In re CNC Payroll, Inc.

491 B.R. 454, 2013 WL 1844109, 2013 Bankr. LEXIS 1771, 57 Bankr. Ct. Dec. (CRR) 260
CourtUnited States Bankruptcy Court, S.D. Texas
DecidedMay 1, 2013
DocketNo. 12-33012
StatusPublished
Cited by4 cases

This text of 491 B.R. 454 (In re CNC Payroll, Inc.) is published on Counsel Stack Legal Research, covering United States Bankruptcy Court, S.D. Texas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
In re CNC Payroll, Inc., 491 B.R. 454, 2013 WL 1844109, 2013 Bankr. LEXIS 1771, 57 Bankr. Ct. Dec. (CRR) 260 (Tex. 2013).

Opinion

MEMORANDUM OPINION

MARVIN ISGUR, Bankruptcy Judge.

The Court must determine whether W. Steve Smith must be removed as the chapter 7 trustee in this case. Because the Court has determined that there is not clear and convincing evidence1 that Smith breached his fiduciary duty to the Estate, the Court will not order his removal.

When Smith determined that the Estate should retain counsel, he sought to retain a law firm in which he is a partner. After the Court questioned whether his own law firm should be retained, Smith wrote a letter soliciting other firms to serve as Estate counsel. Because the letter appeared to have been designed to favor Smith’s firm, the Court issued an order requiring Smith to show cause why he should not be removed as Trustee. This opinion examines whether Smith’s conduct mandates his removal.

The Role of a Chapter 7 Trustee

Section 323(a) of the Bankruptcy Code makes the trustee the representative of the bankruptcy estate. In re Bechuck, 472 B.R. 371, 375 (Bankr.S.D.Tex.2012). Indeed, a trustee is vested with extraordinary rights as the general representative of an estate’s creditors. Ingalls v. Erlewine (In re Erlewine), 349 F.3d 205, 210 (5th Cir.2003) (citing, Coleman v. Alcock, 272 F.2d 618, 621-22 (5th Cir.1960)). In that capacity, the Chapter 7 Trustee serves as a fiduciary to the Estate. Love v. Tyson Foods, Inc., 677 F.3d 258 (5th Cir.2012).

The duties of a trustee are of great import to preserving the integrity and efficiency of the bankruptcy system. As such, accusations or appearances of impropriety by a trustee should not be taken lightly. Courts should investigate serious accusations against trustees in order to uphold public confidence in the integrity of the bankruptcy system.

[457]*457Based on this precept, the Court issued its Order to Show Cause Why Trustee Should Not Be Removed Pursuant To 11 U.S.C. § 324. ECF No. 22. The Court finds insufficient cause to remove W. Steve Smith as trustee.

Background

CNC Payroll, Inc. filed its voluntary petition on April 25, 2012. ECF No. 1. On the same date, W. Steve Smith was appointed chapter 7 trustee. On November 20, 2012, Mr. Smith filed Trustee’s Application to Employ General Counsel (ECF No. 12), seeking to employ a law firm in which Smith is a partner, McFall, Breitbeil & Smith, P.C. On December 14, 2012, the Court issued its Order Requiring Supplemental Pleading on Application to Retain Trustee’s Law Firm, (ECF No. 13), requiring that no later than January 11, 2013, the Trustee demonstrate that retention of his law firm was superior to the retention of other law firms. The Court ordered that if the Trustee had not contacted other firms, he should explain why he chose not to make such contacts.

On January 10, 2013, the Trustee filed Trustee’s Supplement to Application to Employ General Counsel. ECF No. 15. Attached to the Supplement was a letter, dated December 18, 2012, from the Trustee to twenty-nine law firms (the “Solicitation Letter”). ECF No. 15-2. On February 11, 2013, a hearing was held regarding the Supplement. It was the Solicitation Letter, and Smith’s explanations offered at the February 11, 2013 hearing, that prompted the Order to Show Cause. Namely, the Court was concerned with the following:

1.The Trustee sent the letter by United States mail on December 18, 2012, and required a response from interested law firms by December 31, 2012. Allowing three days for mailing, the letter would have been received on Friday, December 21, 2013. Monday was Christmas Eve and Tuesday was Christmas Day. Accordingly, even assuming that the necessary people were working during the Holiday Season, Smith only gave approximately three business days to reply to the solicitation.
2. Paragraph 3 of the letter required a competing firm to provide certain information by December 31, an unrealistic time frame. Additionally, Smith did not impose a similar requirement on his own law firm. At the February 11, 2013 hearing, Smith said that he knew all the answers in his head, and so did not require the information from his own firm.
3. Although Smith’s firm was the primary competitor to any letter recipient, the letter was drafted by an associate of Smith’s own firm, whom he directly supervises.
4. The Court was concerned that the letter was intended to discourage competitive bids. The letter advises that it is being sent “to comply with a recent court order.” Over one quarter of the letter cautions prospective firms that they might not get paid, but fails to mention that the Estate holds $219,523.00 in cash. The letter instructs that any questions should be directed to Smith’s assistant, rather than Smith himself. The letter fails to make a single positive statement about the potential litigation.
5. At the February 11 hearing, the Court inquired why Smith did not personally call any lawyers regarding the case. Smith replied that he did not wish to be accused of cronyism. However this statement is inconsistent with Smith’s other actions, since he also testified that his reason for not considering one of the two firms that [458]*458did respond to the Solicitation Letter was because he did not personally know the lawyers that would be working on the case. Essentially, Smith would not directly contact people he knew and would not consider those he did not.

ECF No. 22 at 3-5.

The Court issued the Show Cause Order based on its concern that the Trustee’s actions were calculated to preordain retention of his own law firm, in which he has a personal financial interest.

The Court issued an earlier opinion regarding the Trustee’s retention of his own firm, In re Interamericas, Ltd., 321 B.R. 830 (Bankr.S.D.Tex.2005).2 In Interamer-icas the Court wrote:

In the present case, the Trustee’s application reflects that the Trustee is seeking to retain his own firm for reasons that are unrelated to whether it is in the best interest of the Estate. Exhibit “A” to the Trustee’s application indicates that the Trustee relies on his own firm to handle unprofitable cases. Thus, the Trustee reasons that in order to allow his firm to afford to prosecute the unprofitable cases, he must also hire his firm to handle profitable cases — such as the present case. The Trustee’s logic reflects that it may be in the firm’s best interest to be hired in this case. It may also reflect that it is in the best interest of unrelated, unprofitable estates for the Trustee’s firm to be hired in this case. However, those factors are irrelevant to the determination that must be made under § 327(d). Indeed, those factors reflect that the Trustee is considering facts that are inconsistent with his well-established duties to the estate.

In re Interamericas, Ltd., 321 B.R. 830, 835 (Bankr.S.D.Tex.2005).

In the present case (as with Interameri-cas ),

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Related

Smith v. Robbins (In Re IFS Financial Corp.)
803 F.3d 195 (Fifth Circuit, 2015)
In re Edwards
510 B.R. 554 (S.D. Texas, 2014)
In re JMW Auto Sales
494 B.R. 877 (S.D. Texas, 2013)

Cite This Page — Counsel Stack

Bluebook (online)
491 B.R. 454, 2013 WL 1844109, 2013 Bankr. LEXIS 1771, 57 Bankr. Ct. Dec. (CRR) 260, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-cnc-payroll-inc-txsb-2013.