Bankruptcy Trustee May Be Personally Liable if Claims Secured by an Undisclosed Right of Pledge Are Collected Against the Will of the Pledge Holder

The Supreme Court has ruled in a recent case, that a bankruptcy trustee who willfully ignores the rules for the collection of claims secured by an undisclosed right of pledge, may be personally liable vis-à-vis the pledge holder.

In the case at hand, a shipyard company had given its bank an undisclosed right of pledge on all of the company’s claims against its debtors. Two years later, the company was declared bankrupt. In the course of the liquidation of the estate, it became apparent that the company had claims against its customers based on repair works which had not yet been invoiced. The bank invoked its right of pledge with respect to these claims not yet invoiced. However, the bankruptcy trustee refused to provide the bank (access to) the administration of the company. In addition, the bankruptcy trustee proceeded to collect the claims not yet invoiced for the benefit of the estate. Lastly, the estate was almost entirely claimed by the bankruptcy trustee in connection with his remuneration. The bank subsequently initiated proceedings against the bankruptcy trustee arguing, inter alia, that in the event of a bankrupt’s insolvent estate, the estate claim of a pledge holder relating to the wrongful collection of claims by the trustee has priority over the estate claim relating to the trustee’s remuneration.

In its ruling, the Supreme Court held that an estate claim based on damages suffered by a pledge holder, caused by the wrongful collection of claims (secured by a right of pledge) by a bankruptcy trustee, does not have priority over the estate claim relating to the remuneration of the trustee. While the Supreme Court noted that not allowing priority to the estate claim of the pledge holder could have the undesirable result that trustees may intentionally – and wrongfully – collect claims secured by an undisclosed right of pledge in order to recoup their remuneration, the Supreme Court is not willing to create a new category of so-called “super estate claims”. However, the Supreme Court stated that the bankruptcy trustee may be personally liable vis-à-vis the pledge holder if the bankruptcy trustee collects claims secured by a right of pledge against the will of the pledge holder.