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Trustee Liability and the Curious Case of Maxwell v. KPMG, LLP

By Peter J. Roberts and Gordon E. Gouveia

Last year, Judge Richard A. Posner of the Seventh Circuit Court of Appeals wrote an opinion that sent shockwaves throughout the bankruptcy community, particularly in trustee circles. The shocking part of Maxwell v. KPMG, LLP, 520 F.3d 713 (7th Cir. 2008) (“Maxwell I“) was not its holding, but its dicta. In affirming the dismissal of a bankruptcy trustee's $600 million accounting malpractice case, the Seventh Circuit admonished bankruptcy judges to “be vigilant in policing the litigation judgment exercised by trustees in bankruptcy,” and it also suggested the imposition of personal sanctions against trustees who file frivolous lawsuits. See Maxwell I, 520 F.3d at 718-719.

Some commentators have applauded Maxwell I as just deserts for a bankruptcy trustee who brought suit based on overly aggressive theories of liability and damages. Others have been troubled by the Seventh Circuit's criticism of bankruptcy trustees and its unsupported suggestion of personal sanctions against plaintiff trustees. However, almost all commentators have correctly regarded Maxwell I as a cautionary tale for any trustee embarking upon an aggressive litigation strategy.

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