A third violation of fiduciary duties is enough in the Fifth Circuit to remove a trustee for cause under Section 324(b).
A trustee for a bankrupt company recovered a $1.5 million judgment. For an appeal to the Fifth Circuit, he hired his wife to be the lawyer. He charged the bankruptcy estate some $3,500 for a five-day trip to New Orleans for oral argument.
The lawyer and his wife made the trip together, along with their two children.
U.S. Bankruptcy Judge Marvin Isgur removed Smith as trustee in an opinion from May 2013, concluding that the lawyer “intentionally charged the estate ... for substantial expenses incurred for his personal benefit.” He found “clear and convincing” evidence of breach of fiduciary duty based in part on two other cases where the court had questioned his conduct.
The lawyer failed to win a stay pending appeal. Consequently, the statute automatically resulted in his removal as trustee in all other cases in which he was serving.
The district court upheld his removal last year because “staying in an expensive hotel might be poor judgment, but staying in an expensive one in a vacation town when you are not needed is categorically worse.”
The lawyer appealed again and lost in a Sept. 25 opinion written by Fifth Circuit Judge Patrick E. Higginbotham. His opinion can be read to infer that a trustee can be more easily removed if prior criticism gave notice “that he need[s] to scrupulously observe his fiduciary duties.”
Construing the elements of “cause” required for removal, Judge Higginbotham held that the lawyer’s conduct would meet both the “gross negligence” or “actual injury or fraud” standards. In the process, he pointed out a conflict between the Second Circuit on one side and the Third and Ninth Circuits on the other.
Where the New York appeals court requires “fraud or actual injury,” the other two circuits take a “middle ground approach” where “threat of material adversity” is enough in the context of a conflict of interest.
Judge Higginbotham also rejected the lawyer’s argument that Section 324(a) is unconstitutional on its face or as applied
A third violation of fiduciary duties is enough in the Fifth Circuit to remove a trustee for cause under Section 324(b).