In Re Paolino
The focus of our inquiry into the case before us is whether we should appoint a trustee in a chapter 11 reorganization under
We find the facts of this case to be as follows: 1 The husband-debtor is a doctor of medicine who owns and operates a medical facility which generates for the doctor an annual income of approximately $550,-000.00. From this income the debtors purchased, several years ago, numerous rental properties as well as a former schoolhouse which they hoped to convert into a medical treatment center. The schoolhouse was purchased in late 1982 for $1,300,000.00 with part of a two year loan of $1,750,-000.00 which was advanced by an affiliate of Union National Bank and Trust Company (“the Union”) which is one of the mov-ants for the appointment of a trustee. The balance of the loan was consumed by settlement costs, architectural fees and sundry expenses. Within a few months the debtors unsuccessfully sought a $250,-000.00 line of credit from the Union to continue work on the schoolhouse. The debtors’ expectations of refinancing the $1,750,000.00 with a bond issue fizzled and prospects of the timely repayment of the loan looked dim.
In the early part of 1983 the debtors systematically shifted funds among their half a dozen checking accounts with the deceitful design of withdrawing uncollected funds which is known in the vernacular as “check kiting.” In a 24 hour period in March of 1983, checks with a face value of nearly half a million dollars were returned to the debtor due to insufficient funds and on that fateful day the kite became an albatross. The debtors passed the checks knowing that their account funds were inadequate to cover the checks. The Union, being one of the banks most harmed by the scheme, prevailed in an action in state court for the appointment of a receiver. The receiver directed the debtors to pay all necessary expenses for the operation of the husband-debtor’s medical practice but directed the turnover of any remaining funds to the receiver. From this mandate the debtors significantly deviated by making numerous mortgage payments during the receivership. The debtors were also derelict in failing to submit to the receiver the obligatory periodic operating reports. After the debtors’ unsanctioned lapse in reporting, the receiver was obliged to resort to judicial intervention to rectify the deficiency. The reports that were filed, were inadequate and failed to portray accurately the debtors’ financial transactions.
In March of 1985 several credit'ors filed an involuntary petition for reorganization against the debtors under chapter 11 of the Bankruptcy Code. Two and a half months later, an order for relief was entered and the debtors were thereby dutybound to file monthly operating reports with the court. No reports have been filed during that four month interval. Along with the Union the petitioning creditors have also moved for the appointment of a trustee.
The Code provides for the appointment of a trustee in a chapter 11 ease in the following language:
§ 1104 . Appointment of trustee or examiner
(a) At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest, and after notice and a hearing, the court shall order the appointment of a trustee—
(1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debt- or by current management, either before or after the commencement of thecase, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor; or
(2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.
The legislative history reveals that Congress intended that the case law “flesh out” the bare language of
As debtors in possession, the debtors are fiduciaries holding estate property for the benefit of their creditors.
In Re Modern Office Supply, Inc., 28
B.R. 943, 944 (Bankr.W.D.Okla.1983);
In Re Martin Custom Made Tires Corp.,
As an alternative and independent basis for our decision in this case, that the debtors’ check kiting scheme warrants the appointment of a trustee since such conduct constitutes fraud.
In Re McCordi,
On the basis of the debtors’ check kiting scheme and their failure to provide adequate financial documentation we will appoint a trustee under
Notes
. This opinion constitutes the findings of fact and conclusions of law required by Bankruptcy Rule 7052.