A creditors’ committee member violated her fiduciary duties because she did not disclose upon appointment that she intended to press a first-priority claim that would consume the entire estate, according to Bankruptcy Judge Mark S. Wallace of Santa Ana, Calif.
A man filed a chapter 11 petition four years after the state court terminated the marriage with his former wife. At the time of filing, the wife had been awarded temporary spousal support, but the state court had not awarded retroactive or permanent spousal support.
The wife volunteered for service on the official unsecured creditors’ committee. She was seated on the committee along with two other individuals. On the U.S. Trustee’s membership solicitation form, the former wife estimated her claim at $6 million.
Less than two months after filing, the wife filed a proof of claim asserting an unliquidated, first-priority claim under Section 507(a)(1).
According to Judge Wallace’s November 15 opinion, the former wife provided information about the debtor’s assets that “greatly augmented the amount of cash” in the estate.
Along with the other committee members, the former wife supported the appointment of a chapter 11 trustee, who was tapped by the court about eight months into the reorganization effort.
According to Judge Wallace, the former wife dodged answering questions by the newly appointed trustee about the amount of her priority claim. He quoted the trustee as saying she would not administer the estate exclusive for the benefit of the former wife.
The magnitude of the former wife’s claim finally became apparent when she filed an objection to the allowance of professional fees 11 months after the trustee’s appointment. In the objection, the wife said that her first-priority claim would, in substance, consume the entire estate. She resigned from the committee 10 days later.
After the case converted to chapter 7, the trustee prosecuted an adversary proceeding to subordinate the wife’s claim, based on her alleged violation of fiduciary duties.
Judge Wallace said that committee members have fiduciary duties to all creditors they represent. He said that a duty to disclose arises from the duties of care and loyalty. He quoted Benjamin Cardozo: “Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty . . . .” Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (N.Y. 1928).
Judge Wallace conceded that the former wife had the right to seek full allowance of her domestic support award, but, he said, “she does not and did not have the right to actively conceal her intentions with respect to such claim by dodging [the trustee’s] repeated inquiries on that subject.”
Judge Wallace said that the former wife’s duties required her “to disclose at the outset of the case” what she ultimately disclosed 20 months later — namely, her belief that estate professionals did not have the right to be paid from what would be her property.
Had she disclosed that the professionals would be working for free, Judge Wallace said that the creditors would have sought dismissal of the case or would have negotiated a carveout to pay professionals and something for unsecured creditors.
“Thus,” Judge Wallace said, the wife “seriously breached her fiduciary duties, including the duty of disclosure and the duty of loyalty, by refusing to answer [the trustee’s] questions [and] concealing her true intentions . . . .” He said that the former wife’s concealment deprived general unsecured creditors of the chance to negotiate a carveout.
Judge Wallace said that the former wife’s breach of fiduciary duties “rises to the level of inequitable conduct” justifying claim subordination under Section 510(c). He subordinated the wife’s priority claim to the claims of the trustee’s professionals beginning two weeks after the trustee’s appointment.
Because the facts were not yet fully developed, Judge Wallace deferred a decision on subordination to the claims of unsecured creditors.
Judge Wallace received his J.D. from Columbia University School of Law, where he was a Harlan Fiske Stone Scholar and a notes and comments editor of its law review.
A creditors’ committee member violated her fiduciary duties because she did not disclose upon appointment that she intended to press a first-priority claim that would consume the entire estate, according to Bankruptcy Judge Mark S. Wallace of Santa Ana, Calif.
A man filed a chapter 11 petition four years after the state court terminated the marriage with his former wife. At the time of filing, the wife had been awarded temporary spousal support, but the state court had not awarded retroactive or permanent spousal support.
The wife volunteered for service on the official unsecured creditors’ committee. She was seated on the committee along with two other individuals. On the U.S. Trustee’s membership solicitation form, the former wife estimated her claim at $6 million.
Less than two months after filing, the wife filed a proof of claim asserting an unliquidated, first-priority claim under Section 507(a)(1).
According to Judge Wallace’s November 15 opinion, the former wife provided information about the debtor’s assets that “greatly augmented the amount of cash” in the estate.
Along with the other committee members, the former wife supported the appointment of a chapter 11 trustee, who was tapped by the court about eight months into the reorganization effort.
According to Judge Wallace, the former wife dodged answering questions by the newly appointed trustee about the amount of her priority claim. He quoted the trustee as saying she would not administer the estate exclusive for the benefit of the former wife.