491 B.R. 454
Bankr. S.D. Tex.2013Background
- CNC Payroll filed a voluntary petition and W. Steve Smith was appointed chapter 7 trustee.
- Smith sought to employ his own law firm, McFall, Breitbeil & Smith, P.C., as general counsel.
- The court questioned the propriety of that retention, prompting an order to show cause to determine removal viability.
- Smith issued a Solicitation Letter to outside firms, drafted by an associate of his firm, with deadlines and negative framing.
- The Court found concerns that the letter favored Smith’s firm and could deter competitive bids, prompting extensive briefing and evidence.
- The court ultimately concluded there was not clear and convincing evidence of fiduciary breach, so removal was not warranted.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standard of proof for removal of a trustee | Removal requires clear and convincing evidence. | Preponderance may suffice given no explicit standard in the Code. | Clear and convincing standard applies due to broad public interests and impact across cases. |
| Whether Solicitation Letter breached fiduciary duties by self-dealing or conflict | Letter was designed to dissuade competition and benefited Smith’s firm. | Letter was inartful but not intended to harm the estate; it encouraged responses. | Letter was not proven to meet the clear and convincing evidentiary threshold for breach; hesitancy remains due to evidence but not satisfied. |
| Whether the Trustee’s conduct falls outside the business judgment rule due to self-interest | Self-dealing invalidates business judgment protection. | Code permits retention of his own firm; business judgment rule does not apply to conflicts. | Business judgment rule not applicable where a conflict of interest exists; need to show estate benefit is required. |
Key Cases Cited
- In re Interamericas, Ltd., 321 B.R. 830 (Bankr.S.D.Tex. 2005) (trustee's self-dealing considerations irrelevant to fiduciary duties; conflicts must be assessed)
- In re AFI Holding, Inc., 530 F.3d 832 (9th Cir. 2008) (cause for removal includes breach of fiduciary duties and lack of disinterestedness)
- In re Vega, 102 B.R. 552 (Bankr.N.D.Tex. 1989) (unauthorized use of funds by trustee as breach supporting removal from all cases)
- In re Stephens & Co., 30 F.2d 725 (S.D. Cal. 1928) (neglect and indifference can justify removal to protect estate interests)
- Shafer v. Army & Air Force Exch. Serv., 376 F.3d 386 (5th Cir. 2004) (clear articulation of what constitutes clear and convincing evidence in certain contexts)