ROBERT L. JONES, Bankruptcy Judge.
Trial of this adversary proceeding was held on May 28, 2010, after which the Court granted the parties' request to file post-trial briefs; upon receipt of the briefs, the Court took the matter under advisement. By this suit, the plaintiff, Lamesa National Bank ("LNB"), seeks recovery from the defendant, Liberty Mutual Surety ("Liberty Mutual"), which is the surety under the blanket bond issued to cover bankruptcy trustees serving the bankruptcy court for the Northern District of Texas. LNB, in accordance with Bankruptcy Rule 2010(b), brings this suit in the name of the United States.
In accordance with the Court's findings of fact and conclusions of law set forth below, the Court has determined that Liberty Mutual is obligated under the bond, but such obligation runs in favor of the bankruptcy estate, not LNB. Liberty Mutual is directed to remit the sum of $112,247.66 to the bankruptcy estate of the debtors, Robert Dean Schooler and Tina Marie Schooler.
The Court has jurisdiction over this matter under 28 U.S.C. § 1334(b); this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). This Memorandum Opinion and Order contains the Court's findings of fact and conclusions of law. FED. R. BANKR.P. 7052.
Robert and Tina Schooler filed their chapter 7 bankruptcy case on August 21, 2001; immediately after the filing, the chapter 7 case trustee (the "Trustee") was appointed. LNB is an unsecured creditor of the Schoolers; it has filed four proofs of claim in the case that, when added together, total $143,644.00.
Liberty Mutual is the surety and the Trustee is the principal on the blanket bond issued by Liberty Mutual to the United States under the names of the trustees specifically scheduled under the bond, including the Trustee. See Plaintiff's Exhibit 32. The bond provides that the Trustee, as principal, and Liberty Mutual, as surety, are "bound unto" the United States "for the payment of which well and truly to be made, ... jointly and severally, firmly by these presents. The joint and several liability is between each trustee and the surety." Id. The bond further provides that, "as a condition to serving in the capacity as Trustee, Section 322 of the Bankruptcy Code requires that said Principal provide a surety bond for the faithful performance of [her] official duties as Trustee of the estates of ... debtors assigned to the Principal by the United States Trustee." Id. (emphasis added). Finally, the bond states, "if said Principals shall faithfully perform their official duties and orders issued by the Court as Trustee, then this obligation shall be null and void; otherwise to remain in full force and effect." Id. The liability to the surety is limited per case and in the aggregate to $300,000.00 and $8,000,000.00, respectively.
The Trustee is an attorney that, in addition to serving as a case trustee in chapter
Hank Gremminger ("Gremminger"), father of Tina Schooler, died on November 2, 2001, just over two months after the Schoolers' chapter 7 bankruptcy filing. Tina Schooler and her sister, Kim McWilliams, were the beneficiaries under Gremminger's will—Tina received an undivided one-half of Gremminger's estate, with the other half to be held in trust for the benefit of Kim McWilliams and her son, Timothy Chase McWilliams. See Plaintiff's Exhibit 2. Tina Schooler was named the executrix under the will. In the event she was unable to serve as executrix, John Westhoff, an attorney who was designated as the trustee of the trust for Kim McWilliams and Timothy Chase McWilliams, was named an alternate executor. Id.
Six days after Gremminger's death, on November 8, 2001, Tina Schooler filed an application to probate Gremminger's will. Id.
As a major unsecured creditor in the Schoolers' bankruptcy case, LNB was aware of the bankruptcy estate's rights to Tina Schooler's inheritance from Gremminger. By letter dated November 28, 2001 from Riley Nix, counsel for LNB, to the Trustee, Nix stated as follows:
Plaintiff's Exhibit 5. The hearing on Schooler's application to admit Gremminger's will to probate was set the next day, November 29, 2001, which Nix acknowledged presented a practical problem to having the Trustee appointed as a replacement executor. He therefore suggested an alternate course of action.
Id. Finally, Nix suggested that "some discovery should be done in order to ascertain the nature of the assets involved ... and those that will pass as the result of a non-testamentary transfer, such as certain bank accounts, insurance policies, retirement accounts, and stock or mutual fund accounts." Id.
The next day, November 29, 2001, Nix sent a letter to John Westhoff, who was also serving as attorney for Tina Schooler in her application to probate Gremminger's will. Nix's letter warned Mr. Westhoff that Tina Schooler had not advised the Trustee of the inheritance, the inheritance passed to the bankruptcy estate, the Trustee was entitled to take control over the probate estate, and she (Tina Schooler) was accountable "to the U.S. Bankruptcy Judge for any proceeds received from this Estate or otherwise since the filing of her bankruptcy." Plaintiff's Exhibit 24. The Trustee was sent a copy of this letter.
Tina Schooler initially took the position that she could disclaim the inheritance. See Plaintiff's Exhibit 25. (If she could disclaim the inheritance, it would arguably prevent the inheritance from passing to the bankruptcy estate and thus eliminate her requirement to file amended bankruptcy schedules disclosing the inherited assets.) The Trustee, by letter dated December 4, 2001 to Mike Calfin, the Schoolers' bankruptcy counsel, disputed this claim.
Id. The Trustee emphasized the requirement that the Schoolers amend their schedules and expressed concern about Tina Schooler serving as executrix of her father's probate estate.
Id.
The Trustee sent a similar letter to Mr. Westhoff on the same date, advising him of the bankruptcy estate's entitlement to one-half of Gremminger's estate under section 541(a)(5)(A) of the Bankruptcy Code and, in furtherance of such right, the debtors' obligation to amend their bankruptcy schedules. She told Mr. Westhoff of her
Mr. Westhoff responded to the Trustee the next day, December 5, 2001. See Defendant's Exhibit 12. He informed the Trustee that he did not represent the Schoolers in any individual capacity, but that it was his "belief that "Mrs. Schooler did not inherit any assets, unless and until all debts and obligations of the Estate have first been discharged." Id. Despite asserting that he did not represent the Schoolers in any individual capacity, he offered his opinion that Tina Schooler did have the right to disclaim her inheritance. Id.
A few days later, on December 11, 2001, bankruptcy counsel for the Schoolers sent a memo to the Trustee making somewhat nebulous claims:
Defendant's Exhibit 2. The Schoolers were not conceding the Trustee's rights to the inherited assets.
On December 13, 2001, Mr. Nix issued a sharp response to bankruptcy counsel, stating that Tina Schooler's position that she could disclaim her interests was "ridiculous," that he (Mr. Nix) had "concerns about [Tina Schooler] serving as Executrix of this Estate ..." and that the "real issue is whether or not [Tina Schooler] has spent any of the proceeds from her father's estate, even a dime." Plaintiff's Exhibit 28. The Trustee was provided with a copy of this letter.
In early February 2002, Nix received an unverified copy of the Schoolers' amended schedules A, B, and C. He addressed concerns he had regarding the schedules in a letter to Mr. Calfin dated February 11, 2002. See Plaintiff's Exhibit 29. In such letter, he stated it would be necessary to take a Rule 2004 examination to inquire about various gifts to Tina Schooler's son and her sister's son that were claimed under the amended schedules, and he questioned the authority for asserting that Ms. McWilliams could claim a life estate in certain real property from the Gremminger Estate. Then he stated, "I am very worried by the fact that Mrs. Schooler is in possession of over $50,000.00 of cash (including life insurance money). This money should certainly be turned over to the Chapter 7 Trustee, and I will be asking the Trustee to make a motion for such relief if Mrs. Schooler will not do so voluntarily." Id. The Trustee was provided with a copy of this letter, as well.
The Schoolers amended their bankruptcy schedules on February 20, 2002. See Plaintiff's Exhibit 16. The amended
On February 28, 2002, Tina Schooler, acting as independent executrix of the estate of Hank Gremminger, filed in the probate estate the Inventory, Appraisement and List of Claims. See Plaintiff's Exhibit 3. The inventory listed total property valued at $252,606.97. This included real property located at 1206 S. Mill Street, Weatherford, Texas, valued at $98,500.00, household furnishings and fixtures of $19,310.00, a $54,242.58 certificate of deposit held at The Bank in Weatherford, Texas, a money market account at the same bank with a value of $42,000.00, a checking account at The Bank in the amount of $9,394.69, and a checking account at First National Bank in the amount of $9,499.70. Id. It also included five vehicles ranging in value from $10,750.00 for a 1999 Chevrolet pickup to $110.00 for a "Small box utility trailer." Id.
Tina Schooler had her examination under Rule 2004 of the Federal Rules of Bankruptcy Procedure taken on March 15, 2002. She was questioned by Graham Winegeart (representing LNB), the Trustee, and her attorney, Mr. Calfin. See Plaintiff's Exhibit 15.
Following the examination of Tina Schooler, on March 22, 2002, Nix sent a letter to the Trustee setting forth LNB's concerns:
Plaintiff's Exhibit 6 (emphasis added).
After the March 22, 2002 letter, LNB, through Mr. Nix, continued to make periodic requests for status reports from the Trustee, but the tone of such requests suggests an assumption that the Trustee had recovered the estate assets. On August 28, 2002, Nix sent a letter to the Trustee simply requesting a "status of the estate's efforts to liquidate the Debtor[s'] interest in the real and personal property which the Debtor inherited...." Plaintiff's Exhibit 7. A similar request was made by letter dated January 20, 2003 from Nix to the Trustee. See Plaintiff's Exhibit 8. On February 26, 2003, Nix wrote the Trustee informing her that as trustee of the Schoolers' bankruptcy case she would be entitled to "additional assets in the Schooler bankruptcy estate in the form of `peanut base acreage.'" Plaintiff's Exhibit 9. He also asked that she call him to provide a "status of the liquidation of the Gremminger Estate." Id.
After the Trustee filed with the Court the Individual Estate Property Record and Report for the period ending March 31, 2003, Nix sent a letter to the Trustee dated June 16, 2003, stating that given his review of the report, he wanted "to know... the status of the listing and sale of the real property coming out of the Estate of Hank Gremminger, Deceased." Plaintiff's Exhibit 10. He also asked if the Trustee "had possession of the $48,000.00 in cash coming out of the same estate." Id. He then requested an estimate of the time remaining until disbursements would begin. Id.
Less than a month prior to Nix's June 16 letter, in May 2003, an amended inventory of assets was filed by Tina Schooler in the Gremminger probate proceedings. See Plaintiff's Exhibit 4. The amended inventory reflected total property of a value of $276,823.77. Id. The increased value of the inventory from the prior inventory
After the May, 2003 letter, the inquiries were more sporadic. Mr. Nix sent letters to the Trustee on July 29, 2003 and November 12, 2003, respectively. See Plaintiff's Exhibits 11, 12. Then, after reviewing the Trustee's Individual Estate Property Record and Report for the period ending March 31, 2004, Nix sent a letter to the Trustee asking again when disbursements would begin. See Plaintiff's Exhibit 13. He also stated, "I understand that you have a heavy case load, but my client must insist that some action be taken in this case immediately." Id. Finally, on January 5, 2005, Nix sent a letter to the Trustee requesting that she call him to discuss various matters within the letter, including information he provided regarding two NFL rings and other personal property that belonged to Mr. Gremminger. See Plaintiff's Exhibit 14.
Despite the numerous inquiries by Mr. Nix, and despite the tenor of such inquiries, the Trustee never provided a written response to Mr. Nix. Prior to March of 2005, she made no formal demand for turnover of the estate assets on Tina Schooler, her bankruptcy counsel, or Mr. Westhoff, the probate estate counsel. She took no action in the probate proceeding to have an alternate executor appointed and never pursued any action in the bankruptcy court to protect the bankruptcy estate's interest in the Gremminger estate.
The Trustee did, on March 26, 2002, file a report with the Court stating that the case had changed from a no-asset case to an asset case. See Plaintiff's Exhibit 17. As stated, she also filed the Individual Estate Property Record and Report for the periods ending March 31, 2003 and March 31, 2004. She continued filing such reports for the periods for years 2005-2008. For the years 2003 and 2004, the reports reflect that the estate was still holding an undivided one-half interest in the "homestead" from the Gremminger estate, valued at $90,000.00, and cash from the Gremminger estate of $48,000.00. For the years 2005 through 2007, the half interest in the homestead was reduced to a value of $45,000.00. In the report for the period ending March 31, 2008, the homestead value was reduced to $4,151.28, with a notation that the "house is held by estate and is subject to life estate in Kim McWilliams; current value is for the remainder interest based on current life expectancy present value." Plaintiff's Exhibit 23. This notation contradicts the Trustee's position as reflected in a letter to debtors' counsel three years earlier, on March 7, 2005. This letter, dated more than three years after Gremminger's death, requested a full accounting of the Gremminger estate, demanded turnover of "all cash and properties to which Tina Schooler became entitled as a result of the death of Gremminger, including both probate and non probate assets," and explained the Trustee's position opposing any homestead claim by Ms. McWilliams to the real property at 1206 S. Mill, Weatherford, Texas. See Plaintiff's Exhibit 27. In this regard, she stated as follows:
Plaintiff's Exhibit 27. The letter concludes with her claim that the two NFL championship rings belong to the Gremminger estate and thus should have been delivered to the Trustee, as well.
The annual reports were not accurate when filed as the Trustee never had either actual or constructive possession of the assets listed in the reports. She testified that such items and their values were taken from the debtors' schedules.
Apart from possible phone conversations between the Trustee and debtors' counsel, the Trustee's March 7, 2005 letter to debtors' counsel represents the only affirmative action taken by the Trustee to recover the Gremminger estate assets. Unfortunately, the letter was too late. It was not until April 2009 that the Trustee confirmed Tina Schooler had indeed received her half interest in the Gremminger estate and, more important, had spent the entirety of the inheritance. This discovery was made after a hearing held on April 21, 2009, on a motion filed by LNB requesting that the Court direct the Trustee to perform her duties. The Court issued its order, entered April 24, 2009, finding that the Trustee had failed to perform certain duties designated to trustees under section 704 of the Bankruptcy Code and, specifically, directed that the Trustee file a written report with the Court by May 22, 2009, setting forth the status and disposition of all assets of the Gremminger estate. See Plaintiff's Exhibit 36. In furtherance of the Trustee's obligation to prepare and file such report, the Court also directed the Trustee to take the examinations of Tina Marie Schooler and John Westhoff, attorney for the Gremminger estate.
After conducting the examinations, the Trustee filed the report that confirmed the loss of the Gremminger estate assets. See Plaintiff's Exhibit 37. The real property held by the probate estate, the home at 1206 S. Mill Street, Weatherford, Texas, sold September 23, 2004 for the sum of
Finally, the Trustee filed a lawsuit against Tina Schooler immediately before the April 21, 2009 hearing on LNB's motion. This lawsuit resulted in a settlement between the Trustee and Tina Schooler. It is anticipated that the estate will net $30,000.00 from this settlement, which must be paid by December 31, 2010.
By bringing this action against Liberty Mutual, LNB submits that Liberty Mutual, as surety under the Trustee's blanket bond, is directly liable to it and, as a result, judgment should issue in LNB's favor in the amount of $112,247.66, plus attorneys' fees and costs. Liberty Mutual's liability is triggered because, according to LNB, the Trustee is obligated as the principal under the bond for her failure to "faithfully perform" her duties as trustee. LNB submits that the Court's order of April 24, 2009, wherein the Court determined the Trustee had failed to perform her duties as trustee, collaterally estops Liberty Mutual from contesting its liability. Alternatively, LNB contends that if gross negligence is the standard for imposing liability on the Trustee and thus Liberty Mutual, the Trustee's failure to perform her duties satisfies a gross negligence standard.
Liberty Mutual submits that LNB's claims are barred by limitations; and if not, Liberty Mutual's liability is contingent upon a finding that the Trustee was grossly negligent. Liberty Mutual contends that the Trustee's conduct, taken as a whole, does not support a finding of gross negligence; and even if some of the Trustee's conduct was grossly negligent, no damages resulted from such conduct. Liberty Mutual disputes that, under any circumstance, LNB is entitled to attorneys' fees.
The merits of LNB's claim turn on whether the Trustee's conduct triggers Liberty Mutual's liability under the bond. Before reaching this issue, however, the Court first addresses both the collateral estoppel argument raised by LNB and the limitations defense raised by Liberty Mutual; either of these claims, if successful, essentially resolves the case without having to delve into the Trustee's conduct. First, the collateral estoppel issue is easily
The limitations question is more complicated. Section 322(d) of the Bankruptcy Code states that "[a] proceeding on a trustee's bond may not be commenced after two years after the date on which such trustee was discharged." Liberty Mutual argues, in effect, that the language of section 322 merely sets an outer limit of limitations and that a state law limitations period may apply and thus result in a shorter limitations period. Thus, the Texas two year statute of limitations under the Texas Civil Practice and Remedies Code applies to bar LNB's claim, according to Liberty Mutual. The Texas statute presumably applies in cases involving negligence or gross negligence. Liberty Mutual submits that as surety, it may rely upon any defense available to the Trustee, the principal under the bond, in a hypothetical action lodged against the Trustee. As its liability can only arise from the Trustee's gross negligence, Liberty Mutual argues that it can also take advantage of the Trustee's defense of limitations under the Texas statute. The action here would therefore be barred as the timing of the legal injury, the loss to the bankruptcy estate, occurred prior to 2005, by which time Tina Schooler had already spent the inheritance and her misappropriation rendered uncollectible. The basic question is whether section 322 of the Bankruptcy Code preempts state law limitations. Stated otherwise, does it "supplant" or merely "supplement" the shorter state law limitations period? See Oles Grain Co. v. Safeco Ins. Co. of Am., 221 B.R. 371 (N.D.Tex. 1998).
Despite the split of authority on this question, the matter is resolved in the Northern District of Texas by Oles Grain. The district court in Oles Grain thoroughly addressed the arguments applicable to the issue, including arguments similar to the ones made here by Liberty Mutual, and concluded "that Congress intended to create a statute of limitations for actions on a bankruptcy trustee's bond that was to be the statute of limitations for such actions." Oles Grain, 221 B.R. at 375. The court found no indication that the two year limitation as referenced in section 322(d) was intended to set an outer limit for limitations purposes, under which a state statute could supply a shorter statute of limitations. Section 322(d) was therefore held controlling. Id.
Notably, the district court also considered whether, under state law, a surety was exonerated when the limitations period had run on a hypothetical action directly against the principal. Id. at 376. In construing Texas law, the district court concluded that the Texas Supreme Court would not adopt a strict rule that exonerated the surety if limitations had run against the principal. The court's analysis included a review of the Texas Supreme Court case cited by Liberty Mutual, Great American Insurance Co. v. North Austin Municipal Utility District No. 1, 908 S.W.2d 415 (Tex.1995). Liberty Mutual submits that Great American undermines the holding of Oles Grain and makes it "clearly incorrect." Despite Liberty Mutual's construction of Great American, the Court disagrees with such a construction and agrees with the reasoning of Oles Grain and, most important, is bound by the decision of Oles Grain. See In re Rand Energy Co., 259 B.R. 274, 276 (Bankr.N.D.Tex. 2001) (Felsenthal, J.); see also In re Jobs. com, Inc., 283 B.R. 209, 218 (Bankr. N.D.Tex.2002) (stating that "decisions from a United States District Court in this District on appeal are binding precedent on bankruptcy courts in this District.") (Houser, J.). Section 322(d) sets the limitations period for this action against Liberty Mutual. This action is not barred by limitations.
As neither LNB's offensive use of collateral estoppel nor Liberty Mutual's defense of limitations are applicable, the Court now addresses the substantive legal issue before it: Is Liberty Mutual liable under the blanket bond in light of the Trustee's failures in fulfilling her duties as the chapter 7 Trustee? The Fifth Circuit in In re Smyth, 207 F.3d 758 (5th Cir. 2000), held that the gross negligence standard applies when assessing whether trustees should be held personally liable for their conduct. Id. at 762. In addition, the Fifth Circuit in In re Texas Pig Stands, Inc., 610 F.3d 937 (5th Cir.2010), which draws a distinction between the trustee's personal liability to a third party (a taxing authority for failure to pay taxes) and the trustee's personal liability to the bankruptcy estate, specifically noted that the Smyth case stands for the proposition "[t]hat a trustee is only liable to the bankruptcy estate for acts of gross negligence." Id. at 3. The gross negligence standard is "the standard of care by a trustee to the estate when the trustee acts as its agent." Id.
Both Smyth and Pig Stands address the liability of a trustee; the liability of a bonding company was not at issue in either case. The Court considers whether the analysis is altered given that the claim here is made exclusively against the bonding company, Liberty Mutual. For example, can a trustee's negligent conduct result in the bonding company's liability? In this regard, the leading treatise on bankruptcy law, Collier on Bankruptcy, states without qualification, "When a trustee negligently performs the trustee's duties, liability under the bond is activated." 3 COLLIER ON BANKRUPTCY ¶ 322.02[2] (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev.) (citing In re Reich, 54 B.R. 995, 1008 (Bankr.E.D.Mich.1985)). The case cited by Collier, the Reich case, addressed at length the confusion that had by then arisen under the law in determining the liability of a bankruptcy trustee. Id. The confusion arises from the distinction some courts have drawn between a bankruptcy trustee's liability in his "official" or professional capacity and his liability personally. This is evident from the court's statement as follows:
In re Reich, 54 B.R. at 998. The effect of the distinction, at least in the Sixth Circuit, is that a trustee is liable in his "official" capacity for mere negligence, but he is personally liable for a willful and deliberate violation of his duties. In the first instance, the trustee could be "surcharged" for negligence, meaning a claim is made against the trustee's "official account" to cover his negligence.
Accordingly, the Court considers whether Liberty Mutual's liability under the bond can be triggered by the Trustee's simple negligence rather than gross negligence on the theory that the surety must answer for either or both of the Trustee's "official" liability or personal liability. In this regard, the Court is satisfied that, regardless whether two types of liability are recognized, the gross negligence standard applies here. The gist of LNB's claim is that the Trustee failed to recover assets for the bankruptcy estate. The Fifth Circuit in Pig Stands noted that its prior decision in Smyth, which sets forth the gross negligence standard, addressed the standard of care owed by a trustee to the estate when he acts as its agent and held that a trustee is "only liable to the estate for acts of gross negligence." Pig Stands, 610 F.3d at 943. The Smyth court, in adopting a gross negligence standard, looked to the Final Report of the National Bankruptcy Review Committee, describing the state of the law on the issue of the trustee's standard of care as a "crazy quilt" of decisions. Smyth, 207 F.3d at 761. Noting the conflicting policy considerations—that too little protection might expose a trustee to excessive personal liability and dissuade capable people from becoming trustees, while too much protection would jeopardize the goal of responsible estate management—the committee recommended the adoption of the gross negligence standard for chapter 7, 12, and 13 trustees. Id. at 761-762.
The Court mentions the policy considerations for the gross negligence standard as it could be argued here that the concept of official liability does not severely undermine the policy of protecting trustees as the trustee's exposure would be limited to the extent of the trustee's pecuniary interest in the case (i.e., the trustee's right to a commission). The problem with this argument, however, is that the trustee presumably indemnifies the bonding company and would thus be subjected personally to the bonding company for whatever amounts the bonding company would have to pay over to the estate to cover the trustee's official liability. See In re Reich, 54 B.R. at 1009.
As the parties are aware, the Court has already decided in its memorandum opinion of May 12, 2010 on the motion for summary judgment filed by LNB, that Liberty Mutual's liability must be triggered by the gross negligence of the Trustee. This conclusion was reached after reviewing the language of the bond along with the Fifth Circuit's holding in the Smyth case.
In re Schooler, No. 01-51003, 09-05011, 2010 WL 1946268, at *3 (Bankr.N.D.Tex. May 13, 2010). The Court reiterates its prior holding that unless the Trustee was grossly negligent, Liberty Mutual is not obligated under the bond.
The Court now addresses the Trustee's conduct (or lack of action) to determine if it meets a gross negligence standard. Liberty Mutual contends the Court cannot make this determination without expert testimony on the standard of care. "Without proof of what a diligent and competent bankruptcy trustee would do under similar circumstances, there can be no basis for a conclusion that [the Trustee] deviated from [the standard of care] by intentionally failing to perform a manifest duty in reckless disregard of the consequences." Liberty Mutual's Post-Trial Brief at 2. Liberty Mutual suggests that the Court is serving as a witness or improperly invoking judicial notice if it determines the Trustee's standard of care.
The Court disagrees with Liberty Mutual. First, the Court recognizes that there is some confusion in the law on whether a trial judge may determine the standard of care in a professional malpractice case. Some courts hold that the judge in a bench trial cannot make this determination. See Royal Ins. Co. of America v. Miles & Stockbridge, P.C., 138 F.Supp.2d 695, 700 (D.Md.2001) (stating that "[a] trial judge does not ... determine the standard of care in a legal malpractice case, even though it is an area in which a court arguably has unique expertise"); see also Lentino v. Fringe Emp. Plans, Inc., 611 F.2d 474 (3rd Cir.1979) (finding expert testimony should be required in bench trials even though the trial judge may be familiar with the relevant standard of care). Other courts have held that the judge may substitute his experience and knowledge for that of an expert witness in determining whether a professional standard of care was met and if the breach caused damages to the plaintiff. See U.S. Fidelity & Guar. Co. v. E.L. Habetz Builders, Inc., No. 06-895, 2008 WL 850431, at *15 (W.D.La. Mar. 28, 2008) (following Louisiana law); see also In Re Monahan Ford Corp. of Flushing, 390 B.R. 493, 504 (Bankr.E.D.N.Y.2008) (finding that the bankruptcy court was inherently qualified to judge the professional competence of debtor's counsel without expert assistance); see also In re Precept Bus. Servs., Inc., No. 01-31351-SAF-7, 2004 WL 2074169, at *10 (Bankr.N.D.Tex. Aug. 23, 2004) (Felsenthal, J.) (stating that the court could decide whether an attorney made a reasonably prudent decision without
The bankruptcy court in Monahan Ford addressed whether, in a bench trial, expert testimony was necessary to determine if the debtor's counsel was negligent.
The court reached its conclusion by looking to two of the factors that the court must consider under section 330 in evaluating compensation of counsel for the debtor-in-possession: "(1) `whether the professional has demonstrated skill and experience in the bankruptcy field'; and (2) `whether the compensation is reasonable based on the customary compensation charged by comparably skilled practitioners' in non-bankruptcy cases." Id. at 503-04. The court emphasized that its evaluation of the reasonableness of attorney's fees under section 330 "necessarily involves an assessment of the professional competence and skill with which the services were performed." Id. The court reasoned that given its statutory duties under sections 329 and 330, as well as its routine observation and evaluation of professionals in bankruptcy cases, it was better situated than any "expert" to evaluate the conduct of debtor's counsel. Id.
In Texas, expert testimony is required to establish negligence "when the alleged negligence is of such a nature as not to be within the experience of [a] layman." 3D/I + Perspectiva v. Castner Palms, Ltd., 310 S.W.3d 27 (Tex.App.-El Paso 2010, no pet.) (citing FFE Transp. Servs., Inc. v. Fulgham, 154 S.W.3d 84, 90 (Tex.2004)); see also Simmons v. Briggs Equip. Trust, 221 S.W.3d 109, 114 (Tex. App.-Houston [1st Dist] 2006, no pet.). In simple negligence cases, a plaintiff must establish "1) a legal duty owed by one person to another, 2) a breach of that duty, and 3) damages proximately resulting from the breach." Marin v. Gilberg, No.V-07-62, 2009 WL 699947, at *2 (S.D.Tex. Mar. 11, 2009) (citing Critchfield v. Smith, 151 S.W.3d 225, 230 (Tex.App.-Tyler 2004, pet. denied)). In cases of professional negligence the same essential elements of negligence must still be met, but duty and breach are defined by the community of professionals to which the defendant belongs. Id. For example, in legal malpractice cases a breach of the applicable standard of care and causation linking the breach to damages suffered by the plaintiff must be established by expert testimony of the standard of care applicable to the community of lawyers in which the defendant practices. Cantu v. Horany, 195 S.W.3d 867,
Texas courts, however, generally do not require expert testimony to prove a breach of the standard of care or a causal link to damages from the breach if the actions were so obvious and egregious to be within the knowledge and experience of a layperson. See F.W. Indus., Inc. v. McKeehan, 198 S.W.3d 217, 221 (Tex.App.-Eastland 2005, no pet.); see also Alexander, 146 S.W.3d at 120. The most common example of such an action is an attorney who let the statute of limitations run on a client's cause of action. Such a breach of the standard of care is considered to be so obvious as to be within a layperson's understanding and, thus, no expert testimony is required. If the actions or the causal link reach beyond the common understanding of a layperson, expert testimony is required. Alexander, 146 S.W.3d at 120; F.W. Indus., 198 S.W.3d at 221 (finding that expert testimony was required because the effect of a bankruptcy filing was not within a layperson's common knowledge). If the action subject to the suit involved a tactical or technical decision by the professional, it is usually deemed beyond the understanding of a common person, and thus expert testimony is required. Id.
Upon considering the state of the law as set forth in the foregoing discussion, the Court is satisfied and concludes that given the particular facts and circumstances present here, the Court can, without the help of expert testimony, assess whether the Trustee's conduct constitutes gross negligence. Whether the Trustee should have done something affirmative, given the warnings she received and concerns expressed by LNB's counsel, requires no technical or expert knowledge. By doing nothing, the Trustee ignored basic human nature. She had to realize that the Schoolers, having filed bankruptcy because of financial difficulties, were tempted to use the inherited funds, especially when apparently no one impressed upon them the requirement to turn over the inheritance or explained to them the consequences of failing to do so. Their use of the funds was especially predictable given the time that elapsed before any affirmative action was taken. Any trustee in a similar situation would conclude that action needed to be taken.
In a case involving similar circumstances, the bankruptcy court in In re Rollins found that the trustee's decision to wait four months from the section 341 meeting to act upon an inheritance left to the debtor constituted a breach of the trustee's duty to secure assets of the estate. In re Rollins, 175 B.R. 69, 74-76 (Bankr.E.D.Cal.1994). In Rollins, the debtor listed an inheritance from her grandfather on her schedules and also informed the trustee of it during the first meeting of creditors. Id. At the 341 meeting, the debtor informed the trustee she would get the trustee more specific information regarding the probate proceeding soon after the meeting, but the debtor failed to turn over any information to the trustee. Id. at 72. After four months passed, the trustee began investigating the situation and learned the debtor had already received the inheritance. Id. at 72-73. The court determined that the trustee's failure to act within a week or two after not receiving the requested information from the debtor constituted negligence.
In addition, the Court agrees with the court in Monahan Ford, discussed above. Bankruptcy courts routinely assess the quality of a trustee's work when considering their requested compensation. The bankruptcy court is charged with the responsibility of determining whether a trustee's services, for work as a professional in the case, were necessary and thereby provided a material benefit to the estate; and assuming the threshold of necessity is met, the court determines the amount of reasonable compensation to be awarded. See 11 U.S.C. § 330(a); see also Kaye v. Hughes & Luce, No. 3:06-CV-01863-B, 2007 WL 2059724, at *9 (N.D.Tex. July 13, 2007). Among the factors to be considered by the court in making this latter assessment are whether the services were necessary or beneficial at the time they were provided; whether they were performed within a reasonable amount of time given the complexity, importance, and nature of the problem, issue, or task addressed; whether, with respect to a professional person, the person is board certified or otherwise has demonstrated skill and experience in the bankruptcy field; and whether the compensation is reasonable as compared with comparably skilled practitioners. See 11 U.S.C. § 330(a)(3).
"A bankruptcy trustee is charged with the duty to `collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest.'" In re Smyth, 207 F.3d at 761 (citing 11 U.S.C. § 704(a)(1)). To be personally accountable to the estate for failing to perform this express statutory duty, the trustee's failure must constitute gross negligence. See id.; see also In re Texas Pig Stands, Inc., 610 F.3d at 943.
The Fifth Circuit, in Smyth, identified the following definition of gross negligence:
In re Smyth, 207 F.3d at 762. "This standard of care strikes the proper balance between the difficulties of the task assumed by trustees and the need to protect the interest of creditors and other parties in the bankruptcy case." Id. (citing J.F.D. Enterprises, 223 B.R. 610, 628 (Bankr. D.Mass.1998)).
The most recent edition of Black's Law Dictionary defines gross negligence as "[a] lack of slight diligence or care" or "[a] conscious, voluntary act or omission in reckless disregard of a legal duty and of the consequences to another party...." BLACK'S LAW DICTIONARY (8th ed. 2004). Additionally, it states:
Id. (citing H.L.A. Hart, "Negligence, Mens Rea and Criminal Responsibility," in Punishment and Responsibility 136, 149 (1968), and W. Page Keeton et al, Prosser and Keeton on the Law of Torts § 34, at 211-12 (5th ed. 1984)). As seen with the two standards above, gross negligence is an imprecise and ill-defined legal concept, with standards varying among jurisdictions. Several bankruptcy courts have adopted the gross negligence standard in determining liability of a trustee for the trustee's failure to perform their duties, but fail to apply a uniform standard for gross negligence. Compare In re Smyth, 207 F.3d at 762 (adopting the Black's Law Dictionary definition for gross negligence) and In re J.F.D. Enters., Inc., 223 B.R. 610, 628 (Bankr.D.Mass.1998) (referencing the Black's Law Dictionary definition for gross negligence) with In re Cont'l Coin Corp., 380 B.R. 1, 14 (Bankr.C.D.Cal.2007) (defining gross negligence as reckless indifference or deliberate disregard of a trustee's fiduciary duty).
Under Texas law, gross negligence is "the breach of a duty involving an extreme degree of risk, considering the probability and magnitude of the potential harm to others, when the actor has actual awareness of the risk involved but nevertheless proceeds in conscious indifference to the rights, safety, or welfare of others." Gen. Motors Corp. v. Sanchez, 997 S.W.2d 584, 595 (Tex.1999); see also Lane v. Halliburton, 529 F.3d 548, 565 (5th Cir.2008) (stating gross negligence is a heightened form of negligence). This standard consists of both objective and subjective components; viewed objectively from the actor's position, the act or omission must involve the required degree of risk, and the actor must subjectively have actual awareness of this risk. Id.; see also First Assembly of God v. Tex. Utils., 52 S.W.3d 482, 494 (Tex.App.-Dallas 2001, no pet). The extreme risk required entails the likelihood of serious injury to others; serious injury is more than a slight possibility of injury or a high probability of minor harm. Mobil Oil Corp. v. Ellender, 968 S.W.2d 917, 921 (Tex.1998). Gross negligence requires more than thoughtless or careless behavior, or inadvertence; acts that are "unjustifiable and likely to cause serious harm" rise to the level of gross negligence. First Assembly of God, 52 S.W.3d at 494. Acts demonstrating a "want of care as to establish that the act or omission was the result of actual conscious indifference to the rights" of others constitute gross negligence. Id. In other words, the defendant knew of the risk, but its acts or omissions demonstrated it did not care. Mobil Oil, 968 S.W.2d at 921.
As set forth in the statement of facts, the Trustee never provided a written
• The Schoolers' bankruptcy case was filed initially as a no-asset case and two months later was followed by Gremminger's death, which latter event signaled the possible recovery of substantial assets for the bankruptcy estate.
• Despite the Schoolers' intransigence in accounting to the Trustee and to the bankruptcy estate for the Gremminger inheritance, Tina Schooler moved immediately—six days after Gremminger's death—to admit Gremminger's will to probate.
• The many letters received by the Trustee from LNB's counsel, the tone of which reflects a genuine and justified concern on LNB's part that the Schoolers would not honor their obligation to account for Tina Schooler's inheritance and that the Trustee was not actively pursuing recovery of the inheritance.
• The failure of the Schoolers, including their counsel and probate counsel, to ever acknowledge an obligation to turn over the probate estate assets to the Trustee; and their assertion of novel legal theories to justify their failure to account for the inheritance.
• The Trustee's appreciation, as early as December 2001, that Tina Schooler was not the best person to serve as executor of the Gremminger estate and that she (the Trustee) should perhaps move to have Schooler replaced as executor of the Gremminger estate.
The Court does not understand why the Trustee, administering a no-asset bankruptcy case, did not immediately pursue a windfall of significant assets. The Trustee is a lawyer who testified that her expertise, in addition to bankruptcy law, includes probate and collections work. It is painfully obvious that the Trustee should have taken affirmative steps early on in the bankruptcy case to ensure the recovery of the probate estate assets. The Court is satisfied that, for example, the Trustee could have intervened in the probate proceeding to protect her rights as successor to Tina Schooler; or she could have moved before this Court. Indeed, she did take action by filing suit against Tina Schooler—but not until April 2009— once she realized her failures to act were being seriously questioned.
The Court rejects the Trustee's contention that she made a conscious decision not to take action, instead relying upon the debtors and their counsel to voluntarily turnover the estate assets. There are two
The Court does not characterize the Trustee's conduct as an intentional or willful failure. Her failure to act does, however, amount to more than mere failure to exercise reasonable care. Her failure amounts to "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." Smyth, 207 F.3d at 762. The consequences of failing to recover the estate's assets were clear. The assets were easily reduced to cash as evidenced by Tina Schooler's use of the assets. The Trustee's several years delay in administering this case is not irrelevant. She clearly should have acted early on in the case. Her failure to act for the many years after the assets were gone merely underscores her failures early on in the case. It evidences a lack of urgency throughout the case; it reflects a blatant and conscious indifference to her statutory duties. At some point, such indifference crosses the fuzzy boundary between negligence and gross negligence. The Court concludes the Trustee's conduct satisfies the gross negligence standard.
Given that the Trustee's conduct satisfies the gross negligence standard, and that in a hypothetical action against the Trustee, the Trustee would be personally liable to the bankruptcy estate, Liberty Mutual, as surety under the bond, is liable. The damages suffered by the estate are equal to the value of the lost assets. Upon the evidence before the Court, the value of the lost assets is $112,247.66.
LNB requests a judgment in its favor and directly against Liberty Mutual. The bond, however, runs in favor of the United States, and is to cover any loss resulting to the bankruptcy estate. It is not issued to cover specific creditors. The Court therefore directs that Liberty Mutual's obligation is satisfied by remitting the loss amount to the bankruptcy estate for ultimate distribution to creditors of the bankruptcy estate.
Finally, Liberty Mutual requests attorneys' fees of $28,438.58. The Court has not been cited to any authority that allows LNB the recovery of its attorneys' fees against Liberty Mutual. The request for attorneys' fees against Liberty Mutual is denied.
As set forth above, the Court determines that the Trustee's conduct satisfies a gross negligence standard. Liberty Mutual's obligation as surety under the blanket bond is thereby triggered. Such obligation flows not to LNB, but to the bankruptcy estate. The Court will therefore issue its order directing that Liberty Mutual shall satisfy its obligation by remitting
The District court in Oles Grain likewise raised the question of whether state law was properly invoked. On the question of whether the surety was exonerated because an action directly against the principal would not be timely under state law, the court said that the issue could conceivably be disposed of on congressional intent grounds and noted further that state laws are preempted to the extent they "stand as an obstacle to the . . . full purposes and objectives of Congress." Oles Grain, 221 B.R. at 376 n. 7. In the same vein, the court stated that it "wonders whether federal common law should be developed in this area." Id. at 376 n. 8.
