Opinion
Civil Action No. 3:00-CV-2331-L
March 14, 2002
ORDER
U.S. Metro Line Services, Inc. ("U.S. Metro") appeals to this court from the Final Judgment entered on November 19, 1999 by the United States Bankruptcy Court for the Northern District of Texas. After careful consideration of the briefs, the record on appeal, and the applicable law, the court affirms the judgment of the bankruptcy court.
I. Factual and Procedural Background
In May of 1996, a number of creditors filed an involuntary bankruptcy petition against U.S Metro in the United States Bankruptcy Court for the Northern District of Texas. Shortly thereafter, John Litzler ("Litzler") was appointed the Chapter 11 Trustee. Between May 24, 1996, and January 17, 1997, Litzler disbursed $1,338,345.69 as trustee. In January 1997, the bankruptcy court confirmed Debtors' Joint Plan of Reorganization (the "plan"). The plan discharged Litzler from his duties as trustee, releasing him from all further authority, duties, and responsibilities related to and arising from the bankruptcy estate.
The plan also named Litzler disbursing agent of the proceeds of a $2.5 million letter of credit. As disbursing agent, Litzler was required to draw upon the letter of credit and deposit the proceeds "in a Claims Reserve Account from which the Disbursing Agent is to pay claims when allowed pursuant to [the plan]." U.S. Metro alleged Litzler drew the letter of credit, but did not deposit the proceeds in a claim reserve account. Instead, Litzler deposited the proceeds into the Trustee operating account.
U.S. Metro initiated an adversary proceeding against Litzler in April 1999, asserting two causes of action against Litzler. First, U.S. Metro alleged Litzler breached his fiduciary duty when he commingled funds from the claim reserve account with funds from the operating account. Second, the debtor asserted Litzler negligently allowed an insurance policy to lapse on a vehicle which was later stolen and deemed an uninsured loss by the insurance company.
On August 6, 1999, the bankruptcy court conducted a hearing, heard evidence, and made oral findings of fact and conclusions of law. In its findings of fact, the court determined that the trustee was discharged from all authorities, duties and responsibilities on the effective date of the plan. The court further determined that the trustee "for one reason or another co-mingled or was inattentive to the detail . . . of what funds belonged to the [operating account] and what funds were to go to the disbursement agent for disbursements to creditors." Based on these findings, the court ordered Litzler to re-audit and present to the bankruptcy court a sworn statement detailing the trustee funds collected and disbursed. The bankruptcy court entered final judgment on November 19, 1999, denying relief on all claims asserted by U.S. Metro in the adversary proceeding. In this appeal, U.S. Metro asserts the bankruptcy court erred in finding no actionable breach of fiduciary duty.
U.S. Metro does not challenge the bankruptcy court's ruling on its negligence cause of action.
II. Standard of Review
The court applies a de novo standard in reviewing questions of law and a clearly erroneous standard in reviewing questions of fact. In re Berryman Prods., Inc., 159 F.3d 941, 943 (5th Cir. 1998). On appeal before the district court, "[a] bankruptcy court's findings of fact are subject to clearly erroneous review, while its conclusions of law are reviewed de novo." In re Pro-Snax Distribs., Inc., 157 F.3d 414, 420 (5th Cir. 1998). Fact findings are reversed on if, based on the entire evidence, the court is left with a definite and firm conviction that a mistake has been made. In re Young, 995 F.2d 547, 548 (5th Cir. 1993). A bankruptcy court's determination that a bankruptcy trustee did not breach the applicable standard of care is a finding of fact, subject to the "clearly erroneous" standard of review. See Smyth v. Huff, 207 F.3d 758. 762 (5th Cir. 2000).
III. Analysis
The Supreme Court has held that a bankruptcy trustee may be personally liable for willfully and deliberately breaching his fiduciary duty of loyalty. See Mosser v. Darrow, 341 U.S. 267, 272-73 (1951). The Fifth Circuit recently addressed the proper standard of care with regard to negligent actions taken by the trustee in the course of his duties. See Smyth, 207 F.3d at 762. In Smyth, the Fifth Circuit concluded that trustees should not be held personally liable unless they are found to have acted with gross negligence. Id. The court defined gross negligence as:
The intentional failure to perform a manifest duty in reckless disregard of the consequences. . . . It is an act or omission respecting legal duty of an aggravated character as distinguished from a mere failure to exercise ordinary care. It amounts to indifference to present legal duty and to utter forgetfulness of legal obligations so far as other persons may be affected.Id. (citations omitted). Using this standard, the Smyth Court affirmed a lower court finding that a trustee's failure to file timely tax returns did not support a conclusion that the bankruptcy trustee was grossly negligent. Id.
Litzler maintains that the standard articulated above does not apply in this case because all of the conduct about which U.S. Metro complains occurred after his discharge as trustee. Thus, Litzler asserts, he cannot be held personally liable for a breach of fiduciary duty as a matter of law. Although this argument has some appeal, the court rejects this reasoning because a number of courts have found that a trustee retains a continuing duty of loyalty even after discharge. See, e.g., In re Russo, 762 F.2d 239, 243 (2d Cir. 1985) (finding former bankruptcy trustees retain some residual fiduciary obligations); In re Allied Gaming Mgmt., Inc., 209 B.R. 201, 203-04 (Bankr. W.D. La. 1997) (holding fiduciary may not deal with estate property on own account and "circumstance of [the fiduciary] resigning his position with the estate does not cure the problem"); In re Grodel Manuf., Inc., 33 B.R. 693, 696 (Bankr. D. Conn. 1983) (prohibiting former trustee's purchase of reorganized debtor's stock because of "graphic appearance of impropriety" caused by former trustee's prior relationship with debtor). Litzler cites no cases to support the proposition that his fiduciary duties expire upon confirmation of the plan of reorganization, and the court has found none.
This court nevertheless affirms the ruling below because the bankruptcy court did not clearly err in its relevant findings. The bankruptcy court had ample basis in the record to find that Litzler was not grossly negligent in the administration of his duties as trustee and disbursing agent. Although the bankruptcy court determined that Litzler may have been "inattentive to detail," such inattention does not amount to an intentional failure to perform one's duties with reckless disregard of the consequences. Moreover, the evidence indicates that U.S. Metro suffered no pecuniary loss as a result of Litzler's actions. The court therefore affirms the final judgment entered by the bankruptcy court entered on November 19, 1999.
IV. Conclusion
For the reasons stated herein, the court affirms the final judgment of the bankruptcy court. Pursuant to Bankruptcy Rule 8016, the clerk of the court is directed to prepare, sign, and enter judgment upon receipt of and in accordance with this order. All reasonable and allowable costs of appeal are to be taxed against the Appellant U.S. Metro Line Services, Inc.
It is so ordered this 14th of March, 2002.