Summary:
Creditor sought the appointment of a Trustee(s) in these related Chapter 11 cases. The Bankruptcy Court held pursuant to 11 U.S.C. § 1104, that it was required, upon the request of a party, to appoint a trustee any time after the case commences and before the confirmation of the plan for cause, but that cause includes, “fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by the current management, either before or after the commencement of the case, or similar cause.” That notwithstanding, the appointment of a trustee in a chapter 11 case is “an extraordinary remedy,” and there is strong presumption in favor of allowing the debtor to remain in possession. Because two problematic transfers in the Hamilton casehad already been brought into the bankruptcy estate (through pre-petition return transfers to the Hamilton) and because the third transfer would likely be classified as a resulting trust, there was no evidence of pre-petition fraud to justify appointment of a Trustee. Regarding the Mitchell case, while there had been payments to family members for legimate debts in the weeks prior to filing, Mitchell had attempted to recover such funds. Nor did her failure to disclose transactions bear the indicia of fraud, but instead was “not so different from many other cases where the debtor has multiple transactions to disclose and thus is continually amending schedules in the early months of the case.”
In the second part of this opinion, the Bankruptcy Court addressed the request to disqualify the attorney for the Hamilton and Mitchell, based on that law firm’s representation of both parties. Based on the objection by the Bankruptcy Administrator and 11 U.S.C. § 327(c), the Bankruptcy Court held that it must disapprove employment if there is an actual conflict of interest where “there is ‘active competition between two interests, in which one interest can only be served at the expense of the other.’” Johnson v. Richter, Miller & Finn (In re Johnson), 312 B.R. 810, 819 (E.D. Va. 2004) \quoting In re BH & P, Inc., 103 B.R. 556, 563 (Bankr. D.N.J. 1989), aff’d 949 F.2d 1300 (3d Cir. 1991)). Here the Bankruptcy Court found that “there may be legal defects in the way the [deal between Hamilton and Mitchell] was structured that need to be seriously investigated” and as such, the attorney was disqualified from representing the Mitchell, but could continue to represent the Hamilton.
For a copy of the opinions, please see:
Hamilton- Appointment of Chapter 11 TrusteeDisqualification of Attorney for the Debtor.pdf
Mitchell- Appointment of Chapter 11 TrusteeDisqualification of Attorney for the Debtor.pdf
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