If you're going to couple business travel with a family trip, don't bill your client for your vacation expenses. That's the lesson from a recent Fifth Circuit ruling upholding the removal of a bankruptcy trustee who billed the estate for his family's extended stay in New Orleans during oral arguments. Steven Smith, the trustee in question, continually put his own interests ahead of the estate's, the court found.
What's more, because Smith was removed as trustee for cause, the Bankruptcy Code required Smith to be removed as trustee from all other bankruptcy proceedings.
A Quick Trip to New Orleans
When Smith was acting as trustee for IFS Financial Corporation, he traveled from Houston to New Orleans for oral arguments. His wife and two children joined him. As the Fifth Circuit explained, "They arrived three days early and stayed the night afterwards. Smith later submitted a large, unitemized bill for his firm's work." The total bill for that oral argument slash family vacation? $3,486.37. The bankruptcy court refused to distribute the amount and, after a hearing, removed him as trustee.
He was also kicked from all other bankruptcy proceedings, since Bankruptcy Code section 324(b) commands that whenever the court removes a trustee for cause, they must be removed in all other bankruptcy cases. A good chunk of business was taken away in an instant, all because of Smith's vacation billing.
I'll Represent All Parties, Please
When IFS went in to bankruptcy proceedings, Sam Smith was appointed as its trustee. He then hired his own law firm to represent him as trustee. Blanche Smith, his wife, served as lead counsel. Smith initiated over 100 proceedings to recover the estate's assets. Three years later, he sought to have his firm retained as counsel for IFS debtors.
The bankruptcy court refused, noting that representing both the debtors and debtee is "inconsistent" with the fiduciary duties of a trustee. It explained Smith's strange logic thusly:
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 one.
In another bankruptcy matter, Smith again tried to bring on his own firm, without making any serious effort to contact other firms. Unsurprisingly, the court soon began to believe that Smith "was attempting to benefit his own firm, to the detriment of the Estate."
The vacation, it seemed, was just the coup de grace. In response to the bankruptcy court's order to show cause, Smith explained that his family lacked child care options (hence the children), that the oral arguments were important, and that many expenses had not been billed to the estate. But, he also revealed that during the bankruptcy, $9 million had been paid out to the lawyers, while the largest creditor had received only $5 million of its $70 million claim.
Whatever fiduciary breaches may have occurred, Smith argued on appeal, they were not sufficient cause for his removal. The Bankruptcy Code does not define what constitutes cause and Smith argued for cause removal should be limited to instances of actual injury or fraud, as in the Second Circuit. The Third and Ninth Circuit follow a "middle ground" approach, allowing for cause removal when there is "a sufficient threat of material adversity."
The Fifth Circuit did not take a firm stand on either side, instead surveying previous "for cause" removals. Trustees have been dismissed for soliciting estate funds, working around payment rules, and for just the appearance of impropriety and conflicts of interest. If those are sufficient, then certainly Smith's removal is as well, the Fifth found.