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Tenth Circuit Upholds Dismissal of Bankruptcy Filer's Lawsuit Against Trustee - Satterfield v. Malloy

December 3, 2012

At Howard Law, P.C., our Norco personal bankruptcy lawyers tell each bankruptcy client that the bankruptcy trustee appointed for them is not necessarily their friend--he or she has the job of maximizing recovery for creditors. This sometimes aligns the trustee with the filer's interests, but often does not. So we were interested to see a case in which the relationship between the trustee and the filer had deteriorated so much that the filer actually sued the trustee. In Satterfield v. Malloy, bankruptcy filer William Satterfield alleged that trustee Patrick Malloy III mismanaged Satterfield's assets in retaliation for Satterfield's opposition to Malloy's attempt to be attorney of the estate. The district court dismissed Satterfield's case, saying suits against trustees are barred unless the bankruptcy court grants prior permission. The Tenth U.S. Circuit Court of Appeals upheld.

Satterfield's troubles began when he was convicted of crimes not specified and ordered to pay $1.7 million in restitution. He consulted several attorneys to discuss whether a bankruptcy would help. Malloy was among those attorneys, and while he did not hire Malloy, he did provide substantial financial information during the consultation. After Satterfield filed for Chapter 11 bankruptcy, Malloy was appointed trustee; Satterfield later claimed he was not adequately apprised of the conflicts this created. The case was later converted to a Chapter 7 bankruptcy and Malloy applied to be attorney of the estate. Satterfield objected, saying Malloy had violated the Bankruptcy Code and, by implication, ethical standards. This objection was overruled, and in his lawsuit, Satterfield alleged that Malloy retaliated in multiple ways for this objection. The suit raises seven claims that Malloy deliberately mismanaged the estate. The district court dismissed the case and Satterfield appealed.

The Tenth Circuit affirmed, also citing Barton v. Barbour. That case said the bankruptcy court must give permission before a party to the bankruptcy case may sue the receiver. This helps prevent one claimant from filing suit to gain an unfair advantage. The Tenth joined several sibling circuits in finding that a bankruptcy trustee can be a receiver within the meaning of the law. However, Satterfield argued that his case fell into one of the exceptions to Barton, permitting an individual whose property was wrongfully seized to bring suit personally, because the receiver is acting ultra vires. The Tenth did not agree. Adopting more rulings from sibling circuits, it found that acts related to the trustee's official duties may not give rise to a lawsuit, even if the debtor alleges the actions were improperly motivated. Even taking Satterfield's allegations as true, it said, Malloy's actions did not fall under the ultra vires exception. After dismissing alternative arguments, it affirmed.

Vincent Howard and our Lake Forest consumer bankruptcy attorneys see a lot of bankruptcy filers, of course, and not all of them are happy with their trustees. Some of this is inevitable; it would be hard to find two people who agree on every aspect of financial management. Some of it is also emotional, because bankruptcy filers are understandably anxious about their financial lives and their chances of finishing bankruptcy with a reasonable amount of assets and a clean start. But giving up control over your finances is a key part of pursuing a bankruptcy. At Howard Law, our Chino individual bankruptcy lawyers guide clients through the process and watch out for their interests while their financial lives are in someone else's hands.

If you're beginning to believe that nothing but bankruptcy will free you of your overwhelming debt, don't hesitate to call Vincent Howard and the team at Howard Law to discuss how we can help. You can reach us through our website or call 1-800-872-5925.

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