Court Rules That Chapter 7 Trustee Be Removed From Chapter 7 Case For Breach of Fiduciary Duty To The Bankruptcy Estate

Posted on May 13, 2013

On May 13, 2013, U.S. Bankruptcy Judge Marvin Isgur removed W. Steve Smith as Chapter 7 Trustee in a case known as In re: IFS Financial Corporation, Case No. 02-39553, in the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division. The Court found that Smith had "willfully breached his fiduciary duty to the (bankruptcy) Estate." The Court also stated that "because no valid basis exists for an exception to the statutory mandate of Sec. 324(b)" of the Bankruptcy Code, this order has the effect of removing Smith from all cases in which he is a trustee.

In its Memorandum Opinion, the Court set forth all the reasons for the removal. Much of the discussion centered on Smith's billing of time and expenses to the Estate for oral argument done in New Orleans in front of the 5th Circuit Court of Appeals for a legal case involving the Estate. The Estate was billed $3486.37 in travel expenses, which included hotel room charges of over $1,600.00, over $600.00 in food charges, $900.00 in airplane tickets, and $170.00 in taxi fares. Smith and his wife, also an attorney for Trustee Smith, went with him, and the Court was surprised to learn that their two children also accompanied them.

The Court concluded that: (1) The New Orleans trip was taken with the purpose of attending of the oral arguments; (2) the trip was intentionally extended to begin on Saturday and end on Wednesday, with no justification. Other expenses, such as the Sunday night hotel expenses and large food expenditures, are highly questionable; (3) Smith intentionally charged the Estate for substantial expenses that were incurred for his personal benefit; (4) Smith’s actions were a willful breach of his fiduciary duty to the Estate. The Court removed Smith as Trustee.

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