The Fifth Circuit Recognizes Broad Immunities for Trustees and Their Counsel

Trustees and their counsel can breathe easier in the Fifth Circuit. In a published, precedential opinion, the court joined several other circuits in affirming that bankruptcy trustees and their counsel are entitled to immunity for personal harms caused by actions that fall within the scope of their official duties.[1] This “qualified immunity” joins the “absolute immunity” that the court’s precedent already recognized for “all actions taken pursuant to a court order.”[2] In light of these protections, the court noted that “[o]nly ultra vires actions — actions that fall outside the scope of their duties as trustees — are not entitled to immunity.”[3]

Of particular interest to readers of this newsletter, the court also held that the trustee’s counsel was protected from suit. This protection has two overlapping sources. First, counsel is entitled to immunity derivatively based on the trustee’s immunity.[4] Second, protection arises from the doctrine of “attorney immunity,” which limits the remedies available to a third party trying to sue someone else’s attorney for actions taken in that role.[5]

The Opinion Below

The initial opinion in this case was written by Hon. Stacey Jernigan of the U.S. Bankruptcy Court for the Northern District of Texas. Her opinion took the form of a “Report and Recommendation,” which was adopted by Chief Judge Barbara Lynn of the Northern District of Texas.[6]

Judge Jernigan’s 55-page opinion is not only “meticulous and well-reasoned,” as the Fifth Circuit characterized it;[7] it is readable and engaging. It brings considerable clarity to doctrines that, as Judge Jernigan notes, can seem “imprecise, inconsistent, and confusing.”[8] Readers interested in understanding the law’s protections for trustees — and the potential remedies for those they aggrieve — will benefit from this opinion.

The underlying proceedings, begun in 2009, defy easy summary.[9] They were lengthy, complex and acrimonious, involving a court-approved global settlement (later contested) and a receivership (later vacated). Ultimately, in this adversary proceeding, the debtor’s former owner and principal brought a panoply of claims, which Judge Jernigan summarized as (1) breach of contract, (2) fraud, (3) malicious prosecution and (4) misadministration of the bankruptcy estate.[10]

Judge Jernigan determined that (1), (2) and (3) were “third-party damages” claims, meaning that the plaintiff suffered injury directly. As to these claims, the trustee was entitled to immunity: either absolute immunity for actions taken pursuant to a court order (of which she noted there were “approximately 147” on the docket, reflecting a significant degree of court supervision[11]), or qualified immunity for actions taken “in his official capacity in the discharge of his duties.”[12] Judge Jernigan noted, after surveying the case law, that “the most common and perhaps only exception to this is when the trustee commits an ultra vires seizure of property.”[13] She found nothing sufficiently alleged in the complaint before her to overcome these immunities.[14] Judge Jernigan also provided an illuminating discussion of why and how counsel for the trustee were protected both derivatively by the trustee’s immunity and through the doctrines protecting attorneys from suit by nonclient third parties.[15]

By contrast, Judge Jernigan characterized (4) as an “estate loss” claim, meaning that harm was to the bankruptcy estate and to all its stakeholders, including the plaintiff.[16] There is no immunity as to such claims, but the standard for such a claim is high: “heightened gross negligence” that “amounts to indifference to present legal duty and to utter forgetfulness of legal obligations.”[17] Judge Jernigan found that the plaintiff’s allegations failed to meet this standard.

Importantly, Judge Jernigan noted that there are numerous ways of constraining both past and future bad behavior by trustees. These remedies include not only claims for gross negligence, but also seeking to limit or disallow trustee compensation, raising “Rule 11” objections to frivolous pleadings, or pursuing removal of the trustee.[18]

Concluding Thoughts

Trustees are human. They make costly mistakes. Some even lie, steal or cheat.[19] At the same time, the efficient administration of a bankruptcy estate requires that trustees be empowered to make difficult decisions in complex situations, with imperfect information, subject to business and legal risks. They must have considerable discretion to do so without incurring personal liability and without being required to run every decision through a judicial process.

Immunity doctrines and other protective mechanisms are not designed to excuse bad behavior but rather to further the goals of the Bankruptcy Code. Thus, these rules seek to balance empowerment with constraint. Congress may well decide to legislate different rules concerning how to strike this balance; one can imagine arguments one way or the other on this policy question. In the meantime, we all benefit when courts provide greater certainty concerning the current state of law, as the Fifth Circuit has done here.