Toledo Trust Co v. Derryberry (In re Hartley)Toledo Trust Co v. Derryberry (In re Hartley)
OPINION AND ORDER
This matter is before the Court upon the motion of the Defendant/Trustee, Quentin M. Derryberry, II, to dismiss the complaint of The Toledo Trust Company for an injunction. Treating the Trustee’s motiоn as a motion for summary judgment under Rule 56 Fed.R.Civ.P., the Court finds that there is no genuine issue of material fact and that the Trustee is entitled to judgment as a matter of law.
FACTUAL BACKGROUND
The Debtors, James Ross Hartley and Sharon Lee Hartley, filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on September 8,1981. Quentin M. Derryberry, II was appointed as trustee of the estate of the debtors under § 701 of the Bankruptcy Code and at all times herein relevant was the duly qualified and acting trustee.
Sometime after his appointment, the Trustee began an investigation into an alleged check kiting scheme involving debtors, as proprietors of a trucking business, and several banks from Ohio, Indiana, Illinois, and elsewhere. In September of 1982, at a meeting between the Trustee and representatives of several of the banks, the Trustee asserted that the banks allegedly involved in thе check kiting scheme had liability to the estate for losses suffered by the creditors of the Hartleys’ estate. In a letter to Toledo Trust, successor by merger to the Peоples Bank of Carey, the Trustee made a claim against Toledo Trust for 5.6 million dollars based on the alleged involvement of the Peoples Bank of Carey in the check kiting scheme. If Toledo Trust failed to meet the Trustee’s demand, the letter indicated that litigation on the claim would be commenced in the United States District Court for the Wеstern District of Pennsylvania.
On November 12, 1982 Toledo Trust filed the present complaint against the Trustee asserting that, by investigating and threatening to institute a lawsuit against Toledo Trust for which no relief can be granted, the Trustee is unlawfully dissipating assets of the estate in derogation of his duties
Earlier, in May of 1982, the Trustee filed an application for instructions and advice with the Court seeking authority to accept money from certain creditors of the еstate for the purpose of pursuing certain litigation on behalf of the estate. After notice to all creditors of such application, the Court entered аn order in June of 1982 which, among other things, authorized the Trustee to accept the proffered money as unsecured borrowings under § 364 of the Code entitled to administrative еxpense priority.
DISCUSSION
• The motion to dismiss states that the complaint fails to state a claim upon which relief can be granted. According to the Trustee, the complаint of Toledo Trust unlawfully seeks to enjoin the Trustee from performing his statutorily mandated duty under § 704(3) of the Bankruptcy Code of investigating the financial affairs of the debtors. Alternativеly, the Trustee asserts that he has already received specific authority to initiate the investigation in question by virtue of the Court’s previously entered order pursuant to his application for instructions and advice.
Toledo Trust responds that it is not seeking to enjoin the lawful investigative activities of the Trustee, but the specifically threatened lawsuit arising out of the alleged check kiting activity. Toledo Trust asserts standing as a creditor of the estate to enjoin the lawsuit since, in its opinion, the threatened suit is legally insufficient and will result, through costs and expenses of litigation, in dissipation of estate assets. The Trustee, it is argued, should be required to show probable cause that he has a viable cause of action to assert. Arguing that any liability resulting from a check kiting scheme is one that belongs to specific creditors and is not enforceablе on behalf of creditors by the Trustee, Toledo Trust asserts such probable cause can not be shown by the Trustee.
Although Toledo Trust has specifically denied that it seеks an injunction against any of the investigating activities of the Trustee, since such relief is prayed for in its complaint, the Court will briefly address this question. The Court is aware of no authоrity under the Bankruptcy Code that places limits on any lawful investigation by the trustee in bankruptcy. Section 704(3) mandates that the trustee investigate the financial affairs of the dеbtor. Furthermore, under the Bankruptcy Code, the trustee is to undertake such investigation “without any direction or order from the court ...” 4 Collier on Bankruptcy 1704.07 at 704-17 (15th ed. 1979). The Court therefore specifiсally rejects the notion that the trustee can be enjoined from pursuing any lawful investigatory activities.
The Court also rejects the claim that it can enjoin any threatеned lawsuit resulting from an investigation or require the Trustee to show probable cause as a precondition to initiation of any such litigation.
This action poses the issuе of whether a creditor can enjoin the trustee in bankruptcy from initiating a lawsuit absent a showing of probable cause. The question of whether the trustee in bankruptcy сan maintain a cause of action against a creditor due to its asserted negligent or intentional involvement in a check kiting scheme involving the debtor is simply not befоre the Court. While the Court concurs that it is doubtful as a general proposition, that any criminal activities of the debtor can redound to the benefit of the estate, but sеe Buttrey v. Merrill, Lynch, Pierce, Fenner, and Smith, Inc.,
As a final matter, the Court rejects the assertion that the Trustee should be required to show probable cause as a precondition to initiation of any such lawsuit. The authorities relied upon by plaintiff for such assertion, while recognizing paramount concern of the bankruptcy courts for conservation of the assets of the estate, do not stand for the proposition that a trustee must make an affirmative showing of probable cause as a precondition to undertaking litigation on behalf of the estate. In In re Crutcher Transfer Line, Inc.,
Requiring the trustee to make an affirmative showing of probable cause is nowhere supported in the Bаnkruptcy Code. On the contrary, requiring the trustee to obtain court approval prior to initiation of litigation is inconsistent with the changed role of the bankruptcy judge under the Code. “Under the Code the judge is no longer a supervisor and advisor for trustees, but an impartial arbitrator of disputes which are properly brought before him.” In re Zeus Management Consultants, Inc.,
The Court shоuld not and will not rule on the merits of the Trustee’s claim, if any, other than in an appropriate adversarial proceeding initiated on the claim. Although the Trustee used the Court’s previous order on his application for “instructions and advice” as a token of the Court’s approval of his investigation and any resulting litigation, this order should not be construed in any other sense than the mere grant of authority to borrow money to fund the investigation and litigation.
There being no disputed issues of material fact, the trustee is entitled to judgment as a matter of law.
SO ORDERED.