In re Grasso, 490 B.R. 500

On Oct. 16, 2012, the court issued a Trustee Order appointing a Chapter 11 Trustee for cause under § 1104(a)(1) and in the best interests under § 1104(a)(2); on Oct. 31, 2012, Debtor sought reconsideration to limit appointment to § 1104(a)(2) and remove findings, which the court denied except agreed to strike Paragraph L(13) later.
The procedural history began with Madison Capital’s July 23, 2012 Motion to Convert to Chapter 7, followed by the U.S. Trustee’s July 25, 2012 Motion to Convert or Dismiss; hearings occurred Aug.–Sept. 2012.
At the Oct. 15, 2012 hearing, the court found misconduct supporting appointment due to deceit, fiduciary breaches, asset diversion, and concealment related to the Debtor’s control of multiple entities.
A central factual episode was the Debtor’s purchase of the WSFS claim against him, funded in part by estate assets, with testimony inconsistencies and non-disclosures about the source of funds and the Debtor’s role.
The Debtor also faced issues over alleged entireties ownership in various partnerships, lack of documentation for wife’s interests, and potential conflicts of interest that would impede reorganization.
Post-petition matters included a $30,000 post-petition retainer to the Debtor’s counsel paid by a related partnership, and the Debtor’s failure to timely file financial disclosures and operating reports.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the Trustee Order should be amended to limit to § 1104(a)(2) only	Grasso argues to strike §1104(a)(1) findings to preserve reorganization prospects	Grasso contends findings are necessary to justify appointment	Amendment granted only to strike Paragraph L(13); otherwise denied.
Whether appointment under § 1104(a)(1) was warranted	Cause existed due to Debtor’s misconduct	No appointment warranted on those grounds	Court held that § 1104(a)(1) cause existed and appointment was warranted.
Whether Debtor’s purchase of the WSFS Claim violated fiduciary duties	Purchase disclosed as beneficial to estate; no breach	Insider knowledge and failure to disclose violate fiduciary duties	Yes; mismanagement and breach of fiduciary duty established; supports appointment.
Whether Debtor failed to obtain court approval for professional employment (Kaplan)	Retention must be court-approved; failure to file application	Kaplan’s role was informal; approval not required	Paragraph L(13) struck; issue left for later determination; no final ruling on §327 employment here.

In re Papercraft Corp., 160 F.3d 982 (3d Cir.1998) (insider fiduciary duty to disclose corporate opportunities to estate creditors; equitable subordination context)
Brown v. Presbyterian Ministers, 484 F.2d 998 (3d Cir.1973) (corporate opportunity doctrine; fiduciaries may not exploit opportunities without disclosure)
In re PRS Insurance Group, Inc., 274 B.R. 381 (Bankr.D. Del.2001) (diversion of funds justifies trustee appointment; mismanagement standard)
In re Sharon Steel Corp., 871 F.2d 1217 (3d Cir.1989) (fiduciary duties and conflicts of interest; need for independent trustee)
Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir.2003) (trustee appointment as an extreme remedy; balancing interests of creditors and estate)