Personal misconduct unrelated to someone’s activities as a chapter 7 trustee can result in removal as a panel trustee for “cause” under Section 324(a), according to a nonprecedential opinion from the Ninth Circuit Bankruptcy Appellate Panel, or BAP.

The husband of a chapter 7 panel trustee had taken his wife out of his will. While he allegedly was elderly and mentally infirm, the wife persuaded her husband to put her back in his will, making her the sole heir of valuable real estate to the exclusion of the husband’s children with a former wife.

After the husband’s death, the children challenged the will. In a tentative opinion after trial, the state court “laid out a harrowing tale of [the wife’s] abuse, intimidation, and manipulation of [the husband] while he was in desperate mental, emotional, and physical condition,” the BAP said in its April 8 opinion. The BAP went on the say that the state “court indicated its intention to decide that [the husband] was an abused spouse.”

Before the state court entered a final opinion and judgment voiding the will, the wife applied for and received a federal Covid loan of some $925,000, based on her statement that she had undisputed title to the deceased husband’s real estate. According to the BAP, the wife used half of the proceeds to pay her attorneys’ fees and spent the other half on personal expenses.

Before time expired for objecting to the tentative opinion, the wife filed a personal chapter 11 petition and voluntarily sought suspension from assignment of new chapter 7 cases. The deceased husband’s heirs moved in bankruptcy court to modify the automatic stay so the state court could enter a final decision. The heirs also objected to the dischargeability of the wife’s debts to the probate estate.

The heirs and the wife-debtor settled most of their disputes in conversion of the chapter 11 case to chapter 7. Two months after conversion, the U.S. Trustee moved in one of the wife’s chapter 7 cases to remove her as trustee under Section 324(a) in that case and in all of her other cases. The U.S. Trustee took the position that the wife’s misstatement in obtaining the Covid loan and her use of the proceeds were “cause” for removal.

Before the hearing on removal, the wife resigned from the chapter 7 panel, but the U.S. Trustee took the position that resignation did not moot the removal motion. After hearings, the bankruptcy judge granted the removal motion and removed the wife as trustee in all but a few cases, finding that her conduct regarding the Covid loan was “cause” for removal.

The wife-trustee appealed. The BAP conducted a review for abuse of discretion. The wife-trustee argued that conduct unrelated to work as a trustee could not be cause for removal.

Section 324(a) says that the “court, after notice and a hearing, may remove a trustee, other than the United States trustee, or an examiner, for cause.” The BAP’s per curiam opinion quoted the Ninth Circuit for saying that “cause” in Section 324(a) “‘is determined on a case-by-case, totality-of-circumstances approach, subject to the bankruptcy court’s broad discretion.’”

The BAP added that “Congress used only the broad word ‘cause,’ with no qualifications or adornment.” If Congress meant that “cause” should only relate to work as a trustee, the panel said that Congress “would have used a narrower word or phrase.”

Finding “no case . . .  refusing to remove a trustee for personal misconduct,” the panel cited the Collier treatise for saying that “cause” in Section 324(a) includes “personal misconduct.”

The BAP found no error in the bankruptcy court’s finding that the wife-trustee’s actions with regard to the Covid loan “qualified as personal misconduct warranting removal under § 324(a),” because she did not disclose litigation regarding her ownership of the properties. Further, she had not used the loan proceeds as “working capital,” as the loan required.

The BAP affirmed the trustee’s removal.

Observations

Prof. Nancy B. Rapoport provided the following commentary:

This is one of those cases in which egregious facts lead to a logical result and still leave us with a line-drawing problem. Obviously, spousal abuse is a bad thing; sexual harassment is a bad thing; and it seems as though the Court is saying that moral turpitude crimes are a bad thing. Who could disagree with that?

But other than moral turpitude caselaw, how do we draw the boundary so the U.S. Trustee and panel trustees know the boundary? Unpaid parking tickets wouldn’t be cause. A murder conviction would. What about a trustee who makes her team work on federal holidays?

One of the country’s leading experts on ethics in bankruptcy cases, Prof. Rapoport is a UNLV Distinguished Professor and the Garman Turner Gordon Professor of Law at the University of Nevada, Las Vegas William S. Boyd School of Law.