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Bankruptcy Court Considers Whether Chapter 7 Trustee May Bring Private Cause of Action For Alleged Breach of Debtor’s Duties

The U.S. Bankruptcy Court for the Eastern District of Michigan recently considered the issue of whether a Chapter 7 trustee may bring a cause of action against a debtor for damages caused to the bankruptcy estate by the debtor’s alleged failure to comply with the debtor’s duties under section 521 of the Bankruptcy Code. Under the circumstances, the court held that no private cause of action existed and thus ruled in favor of the debtor on the issue.[1]

The Facts

The case involves a Chapter 7 debtor who, the Chapter 7 trustee alleged, failed to cooperate with the trustee as required by section 521 of the Bankruptcy Code. The trustee argued that the debtor failed to provide required documents and surrender property of the estate.

The trustee initiated an adversary proceeding containing five counts, one of which sought a money judgment against the debtor for breach of her statutory duties. The trustee and debtor filed cross motions for summary judgment on the various counts. The court ruled on the motions as to the other four counts and took under advisement the parties’ motions on the count for damages as a result of the debtor’s breach of her statutory duties. The court then issued an opinion on that issue.

The Court’s Ruling

The trustee alleged that debtor’s breach of duties led the trustee to incur additional fees and expenses in attempts to compel the debtor to perform her duties, and argued that there were no genuine issues of material fact in dispute regarding this count of the complaint.

The debtor countered that there were genuine issues of material fact in dispute and also argued that, as a matter of law, the trustee could not bring a cause of action against the debtor to recover damages caused by a breach of her statutory duties under section 521 of the Bankruptcy Code.

The court found that there were genuine issues of material fact with respect to trustee’s allegation. The court also analyzed the legal issue - whether the trustee had the power to bring the cause of action in the first place.

The court noted (a point the trustee conceded) that the Bankruptcy Code does not expressly authorize a trustee to recover damages due to a debtor’s breach of statutory duties under section 521 of the Bankruptcy Code. The trustee’s argument relied upon the broad powers granted a bankruptcy court under section 105(a) of the Bankruptcy Code.

The debtor argued that there is no provision in the Bankruptcy Code that expressly authorizes a trustee to bring a cause of action under these circumstances, and pointed out that other remedies exist, including a motion to compel, sanctions and denial of discharge.

While the court recognized there is no express cause of action for damages, it considered whether there is an implied one. It began by reviewing the U.S. Supreme Court’s decision in Cort v. Ash[2] in which the Supreme Court established a framework for courts to employ in considering whether a private cause of action is implied in a federal statute. There are four relevant factors that courts should consider in this analysis.

  1. Is the plaintiff one of the class for whose special benefit the statute was enacted?
  2. Is there any indication of legislative intent, explicit or implicit, either to create such a remedy or deny one?
  3. Is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff?
  4. Is the cause of action one traditionally relegated to state law, in an area basically the concern of the states, so that it would be inappropriate to infer a cause of action based solely on federal law?

The court then analyzed section 521 of the Bankruptcy Code relative to these factors. It concluded that “[n]one of the four Cort factors provide even the slightest hint that Congress intended to create a private right of action in favor of a trustee and against a debtor” under section 521 of the Bankruptcy Code. Moreover, section 105(a) does not permit the court to find a private, implied cause of action under the circumstances.

In ruling for the debtor, the court noted that, just because a cause of action of the type asserted is not permitted, its opinion should not be interpreted to mean that a debtor may take its duties to comply and perform under section 521 of the Bankruptcy Code lightly. While a private cause of action is not permitted, many additional remedies exist.

If you have any questions about this case, or bankruptcy issues in general, please contact Patricia Scott at pscott@fosterswift.com or 517.371.8132.

[1] Miller v. Mathis (In re Eboni Latraca Mathis), Case No. 15-5001-pjs (Bankr. E.d. Mich., April 18, 2016).

[2] 422 U.S. 66 (1975).

Categories: Chapter 7, Eastern District of Michigan

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