Imagine that you have been appointed to serve as a trustee in a bankruptcy case. As the “representative of the estate,” one of your responsibilities is to properly manage the estate’s assets. You decide to invest the estate’s funds in several risky penny stocks, relying on minimal research you performed online. Unfortunately, these investments quickly decrease in value, substantially diminishing the value of the estate. Now, of course, the debtor and his creditors are angry and want to sue you for mismanaging the estate’s funds. Can you be held personally liable? In other words, will you have to pay for those losses from your own bank account?
The answer varies according to the jurisdiction in which the case is heard. Unfortunately, the bankruptcy code is silent about when a trustee will be held liable for mistakes or misconduct. Some circuits hold that a trustee is personally liable for mere negligence; one circuit will impose personal liability only for gross negligence; and others will hold a trustee personally liable only for intentional misconduct. This memo will discuss a trustee’s vulnerability to personal liability and the standards that circuit courts use in determining whether to impose such liability.
Part I of this memo will briefly outline the responsibilities of a bankruptcy trustee. Part II will examine the theory of trustee personal liability and explain why it is significant to aggrieved parties. Part III will discuss the various standards that circuit courts apply to decide whether to impose liability on trustees. It will also explain various policy considerations expressed in favor and against each standard. This memo will conclude that because there is no uniform law of trustee liability, it is important that all parties to a bankruptcy case, especially the trustee, understand the trustee’s standards of care imposed by the relevant jurisdiction.