FILED
DEC 22 2011
1 SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. SC-11-1000-KiMkH
)
6 LOG & CONVENTIONAL HOMES, ) Bk. No. 09-12365-JM
INC., )
7 )
Debtor. )
8 ______________________________)
)
9 ROBERT DOAN, )
)
10 Appellant, )
)
11 v. ) M E M O R A N D U M1
)
12 LESLIE GLADSTONE, Chapter 7 )
Trustee, )
13 )
Appellee. )
14 ______________________________)
15 Argued and Submitted on October 20, 2011
at San Diego, California
16
Filed - December 22, 2011
17
Appeal from the United States Bankruptcy Court
18 for the Southern District of California
19 Honorable James W. Meyers, Bankruptcy Judge, Presiding
_____________________________________
20
Appearances: Daniel Joseph Winfree, Esq. argued for appellant,
21 Robert Doan; Christin Alene Batt, Esq. of the
Financial Law Group argued for appellee, Leslie
22 Gladstone, Chapter 7 Trustee.
_____________________________________
23
Before: KIRSCHER, MARKELL, and HOLLOWELL, Bankruptcy Judges.
24
25
26
1
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8013-1.
1 Appellant, creditor Robert Doan (“Doan”), appeals a
2 bankruptcy court order denying his motion to remove chapter 7
3 trustee, Leslie Gladstone (“Trustee”), from debtor’s bankruptcy
4 case. We AFFIRM.
5 I. FACTUAL AND PROCEDURAL BACKGROUND
6 Prior to filing bankruptcy, debtor, Log & Conventional
7 Homes, Inc. (“LCH”), had entered into a contract to build a log
8 home for the Haddocks. A dispute arose between the parties, and
9 LCH sued the Haddocks in state court for breach of contract (the
10 “State Court Action”). The Haddocks filed a counterclaim for
11 approximately $226,000 in damages due to LCH’s alleged failure to
12 complete the home.
13 Doan is the sole shareholder of LCH. LCH filed a voluntary
14 chapter 72 petition on August 20, 2009. Its assets consisted of
15 a $43,000 bond securing a mechanic’s lien, and a receivable of
16 $67,100, which is the amount Haddocks allegedly owed LCH on the
17 contract. LCH has only two unsecured creditors: the Haddocks and
18 Doan.3
19 Between September and November 2009, Trustee conducted four4
20 § 341 creditor’s meetings with LCH and Doan. Notably, Trustee’s
21 primary topic of discussion at all four meetings was the
22
23 2
Unless otherwise indicated, all chapter, section and rule
references are to the Bankruptcy Code,
11 U.S.C. §§ 101-1532, and
24 to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
25 3
Three proofs of claim were filed in LCH’s bankruptcy case:
(1) a claim from Haddocks for $226,198; (2) a claim from Doan for
26 $265,898; and (3) a claim filed by Doan on behalf of LCH for
$110,006.
27
4
Five meetings were held, but no testimony occurred at the
28 third meeting on October 29, 2009.
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1 potential preferences and fraudulent transfers made by LCH to
2 Doan. Over the course of the four meetings, Trustee made only
3 brief inquiries about the State Court Action. At the first
4 meeting, Trustee asked about the status of the matter. Doan
5 explained that LCH and Haddocks had been in litigation for two
6 years, and that Haddocks’s title insurance company had posted a
7 bond insuring LCH’s mechanic’s lien, which was payable to LCH.
8 Doan told Trustee that he would provide her with the necessary
9 state court documents regarding perfection of LCH’s mechanic’s
10 lien. As a result of the mechanic’s lien and the receivable,
11 Doan contended that the Haddocks owed LCH approximately $110,000.
12 During the third meeting, Doan admitted that he had gambled
13 with some of the funds he received from LCH. Trustee posed
14 several follow-up questions to Doan on that issue. The only
15 other mention of the State Court Action was at the fourth meeting
16 on November 19, 2009. Trustee noted that she had not yet been
17 provided with the mechanic’s lien documents, but stated that she
18 had been “talking to the party about resolving [the State Court
19 Action].” Trustee further expressed her intention to pursue a
20 “slam-dunk preference [action]” against Doan to recover at least
21 $81,000 for LCH’s estate. At the end of the fourth meeting, the
22 parties agreed to meet at Doan’s counsel’s office on December 4,
23 2009, to further discuss Trustee’s preference action and the
24 State Court Action.5
25
26 5
Trustee filed her Complaint for Avoidance and Recovery of
27 Fraudulent Transfers and/or Insider Preferential Transfers
against Doan on February 25, 2010. In her complaint, which is
28 still pending, Trustee is seeking to recover approximately
$210,000 from Doan in alleged fraudulent and/or preferential
transfers under §§ 547 and 548.
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1 A. The Settlement Motion.
2 On April 7, 2010, Trustee filed a Notice of Intended Action
3 to Approve Stipulation to Settle Claim, Release Mechanic’s Lien,
4 and Dismiss State Court Action (the “Settlement Motion”).
5 According to the Settlement Motion, Haddocks were entitled to an
6 allowed unsecured claim in the amount of $100,000, and Trustee
7 agreed to release LCH’s mechanic’s lien. The parties further
8 agreed to dismiss the State Court Action with prejudice.
9 In his opposition to the Settlement Motion, Doan questioned
10 the objectivity and neutrality of the Trustee. Specifically,
11 Doan contended that Trustee’s motion failed to set forth any
12 factual background about the mechanic’s lien or LCH’s claim
13 against Haddocks and the Haddocks’s counter-claim, or recite any
14 of the factors set forth in A & C Properties.6 In Doan’s
15 opinion, the settlement effectively purged LCH’s estate of its
16 only asset while receiving nothing in return. Attached to Doan’s
17 declaration was a letter that LCH’s counsel in the State Court
18 Action had sent to Trustee. In that letter, counsel stated that
19 he “[could not] fathom how [Trustee] could possibly reach a
20 conclusion that the Haddocks [were] entitled to any compensation
21 from [LCH]. . . . The facts and evidence [were] strong and well
22 supported that the Haddocks’ claim was trumped up and was not
23 supported by any factual or legal basis. The evidence was also
24
6
The fair and equitable settlement standard under Rule 9019
25 requires consideration of: (1) probability of success in the
litigation; (2) collectability; (3) complexity, expense,
26 inconvenience, and delay attendant to continued litigation; and
(4) the interests of creditors, which are said to be “paramount.”
27 Martin v. Kane (In re A & C Props.),
784 F.2d 1377, 1381 (9th
Cir. 1986). These four factors are often referred to as the
28 “A & C factors.”
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1 overwhelming that the Haddocks owed [LCH] at least $40,000.00 and
2 possibly more.”
3 Trustee asserted in her reply that in negotiating the
4 settlement, she had “reviewed many documents regarding [the State
5 Court Action] and interviewed the Debtor at length about [it].”
6 In her investigation, Trustee had obtained a copy of an
7 independent report prepared by Roel Consulting Services (the
8 “Roel Report”), an expert retained by the insurance carrier for
9 LCH’s contractor’s license bond. The Roel Report concluded that
10 LCH had not completed the work on the Haddocks’s home and was
11 “‘guilty of Willful Disregard of Accepted Trade Standards in the
12 construction of the home for the claimant.’” The Roel Report
13 also concluded that necessary repairs/reconstruction to complete
14 the work for which LCH was obligated amounted to $115,000.
15 Trustee further stated that LCH offered her no competing expert
16 opinion to contradict the Roel Report’s findings.
17 A hearing on the Settlement Motion was held on June 23,
18 2010. There, the parties were ordered to file additional
19 briefing before a continued hearing on the matter on August 4,
20 2010. In short, Doan’s supplemental declaration questioned the
21 thoroughness of Trustee’s investigation of the State Court Action
22 and disputed the findings in the Roel Report. Doan noted that
23 the mechanic’s lien, with interest and court costs, was now worth
24 $110,006.
25 In her supplemental declaration, Trustee stated that she had
26 told Doan and his counsel that she welcomed any information
27 regarding the State Court Action, but they never provided her
28 with any. In addition to the Roel Report, Trustee now stated
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1 that she also interviewed counsel for the Haddocks and reviewed
2 many of the State Court Action documents.7 Trustee also included
3 a declaration from Mr. Haddock to counter Doan’s assertions about
4 the Roel Report’s findings.
5 After considering all of the pleadings and exhibits, the
6 bankruptcy court approved Trustee’s Settlement Motion, finding
7 specifically that Trustee had met her burden to support the
8 settlement as fair and reasonable under A & C Properties. The
9 court entered an order consistent with its tentative ruling on
10 August 26, 2010. Doan did not appeal the settlement order.
11 B. The Removal Motion.
12 On November 9, 2010, Doan moved to remove Trustee from LCH’s
13 bankruptcy case (the “Removal Motion”). The primary basis for
14 the motion was Doan’s displeasure with Trustee’s handling of the
15 Settlement Motion and her alleged favoritism of the Haddocks, the
16 only other creditor in the case. According to Doan, Trustee made
17 false representations to the court about the thoroughness of her
18 investigation of the State Court Action; her inquiries about it
19 were cursory and not what she represented in the Settlement
20 Motion.
21 To support his Removal Motion, Doan included transcripts
22 from the four § 341 creditor’s meetings to show how little the
23 State Court Action was discussed. Doan also included a
24 declaration from his bankruptcy counsel, in which counsel stated
25 that the State Court Action was never discussed at the December 4
26
27 7
Trustee never mentioned that she spoke with state court
counsel for LCH, who had expressed to her his disagreement with
28 the settlement.
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1 meeting at his office as Trustee had represented. In short, Doan
2 argued that Trustee should be removed because: (1) her actions
3 had harmed the estate by dissipating its only asset; (2) her
4 preference of one creditor over another evidenced an apparent
5 lack of disinterestedness and bias; (3) she had failed in her
6 duties to conduct a complete investigation of the State Court
7 Action and the Haddocks’s claim; and (4) she had used her
8 position to personally attack, harass, and intimidate Doan.
9 Trustee opposed the Removal Motion, contending that Doan
10 failed to establish “cause” under § 324(a); it was merely Doan’s
11 attempt to disrupt her motion for summary judgment in the pending
12 avoidance action against him. Trustee denied Doan’s allegations
13 of bias and adverse interest to the estate, and defended her
14 investigation of the State Court Action and the validity of the
15 Settlement Motion. Trustee further denied Doan’s allegations of
16 her improper dissipation of the estate’s assets. To Trustee,
17 Doan was a disgruntled defendant who failed to recognize the
18 highly valuable asset of Trustee’s avoidance action against him,
19 and her obligation to pursue it. Doan had also failed to
20 recognize Trustee’s duty to inquire further about his use of
21 LCH’s funds to pay some of his gambling expenses.
22 In his reply, Doan reiterated his allegations, contending
23 that Trustee’s conduct in this case showed not only a clear
24 appearance of impropriety, but also fell short of the fiduciary
25 standards applicable to bankruptcy trustees.
26 The bankruptcy court heard Doan’s Removal Motion on
27 December 15, 2010, and denied it for failing to establish “cause”
28 under § 324. An order denying the Removal Motion was entered on
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1 January 21, 2011. Doan’s premature notice of appeal filed on
2 December 27, 2010, was considered timely upon entry of the
3 removal order. Rule 8002(a).
4 II. JURISDICTION
5 The bankruptcy court had jurisdiction under 28 U.S.C.
6 §§ 1334 and 157(b)(2)(A). An order denying a motion to remove a
7 bankruptcy trustee is a final order. Dye v. Brown (In re AFI
8 Holding, Inc.),
530 F.3d 832, 837 (9th Cir. 2008)(collecting
9 cases). Therefore, we have jurisdiction under
28 U.S.C. § 158.
10 III. ISSUE
11 Did the bankruptcy court abuse its discretion in denying the
12 Removal Motion?
13 IV. STANDARD OF REVIEW
14 Removal of a trustee under § 324(a) is left to the sound
15 discretion of the bankruptcy court. In re AFI Holding, Inc.,
16
530 F.3d at 844. To determine whether the bankruptcy court
17 abused its discretion, we conduct a two-step inquiry: (1) we
18 review de novo whether the bankruptcy court “identified the
19 correct legal rule to apply to the relief requested” and (2) if
20 it did, whether the bankruptcy court’s application of the legal
21 standard was illogical, implausible or “without support in
22 inferences that may be drawn from the facts in the record.”
23 United States v. Hinkson,
585 F.3d 1247, 1261-62 (9th Cir.
24 2009)(en banc).
25 V. DISCUSSION
26 A. Removal under § 324(a).
27 A bankruptcy trustee is the legal representative and
28 fiduciary of the estate. In re AFI Holding, Inc., 530 F.3d at
- 8 -
1 844 (citing United States Trustee v. Joseph (In re Joseph),
2
208 B.R. 55, 60 (9th Cir. BAP 1997)). A trustee’s duties revolve
3 around marshaling and distributing the assets of the debtor’s
4 estate according to the distribution scheme prescribed by the
5 Code, and then closing the estate. Id. at 845.
6 The court, after notice and a hearing, may remove a trustee
7 for “cause.” § 324(a). Removal of a trustee is an extreme
8 remedy. Morgan v. Goldman (In re Morgan),
375 B.R. 838, 847
9 (8th Cir. BAP 2007); United States Trustee v. Repp (In re
10 Sheehan),
185 B.R. 819, 822 (Bankr. D. Ariz. 1995). If a trustee
11 is removed for cause, then that trustee is removed from all other
12 cases in which the trustee is then serving. See § 324(b).
13 Although not defined in the Code, case law has established
14 that “cause” to remove a trustee may include incompetence,
15 violation of fiduciary duties, misconduct or failure to perform
16 the trustee’s duties, or lack of disinterestedness or holding an
17 interest adverse to the estate. In re AFI Holding, Inc.,
18
530 F.3d at 845. The party seeking removal has the burden to
19 show specific facts supporting “cause.”
Id.
20 B. The bankruptcy court did not abuse its discretion in denying
the Removal Motion.
21
22 Doan’s burden of establishing an abuse of discretion has not
23 been aided by his conduct of this appeal. Doan’s opening brief
24 fails to include a table of cases, a statement of the basis of
25 appellate jurisdiction, a statement of the issues presented on
26 appeal, or to provide a proper conclusion. See Rule 8010(a). In
27 any event, Doan asserts the bankruptcy court abused its
28 discretion by overlooking the evidence supporting his Removal
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1 Motion: Trustee lied about the thoroughness of her of
2 investigation of the State Court Action and Haddocks’s claim;
3 Trustee showed a lack of disinterestedness by preferring one
4 creditor (the Haddocks) over another (Doan); and she harmed the
5 estate by causing a complete dissipation of estate assets.
6 After the bankruptcy court reviewed the pleadings and
7 exhibits filed by the parties, and considered the same arguments
8 Doan raises on appeal, it concluded that Doan was merely
9 rehashing the arguments he raised to oppose the Settlement
10 Motion, and that his evidence failed to establish “cause” under
11 § 324(a) and In re AFI Holding, Inc. Because the bankruptcy
12 court applied the correct legal standard, we now review whether
13 its factual findings are illogical, implausible, or without
14 support in the record.
15 A trustee “‘may not be the representative of any particular
16 creditor, but must represent all creditors without partiality.’”
17 In re AFI Holding, Inc.,
530 F.3d at 844 (quoting Gross v. Russo
18 (In re Russo),
18 B.R. 257, 270-71 (Bankr. E.D. N.Y. 1982)). In
19 reviewing the underlying documents for the Settlement Motion, we
20 agree that Trustee’s investigation of the State Court Action may
21 not have been as “extensive” as she had claimed. She spent
22 little time questioning Doan about it. She also apparently never
23 consulted with LCH’s state court counsel in the suit, who opposed
24 the settlement. Nonetheless, Doan has not established that
25 Trustee’s conduct regarding the Settlement Motion constituted
26 “cause” to remove her from LCH’s case. This conclusion is
27 particularly true since the bankruptcy court found the settlement
28 was fair and reasonable under A & C Properties, and Doan never
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1 appealed the settlement order.
2 For purposes here, a “disinterested person” is one that
3 “does not have an interest materially adverse to the interest of
4 the estate or of any class of creditors or equity security
5 holders, by reason of any direct or indirect relationship to,
6 connection with, or interest in, the debtor, or for any other
7 reason.” § 101(14)(C). An “adverse interest” is the
8 (1) possession or assertion of an economic interest that would
9 tend to lessen the value of the bankruptcy estate; or
10 (2) possession or assertion of an economic interest that would
11 create either an actual or potential dispute in which the estate
12 is a rival claimant; or (3) possession of a predisposition under
13 circumstances that create a bias against the estate. In re AFI
14 Holding, Inc.,
530 F.3d at 845. An adverse interest is
15 “material” if it exists “by reason of any direct or indirect
16 relationship to, connection with, or interest in, the debtor
17 . . ., or for any other reason.”
Id. at 845-46.
18 Doan failed to establish that Trustee held an economic, or
19 any other, interest materially adverse to the interest of the
20 estate or any class of creditors or equity security holders. No
21 evidence established that Trustee had a prior direct or indirect
22 relationship to, connection with, or interest in, LCH, Doan, or
23 the Haddocks, or that Trustee had any actual or potential
24 conflict of interest with same. Trustee’s exercise of her
25 business judgment to conclude that the Haddocks had a stronger
26 case than LCH in the State Court Action does not equate to her
27 holding an interest materially adverse to the estate.
28 As for Doan’s argument that Trustee’s settlement with the
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1 Haddocks improperly dissipated the estate’s assets, Doan fails to
2 recognize, and understandably so, that Trustee’s action against
3 him is a valuable asset in LCH’s bankruptcy estate, potentially
4 worth at least $210,000. Doan’s displeasure with Trustee’s
5 action against him does not provide a basis for “cause” under
6 § 324(a). Furthermore, if Doan had issues with the bankruptcy
7 court’s findings on the Settlement Motion, he could have appealed
8 the settlement order.
9 Finally, Doan contends that Trustee should be removed
10 because she has used her position of authority to intimidate and
11 demean him. We reviewed Doan’s evidence to support this
12 contention, including the transcripts from all of the § 341
13 creditor’s meetings, and we disagree. We see no evidence that
14 Trustee’s interview of Doan was, as he suggests, “an abusive and
15 angry tirade intended to demean” him. Trustee’s questions and
16 responses were proper, even if they may have seemed harsh or
17 intrusive to Doan.
18 Accordingly, because the bankruptcy court’s finding that
19 Doan had failed to present specific facts establishing removal is
20 not illogical, implausible or without support in the record, we
21 conclude that it did not abuse its discretion in denying the
22 Removal Motion. Hinkson,
585 F.3d at 1261-62.
23 VI. CONCLUSION
24 For the foregoing reasons, we AFFIRM.8
25
26 8
At oral argument, Trustee moved for sanctions against Doan
27 for prosecuting a frivolous appeal. A request for sanctions must
be made in a separately filed motion. Rule 8020; Highland Fed.
28 Bank v. Maynard (In re Maynard),
264 B.R. 209, 213 n.5 (9th Cir.
BAP 2001). Accordingly, Trustee’s improper oral motion for
sanctions is denied.
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