§ 53.3     Removal and Liability of Trustee
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 53.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Except when the U.S. trustee is serving as Chapter 13 trustee, the Chapter 13 trustee can be removed for cause by the bankruptcy court, on the motion of a party in interest, after notice and a hearing.1 Absent an order to the contrary, removal for cause in any one case requires removal in all Chapter 13 cases in which the trustee is serving.2 When the Chapter 13 trustee is disqualified in a single case, for example, by a conflict of interest, the motion to disqualify should request a limitation on removal to avoid the more general effect of § 324(b). In the analogous Chapter 12 context, it has been held that “resignation” is different from “removal”—a Chapter 12 trustee was permitted to resign by delivering a letter of resignation to the U.S. trustee, without action by the bankruptcy court.3

[2]

Removal of a standing trustee from all pending cases is a serious consequence that has been invoked only in especially egregious situations.4 Nearly 200 individuals serve as standing Chapter 13 trustees, handling hundreds of thousands of cases and disbursing hundreds of millions of dollars each year. Very few reported cases discuss misconduct by a Chapter 13 trustee.5

[3]

At least in the Ninth Circuit, Chapter 13 trustees are sometimes exposed to personal liability. For example, in Nash v. Kester,6 the U.S. Court of Appeals for the Ninth Circuit personally surcharged the Chapter 13 trustee for funds distributed to creditors after dismissal of the Chapter 13 case. The Ninth Circuit reasoned that funds in the hands of Chapter 13 trustee belong to the debtor at dismissal and should not have been distributed to creditors consistent with the confirmed plan.7

[4]

In a case out of a trustee’s worst nightmare, the Bankruptcy Appellate Panel and the U.S. Court of Appeals for the Ninth Circuit discussed the immunity of Chapter 13 trustees for acts of negligence. In Curry v. Castillo (In re Castillo),8 local practice required the Chapter 13 trustee to schedule the hearing on confirmation and the trustee was responsible for giving notice of that hearing. Due to a clerical error in the trustee’s office, the confirmation hearing was set for a date different than the date announced at the meeting of creditors and neither the debtor nor debtor’s counsel was given notice of the actual date. The court held the confirmation hearing. The debtor did not appear and the court dismissed the Chapter 13 case. Within a few days, a creditor with a mortgage on the debtor’s residence foreclosed and the residence was sold to a third party before debtor’s counsel moved to vacate the dismissal. The debtor sued her own attorney and the Chapter 13 trustee. The trustee asserted the defense of immunity.

[5]

When the case reached the BAP, the panel first observed that “the Ninth Circuit had extended absolute immunity to nonjudicial officers who performed tasks that are ‘an integral part of the judicial process.’”9 To determine whether an action by a trustee is a judicial function, the BAP stated the test as, “whether a function that is part of the judicial process is functionally comparable to that normally performed by judges in that it involves the exercise of a discretionary judgment.”10 With respect to the scheduling of the hearing on confirmation, the BAP concluded that the trustee was performing a judicial function:

We . . . conclude that the scheduling of hearings is a discretionary function that should be protected by immunity. Setting hearings involves management of the court’s calendar, a discretionary function normally performed by judges that furthers the ultimate process of adjudicating disputes between parties. When that function is delegated to another person, whether a court employee or not, that person is absolutely immune from liability for exercising the judicial discretion inherent in performing the function. Because in this case this is no dispute that [the trustee] was delegated the task of setting the confirmation hearings, she and [her employee] are absolutely immune from liability for damages resulting from their performance of that task.11
[6]

With respect to the trustee’s failure to send notice of the hearing, the BAP reached a different conclusion:

Sending notice of hearings does not involve the exercise of any discretion. The sending of notices of confirmation hearings is not an action normally performed by the judge. By rule, the task has been given to the court clerk, “or some other person as the court may direct.” Fed. R. Bankr. P. 2002(b). . . . Sending a notice of a hearing is a purely ministerial act, for which no absolute immunity attaches.12
[7]

Citing Ninth Circuit authority, the BAP then concluded that the trustee did not enjoy qualified immunity for the negligent failure to send notice of the confirmation hearing to the debtor and debtor’s counsel:

The trustee’s duty to give notice of hearings is a duty imposed on the court clerk by law. . . . The court has delegated that duty to the trustee. Under [Kashani v. Fulton (In re Kashani), 190 B.R. 875 (B.A.P. 9th Cir. 1995),] and [Hall v. Perry (In re Cochise College Park, Inc.),] 703 F.2d 1339 (9th Cir. 1983), on which the panel in Kashani relied, the trustee and her staff are not immune from suit for alleged negligent actions that amount to violations of those duties. The Ninth Circuit has specifically rejected the reasoning of the cases on which the trustee relies for the proposition that a trustee is liable only for intentional acts.13
[8]

The BAP decision in Castillo was frightening to trustees and debtors’ counsel everywhere.14 The ordinary negligence standard applied to ministerial acts such as the mailing of notice exposes trustees and practitioners to (intolerably) great potential liability in the ordinary course of administering a Chapter 13 program. On further appeal, the U.S. Court of Appeals for the Ninth Circuit reversed the BAP in part, holding that the trustee was entitled to quasi-judicial immunity with respect to the scheduling and giving of notice:

[I]n combining administrative duties with adjudicatory functions, Congress created a hybrid official. The bankruptcy trustee, both at common law and today, performs some functions historically viewed as judicial in nature, and others that are not. . . . [Q]uasi-judicial immunity attaches to only those functions essential to the authoritative adjudication of private rights to the bankruptcy estate. [Antoine v. Byers & Anderson, Inc., 508 U.S. 429, 433, 113 S. Ct. 2167, 124 L. Ed. 2d 391 (1993)] . . . . Both the scheduling and giving of notice of hearings are part of the judicial function of managing the bankruptcy court’s docket . . . . [I]mmunity extends to the giving—or failure to give—notice, as well as to the scheduling of the hearing. The judicial function at issue meets both prongs of Antoine. . . . We do not hold that all of the Trustee’s many functions are covered by absolute quasi-judicial immunity. . . . Because we decide that Curry is entitled to immunity, we need not reach Castillo’s argument that bankruptcy trustees may be liable for negligence.15
[9]

The good news from the Ninth Circuit in Castillo is giving notice of a bankruptcy court hearing is part of the judicial function in a Chapter 13 case. Implicitly, the immunity extended by the Ninth Circuit to Chapter 13 trustees would extend to counsel in districts where notice functions are assigned to counsel. That the Ninth Circuit left open the question whether trustees (or others) may be liable for ordinary negligence with respect to other tasks serves as a reminder that the jury is still out on the full extent of exposure for mistakes in the processing of Chapter 13 cases.


 

1  11 U.S.C. § 324(a). See Flournoy v. Hershner, 68 B.R. 165 (M.D. Ga. 1986) (Chapter 13 trustee is entitled to notice and a hearing before removal under 11 U.S.C. § 324.).

 

2  11 U.S.C. § 324(b).

 

3  In re Brookover, 352 F.3d 1083 (6th Cir. 2003).

 

4  See, e.g., In re Chapter 13, Pending & Future Cases, 19 B.R. 713 (Bankr. W.D. Wash. 1982) (Trustee removed for cause based in part upon violation of state employee protection laws.).

 

5  See, e.g., Richman v. Straley, 48 F.3d 1139 (10th Cir. 1995) (U.S. trustee can appoint a new Chapter 13 trustee in a district and assign all future cases to that new trustee without violating the statutory or due process rights of the existing standing trustee.); In re Colvin, 125 B.R. 182 (Bankr. E.D. Mich. 1991) (It is misconduct for Chapter 13 trustee to appropriate and disburse money to unsecured creditors without notice to debtor. Income deduction order required debtor’s employer to deduct $149.49 weekly. Employer paid debtor $40,000 for debtor’s voluntary termination of employment. Without notice to debtor, trustee convinced employer to remit in excess of $6,000 from the $40,000 to the trustee. The trustee then disbursed the money, paying unsecured claim holders 100%. Although the trustee’s conduct was “egregious,” debtor failed to prove harm because the trustee distributed the funds consistent with a confirmed plan calling for 100% payment of unsecured claims. Debtor might be entitled to modification of the plan to reduce payments to unsecured claim holders to reflect change in employment status. If modification was approved, the trustee’s actions would have harmed debtor and some remedy would be appropriate.).

 

6  765 F.2d 1410 (9th Cir. 1985).

 

7  See also § 338.1 [ In General ] § 153.1  In General.

 

8  248 B.R. 153 (B.A.P. 9th Cir. 2000), rev’d in part, 297 F.3d 940 (9th Cir. 2002).

 

9  248 B.R. at 157.

 

10  248 B.R. at 158.

 

11  248 B.R. at 158–59.

 

12  248 B.R. at 159.

 

13  248 B.R. at 160.

 

14  See Randolph J. Haines, Trustees May Be Liable For Mere Negligence, 10 norton Bankr. l. adviser 1 (2000).

 

15  Curry v. Castillo (In re Castillo), 297 F.3d 940, 951–53 (9th Cir. 2002).