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The Bankruptcy Hotline
Embezzlement By Bankruptcy Counsel Tolls Time Bar
The Third Circuit has ruled that a bankruptcy attorney who embezzled money from the estate should not be able to use the statute of limitations as a shield to his malfeasance because the trust placed in counsel may have prevented the debtor and trustee from discovering the theft. In Re: Mushroom Transportation Company Inc., No 02-3754 (August 24).
The debtor and its related subsidiaries filed a Chapter 11 bankruptcy petition that was later converted to a Chapter 7 liquidation. The bankruptcy court later authorized debtor's counsel to open an escrow account to hold the proceeds generated from the sale of the debtor's assets. Unfortunately counsel also embezzled more than $500,000 from this escrow account. The Chapter 7 trustee filed an adversary action alleging conversion, breach of fiduciary duty, breach of contract and legal malpractice, but defense counsel argued that these claims were time-barred because the debtor had failed to exercise reasonable diligence in discovering the embezzlement. The bankruptcy court agreed, finding that the debtor was not entitled to any “equitable tolling” of the statutes of limitations. The district court affirmed, finding that because the debtor had abdicated its statutory duty to preserve the estate's assets, it also could not show it had been reasonably diligent with respect to the rules of discovery.
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