Trustworthy Trustee? Federal Judge Rules “Breach of Trust” and “Sloppy” Billing

Bankruptcy is a team effort.  It requires honesty, good will, and cooperation between debtors, creditors, judges, attorneys, and trustees. Most of the time, all parties involved strive to reach some sort of transparent and mutually agreeable arrangement — but not always. In this instance, it appears one Chapter 7 trustee may not have been so trustworthy after all, with U.S. District Judge Lynn Hughes of Houston citing “poor judgment” and “breach of trust” after W. Steve Smith spent thousands in estate funds on potentially unwarranted travel expenses. Smith maintains his innocence and plans to bring his case to the U.S. Court of Appeals for the Fifth Circuit in New Orleans.

Bankruptcy Court Finds “Willful Breach of Fiduciary Duty”

Bankruptcy cases are complex matters which often require input from multiple people.  One of these people is the trustee, whose job is to act as a neutral financial overseer.  The trustee is tasked with administering the case, and in Chapter 13 scenarios, to ensure that the repayment plan is feasible and that the numbers are all correct.  The trustee is also responsible for overseeing the meeting of creditors, reviewing creditor claims (“proof of claims”) for accuracy, and selling off nonexempt assets to help repay debts.  In bankruptcy, the trustee is an important person with a vital role to play — but what if there are allegations of misconduct?

Smith served as a Chapter 7 panel trustee for IFS Financial Corp. from 2002 to 2013.  The trouble began when IFS objected to a request from Smith for reimbursement for $3,486 in expenses after traveling to New Orleans to help his wife, also an attorney, prepare for a hearing.

Smith initially argued that the expenses were necessary: $2,121 for four nights in hotels, $220 for meals, $900 for plane tickets, and $245 for cabs and parking spaces.  However, Bankruptcy Judge for the South District of Texas Marvin Isgur disagreed with Smith and ordered him removed, finding that “his attempt to convert the estate’s assets was a willful breach of his fiduciary duty.”

Judge’s Opinion: “He Cannot Be Trusted”

Smith then attempted to appeal the decision, but U.S. District Judge Lynn Hughes again denied Smith’s motion for a stay, finding inconsistencies in Smith’s reasoning.

“If seclusion were needed,” Hughes argued in his opinion, “a modest room in Houston would have supplied it.” As for Smith accompanying his wife to New Orleans, Judge Hughes wrote, “If Smith were needed to help on the argument, he too was available in Houston.”

In fact, Smith retracted part of his argument, conceding that “five days with their children in New Orleans was not rationally part of legal preparation.”

Nonetheless, Smith maintains that he acted with propriety, stating this month he intends to appeal Judge Hughes’ order for removal to the U.S. Court of Appeals for the Fifth Circuit in New Orleans.  “We will appeal it,” says Smith, “because I did not spend the estate’s money.  I requested reimbursement from the estate and was denied.”  Smith called the spending an “honest mistake” — but, once again, Judge Hughes expressed sharp criticisms in his opinion.

“A trustee’s casually-careless billing for wasteful or luxurious expenses for personal enjoyment becomes functional incapacity,” wrote Hughes.  He added, “Poor judgment can come in a variety of forms…  Staying in an expensive hotel might be poor judgment, but staying in an expensive one in a vacation town when you are not needed is categorically worse…  The bankruptcy court removed Smith for a compelling reason.  During a hearing on April 25, 2013, he admitted that his fees were improper. He conceded that he billed the estate for personal expenses.  Whether his billing was sloppy, reckless, or intentional, he cannot be trusted.”

Judge Hughes went on to elaborate, “Trustees must be trustworthy.  After admitting that he took money from an estate — however recklessly — the bankruptcy court correctly concluded that Smith cannot be trusted.  Its orders removing W. Steve Smith as a Chapter 7 trustee and denying a stay of his removal pending appeal will be affirmed.”

For the time being, Smith is in a somewhat precarious position.  He maintains his status as a Chapter 7 panel trustee, but has been removed from all of the appointments he was previously holding.  If his Fifth Circuit appeal is unsuccessful, Hughes believes he will be asked to ” resign from the panel.”

If you or someone you love is going through a Chapter 13 or Chapter 7, it is critically important that you have the support of an experienced Bucks County bankruptcy lawyer who can help to ensure that your legal rights aren’t being violated. To schedule a free and confidential case evaluation, call the law offices of Young, Marr, Mallis & Associates at (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania, or contact us online.