If an individual chapter 7 debtor fails to perform her duties, does the trustee have an implied private right of action for damages?
Finding no direct authority one way or the other, Chief Bankruptcy Judge Phillip J. Shefferly of Detroit held that a trustee has no private right of action. However, the opinion leaves the door open a crack for creditors to mount a lawsuit for damages resulting from a debtor’s failure to cooperate.
The chapter 7 trustee filed a complaint alleging that the debtor failed to cooperate and comply with her duties under Section 521. The trustee said she failed to file a statement of projected income and expenses. She also allegedly interfered with the trustee’s attempt to show her residence to potential buyers and failed to surrender personal property.
In addition to seeking denial of discharge, the trustee sought a judgment for damages resulting from the debtor’s failure to cooperate, even though no provision in the Bankruptcy Code explicitly gives the trustee a claim for damages.
Recognition of a private right of action is controlled by the Supreme Court’s 1975 decision in Cort v. Ash, according to Judge Shefferly. He found that none of the four Cort factors were present to show “even the slightest hint that Congress intended to create a private right of action in favor of a trustee” when a debtor fails to perform her duties.
When a debtor disregards her duties, Judge Shefferly said that bankruptcy law gives the trustee other remedies, such as denial of discharge.
Judge Shefferly said that some of the four Cort factors point in the direction of giving creditors an implied right of action. Whether creditors could mount a successful damage suit is similarly doubtful because bankruptcy law gives creditors other remedies, just like the trustee.