Smith v. Silverman
2011 U.S. App. LEXIS 10309
2d Cir.2011Background
- Debtor Richard A. Smith, his wife Nelsi, and sister Carole Ann Caruso sought to reopen a Chapter 7 case opened after a Chapter 13 filing (Jan 12, 1996; conversion by 1997).
- Trustee Kenneth P. Silverman, appointed Apr 29, 1997, represented the estate; potential estate recoveries depended on pending pre-bankruptcy civil actions against Meadow Mechanical Corp.
- Pending actions included a dissolution action and a promissory-note action related to Meadow; the trustee valued these assets as potentially negative and sought to settle the dissolution action.
- Debtor opposed a proposed settlement in 2004; the bankruptcy court rejected it in 2004; in 2005 the trustee abandoned the claims to the debtor.
- In 2008 the debtors sought to reopen to sue the trustee and bondholders for malpractice; the bankruptcy court denied; the district court affirmed; in 2010 the district court also affirmed, and the matter proceeded to this appeal.
- The appellate court affirmed the denial of reopening, held the trustee’s decision not to pursue claims was protected by business judgment, and suggested sanctions may be warranted for frivolous appeal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the bankruptcy court abused its discretion in denying reopening under 11 U.S.C. § 350(b). | Smith argues reopening is warranted to pursue claims against the trustee. | The trustee’s business judgment and lack of merit support denial. | No abuse of discretion; denial upheld. |
| Whether the trustee was immune from liability for not pursuing estate claims under the business judgment rule. | Estate claims should have been pursued; trustee liable for inaction. | Trustees are immune for business-judgment decisions not to pursue litigation. | Trustee's decision to refrain from pursuing litigation was protected by business judgment. |
| Whether sanctions should be imposed for frivolous appeal. | Appellants seek to subvert final orders and extend litigation. | The appeal is meritless but sanctions may be warranted; court to consider. | Court may impose sanctions; issued to show cause for potential sanctions. |
Key Cases Cited
- In re Ctr. Teleprods., Inc., 112 B.R. 567 (Bankr. S.D.N.Y. 1990) (trustee immunity for acts taken as business judgment)
- In re M & S Grading, Inc., 541 F.3d 859 (8th Cir. 2008) (business-judgment affirmation of not pursuing litigation)
- Gallop v. Cheney, 642 F.3d 364 (2d Cir. 2011) (potential for sua sponte sanctions for frivolous appeals)
- State Bank of India v. Chalasani, 92 F.3d 1300 (2d Cir. 1996) (standard of review for reopened bankruptcy proceedings; deferential review of denial)
- Sims v. Blot, 534 F.3d 117 (2d Cir. 2008) (abuse-of-discretion standard for bankruptcy decisions)