figure, or less. Whether in reality there
would have been any distribution to Debtor is thus a bit
questionable.
Of course, once the case was reclosed, this time with the	9
asset having been scheduled under §521(a)(1), the claim would
have been abandoned by the Trustee pursuant to §554(c), and thus
available in full to the Debtor to recover and keep, free and
clear of claims of prepetition creditors. The parties have
chosen not to argue that issue at this stage of the proceedings.
E.g., Reply on Motion to Dismiss at 2, n.2 (doc 8).
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complaint fails to recite facts that plausibly support a claim
against the Trustee for a failure of fiduciary duty by failing to
monitor her counsel.10
Trustee’s Immunity
The standard for the sort of liability for which a trustee
may be held liable in her personal capacity in the Tenth Circuit
is set out in Sherr v. Winkler, 552 F.2d 1367 (10 Cir. 1977).	th
In that Act case, a Chapter X trustee obtained a turnover order
for proceeds from certain oil and gas leases. The trustee, under
some pressure to act expeditiously, failed, before obtaining the
order, to check for others who might have an interest in the
proceeds. Plaintiffs Sherr and Rubin did in fact have such an
interest, and alleged that the trustee’s action caused them to
have to intervene in the reorganization case to protect their
interests, causing them to unnecessarily incur significant
attorney fees. The District Court dismissed the complaint, which
ruling the Tenth Circuit affirmed, ruling in part as follows:
Thus, a trustee in bankruptcy is not to [be] held
personally liable unless he acts willfully and
deliberately in violation of his fiduciary duties. A
trustee in bankruptcy may be held liable in his
official capacity and thus surcharged if he fails to
exercise that degree of care required of an ordinarily
prudent person serving in such capacity, taking into
consideration the discretion allowed. The rule applies
to the trustee's selection and supervision of his
The sufficiency of the allegations in Count III against	10
the Trustee in her personal capacity are addressed immediately
below in the section on Trustee Immunity.
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agents and employees. (Emphasis added; citations
omitted.)
Id. at 1375. The complaint speaks repeatedly of “malpractice”,	11
“negligence” and “negligent actions”, “fail[ure] to exercise
ordinary care”, etc. However, paragraph 43 of Count II alleges
that “Ms. Gonzales’ actions were committed knowingly,	12
intentionally and maliciously, or in reckless disregard to
Plaintiffs’ rights.” And paragraph 46 of Count III, alleging New
Mexico Unfair Practices Act violations against Yvette Gonzales,
LLC, asserts that “Trustee’s Law Firm and Ms. Gonzales knowingly
made false or misleading statements or other representations in
connection with the services and benefits contract for by Trustee
and the Herrera Bankruptcy Estate.” Finally, paragraph 55, also
part of Count III, states that “Trustee’s Law Firm’s and Ms.
Gonzales’ actions were committed knowing, intentionally and
maliciously, or in reckless disregard to Ms. Herrera’s rights and
The ruling was based on the court’s interpretation of	11
Mosser v. Darrow, 341 U.S. 267 (1951). There are rather widely
differing standards among the circuits concerning trustee’s
personal liability, see Louis M. Phillips and Ashley S. Green,
Musings on the Standard of Care Governing the Question of Trustee
Immunity and Trustee Liability, Part 2, at 12-19 (Nat’l Ass’n of
Bankruptcy Trustees, NABTalk Winter 2008). And the Ninth Circuit
has specifically disagreed with the Sherr court’s interpretation
of Mosser v. Darrow and thus with the standard applied by the
court in Sherr v. Winkler. Hall v. Perry (In re Cochise College
Park), 703 F.2d 1339, 1357 n.26 (9 Cir. 1983). Of course, the	th
Tenth Circuit decision and standard of liability is binding on
this Court.
“Ms. Gonzales” is defined in the complaint to mean the	12
Trustee in her personal capacity. Complaint at paragraph 3.
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well being.” The problem with the allegations is that while they
use the talismanic words that get beyond the mere negligence (for
which there is only a claim against the estate, at least in the
Tenth Circuit), the allegations are themselves bare legal
conclusions that do not provide a sufficient factual predicate to
sustain the complaint under the standards enunciated in Twombley
and Iqbal. There is no explicit recitation of actions that on
their face would have constituted knowing, intentional, malicious
or reckless harm to Debtor. Thus as a complaint against the
Trustee individually, it fails and must be dismissed.
Permission to sue a trustee
In Barton v. Barbour, 104 U.S. 126 (1881), the United States
Supreme Court ruled that a person allegedly injured by the
negligence of a (state court) receiver operating a railroad	13
must obtain the permission of the court that had appointed the
receiver before pursuing an action against the receiver. Id. at
136-37. Mr. Justice Miller dissented and in effect won the day,
when six years later Congress passed legislation which was the
predecessor to 28 U.S.C. §959(a). Collier on Bankruptcy ¶	14
“Barton involved a receiver in state court, but the	13
circuit courts have extended the Barton doctrine to lawsuits
against a bankruptcy trustee.” Carter v. Rodgers, 220 F.3d 1249,
1252 (11th Cir. 2000).
The opening lines of Mr. Justice Miller’s dissent seem as	14
apropos as ever today:
(continued...)
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10.01 (Alan N. Resnick & Henry J. Sommer eds., 16 ed. 2012).	th
Section 959(a) reads as follows:
(a) 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. Such actions shall be
subject to the general equity power of such court so
far as the same may be necessary to the ends of
justice, but this shall not deprive a litigant of his
right to trial by jury.
The language of the statute embraces virtually all the
issues that were argued in Barton. Since that case was decided
and the statute passed, an important distinction has been
recognized in at least some of the case law: it is one thing to
without leave of the appointing court sue the trustee who is
operating a business; it is quite another to sue the trustee
without leave who is merely performing her duties in
administering the estate, including perhaps gathering the assets
of the estate. Collier on Bankruptcy, ¶ 10.01. For example, in
Muratore v. Darr, 375 F.3d 140, 145 (1 Cir. 2004), the chapter	st
11 trustee was sued in the United States District Court for
negligence, breach of fiduciary duty, and other claims arising
(...continued)	14
The rapid absorption of the business of the country of
every character by corporations, while productive of
much good to the public, is beginning also to develop
many evils, not the least of which arises from their
failure to pay debts and perform the duties which by
the terms of their organization they assumed.
Id. at 137.
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out of his administration of the case, after the case was closed.
The First Circuit cited numerous cases which compelled the
dismissal of the case, holding in part that
actions taken in the mere continuous administration of
property under order of the court do not constitute an
“act” or “transaction” in carrying on business
connected with the estate. Field v. Kansas City
Refining Co., 9 F.2d 213, 216 (8th Cir. 1925); see also
[Allard v. Weitzman] In re DeLorean Motor Co., 991 F.2d
[1236] at 1241 [6 Cir. 1993] (action against trustee	th
and representatives alleging abuse of process and
malicious prosecution in relation to prosecution of
fraudulent conveyance action is a suit for actions of
trustee wholly unrelated to carrying on debtor's
business because trustee merely collected, took steps
to preserve, and/or held assets, as well as performed
other aspects of administering and liquidating estate);
Carter [v. Rodgers], 220 F.3d [1249] at 1254 [(11th
Cir. 2000)].
Id. at 144-45. See also Springer v. The Infinity Group Co., 189
F.3d 478 (10 Cir. 1999) (dismissal of action brought in the	th
Northern District of Oklahoma against trustee appointed by the
District Court for the Eastern District of Pennsylvania in an SEC
action, citing with approval DeLorean Motor Co.). In contrast,	15
§ 959 “is intended to ‘permit actions redressing torts committed
in furtherance of the debtor's business, such as the common
situation of a negligence claim in a slip and fall case where a
bankruptcy trustee, for example, conducted a retail store.’ ”
DeLorean also extended the Barton doctrine to trustee’s	15
counsel as the functional equivalent of the trustee. 991 F.2d at
1240.
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Carter, 220 F.3d at 1254 (quoting Lebovits v. Scheffel (In re
Lehal Realty Assocs.), 101 F.3d 272, 276 (2d Cir.1996)).
There is no disagreement that Plaintiffs failed to obtain
this Court’s permission to initiate the state court action
against the Trustee. There is no doubt that the Trustee was not
operating a business in the course of administering this simple
chapter 7 case. Thus dismissal is required unless the
happenstance of this state court case having been removed to, and
now pending in this Court as, an adversary proceeding compels a
different result. It does not.
In Heavrin v. Schilling (In re Triple S Restaurants,
Inc.),342 B.R. 508 (Bankr. W.D. Ken. 2006), aff’d Heavrin v.
Schilling (In re Triple S Restaurants, Inc.), 519 F.3d 575 (6th
Cir. 2008), plaintiff filed an action for intentional infliction
of emotion distress against the trustee for threatening to report
him to the United States Attorney’s office in connection with
life insurance proceeds that the trustee asserted belonged to the
estate. The action was filed in state court and removed to the
bankruptcy court. The bankruptcy court granted the trustee’s	16
motion to dismiss on Barton grounds, holding that “the appointing
The Court uses the phrase “removed to the bankruptcy	16
court” as shorthand for the process which requires removal of an
action to the United States District Court pursuant to 28 U.S.C.
§1452(a) and then an automatic referral of the action to the
United States Bankruptcy Court pursuant to the district’s
standing order of referral and 28 U.S.C. §157(a).
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court has a strong interest in protecting the trustee from
unjustified personal liability for act taken within the scope of
his official duties (citing In re Lehal Realty Assocs.). Id. at
512. In a similar vein, Judge Posner has stated in relevant part
as follows:
Just like an equity receiver, a trustee in
bankruptcy is working in effect for the court that
appointed or approved him, administering property that
has come under the court's control by virtue of the
Bankruptcy Code. If he is burdened with having to
defend against suits by litigants disappointed by his
actions on the court's behalf, his work for the court
will be impeded.
This concern is most acute when suit is brought
against the trustee while the bankruptcy proceeding is
still going on. The threat of his being distracted or
intimidated is then very great, and some of the cases
we have cited stress this. In this case, the suit and
the motion for leave to file it came after the
bankruptcy had been wound up. We cannot find any
federal appellate court rulings on whether leave is
required in such a case. But we think that it is.
Without the requirement, trusteeship will become a more
irksome duty, and so it will be harder for courts to
find competent people to appoint as trustees. Trustees
will have to pay higher malpractice premiums, and this
will make the administration of the bankruptcy laws
more expensive (and the expense of bankruptcy is
already a source of considerable concern). Furthermore,
requiring that leave to sue be sought enables
bankruptcy judges to monitor the work of the trustees
more effectively. It does this by compelling suits
growing out of that work to be as it were prefiled
before the bankruptcy judge that made the appointment;
this helps the judge decide whether to approve this
trustee in a subsequent case.
Yet these reasons alone might not be sufficient to
warrant the extension (if that is how it should be
regarded) of the leave-to-file requirement to suits
filed after the winding up of the bankruptcy. For we
are mindful of the Supreme Court's refusal in Ferri v.
Ackerman, 444 U.S. 193, 100 S.Ct. 402, 62 L.Ed.2d 355
(1979), to grant appointed counsel in federal criminal
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cases immunity from malpractice suits by their clients,
in the face of arguments similar to those in the
preceding paragraph. See id. at 204-05, 100 S.Ct. at
409-10. At stake in the present case, however, is a
concern that has no counterpart in Ferri, concern with
the integrity of the bankruptcy jurisdiction. If
debtors, creditors, defendants in adversary
proceedings, and other parties to a bankruptcy
proceeding could sue the trustee in state court for
damages arising out of the conduct of the proceeding,
that court would have the practical power to turn
bankruptcy losers into bankruptcy winners, and vice
versa. A creditor who had gotten nothing in the
bankruptcy proceeding might sue the trustee for
negligence in failing to maximize the assets available
to creditors, or to the particular creditor. A debtor
who had failed to obtain a discharge might through a
suit against the trustee obtain the funds necessary to
pay the debt that had not been discharged.
Of course principles of res judicata and the good
faith of state courts would head off the worst
consequences of the kind of divided jurisdiction over
bankruptcy matters that we have just described. But a
simpler and more secure protection is to require the
person wanting to bring a suit in state court against a
trustee in bankruptcy to obtain leave to do so from the
bankruptcy court.
Matter of Linton, 136 F.3d 544, 545-46 (7 Cir. 1998) (state	th
court action filed against trustee after chapter 7 bankruptcy
case closed; plaintiffs then filed a motion in the bankruptcy
court to be allowed to continue the state court action; motion
denied).17
In both Heavrin and Linton, the bankruptcy courts arguably
could have declined to apply Barton but did not. On the other
hand, in Harris v. Wittman (In re Harris), 590 F.3d 730 (9 Cir.	th
The Court is not citing Judge Posner’s decision for the	17
use of the Barton doctrine as a device for vetting trustees for
future assignments.
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2009), the Ninth Circuit took the opposite approach. While it
affirmed the dismissal of the state court action that had been
removed to the bankruptcy court based on the trustee’s quasi-
judicial immunity, id. at 742-44, it ruled that the mere act of
removing the action to the bankruptcy court eliminated the Barton
issue:
Here, it is undisputed that Harris did not seek
leave of the appointing court before filing his claim
in state court. As a result, when the case was removed
to bankruptcy court, the bankruptcy court held that,
under the Barton doctrine, even as the appointing
court, it did not have subject matter jurisdiction to
hear Harris's claim, and so dismissed the suit.
This was error, however, because, absent leave of
the appointing court, the Barton doctrine denies
subject matter jurisdiction to all forums except the
appointing court. The Barton doctrine is a practical
tool to ensure that all lawsuits that could affect the
administration of the bankruptcy estate proceed either
in the bankruptcy court, or with the knowledge and
approval of the bankruptcy court. The Barton doctrine
is not a tool to punish the unwary by denying any forum
to hear a claim when leave of the bankruptcy court is
not sought. When Harris's case was removed to the
appointing bankruptcy court, all problems under the
Barton doctrine vanished. Therefore, the district court
erred in affirming the bankruptcy court's dismissal of
Harris's suit for lack of subject matter jurisdiction
under the Barton doctrine.
Id. at 742.
Without in any way disparaging the utility of an “it’s here
now, let’s just deal with it” approach, the fact is that there
are many doctrines that have the effect of punishing the unwary,
such as filing requirements, statutes of limitations and repose,
etc. Despite how inefficiently and even unfairly those policies
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seem to work sometimes, they continue to be enforced because they
implement major policies deemed to be of overriding importance.
So here trustees should not face personal liability – both the
cost of defense and the possibility of a judgment – unless the
action has been filed in the first instance in the bankruptcy
court or there has been a determination by the bankruptcy court
that the action can be initiated elsewhere.
All problems under the Barton doctrine do not vanish when
the unauthorized non-bankruptcy court action is removed to
bankruptcy court. The trustee should not have to expend
resources to remove the action to begin with. Nor should the
trustee have to file a motion to dismiss in the non-bankruptcy
forum, educating that court about the Barton doctrine and hoping
for the correct result. And what if she is not properly served	18
Should the non-bankruptcy court deny the Barton motion to	18
dismiss, presumably the Rooker-Feldman doctrine would dictate
that an appeal would lie to the appellate court in that system.
The Rooker-Feldman doctrine [Rooker v. Fidelity Trust Co., 263
U.S. 413, 414-416 (1923) and District of Columbia Court of
Appeals v. Feldman, 460 U.S. 462, 482(1983)] ordinarily prevents
a federal court from acting as an appellate court to review a
state court decision. However, the importance of the issues
concerning administration of bankruptcy estates are of such
significance that a bankruptcy court might be tempted to ignore
Rooker-Feldman. Cf., e.g., Chao v. Hospital Staffing Services,
Inc., 270 F3d 374, 384 (6 Cir. 2001) ("If the non-bankruptcy	th
court's initial jurisdictional determination [concerning the
applicability of the automatic stay] is erroneous, the parties
run the risk that the entire action later will be declared void
ab initio. (Citation omitted.) If a state court and the
bankruptcy court reach differing conclusions as to whether the
automatic stay bars maintenance of a suit in the non-bankruptcy
(continued...)
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but the action proceeds anyway, resulting in liability to her
which may be overturned later but is still in effect for some
period of time. What happens if the trustee is unable to remove
the action timely? Only by requiring any potential plaintiff to
always start in the bankruptcy court, either by filing a Barton
motion or filing the action itself in the bankruptcy court, can
the process, and trustees, most consistently be protected.19
This Court concurs strongly with those courts that view the
bankruptcy process as fraught with debtor and creditor
unhappiness and that also consider competent trustees to be
critical to the functioning of a process often viewed critically
by the public. For that reason, the Court will require
Plaintiffs to file a motion seeking leave to proceed, in this
Court or any other, attaching thereto a copy of the proposed
amended complaint. See Kashani v. Fulton (In re Kashani), 190
B.R. 875, 885-86 (9 Cir. BAP 1995). This procedure seems	th
justified by the fact that the decision on the Barton motion will
depend in good part on the allegations of the amended complaint.
(...continued)	18
forum, the bankruptcy forum's resolution has been held
determinative, presumably pursuant to the Supremacy Clause.").
If the bankruptcy case has already been closed, requiring	19
the filing of a Barton motion presumably will require the
reopening of the case pursuant to § 350. That is a small burden
to impose on a plaintiff that seeks to pursue relief that could
have a major impact on the trustee and perhaps the court.
Indeed, the motion to reopen might itself be what triggers the
Barton inquiry.
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If the amended complaint survives scrutiny – that is, if the
Court would have allowed it to have been filed in state court,
then the adversary proceeding will continue with subsequent
pleadings, an initial pretrial conference, discovery, perhaps
another motion to dismiss, etc.
Conclusion
Given the analysis set out above, the Court finds that it
need not decide whether Plaintiffs have stated a cause of action
against the Trustee under the New Mexico Unfair Practices Act at
this time. However, the Court has determined that under the
Barton doctrine Plaintiffs will have to file a motion for
permission to proceed against the Trustee, and attach to that
motion an amended complaint.
ORDER
IT IS THEREFORE ORDERED that Plaintiffs may file an amended
complaint.
IT IS FURTHER ORDERED that as a condition to filing an
amended complaint, Plaintiffs must file a motion (and attach a
copy of the amended complaint to the motion) seeking permission
of this Court to sue the Trustee (and her law firm) in her
personal capacity.
IT IS FURTHER ORDERED that the motion shall be filed no
later than May 16, 2012, unless the parties agree to a different
date. Should the motion with the attached amended complaint not
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be filed timely, the Trustee shall submit a form of order to the
Court dismissing the complaint without leave to amend.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: April 16, 2012
Copies to:
Ryan T. Sanders
Allen Shepherd Lewis Syra & Chapman, PA
4801 Lang Ave NE #200
87109-4475
PO Box 94750
Albuquerque, NM 87199-4750
Charles R. Hughson
Rodey, Dickason, Sloan, Akin & Robb, P.A
P.O. Box 1888
Albuquerque, NM 87103-1888
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