Court Opinion

ID: 9688869
Source: CourtListenerOpinion
Date Created: 2023-08-24 18:10:07.865993+00
Date Added: 2024-06-11T18:18:42.743742
License: Public Domain

RUSSELL, D., Bankruptcy Judge,
dissenting.
I disagree with the majority’s novel conclusion that Rule 2003(d) abridges or modifies the substantive rights found in § 702 in violation of 28 U.S.C. § 2075. Accordingly, I respectfully dissent.
The Federal Rules of Bankruptcy Procedure were promulgated by the Supreme Court pursuant to 28 U.S.C. § 2075. See In re Greene, 223 B.R. 548, 550 (N.D.Cal.1998). As the Ninth Circuit has explained:
The [ ] bankruptcy rules were studied by committees of
experts, then adopted by the Supreme Court, and became effective only after submission to Congress for review.... It cannot be assumed easily that the Supreme Court acted outside the power *334delegated to it under § 2075, or that Congress allowed rules to become operative which would effect substantive rights.
Hill, 811 F.2d at 487 (quoting Wolff v. Wells Fargo Bank (In re Moralez), 618 F.2d 76, 78 (9th Cir.1980)). Thus, there is a strong presumption that the Bankruptcy Rules do not modify substantive rights. Greene, 223 B.R. at 550; In re Meyer-Midway, Inc., 68 B.R. 181, 183 (N.D.Ill.1986) (“It is presumed that the Supreme Court acted within the limits of Section 2075 when drafting the rules and that if they had overstepped the bounds of their authority Congress would have stepped in to modify the rule.”). Therefore, the Rules are presumptively valid if they are not inconsistent with a statute. In re Dominguez, 51 F.3d 1502, 1507 (9th Cir.1995).
The majority concludes that Rule 2003(d) and § 702 are inconsistent. I believe that they can be read in harmony. Standing alone, § 702(c) is incomplete. It provides no mechanism for verifying an election result. Even if a candidate were to receive all the votes at the § 341(a) hearing, he could not serve until the court declared him to be the new trustee.
Rule 2003(d) provides the means to certify the election. Under the Rule, the UST can declare the winner at the conclusion of the § 341(a) hearing and transmit the name and address of the declared winner to the court. Fed.R.BankR.P. 2003(d). However, if a winner cannot be declared at the conclusion of the election, as in this case, there is a dispute which the U.S. Trustee is not permitted to resolve.20 See Fed.R.Bankr.P. 2003 advisory committee’s note (1991). An interested party must move the court to resolve the dispute and the court declares the winner. Id. Rule 2003(d)’s 10-day limitation merely requires that the interested party move quickly to resolve the dispute in order to ensure the prompt administration of the estate. See Sandhurst Securities, 96 B.R. at 457 (noting that election disputes can effectively halt administration of the estate and that Rule 2003(d) is designed to remedy this); In re Carla Leather, Inc., 50 B.R. 764, 770 (S.D.N.Y.1985) (same). If an interested party does not move quickly, then the interim trustee serves as the trustee. The majority is simply incorrect in its contention that Rule 2003(d) invalidates an election in violation of § 702 because pending a final determination by the bankruptcy court, there is no winner in a disputed election. Here, Mordy was not declared the trustee at the § 341(a) hearing. Thus, I can not agree that Rule 2003(d) invalidates an election when there has been no declared winner. Pending a final determination by the bankruptcy court on the disputed election, Mordy merely received votes but was not designated the trustee.
Moreover, the right of an elected candidate to serve as the trustee is not absolute. A candidate must be eligible to serve, see § 321, and must also qualify to serve under § 322. Section 322 of the Bankruptcy Code provides, in relevant part, that:
[a] person selected under section ... 702 ... of this title to serve as trustee in a case under this title qualifies if before five days after such selection, and before beginning official duties, such person has filed with the court a bond in favor of the United States conditioned on the faithful performance of such official duties.
11 U.S.C. § 322 (emphasis added). The interim trustee continues to serve until a trustee is elected or designated under § 702 and qualifies to serve under § 322. In re Young, 97 B.R. 679, 680 (Bankr.N.D.Ga.1988). The court designates the trustee when it resolves the election dispute. Section 322’s requirement that the party designated as the trustee file a bond within 5 days to qualify as the trustee is also meant to ensure prompt administration of the estate. Rule 2003(d) compliments § 322 by emphasizing that time is of the essence in certifying a permanent trustee.
Furthermore, I disagree with the majority’s conclusion that even if the requirements *335of Rule 2003(d) were procedural rather than substantive, the 10-day limitation unreasonably frustrates the substantive rights established by § 702. See Hill, 811 F.2d at 487 (“a procedural rule could be so harsh as to arbitrarily frustrate a substantive right”). In support of this conclusion, the majority first contends that the Rule impermissibly shifts the burden to the creditors who voted for a trustee to bring the dispute to the court’s attention despite their belief that the election was valid under § 702. However, the 10-day requirement cuts both ways. If an interested party objected to the UST’s determination at the § 341(a) hearing that a particular person has been elected the chapter 7 trustee, they must also move within 10 days to bring the objection before the bankruptcy court. The creditors in this case simply erred in presuming that the election was final. Mordy had not been declared the trustee at the April 20, 1997 § 341(a) hearing. This failure to name a trustee at the hearing was enough to alert the creditors that there was a disputed election and that they should promptly seek resolution of the dispute.21
The majority’s second contention is that Rule 2003(d) provides an unreasonably short period of time in which to file a motion to resolve an election dispute, particularly in light of the fact that the UST is not required to file a report of an election dispute with the court within 10 days. I agree that better procedures would be to either trigger the 10-day period after the UST files and serves its report, see Rule 2007.1(b)(3)(B)22, or provide more time for filing a motion to resolve the dispute. However, use of the present procedure does not arbitrarily or unreasonably frustrate a substantive right. As discussed, the creditors here clearly had notice of a dispute by the failure of the UST to name a trustee at the § 341(a) hearing. Given this notice, 10 days is not an unreasonable time period within which to require the filing of a motion to resolve an election dispute, especially considering the Supreme Court and Congress’s desire to promptly resolve such disputes. See Fed.R.Bankr.P. 9006(b)(2) (precluding enlarging time for taking action under Rule 2003(d)).23 It is within the province of those two bodies to set the appropriate deadline period. It is not the function of this Panel.
Finally, the majority states that it would be unfair to deny Mordy the opportunity to serve as trustee and that the alleged wrongdoings of the debtor and Caudill might go uninvestigated if the interim trustee continued to serve. I think that this is a phantom threat. A chapter 7 trustee has a fiduciary duty to act diligently and in the best interest of the creditors. In re Accomazzo, 226 B.R. 426, 429 (D.Ariz.1998); In re Melenyzer, 140 B.R. 143, 154-55 (Bankr.W.D.Tex.1992). There has been no suggestion that the interim trustee in this case will not act in the best interest of the parties in interest. We should not presume that the interim trustee will not thoroughly investigate the allegations of wrong-doing. See 11 U.S.C. § 704(4) (requiring the trustee to investigate the debtor’s financial affairs).
*336Accordingly, I would REVERSE because the debtor’s motion to strike the certification motion should have been granted. The creditors’ certification motion was untimely and the time limitation of Rule 2003(d) does not abridge or modify the substantive rights of § 702(c).

. The use of the term "disputed election” in Rule 2003(d) is unfortunate because it implies a contested election involving multiple candidates. Here, the creditors may have believed that there was no disputed election because there was no challenger to Mordy. However, a disputed election is more properly understood as any election where a winner is not declared by the UST at the § 341(a) hearing.

. Here, the UST’s attorney indicated at the § 341(a) hearing that the parties had 10 days from the date she filed her report with the court to resolve any disputes. Obviously she was wrong and the creditors' reliance on her statement, if any, is unfortunate. Nevertheless, all parties are presumed to be familiar with the Bankruptcy Rules. Rule 2003(d), like any other procedural rule, can be a trap for the unwary. See Carla Leather, 50 B.R. 764.

. With regard to a dispute in the election of a chapter 11 trustee, Rule 2007.1(b)(3)(B) requires that the UST promptly file a report with the court stating that the election is disputed and serve a copy of the report on all parties in interest. An interested party then has 10 days to file a motion to resolve the election dispute or the individual appointed by the UST serves as the chapter 11 trustee. Rule 2007.1(b)(3)(B), implemented in 1997, was specifically derived from Rule 2003(d). Fed.R.Bankr.P. 2007.1 (b)(3)(B) advisory committee note (1997). Had the rules advisory committee, the Supreme Court, or Congress believed that Rule 2003(d) abridged or modified substantive rights, they likely would have changed it in 1997 to comport with Rule 2007.1(b)(3). The fact that Rule 2003(d) was not modified when Rule 2007.1(b) was enacted further supports the conclusion that it does not violate 28 U.S.C. § 2075.

.The majority’s holding not only states that the Supreme Court and Congress erroneously abridged substantive rights by enacting Rule 2003(d), but necessarily implies that they compounded this error by reinforcing its validity in Rule 9006(b)(2).