Does removal of a trustee for cause immediately start the clock ticking on the two-year window for suing to recover on the trustee’s surety bond under Section 322(d)?
Distinguishing between the words “discharged” and “removed,” Bankruptcy Judge Marvin Isgur of Houston ruled that the two words are not interchangeable and that the statute of limitations for suing on a surety bond does not begin with the trustee’s removal. In substance, Judge Isgur said that the provider of a bond must create a statute of limitations by contract.
The case involved a trustee who was removed for cause under Section 342(d) in 2013. More than two years later, the new trustee filed suit in bankruptcy court against the former trustee and the insurance company that provided the former trustee’s surety bond. The suit alleged that the trustee misapplied estate property.
The bond was payable if the trustee did not “in all respects faithfully perform all his official duties as Trustee” or did not “faithfully and truly account for all moneys, assets, and effects of the estate.” Section 322(a) requires a trustee to provide a bond “conditioned on the faithful performance of such official duties.”
The insurance company that provided the bond filed a motion for summary judgment, contending that the suit was filed beyond the two-year window contained in Section 322(d). That section requires commencing an action on a bond within “two years after the date on which such trustee was discharged.” [Emphasis added.]
The bonding company argued that “discharged” and “removed” are functionally synonymous. Judge Isgur disagreed in his Nov. 9 opinion, held that removal does not invoke the limitation in Section 322(d), and denied the insurer’s motion to dismiss.
Judge Isgur said that “removal does not carry any implications that [the trustee] satisfied his legal duties.” In the context of a trustee, the word “discharge,” he said, should be given a meaning similar to how the term is used elsewhere in the Bankruptcy Code — for example, where it means “relief from debts” when referring to an individual’s discharge of debts.
The insurance company argued that “its bond obligation could theoretically never expire” if Section 322(d) did not apply. In that regard, Judge Isgur laid the blame on the insurance company because the bond could have contained a provision imposing a two-year limitation for making a claim.
If the U.S. Trustee had objected to requiring a claim within two years, Judge Isgur said the insurance company could have refused to issue the bond. He also said the insurance company could monitor cases where it had issued bonds and institute proceedings to determine its own liability.
Judge Isgur left open the possibility that the insurance company could raise an estoppel defense at a later, appropriate time in the litigation, because the new trustee had failed to raise claim on the bond for several years after the first trustee had been removed.