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In Re: Log & Conventional Homes, Inc v. Leslie Gladstone

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT


December 22, 2011

IN RE: LOG & CONVENTIONAL HOMES, INC., DEBTOR. ROBERT DOAN, APPELLANT,
v.
LESLIE GLADSTONE, CHAPTER 7 TRUSTEE, APPELLEE.

Appeal from the United States Bankruptcy Court for the Southern District of California Honorable James W. Meyers, Bankruptcy Judge, Presiding Bk. No. 09-12365-JM

SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

MEMORANDUM*fn1

Argued and Submitted on October 20, 2011 at San Diego, California

Filed - December 22, 2011

Before: KIRSCHER, MARKELL, and HOLLOWELL, Bankruptcy Judges.

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.

Appellant, creditor Robert Doan ("Doan"), appeals a bankruptcy court order denying his motion to remove chapter 7 trustee, Leslie Gladstone ("Trustee"), from debtor's bankruptcy case. We AFFIRM.

I. FACTUAL AND PROCEDURAL BACKGROUND

Prior to filing bankruptcy, debtor, Log & Conventional Homes, Inc. ("LCH"), had entered into a contract to build a log home for the Haddocks. A dispute arose between the parties, and LCH sued the Haddocks in state court for breach of contract (the "State Court Action"). The Haddocks filed a counterclaim for approximately $226,000 in damages due to LCH's alleged failure to complete the home.

Doan is the sole shareholder of LCH. LCH filed a voluntary chapter 7*fn2 petition on August 20, 2009. Its assets consisted of a $43,000 bond securing a mechanic's lien, and a receivable of $67,100, which is the amount Haddocks allegedly owed LCH on the contract. LCH has only two unsecured creditors: the Haddocks and Doan.*fn3

Between September and November 2009, Trustee conducted four*fn4 § 341 creditor's meetings with LCH and Doan. Notably, Trustee's primary topic of discussion at all four meetings was the potential preferences and fraudulent transfers made by LCH to Doan. Over the course of the four meetings, Trustee made only brief inquiries about the State Court Action. At the first meeting, Trustee asked about the status of the matter. Doan explained that LCH and Haddocks had been in litigation for two years, and that Haddocks's title insurance company had posted a bond insuring LCH's mechanic's lien, which was payable to LCH.

Doan told Trustee that he would provide her with the necessary state court documents regarding perfection of LCH's mechanic's lien. As a result of the mechanic's lien and the receivable, Doan contended that the Haddocks owed LCH approximately $110,000.

During the third meeting, Doan admitted that he had gambled with some of the funds he received from LCH. Trustee posed several follow-up questions to Doan on that issue. The only other mention of the State Court Action was at the fourth meeting on November 19, 2009. Trustee noted that she had not yet been provided with the mechanic's lien documents, but stated that she had been "talking to the party about resolving [the State Court Action]." Trustee further expressed her intention to pursue a "slam-dunk preference [action]" against Doan to recover at least $81,000 for LCH's estate. At the end of the fourth meeting, the parties agreed to meet at Doan's counsel's office on December 4, 2009, to further discuss Trustee's preference action and the State Court Action.*fn5

A. The Settlement Motion.

On April 7, 2010, Trustee filed a Notice of Intended Action to Approve Stipulation to Settle Claim, Release Mechanic's Lien, and Dismiss State Court Action (the "Settlement Motion").

According to the Settlement Motion, Haddocks were entitled to an allowed unsecured claim in the amount of $100,000, and Trustee agreed to release LCH's mechanic's lien. The parties further agreed to dismiss the State Court Action with prejudice.

In his opposition to the Settlement Motion, Doan questioned the objectivity and neutrality of the Trustee. Specifically, Doan contended that Trustee's motion failed to set forth any factual background about the mechanic's lien or LCH's claim against Haddocks and the Haddocks's counter-claim, or recite any of the factors set forth in A & C Properties.*fn6 In Doan's opinion, the settlement effectively purged LCH's estate of its only asset while receiving nothing in return. Attached to Doan's declaration was a letter that LCH's counsel in the State Court Action had sent to Trustee. In that letter, counsel stated that he "[could not] fathom how [Trustee] could possibly reach a conclusion that the Haddocks [were] entitled to any compensation from [LCH]. . . . The facts and evidence [were] strong and well supported that the Haddocks' claim was trumped up and was not supported by any factual or legal basis. The evidence was also overwhelming that the Haddocks owed [LCH] at least $40,000.00 and possibly more."

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 that she also interviewed counsel for the Haddocks and reviewed many of the State Court Action documents.*fn7 Trustee also included a declaration from Mr. Haddock to counter Doan's assertions about the Roel Report's findings.

After considering all of the pleadings and exhibits, the bankruptcy court approved Trustee's Settlement Motion, finding specifically that Trustee had met her burden to support the settlement as fair and reasonable under A & C Properties. The court entered an order consistent with its tentative ruling on August 26, 2010. Doan did not appeal the settlement order.

B. The Removal Motion.

On November 9, 2010, Doan moved to remove Trustee from LCH's bankruptcy case (the "Removal Motion"). The primary basis for the motion was Doan's displeasure with Trustee's handling of the Settlement Motion and her alleged favoritism of the Haddocks, the only other creditor in the case. According to Doan, Trustee made false representations to the court about the thoroughness of her investigation of the State Court Action; her inquiries about it were cursory and not what she represented in the Settlement Motion.

To support his Removal Motion, Doan included transcripts from the four § 341 creditor's meetings to show how little the State Court Action was discussed. Doan also included a declaration from his bankruptcy counsel, in which counsel stated that the State Court Action was never discussed at the December 4 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 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).

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 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.

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 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.

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.

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 - 10 - 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.

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 Haddocks improperly dissipated the estate's assets, Doan fails to recognize, and understandably so, that Trustee's action against him is a valuable asset in LCH's bankruptcy estate, potentially worth at least $210,000. Doan's displeasure with Trustee's action against him does not provide a basis for "cause" under § 324(a). Furthermore, if Doan had issues with the bankruptcy court's findings on the Settlement Motion, he could have appealed the settlement order.

Finally, Doan contends that Trustee should be removed because she has used her position of authority to intimidate and demean him. We reviewed Doan's evidence to support this contention, including the transcripts from all of the § 341 creditor's meetings, and we disagree. We see no evidence that Trustee's interview of Doan was, as he suggests, "an abusive and angry tirade intended to demean" him. Trustee's questions and responses were proper, even if they may have seemed harsh or intrusive to Doan.

Accordingly, because the bankruptcy court's finding that Doan had failed to present specific facts establishing removal is not illogical, implausible or without support in the record, we conclude that it did not abuse its discretion in denying the Removal Motion. Hinkson, 585 F.3d at 1261-62.

VI. CONCLUSION

For the foregoing reasons, we AFFIRM.*fn8


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