Opinion ID: 1189498
Heading Depth: 1
Heading Rank: 12

Heading: Application to Our Facts

Text: Having adopted the totality-of-circumstances approach to determine lack of disinterestedness under § 101(14)(E) as cause under § 324, we now examine the facts and procedure in our case. Indeed, the bankruptcy court made the precise analysis. It found that Dye had certain social connections with Meister, whom she had represented when he was an insider of Debtor, and a past professional connection with Eriksen (Meister's domestic partner), who was an investor and limited partner in the AFI Entities (Dye described him as a partner in her letter to Eisenberg during the settlement negotiations). Both individuals had a direct interest in, or adverse interest to, Debtor at the time she represented them. However, Dye argues that insider status must be a present one and maintains that such individuals were no longer affiliated with AFI at the time of the bankruptcy petition. Dye urges that whether circumstances exist as would create a conflict of interest must be considered as of the time of appointment. In re Lee Way Holding, Co., 102 B.R. 616 (S.D.Ohio 1988). The facts and law support the bankruptcy court's ruling and make practical sense. The definition of insider is open-ended because the term is not precise. 3 Collier, supra, ¶ 327.04[2][a][iii][C], at 327-36 to 327-37. [I]nsider status may be based on a professional or business relationship with the debtor, in addition to the Code's per se classifications, [ [12] ] where such relationship compels the conclusion that the individual or entity has a relationship with the debtor, close enough to gain an advantage attributable simply to affinity rather than to the course of business dealings between the parties. Friedman v. Sheila Plotsky Brokers, Inc. (In re Friedman), 126 B.R. 63, 70 (9th Cir. BAP 1991). The bankruptcy court properly considered the larger picture of these interrelationships in order to determine their materiality. At the time Dye formed business and social relationships with Meister and Eriksen, they were insiders. Dye claimed that she did not know about Meister's problems with AFI, but there was colorable evidence that she knew that Eriksen's reasons for wanting to withdraw his investment were closely tied to the fallout from the Ponzi scheme. Dye was in an adversarial position with AFI in representing Eriksen and negotiated a settlement for him which she could have believed would withstand scrutiny by any future bankruptcy trustee. As fate had it, she was that trustee. In addition, the court correctly found that these associations could conceivably have influenced Dye's decision not to assert a recovery action against Eriksen [13] or litigation against Meister. Then, Dye received payment from AFI as part of the settlement. These relationships created suspicion and discord between Dye and the estate's creditors which was detrimental to the administration of the estate. [14] A trustee/fiduciary must be free from any hint of bias. All of this evidence fits within the parameters of a materially adverse interest based on either an appearance of impropriety or a potential conflict of interest. Either is a viable cause for removal. The Code's definition of disinterestedness covers not only actual impropriety, but the appearance of impropriety as well. In re Paolino, 80 B.R. 341, 345 (Bankr.E.D.Pa.1987); see also Martin, 817 F.2d at 180-81 (Section 327 is intended, however, to address the appearance of impropriety as much as its substance, to remove the temptation and opportunity to do less than duty demands.); In re Vebeliunas, 231 B.R. 181, 191-92 (Bankr. S.D.N.Y.1999) ([t]o be disinterested is `to prevent even the appearance of a conflict' and a disinterested person `should be divested of any scintilla of personal interest which might be reflected in his decision concerning estate matters.') (citations omitted). [15] Even if an appearance of impropriety is not an adequate basis upon which to disqualify an employed professional, see Tevis, 347 B.R. at 688 (stating that what constitutes material adversity for a lawyer is defined by neither bankruptcy law nor other federal law, but by California state law), it can be cause for a trustee's removal under § 324. Such a condition tends to create disharmony and lack of confidence among the creditor body. Furthermore, courts which eschew the appearance of impropriety standard will authorize the bankruptcy court to remove a trustee or attorney with a potential conflict. The Third Circuit, with respect to attorney representation, held: (I) Section 327(a), as well as § 327(c), imposes a per se disqualification as trustee's counsel of any attorney who has an actual conflict of interest; (2) the district court may within its discretion-pursuant to § 327(a) and consistent with § 327(c)disqualify an attorney who has a potential conflict of interest and (3) the district court may not disqualify an attorney on the appearance of conflict alone. Marvel Entm't Group, 140 F.3d at 476 (emphasis supplied). The Ninth Circuit has held that disqualification is appropriate where trustee's counsel previously represented an electric company and had a potential conflict of interest in pursuing a cause of action against such company on behalf of the estate. Chugach Elec. Ass'n v. U.S. Dist. Ct., 370 F.2d 441, 442-43 (9th Cir.1966). The court concluded: A likelihood here exists which cannot be disregarded that [counsel's] knowledge of private matters gained in confidence would provide him with greater insight and understanding.... Where conflict of interest or abuse of professional confidence is asserted, the right of an attorney freely to practice his profession must, in the public interest, give way in cases of doubt. Id. at 443-44. Here, the loss of Appellees' confidence in Trustee Dye was not simply tactical, but was based on perceptions of partiality due to her prior connections with Meister and Eriksen and her receipt of the AFI payment. The bankruptcy court also considered the factor of Dye's nondisclosure regarding a material conflict of interest. At the time of her appointment as chapter 11 trustee, Dye's Declaration of Disinterestedness merely referred to her previous representation of an unnamed investor. Dye did not mention her representation of Meister, identify Eriksen, nor either explain the connection between Meister and Eriksen or Mister's connection to AFI. [16] She did not make full disclosure until four years later, prompted by the litigation with Appellees, after she had been appointed the chapter 7 trustee. It is axiomatic that a fiduciary has a duty to disclose any connections with the debtor, creditors, or any other party in interest. See In re Haldeman Pipe & Supply Co., 417 F.2d 1302, 1304 (9th Cir. 1969); Triple Star Welding, 324 B.R. at 789. Failure to do so, even if inadvertent, can be a relevant factor for the bankruptcy court's consideration of cause for a panel trustee's removal Such nondisclosure could serve as a basis for the creditors to lose confidence in the trustee, which is precisely what the court found had occurred in this case. Therefore, the bankruptcy court did not abuse its discretion in finding that such nondisclosure supported the cause necessary to require removal under § 324. Based on the foregoing analysis, we conclude that the bankruptcy court did not err in its determination that Dye was not disinterested because she had a materially adverse interest which created ongoing disharmony in the administration of the estate. Thus, these factors were sufficient to constitute cause for her removal under § 324.