Case: 10-1565 Document: 129-1 Page: 1 05/20/2011 295133 9
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`10-1565-bk (L)
`Smith v. Silverman
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`UNITED STATES COURT OF APPEALS
`FOR THE SECOND CIRCUIT
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`August Term, 2010
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`(Argued: April 5, 2011
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` Decided: May 20, 2011)
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`Docket Nos. 10-1565-bk (L), 10-1655-bk (con)
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`IN RE: RICHARD A. SMITH,
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`Debtor.
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`RICHARD A. SMITH, CAROLE ANN CARUSO, and NELSI SMITH,
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`Appellants,
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`v.
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`Nos. 10-1565-bk (L),
`10-1655-bk (con)
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`KENNETH P. SILVERMAN and LIBERTY MUTUAL INSURANCE
`COMPANY,
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`Appellees.*
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`Before: WINTER, WALKER, and CABRANES, Circuit Judges.
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`Appellants Richard A. Smith, Carole Ann Caruso, and Nelsi Smith appeal two orders of the
`United States District Court for the Eastern District of New York (Joanna Seybert, Judge), dated March
`24, 2010, and March 30, 2010, affirming orders of the United States Bankruptcy Court for the Eastern
`District of New York (Dorothy T. Eisenberg, Judge), dated January 26, 2009, and May 13, 2009. The
`Bankruptcy Court orders denied appellants’ motion to reopen Richard Smith’s bankruptcy case and
`dismissed a complaint filed by appellants against the trustee of the bankruptcy estate and the trustee’s
`bondholders. We hold that the District Court properly determined that the Bankruptcy Court (1) did
`not abuse its discretion in denying appellants’ motion to reopen and (2) properly dismissed appellants’
`complaint. Accordingly, the orders of the District Court are AFFIRMED.
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`* The Clerk of Court is directed to amend the caption to read as shown above.
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`1
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`

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`Additionally, in light of the frivolous nature of this appeal, appellants and their counsel are
`ordered to show cause why sanctions should not be imposed under Federal Rule of Appellate
`Procedure 38, 28 U.S.C. § 1927, and the inherent power of this Court.
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`THOMAS J. MCGOWAN, Meltzer, Lippe, Goldstein & Breitstone, LLP,
`Mineola, NY, for appellants.
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`ANTHONY C. ACAMPORA, Silverman Acampora LLP, Jericho, NY, for
`appellee Kenneth P. Silverman.
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`CAROLYN K. FIORELLO (David Westermann, Jr., on the brief), Uniondale,
`NY, for appellee Liberty Mutual Insurance Company.
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`PER CURIAM:
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`Richard A. Smith (“Smith” or “debtor”), his wife Nelsi Smith, and his sister Carole Ann Caruso
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`(jointly, “appellants”), seek to reopen debtor’s Chapter 7 bankruptcy case for the purpose of pursuing
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`an adversary proceeding against Kenneth P. Silverman (“Silverman” or “trustee”), who was the Chapter
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`7 trustee of debtor’s estate, and Liberty Mutual Insurance Company (“Liberty”), one of the trustee’s
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`bondholders. The United States Bankruptcy Court for the Eastern District of New York (Dorothy T.
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`Eisenberg, Judge) denied appellants’ motion to reopen, In re Smith, 400 B.R. 370, 372 (Bankr. E.D.N.Y.
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`2009), and the United States District Court for the Eastern District of New York (Joanna Seybert, Judge)
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`affirmed this judgment, In re Smith, 426 B.R. 435, 437 (E.D.N.Y. 2010).
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`BACKGROUND
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`The bankruptcy proceeding that appellants seek to reopen commenced on January 12, 1996,
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`when debtor filed for relief under Chapter 13 of the Bankruptcy Code. The case was later converted to
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`a Chapter 7 proceeding, and on April 29, 1997, Silverman was appointed trustee of debtor’s estate.
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`2
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`The only potential sources of recovery for the trustee were pending civil suits that debtor, along
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`with his wife, had initiated several years prior to the commencement of the bankruptcy proceeding. On
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`July 11, 1990, nearly seven years before Silverman was appointed as trustee, the Smiths filed two
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`separate lawsuits in the Supreme Court of the State of New York relating to a dispute with debtor’s
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`former company, Meadow Mechanical Corp. (“Meadow”). One suit was a “dissolution action” brought
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`by debtor and his wife—who owned 22.5% and 5% of Meadow stock, respectively—against Meadow’s
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`remaining shareholders following the discharge of debtor as president of Meadow. The defendants in
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`that suit initially served their notice of election to buy out the Smiths’ shares pursuant to New York law,
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`see N.Y. Bus. Corp. Law § 1118(a),1 but then subsequently sought to revoke this election. The Appellate
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`Division, Second Department thwarted these efforts by holding the defendants to their election;
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`additionally, the Second Department ordered that the defendants post a $750,000 security bond as the
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`parties continued to negotiate an acceptable share price. See Smith v. Russo, 646 N.Y.S.2d 711 (2d Dep’t
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`1996).
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`In a separate action (the “note action”), the Smiths sought to recover on a $275,000 promissory
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`note that Meadow had issued to Richard Smith. The Smiths unsuccessfully sought summary judgment,
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`with the Second Department concluding that material issues of fact remained concerning whether the
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`conditions for payment on the note had been satisfied. Smith v. Meadow Mech. Corp., 610 N.Y.S.2d 76
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`(2d Dep’t 1994).
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`1 In relevant part, § 1118(a) states:
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`In any proceeding brought pursuant to section eleven hundred four-a of this chapter, any other
`shareholder or shareholders or the corporation may, at any time within ninety days after the filing of
`such petition or at such later time as the court in its discretion may allow, elect to purchase the shares
`owned by the petitioners at their fair value and upon such terms and conditions as may be approved
`by the court . . . .
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` N.Y. Bus. Corp. Law § 1118(a).
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`3
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`Neither the dissolution action nor the note action had been resolved by the time Silverman took
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`over as trustee of the bankruptcy estate of Smith in 1997. After investigating these claims, the trustee
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`concluded that Meadow had a negative value as of the date of the dissolution action, and thus
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`attempted to settle the dissolution action for $350,000. Debtor and his wife vigorously opposed this
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`proposal on the grounds that this sum was insufficient. The Bankruptcy Court rejected the proposed
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`settlement in 2004.
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`The following year, debtor moved to have the Bankruptcy Court compel the trustee to
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`prosecute the dissolution action and the note action and to commence a handful of related claims
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`arising out of the same underlying business dispute. In response, “[t]he Trustee informed the court that
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`the estate was administratively insolvent, and any litigation on the derivative claims that the Debtor
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`sought to compel the Trustee to bring would have cost between $50,000 and $100,000 in litigation
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`costs without any assurance of a significant award to the estate.” In re Smith, 400 B.R. 370, 374 (Bankr.
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`E.D.N.Y. 2009). Acting on this information, the Bankruptcy Court denied debtor’s motion; debtor did
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`not appeal that order.
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`On July 14, 2005, at debtor’s request, the Bankruptcy Court authorized the trustee to abandon
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`to debtor the dissolution action, the note action, and any related claim that debtor may have wished to
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`pursue. Id. Now back in control of his own claims, debtor moved in state court to amend the
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`dissolution action to add some related claims. This motion was denied by the Supreme Court, Queens
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`County (Kelly, J., Oct. 18, 2006, Index No. 11882/90), on the grounds that the relevant statute of
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`limitations had run in 2000. Id. at 374-75.
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`After the trustee filed a no-asset report on February 7, 2007, the bankruptcy case was closed on
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`February 13, 2007, and the trustee was duly discharged. On July 2, 2008, appellants filed a motion to
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`reopen the bankruptcy proceedings so that appellants could commence an adversary proceeding against
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`4
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`the discharged trustee’s counsel for malpractice stemming from a failure to pursue debtor’s claims
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`against Meadow. Id. at 375. The Bankruptcy Court denied the motion because, the Court concluded,
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`appellants failed to establish privity with the trustee’s counsel. Id.
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`On October 24, 2008—more than 18 months after the final decree closing the case had been
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`entered—appellants filed yet another motion to reopen debtor’s bankruptcy case in the Bankruptcy
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`Court. Appellants1 sought to reopen the bankruptcy case in order to commence adversary proceedings
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`against the trustee himself, as well as the insurers who issued his surety bond. Appellants’ underlying
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`complaint, which was filed with the Clerk of the Bankruptcy Court on the same day as the motion to
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`reopen, alleged, in pertinent part, that the trustee breached his fiduciary duty by negligently failing to
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`pursue and investigate the dissolution action, the note action, and related claims belonging to the
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`bankruptcy estate, and that the insurance companies, including Liberty Mutual, who had issued blanket
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`trustee surety bonds, failed to ensure the trustee’s faithful performance of his duties. The Bankruptcy
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`Court denied appellants’ motion to reopen and then subsequently granted Liberty’s motion to dismiss
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`appellants’ underlying complaint.
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`On appeal from the judgment of the Bankruptcy Court, the District Court affirmed both orders
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`in separate opinions. See In re Smith, 426 B.R. 435, 437 (E.D.N.Y. 2010) (affirming the denial of
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`appellants’ motion to reopen); In re Smith, No. 09-cv-2563, 2009 U.S. Dist. LEXIS 126366 (E.D.N.Y.
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`Mar. 30, 2010) (affirming the granting of Liberty’s motion to dismiss). In addition to affirming the
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`orders of the Bankruptcy Court, the District Court sua sponte considered whether sanctions would be
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`appropriate under either Rule 11 of the Federal Rules of Civil Procedure or 28 U.S.C. § 1927, in light of
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`appellants’ apparent desire to prolong needlessly the litigation. As the District Court explained:
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`1 Nelsi Smith and Carole Ann Caruso each have standing to pursue these claims, along with Richard Smith,
`regardless of the merit of the claims, vel non, because each separately purchased claims held by debtor’s creditors.
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`5
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`“Appellants simply are not satisfied to allow the final Orders of this Court or those of the Bankruptcy
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`Court to stand after fourteen long and tortured years of litigation. Moreover, it appears that some form
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`of sanctions is necessary to prevent Appellants from further unreasonable and vexatious multiplying of
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`these proceedings.” In re Smith, 2009 U.S. Dist. LEXIS 126366, at *13. While appellants were ordered
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`to show cause why sanctions should not be imposed, the District Court ultimately declined to press the
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`issue any further. Appellants, meanwhile, have decided to press their luck with the instant appeal.
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`DISCUSSION
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`“Our review of an appeal that proceeds from the bankruptcy court to the district court is
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`plenary and independent. We affirm factual findings unless clearly erroneous and review legal
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`conclusions de novo.” State Bank of India v. Chalasani, 92 F.3d 1300, 1306 (2d Cir. 1996). A bankruptcy
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`judge’s decision to grant or deny a motion to reopen pursuant to 11 U.S.C. § 350(b) shall not be
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`disturbed absent an abuse of discretion. Id. at 1307; see generally Sims v. Blot, 534 F.3d 117, 132 (2d Cir.
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`2008) (“A district court has abuse[d] its discretion if it based its ruling on an erroneous view of the law
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`or on a clearly erroneous assessment of the evidence, or rendered a decision that cannot be located
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`within the range of permissible decisions.” (quotation marks and citations omitted)).
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`Upon a review of the record, we conclude that the Bankruptcy Court acted well within its
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`discretion in denying appellants’ October 24, 2008 motion to reopen. The only purpose of granting the
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`motion to reopen would have been to allow appellants to pursue adversary claims against the trustee
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`(and the bondholders), but we agree with the Bankruptcy Court that these underlying claims were
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`entirely without merit.
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`The gravamen of appellants’ putative complaint is that the trustee negligently failed to pursue
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`certain legal claims belonging to the bankruptcy estate. “[A] bankruptcy trustee is immune from suit
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`for personal liability for acts taken as a matter of business judgment in acting in accordance with
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`statutory or other duty or pursuant to court order.” In re Ctr. Teleprods., Inc., 112 B.R. 567, 578 (Bankr.
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`S.D.N.Y. 1990); see also In re M & S Grading, Inc., 541 F.3d 859, 867 (8th Cir. 2008) (affirming under the
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`business judgment rule the bankruptcy court’s approval of a bankruptcy trustee’s decision not to pursue
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`litigation on behalf of the estate). As both the Bankruptcy Court and the District Court determined, the
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`trustee exercised his sound business judgment in declining to assume the expense of raising and/or
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`pursuing the legal claims identified by appellants. Appellants’ criticism of the trustee’s failure to
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`prosecute the dissolution and note actions evidences a remarkable chutzpah. Both of these actions had
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`been pending—in a seemingly dormant state—for several years before Silverman was ever named trustee.
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`Moreover, the Bankruptcy Court, as far back as 2005, had held that the trustee was not required to
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`prosecute those two claims, a decision that appellants could have appealed, but did not. Finally, the
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`claims apparently still remain pending in the state court even though the trustee relinquished all control
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`over them in 2005.
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`Appellants’ failure to bring either of these matters to a conclusion is particularly telling in light
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`of the fact that appellant Nelsi Smith was a co-plaintiff in both of these state actions, and was thus in a
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`position independently to pursue essentially the same claims she now faults the trustee for not pursuing
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`on behalf of the bankruptcy estate. Nelsi Smith evidently exercised her business judgment not to press
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`forward with these claims, and yet has no problem finding fault with the very same business judgment
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`exercised by the trustee.2
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` The Bankruptcy Court correctly decided not to reopen debtor’s bankruptcy proceedings so that
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`2 At oral argument, counsel for appellants indicated that Nelsi Smith’s efforts in prosecuting the dissolution and
`note actions in the state courts were hampered by a lack of financial resources; of course, this is the same argument made
`by the trustee in explaining why he had declined to press forward with the claims. In re Smith, 400 B.R. 370, 374 (Bankr.
`E.D.N.Y. 2009).
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`7
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`appellants could pursue their meritless complaint, and the District Court correctly affirmed the
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`judgment of the Bankruptcy Court.3
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`Although not raised by appellees directly, we cannot help but register our concern with
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`appellants’ frivolous conduct in pursuing this appeal. In short, the issues presented to us by appellants
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`have either been long settled by the Bankruptcy Court, or plainly refuted by appellants’ own conduct.
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`The District Court warned appellants that their conduct was, in its view, borderline sanctionable, see In
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`re Smith, No. 09-cv-2563, 2009 U.S. Dist. LEXIS 126366, at *13 (E.D.N.Y. Mar. 30, 2010), and yet
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`appellants pressed ahead with this appeal—thereby obliging the trustee, Liberty, and the courts to stay
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`involved in proceedings that should have ended years ago.
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`We have recently recalled that, “[p]ursuant to the terms of Federal Rule of Appellate Procedure
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`38, 28 U.S.C. § 1927, and the inherent authority of the Court to consider sanctions on parties who
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`pursue patently frivolous appeals and force this Court to consider—and the [appellees] to
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`defend—vexatious litigation, we may, with adequate notice and opportunity to be heard, impose
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`sanctions nostra sponte.” Gallop v. Cheney, No. 10-1241-cv, 2011 U.S. App. LEXIS 8554, at *13 (2d Cir.
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`Apr. 27, 2011). In light of the meritless appeal before us, we think that such sanctions may be
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`warranted. Accordingly, appellants and their counsel are ordered to show cause, by no later than 21
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`days following entry of this decision and order, why they should not be sanctioned in the form of
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`double costs and $5,000 in damages, for which appellants and counsel would be jointly and severally
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`liable. The memorandum response shall be no more than twenty pages, double-spaced. Appellees shall
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`respond within fourteen days of the filing of appellants’ memorandum, in a supplemental letter brief
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`that shall not exceed twenty pages, double-spaced.
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`3As appellants concede, the Bankruptcy Court’s order removing their complaint from the Bankruptcy Court
`docket must necessarily be upheld if we conclude—as we do—that the Bankruptcy Court did not abuse its discretion in
`denying appellants’ motion to reopen.
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`CONCLUSION
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`For the foregoing reasons, the orders of the District Court are AFFIRMED. Appellants and
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`their counsel have 21 days from the date of the filing of this opinion to file a written statement with our
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`Court concerning the propriety of sanctions.
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`9
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