Bankruptcy Law

Bankruptcy trustee may be tossed from all of his cases due to hotel bill, 5th Circuit says

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A federal appeals court has affirmed a decision to toss a Chapter 7 bankruptcy trustee from all of his cases after a district court judge questioned his bill for an extended hotel stay.

The New Orleans-based 5th U.S. Circuit Court of Appeals ruled against the lawyer, W. Steve Smith, in a Sept. 25 decision, Texas Lawyer reports.

Smith, a former shareholder in McFall Breitbeil & Smith, told Texas Lawyer he was considering an appeal in the case, involving the bankruptcy of IFS Financial Corp.

Smith had sought $3,486 from the bankruptcy estate for a 2011 New Orleans trip to a court argument, arriving three days early and staying the night of his courtroom appearance. About $2,100 of the charge was for the stay at the Roosevelt hotel and $220 was for meals. Smith maintained he and his wife—who served as lead counsel—had spent much of the time preparing. The bankruptcy judge allowed only $200 in hotel charges, for a one-day hotel stay, and $75 for meals.

Smith failed at first to itemize the trip expenses billed to the estate, providing the details only days before a hearing on objections by the major creditor in the bankruptcy, the 5th Circuit said. During the hearing on the objections, Smith “was not forthcoming with the fact” that his children accompanied the Smiths on the trip.

After a show-cause hearing, the bankruptcy court removed Smith as trustee in the case and approved his removal from all his other cases in the Southern District of Texas. In reaching its decision, the bankruptcy judge noted a 2009 matter in which Smith appealed a ruling that Smith’s law firm, which represented him as trustee and also represented the debtors on contingency, was expected to advance certain litigation expenses. The district court said it was considering the 2009 appeal, which was against the estate’s interests, as “context” in the hotel bill dispute.

The 5th Circuit affirmed Smith’s removal, finding the court did not abuse its discretion. The appeals court also upheld the section of the Bankruptcy Code that allowed Smith’s removal as trustee in the unrelated cases. Smith had challenged the provision as infringing his liberty and property interests in his continued employment as a trustee.

The decision (PDF) is In re IFS Financial Corp.

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