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In re Schooler

United States Court of Appeals, Fifth Circuit

August 6, 2013

In the Matter of: ROBERT DEAN SCHOOLER; TINA MARIE SCHOOLER, Debtors
v.
UNITED STATES OF AMERICA BY LAMESA NATIONAL BANK, Appellee LIBERTY MUTUAL INSURANCE COMPANY, Appellant

Appeal from the United States District Court for the Northern District of Texas

Before KING, DAVIS, and ELROD, Circuit Judges.

KING, Circuit Judge.

In 2009, the United States by Lamesa National Bank filed suit against Liberty Mutual Insurance Company, asserting that Liberty Mutual was liable under a federally-required surety bond for the alleged misconduct of its principal, a trustee in a Chapter 7 bankruptcy proceeding. After a trial on Lamesa's claim, the bankruptcy court concluded that the trustee had committed gross negligence, causing damages to the bankruptcy estate in the amount of $112, 247.66. The court also held that, as the trustee's surety, Liberty Mutual was liable for those damages under the terms of the bond. The bankruptcy court therefore ordered Liberty Mutual to remit $112, 247.66 to the bankruptcy estate for distribution to the estate's creditors. Liberty Mutual appealed the bankruptcy court's judgment to the district court, which affirmed. Liberty Mutual now appeals to this court. For the following reasons, we also AFFIRM.

I. FACTUAL AND PROCEDURAL BACKGROUND

On August 21, 2001, Robert and Tina Schooler filed for Chapter 7 bankruptcy in the Northern District of Texas. Immediately thereafter, the bankruptcy court appointed Deborah Penner a Chapter 7 trustee (the "Trustee") for the bankruptcy estate. The Trustee is an attorney who, in addition to serving as a trustee in Chapter 7 bankruptcy cases, has a law practice that includes collection and probate work. Like other trustees operating in the Lubbock Division of the Northern District of Texas, the Trustee was covered under a blanket surety bond issued by Liberty Mutual Insurance Company. As relevant, the bond provides that the Trustee, "as [p]rincipal, and Liberty Mutual Insurance Company, as surety, are held and firmly bound unto the United States, " in accordance with 11 U.S.C. § 322(a), jointly and severally "for the faithful performance of [the principal's] official duties as Trustee of the estates of . . . debtors assigned to the [p]rincipal by the United States Trustee."[1]

After the Schoolers filed for bankruptcy, but within the 180-day statutory window for the inclusion in the estate of inherited assets, Mrs. Schooler's father, Hank Gremminger, Jr., died.[2] Mrs. Schooler was named independent executrix of Gremminger's will, and was left a one-half interest in his estate, which included real estate, cash, and other assets. Six days after Gremminger's death, Mrs. Schooler filed an application to probate her deceased father's will.

Lamesa National Bank is an unsecured creditor of the Schoolers that has filed several proofs of claim in the Schoolers' bankruptcy case, aggregating approximately $143, 644.00. Upon learning of Mrs. Schooler's appointment as executrix of the Gremminger estate, Lamesa's counsel sent a letter to the Trustee expressing concern that Mrs. Schooler might misappropriate the inherited assets belonging to the bankruptcy estate. In that letter, Lamesa proposed that the Trustee assert entitlement to act as executor of the Gremminger estate and to conduct discovery into the nature of the assets involved, including any that might have passed to Mrs. Schooler as a result of non-testamentary transfers. Lamesa also sent a letter to the attorney assisting Mrs. Schooler in probating Gremminger's will, advising him that Mrs. Schooler had not informed the Trustee of the inheritance, and that the Trustee was entitled to take control of the probate estate. Lamesa sent a copy of this letter to the Trustee.

In response, Mrs. Schooler initially took the position that she could disclaim the inheritance, thereby purportedly preventing it from passing to the bankruptcy estate. In correspondence to the Schoolers' bankruptcy counsel, the Trustee disputed this claim and warned that the Schoolers were required to amend their bankruptcy filings and list all property to which Mrs. Schooler had become entitled as a result of her father's death. The Trustee continued that she was "concern[ed] that Mrs. Schooler may not be the [b]est person to serve as Independent Executrix of her father's probate estate, " and that the matter needed "to be discussed at length to determine whether the creditors' interest [could] be adequately protected if she serve[d] in that capacity." The Trustee sent a similar letter to the attorney assisting Mrs. Schooler with the Gremminger probate matters.

Both attorneys assisting the Schoolers responded quickly with reply letters to the Trustee. In essence, those letters continued to express the view that Mrs. Schooler had the right to disclaim her inheritance; that she was permitted to "retain personal property that may be claimed as exempt property"; and that she could use certain assets in the Gremminger probate estate "to pay the bills." The Schoolers' bankruptcy counsel advised the Trustee to "let [him] know promptly" if she had any "disagreement with [his] presumption[s]" about these matters. This series of letters made apparent that the Schoolers were not conceding that the bankruptcy estate had any rights to the inherited assets.

In subsequent letters sent to the Schoolers' bankruptcy counsel, Lamesa continued to express concern over Mrs. Schooler's management of the Gremminger probate estate. In one letter, Lamesa's counsel specifically addressed worry over "the fact that Mrs. Schooler is in possession of over $50, 000 [in] cash, " and he advised the Schoolers' attorney that "[t]his money should certainly be turned over to the Chapter 7 Trustee, and I will be asking the Trustee to make a motion for such relief if Mrs. Schooler will not do so voluntarily." The Trustee received copies of each of these letters.

In February 2002, the Schoolers amended their bankruptcy filings to reflect Mrs. Schooler's undivided one-half interest in the Gremminger estate. The filings listed various assets as exempt, however, and stated that Mrs. Schooler's sister, herself a beneficiary under the Gremminger will, was claiming an interest in the estate's real property that would have reduced significantly Mrs. Schooler's interest therein. Later that month, Mrs. Schooler filed an "inventory, appraisment, and list of claims" in the probate estate reflecting a total property inventory valued at $252, 606.97—an amount later amended to $276, 823.77.

At Lamesa's request, a Rule 2004 examination of Mrs. Schooler, at which the Trustee was present, was conducted on March 15, 2002.[3] Following that examination, which revealed various details about the Gremminger estate's assets, Lamesa continued to write letters to the Trustee expressing frustration over Mrs. Schooler's management of the Gremminger estate. In particular, Lamesa's attorney raised the concern that Mrs. Schooler intended to spend the cash in the probate estate. Lamesa therefore repeatedly urged the Trustee, in letters sent between 2002 and 2005, to take possession of the cash, real property, and other assets in the Gremminger estate.

Lamesa's pleas went unheeded. Prior to March 2005, the Trustee made no formal demand that the Schoolers turn over assets from the Gremminger estate to the bankruptcy estate. Similarly, the Trustee did not request that the probate court appoint an alternate executor, nor did she pursue any action in the bankruptcy court to protect the bankruptcy estate's interest in the Gremminger estate. Not until March 7, 2005, did the Trustee demand by letter that the Schoolers turn over to the bankruptcy estate all assets to which Mrs. Schooler became entitled as a result of her father's death.

Unfortunately, the letter was too late. Although not discovered by the Trustee until April 2009, the real property in the Gremminger estate had been sold in September 2004, and cash from the probate estate had been disbursed to Mrs. Schooler between 2002 and 2004. By 2005, all of the Gremminger assets disbursed to Mrs. Schooler had been dissipated. This notwithstanding, from 2003 to 2008, the Trustee filed annual reports inaccurately indicating that she had obtained either actual or constructive possession of assets from the Gremminger estate belonging to the bankruptcy estate.

In February 2009, Lamesa filed a motion in the bankruptcy proceeding to compel the Trustee to perform her duties, or, alternatively, to remove her. Only after the bankruptcy court set a hearing for that motion did the Trustee file an adversary proceeding seeking from Mrs. Schooler the assets in the probate estate. The Trustee did not discover that Mrs. Schooler had dissipated those assets until she later conducted a court-ordered Rule 2004 examination of Mrs.Schooler.[4]

Lamesa subsequently filed against Liberty Mutual the adversary proceeding that is the subject of this appeal. In its amended complaint, Lamesa alleged that Liberty Mutual, as surety under the Trustee's bond, was liable for the Trustee's failure to "faithfully perform the duties of [a] Chapter 7 trustee." The complaint further alleged that the Trustee's conduct "breached the condition of [Liberty Mutual's] blanket bond, " thereby obligating Liberty Mutual "to make [Lamesa] whole for the damages it . . . suffered by reason of [the Trustee's] breach of duty."

Following a trial on Lamesa's claim, the bankruptcy court concluded that, contrary to Liberty Mutual's argument, Lamesa's suit was not time-barred. The court further held that the Trustee's gross negligence caused damages to the bankruptcy estate in the amount of $112, 247.66, and that Liberty Mutual was liable for those damages as the Trustee's surety. The court therefore ordered Liberty Mutual to remit that amount to the bankruptcy estate for distribution to the estate's creditors. Liberty Mutual appealed the bankruptcy court's judgment to the district court, which affirmed.

Liberty Mutual once again appeals, raising four challenges. First, it contends that the bankruptcy court erred in concluding that Lamesa's claim was not time-barred. Second, it asserts that the bankruptcy court erred in finding the Trustee grossly negligent in her administration of the Schoolers' bankruptcy estate. Third, it argues that the bankruptcy court erred in finding the Trustee grossly negligent without having heard expert testimony concerning the appropriate standard of care. Finally, it maintains that the bankruptcy court erred in calculating the damages resulting from the Trustee's alleged gross negligence.[5]

II. STANDARD OF REVIEW

"We review a district court's affirmance of a bankruptcy court decision by applying the same standard of review to the bankruptcy court decision that the district court applied." In re Martinez, 564 F.3d 719, 725–26 (5th Cir. 2009). "We thus generally review factual findings for clear error and conclusions of law de novo." In re OCA, Inc., 551 F.3d 359, 366 (5th Cir. 2008). "A finding of fact is clearly erroneous only if on the entire evidence, the court is left with the definite and firm conviction that a mistake has been committed." In re Duncan, 562 F.3d 688, 694 (5th Cir. 2009) (per curiam) (internal quotation marks and citation omitted). "We give deference to the bankruptcy court's determinations of witness credibility." Id. at 695.

III. DISCUSSION

A. Liberty Mutual's Statute of Limitations ...


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