U.S. Ninth Circuit Court of Appeals Judge Jacqueline Nguyen
PASADENA — A federal appeals court has ruled Chapter 7 bankruptcy trustees don’t have blanket "judicial immunity" from lawsuits accusing them of mismanaging estates.
In the underlying litigation, originated in February 2022, Tammy Phillips sued bankruptcy trustee Amy Goldman, alleging she failed to safeguard and preserve certain assets from the estate of debtor Kevan Harry Gilman. Phillips specifically alleged gross negligence in managing of two real estate properties, allowing waste, and failing to collect rent in a manner that breached her fiduciary duties.
Goldman asked a bankruptcy judge to dismiss the complaint, a request granted, with prejudice, on two grounds: statutory limitations and quasi-judicial immunity, the latter relying on a finding Phillips alleged only ordinary — and not gross — negligence. Regarding timing of the complaint, that judge said Phillips should’ve known Goldman wasn’t actively managing the properties in 2011 and notified her about rent payments in 2016, more than four years before she sued.
Phillips asked U.S. District Judge Michael Fitzgerald, of the Central District of California, to review the decision. He reversed the ruling on statutory limitations, saying the complaint didn’t establish Phillips knew anything about the properties’ condition before 2019, but agreed on the matter of quasi-judicial immunity. Fitzgerald also said the complaint lacked allegations exceeding ordinary negligence but remanded the matter for a determination on whether any changes to the complaint might be futile.
A three-judge panel of the U.S. Ninth Circuit Court of Appeals heard arguments on Phillips’ appeal of Fitzgerald’s opinion, then a majority of nonrecused active judges voted to hear the case en banc. Judge Jacqueline Nguyen wrote the court's opinion, filed May 7.
As a first matter, Nguyen explained the Ninth Circuit has jurisdiction because Phillips said there would be no attempt to amend the complaint, which means that on remand the bankruptcy court would only enter another judgement dismissing the complaint with prejudice, which Fitzgerald would affirm.
She then explained the principle behind immunity for bankruptcy trustees: balance between a trustee’s personal liability and the benefit to the public of a trustee administering certain estates.
“Under our case law, bankruptcy trustees may be entitled to immunity if they are acting like judges or for judges,” Nguyen wrote. “The first doctrine, known as ‘quasi-judicial immunity,’ provides trustees absolute immunity from liability for ‘functions involving the exercise of discretionary judgment’ that are ‘essential to the authoritative adjudication of private rights to the bankruptcy estate.’ ”
The panel also examined the other doctrine, “derived judicial immunity,” which it said stems from a well-established practice of trustees directly asking a bankruptcy judge for guidance on difficult questions. It then said Judge Fitzgerald relied on a bankruptcy court case that conflated the two types of immunity, then improperly applied to Goldman “an immunity standard that incorrectly turned on the trustee’s degree of fault.”
Nguyen said the panel expressed doubt that trustees being held liable for negligence would dissuade other people from filling the role.
“As we have explained, a trustee enjoys immunity for negligent and even intentional conduct in some instances,” Ngueyn wrote. “The broad scope of immunity, where it applies, ensures that trustees do not become ‘a lightning rod for harassing litigation aimed at judicial orders.’ Even when a trustee does not have immunity for a particular action or inaction, she can invoke the ‘business judgment rule’ as a defense to liability.”
Trustees also can file regular estate management reports, Nguyen said, which puts the burden of raising objections onto creditors. Further, if creditors bring baseless claims, a trustee can pursue sanctions, a possibility that “should dissuade all but the most foolhardy of creditors from engaging in abusive litigation with the trustee over the estate’s management.”
Turning to Phillips’ lawsuit, the panel found the “claims to be relatively modest in scope. She alleges that Goldman breached her duty to preserve estate assets by allowing the two real properties to deteriorate from Gilman’s neglect. And she alleges that Goldman failed to safeguard estate property by not demanding that the tenants pay rent or that Gilman turn over the rental income he had already collected.”
But those allegations, Ngueyn explained, involved Goldman’s basic functions of gathering property, investigating Gilman’s finances and operating his business on a short-term basis, none of which are intertwined with or analogous to a formal judgment of the private rights to the estate.
“Although they affect the estate’s assets and, indirectly, the total amount available for distribution to creditors, they do not determine how the assets will be divided among the creditors,” Nguyen wrote. “Rather, these functions call upon the trustee to act as a property manager.”
Because administrative roles are not judicial decisions, the panel said, quasi-judicial immunity isn’t applicable. Derived immunity also would not apply because Goldman didn’t ask a bankruptcy court for guidance. On remand, Ngueyn concluded, Goldman has the chance to raise that defense if she has sufficient evidence.
“We reverse the district court’s decision upholding immunity and remand for the bankruptcy court to consider Goldman’s remaining arguments for dismissal,” Nguyen wrote. “We decline Phillips’ request to remand the case to a different bankruptcy judge, as we conclude that the facts do not justify such a measure.”
Phillips is represented by the Law Office of Charles Q. Jakob, of Carmichael.
Goldman is represented by Lewis Brisbois Bisgaard & Smith, of San Diego and Los Angeles; and Kaufman Dolowich, of Los Angeles.
The National Association of Bankruptcy Trustees filed a support brief through Nach Rodgers Hilkert & Santilli, of Phoenix; and Sheehan & Associates, of Wheeling, W.Va.
