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In re Gorski

decided: July 3, 1985.

IN RE JOHN AND ROSEMARY GORSKI, DEBTORS. IN RE KENNETH KIRSCHSENBAUM, TRUSTEE-APPELLANT


Appeal from judgment of the United States District Court for the Eastern District of New York, Mishler, J., affirming order of the bankruptcy court that imposed surcharge on Chapter XIII trustee for breach of his fiduciary duties.

Feinberg, Chief Judge, Friendly and Newman, Circuit Judges.

Author: Feinberg

Feinberg, Chief Circuit Judge.

This is an appeal from an order of the United States District Court for the Eastern District of New York affirming a decision of the bankruptcy court that imposed a $500 surcharge on appellant Kenneth Kirschenbaum for breach of his fiduciary duties as a Chapter XIII trustee. For the reasons stated below, we affirm in part and remand in part.

I.

In August 1979, the named debtors, John and Rosemary Gorski, filed a Chapter XIII petition in the bankruptcy court in the Eastern District of New York. Chapter XIII of the Bankruptcy Act (the Act), which governs this appeal,*fn1 is entitled "Wage Earners' Plans". A petition under Chapter XIII is a voluntary filing in which the debtor submits a plan for extension and repayment of his unsecured debts out of future earnings. 11 U.S.C. § 1023 (repealed).*fn2 The filing of the petition operates as a stay of any action, lien, or judgment against the debtor, and the stay remains in effect until the court dismisses or terminates the proceeding. 11 U.S.C. §§ 1014, 1025; 10 J. Moore & L. King, Collier on Bankruptcy paras. 20.01, 23.05 (14th ed. 1978). The debtor remains in possession of the estate but must abide by the terms and conditions of the plan. 11 U.S.C. §§ 1057, 1058. Upon acceptance of the plan, the court appoints a trustee to receive and distribute, subject to the court's control, all funds paid under the plan. 11 U.S.C. § 1033 (4); Bankruptcy Rules 13-205, 13-208.

In September 1979, Bankruptcy Judge Parente confirmed the Gorskis' plan and appointed appellant Kirschenbaum as trustee. Kirschenbaum was to apply funds received from the Gorskis plan and appointed appellant Kirschenbaum as trustee. Kirschenbaum was to apply funds received from the Gorskis to unsecured debts of approximately $11,700, and the Gorskis were to pay secured debts of approximately $19,000 outside of the plan. For the next thirty-three months, the Gorskis made no payments at all under the plan, and Kirschenbaum failed to bring this fact to the attention of the court, or apparently, to contact the Gorskis and request that they commence making payments.

When the bankruptcy judge learned of this default he ordered all parties, including trustee Kirschenbaum, to appear in court. At a hearing in July 1982, the trustee stated that he was "unaware of the case until the Clerk's Office notified [him] that a report was due," and that he then reviewed his files and discovered that no payments had been mailed. Upon close questioning by the judge about his failure to carry out his obligations under the Act, appellant stated: "I really have no excuse." The bankruptcy judge thereupon advised appellant that he would remove him from the case, and would also recommend that he be removed from other trusteeship positions in that court. He also stated, "I think you should be surcharged and I will give that consideration."

In a decision and order dated September 29, 1982, the judge found that appellant's failure to carry out his obligations under section 47 of the Bankruptcy Act, 11 U.S.C. § 75, and Bankruptcy Rule 13-208 constituted

a material breach and default of his fiduciary duties and . . . a negligent disregard of the rights and best interest of creditors. His misfeasance has allowed the debtors to enjoy the full benefits and protections of Chapter XIII for a period of three years without meeting any of their statutory obligations.

The bankruptcy judge stated that

inherent in the trustee's fiduciary duties under Chapter XIII of the Bankruptcy Act are his obligations to oversee the debtor's compliance with the terms of the plan and to take appropriate action where the debtor does not make the required payments.

The judge ordered Kirschenbaum to be "surcharged in his official capacity as trustee the sum of $500, payable to the estate."

On November 4, 1982, Judge Parente dismissed the Gorskis' Chapter XIII petition with prejudice. Appellant requested at that time that the judge keep the proceeding open pending disposition of appellant's appeal from the surcharge order, so that there would be no disbursement of the $500 to the Gorskis' creditors prior to a decision on the appeal. The judge denied this request, and in open court ordered that the costs imposed on appellant personally "be paid to the Treasury of the United States." ...


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