Opinion ID: 1189498
Heading Depth: 1
Heading Rank: 6

Heading: The Chapter 7 Case and Dye's Supplemental Declaration

Text: The consolidated chapter 11 case was converted to chapter 7 on July 29, 2002, and Dye was appointed its trustee without objection. In July, 2003, Dye initiated litigation to recover about $10 million from more than 150 potential defendants, including investors and parties-in-interest who had received payments under the Ponzi scheme, in an effort to liquidate Debtor's equity. Dye did not sue Eriksen, based on her decision that his claim against the estate had been settled and released and that he was judgment-proof. Nor did she sue Meister for any alleged wrongdoing, indicating that any claims of AFI against him were time-barred and had expired prepetition. Discovery proceeded in the adversary actions, including the taking of depositions of Eisenberg, Meister, Eriksen, and Dye. Being aware of Meister's testimony, Dye filed a Supplement to Declaration of Disinterestedness, on March 14, 2005, in which she belatedly disclosed her relationship with Meister and his relationship to both Eriksen and AFI. She stated that her failure to disclose these facts sooner was due to inadvertence. At the same time, AFI investors, including the appellees herein (Appellees), filed a motion to remove Dye as trustee, pursuant to § 324. They alleged, among other things, that she was not disinterested, had failed to disclose material facts revealing a conflict of interest, and had injured the estate by failing to bring adversary proceedings against either Meister or Eriksen. [4] Dye and the U.S. Trustee opposed the motion. Dye maintained that Appellees failed to show that she was not disinterested because: (1) disinterestedness is defined as having an adverse interest, not as representing an adverse interest, and (2) her representation of Meister and Eriksen was not materially adverse to the estate or a class of creditors. The U.S. Trustee maintained that there was insufficient evidence to support removal in light of a trustee's discretion to make business judgments. He further stated that Dye's inadvertent failure to disclose her representation of Meister was not cause for removal. Appellees replied with accusations that Dye's nondisclosure was intentional, and that she gave false and misleading testimony regarding the extent of her relationship with Meister and Eriksen, as well as failing to produce Ericksen's release agreement. Moreover, Appellees argued that Dye's letter instruction to Eisenberg to pay her $1,250 in attorney's fees made her a direct transferee of payments from AFI, in 1999.