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In re J &S Properties, LLC

United States Court of Appeals, Third Circuit

September 28, 2017

IN RE: J & S PROPERTIES, LLC, Debtor PHOENICIAN MEDITERRANEAN VILLA, LLC, Appellant
v.
LISA M. SWOPE, Esquire, Trustee of the Bankruptcy Estate of J & S Properties, LLC; JAMES FOCHT; J & S PROPERTIES, LLC

          Argued May 23, 2017

         On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. No. 3-15-cv-00268) District Judge: Honorable Kim R. Gibson

          Mary B. Sheats [Argued] Frank Gale Bails Murcko & Pocrass Attorney for Plaintiff-Appellant

         Robert L. Byer, Duane Morris, Andrew R. Sperl [Argued], Duane Attorneys for Defendant-Appellee

          Harry J. Giacometti, Flaster Greenberg, Gary F. Seitz Gellert, Scali Busenkell Attorneys for Amicus-Appellee National Association of Bankruptcy Trustees

          William G. Schwab Attorneys for Amicus-Appellee Third Circuit Bankruptcy Trustees

          Before: HARDIMAN, ROTH, and FISHER, Circuit Judges.

          OPINION OF THE COURT

          HARDIMAN, Circuit Judge.

         A bankruptcy trustee sometimes must act quickly to safeguard property of the estate. In this case, Chapter 7 Trustee Lisa Swope took control of a commercial leasehold possessed by Phoenician Mediterranean Villa, LLC in a building owned by the debtor. Phoenician requested equitable relief to regain possession of its leasehold, claiming that Swope violated the law when she accepted the key to locks that had been changed. The United States Bankruptcy Court for the Western District of Pennsylvania denied the relief sought by Phoenician, holding that Swope was qualifiedly immune from suit. The District Court affirmed and Phoenician filed this appeal.

         The question presented is whether qualified immunity applies to discretionary actions taken by a trustee to preserve the bankruptcy estate's assets, and whether that immunity protects Trustee Swope's conduct in this case. We will affirm because Swope exercised reasonable care under the circumstances and did not violate clearly established law.

         I

         J & S Properties, LLC filed a Chapter 7 petition in the Bankruptcy Court on July 10, 2013. Attorney Lisa Swope was appointed as Chapter 7 Trustee of the estate. The estate's largest asset was a building located in Altoona, Pennsylvania, in which Phoenician was a lessee and previously operated a restaurant. In re J & S Props., LLC, 545 B.R. 91, 94 (Bankr. W.D. Pa. 2015). Pursuant to a court order dated November 5, 2013, Swope rejected Phoenician's lease to facilitate a sale of the property. Although Phoenician was not operating the restaurant at that time, its tenancy had not expired. After the lease was rejected, Phoenician attempted to remove personal property from the restaurant, but Swope objected because the Bankruptcy Court had not determined ownership of the contents of the restaurant, although Phoenician claimed to own all of it.

         After learning from J & S's principal, James Focht, that the restaurant had been shut down, that Phoenician had cancelled its insurance on the premises, and that heating the property could be an issue with an "anticipated arctic blast, " Swope met at the property with Phoenician's principal, Husam Obeid, along with his counsel and a contractor on January 3, 2014. Id. At that meeting, Obeid gave Swope a key to the premises and the contractor recommended that the thermostat be set to at least "sixty degrees Fahrenheit to prevent the pipes from freezing." Phoenician Mediterranean Villa, LLC v. Swope, 554 B.R. 747, 750-51 (W.D. Pa. 2016). Unfortunately, Obeid did not heed this advice, the pipes burst, and the property was flooded on January 13, 2014. Obeid contacted a disaster restoration company, but they apparently refused to work on the property "because there were problems with insurance coverage, the relationship between the parties was acrimonious, and no one agreed to provide the company with a lien." Id. at 751. According to Trustee Swope, Obeid and Focht "did not trust each other" and had previously tried to hurt each other's businesses. Id. at 750. It was in this context that Swope set about to protect, or "adequately preserve[], " the largest asset of the bankruptcy estate. Id.

         Swope asked for another meeting on January 15, 2014 to assess the damage to the property and discuss the status of the building's insurance. Obeid and his counsel did not show up, asking that the meeting be rescheduled and held without Focht; Swope declined the request "[g]iven the urgent nature of the situation." In re J & S Props., 545 B.R. at 95. Swope tried to inspect the premises but discovered the key Obeid had given her did not open the locked interior door to the building.[1] Focht then "had the locks changed and provided Trustee Swope with the key" on January 16. Phoenician Mediterranean Villa, 554 B.R. at 751. Swope claimed in an email to Phoenician that in accepting control of the building, she was attempting to preserve the assets to the best of her ability. On the same day, Swope filed an emergency motion asking the Bankruptcy Court to grant her immediate possession of the property and its contents. In the meantime, she retained the "sole key" and thus control of the premises, and subsequently provided both parties with only "supervised access" to the property. Id.

         Phoenician filed a complaint in equity to "regain possession of the premises, " and the Bankruptcy Court conducted an emergency hearing on January 24, 2014. Phoenician Br. 12.[2] After the hearing, at which Swope testified, the Court denied Phoenician's requests for an injunction and temporary restraining order on January 27. During the hearing, the Bankruptcy Court noted that "the trustee has possession, custody and control of the property, " and opined that Swope is "protected by the automatic stay, " which precludes Phoenician from interfering with the property in any way. App. 399. And on February 7, 2014, the Bankruptcy Court ordered that Phoenician and J & S and their associates "are prohibited from entering into or upon the [Estate] Property without the express authorization of the Trustee, or further order from this Court." Order of Court Granting First Commonwealth Bank Relief from Stay (hereinafter "Feb. 7, 2014 Order"), Bankruptcy No. 13-70512-JAD, ECF No. 113, at ¶¶ 7-8 (Bankr. W.D. Pa. Feb. 7, 2014).

         In its complaint, Phoenician also sued Swope under 42 U.S.C. § 1983 for wrongful eviction, claiming violations of its Fourth and Fourteenth Amendment rights. Swope moved to dismiss this suit based on quasi-judicial immunity. On September 30, 2015, the Bankruptcy Court granted Swope's motion to dismiss the complaint against her, though because the Court looked to additional briefing and other hearings, the Court evaluated the motion under a summary judgment standard. See In re J & S Props., 545 B.R. at 95. It ultimately found that "no genuine dispute of material fact exists as to whether the Trustee exercised her business judgment as to the steps she deemed necessary to protect Estate Property, " and thus Swope was entitled to immunity. Id. at 96.

         On July 27, 2016, the District Court affirmed the Bankruptcy Court's order granting Swope's motion to dismiss. The District Court found that Swope was "entitled to qualified immunity" and that she did not engage in any wrongful or ultra vires conduct since she "took appropriate action to administer and preserve the Estate Property" in accordance "with her duties as the trustee." Phoenician Mediterranean Villa, 554 B.R. at 756-57.

         Phoenician filed this timely appeal.

         II

         The Bankruptcy Court had jurisdiction under 28 U.S.C. § 157(a). The District Court exercised jurisdiction under 28 U.S.C. § 158(a). We have appellate jurisdiction under 28 U.S.C. § 158(d). Like the District Court, we review the Bankruptcy Court's legal determinations de novo and its factual findings for clear error. In re VistaCare Grp., LLC, 678 F.3d 218, 224 (3d Cir. 2012). A factual finding is clearly erroneous only if we are "left with the definite and firm conviction that a mistake has been committed." In re W.R. Grace & Co., 729 F.3d 311, 319 n.14 (3d Cir. 2013) (citation omitted).

         III

         The principal issue on appeal is whether Swope is immune from Phoenician's suit complaining of actions she took between January 16, 2014 and February 7, 2014.[3] The Bankruptcy Court held that Swope is entitled to qualified immunity because she acted within her statutory duties and the District Court agreed, finding Swope did not violate clearly established law. We reach the ...


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