Personal Liability of Trustees in Bankruptcy Cases

By Berman, Eugene B.; Strayer, Kerry David | Business Credit, April 1999 | Go to article overview

Personal Liability of Trustees in Bankruptcy Cases


Berman, Eugene B., Strayer, Kerry David, Business Credit


Creditors can insist upon stronger and more affirmative action by counsel to creditors' committees, trustees and others employed in the administration of a bankruptcy case as a result of a 1998 decision by Bankruptcy Judge Henry J. Boroff of the United States Bankruptcy Court for the District of Massachusetts. The ruling came as a result of the case: J.F.D. Enterprises, Inc., Chapter 7, Case No. 93-41606-HJB, United States Bankruptcy Court, District of Massachusetts.

In addressing the issues raised in an adversary proceeding in which the stockholder of a debtor corporation sought damages for the alleged misconduct of counsel for the creditors' committee, the trustee (Chapter 11 and 7) and a general manager employed to operate the business of the debtor, the Court has presented a statement of the standards of care by which the actions of those employed by a bankruptcy estate will be judged. Although the case is precedent only for the jurisdiction in which it was decided, the decision brings into focus an issue that will be the subject of discussion in consideration of amendments to the Bankruptcy Code and will be often cited as definitive on the issues.

Factual Background

Simply stated, the facts of the case are clear. Joseph DiStefano was the president and a shareholder of J.F.D. Enterprises, Inc. for and on whose behalf a voluntary Chapter 11 petition was filed. Attorney Eugene B. Berman and the Springfield, Massachusetts law firm of Kamberg, Berman were employed as counsel to the official committee of unsecured creditors. By agreement between the debtor and the creditors' committee, DiStefano stepped down as manager of the debtor's liquor store and Roger Dialessi became general manager. Attorney Peter Stern was appointed the Chapter 11 trustee and thereafter, following the conversion of the case, became the Chapter 7 trustee. Dialessi was continued as general manager by Stem as the Chapter 11 trustee and thereafter as the Chapter 7 trustee.

The action that became the adversary proceeding was based on actions allegedly taken by the defendants in J.F.D Enterprises, Inc.'s bankruptcy case. The suit was originally filed in the Massachusetts Superior Court Department of the Trial Court with a demand for a jury trial. The action was removed to the United States District Court and remanded to the Bankruptcy Court. The suit against Park West Bank and Trust Co. and its counsel was dismissed by the plaintiffs, leaving only Stem, Berman and Dialessi as the three defendants.

In the suit, DiStefano, a shareholder and unsecured creditor of J.F.D, and his wife, Patricia A. DiStefano, an under-secured creditor of the debtor, sought damages relative to the business failure and liquidation of the debtor. As the court noted, "(t)hey point the finger of blame for their losses at the three Defendants."

As capsulized in the Memorandum of Decision, the complaint alleged:

That "Stem was negligent and/or willfully failed to properly perform his duties in running the business of [J.F.D]" and "wrongfully mismanaged the assets and business of [J.F.D] and breached his fiduciary duties to" the Plaintiffs. The Plaintiffs alleged that Stern's action caused J.F.D's assets to become "wrongfully and almost completely depleted. . . such that they [were] insufficient to pay the debt of [J.F.D] to Park West Bank which [was] personally guaranteed by [Mr.] DiStephano [sic], and as a stockholder of [J.F.D], he lost the value of the business;"

That Berman "assumed the responsibility and performed the duties of collecting, preserving, managing and administering the assets of the business of [J.F.D]" and that he "negligently and/or willfully" failed to perform those duties;

That Dialessi had a fiduciary duty to each of the Plaintiffs "as stockholders of [J.F.D]," that "Dialessi had a statutory duty to collect, preserve, manage, hold and administer the assets and the business of [J. …

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