Trustee Absolutely Immune from Personal Liability

Posted by NCBRC - October 21, 2020

A trustee who collects fees from the debtors’ exempt property has absolute immunity from personal liability when the fees were incurred in accordance with a bankruptcy court order authorizing sale of the debtors’ homestead. Holley v. Corcoran (In re Holley), No. 20-11096 (E.D. Mich. Oct. 7, 2020).

The case came to the district court on appeal of the bankruptcy court’s denial of the debtors’ motion to compel turnover of exempt property. The case had made two previous trips through the district court to the Sixth Circuit.

The first appeal arose when the chapter 7 trustee obtained an order permitting her to sell the debtors’ homestead under section 363(f). At the close of the case, the trustee filed a report in which she sought to retain $97,734.32 in administrative fees from the sale of the house. The bankruptcy court granted the trustee’s motion over the debtors’ objection. The district court affirmed. The Sixth Circuit vacated the award of administrative fees on the basis that it improperly taxed the debtors’ exempt property in violation of section 522(k). In re Holley, 661 F. App’x 391, 396 (6th Cir. 2016).

On remand, the bankruptcy court ordered the trustee to turn over $84,204.32 to the debtors. The bankruptcy court also found that the debtors’ tax refund was exempt and ordered the trustee to turn over an additional $20,036.68. The Sixth Circuit held that the bankruptcy court did not exceed its mandate with respect to the tax refund and that the bankruptcy court correctly included sales expenses in the administrative fees that could not be taxed against exempt property. In re Holley, Case No. 18-2375 (6th Cir. July 17, 2019).

The trustee ultimately disgorged all the fees and expenses she had collected from exempt property except $6,506.68. The parties agreed that the outstanding amount represented payments the trustee had made in connection with the closing costs from the sale of the debtors’ home as authorized by the bankruptcy court’s order. The debtors filed a motion to compel turnover of that amount. The bankruptcy court denied the motion finding that, because the bankruptcy estate was now insolvent, any collection of the remaining amount would have to come from the trustee’s personal funds. The debtors appealed to the district court.

The question on appeal was whether the trustee could be found personally liable for the remaining amount owed to the debtors after the bankruptcy estate was completely insolvent. The district court found that she could not. In Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 462 (6th Cir. 1982), the court held that a trustee may be held personally liable only for willful and deliberate violations of her fiduciary duty. Otherwise, trustees have absolute immunity from personal liability for any act taken in accordance with a bankruptcy court order. In this case, the remaining funds owed to the debtors were spent in closing the sale of the debtors’ home as ordered by the bankruptcy court. She was therefore absolutely immune from personal liability for those funds.

The court affirmed.

Holley ED Mich Oct 2020

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