SW Legal studies in Business

Trustee Not to Be Removed Except for Intentional Misconduct or Negligence
Description Court refused the request of several creditors to remove the trustee from a bankrupt estate. The creditors believed that the trustee was going to settle a case for far less than could be had by litigation. Court refused to remove the trustee, noting a split in opinion of the creditors, and the lack of evidence of misconduct or negligence on the part of the trustee.
Topic Bankruptcy
Key Words Chapter 7; Trustee; Removal; Cause
C A S E   S U M M A R Y
Facts EquiMed was placed in Chapter 7 and a trustee was appointed. The trustee named more than 80 persons and entities as defendants in an ongoing, complicated proceeding. After more than a year, the parties to that matter reached a settlement. Creditors of EquiMed, unhappy with that development, petitioned to have the trustee removed, contending that the trustee should have pursued litigation rather than settle the claims against the many parties. Failure to litigate reduces the money EquiMed could recoup, so the creditors have lost faith in the trustee.
Decision

Motion denied. A court may remove a trustee for cause. Cause is determined on a case-by-case basis. In general, that means actions of a substantial nature that directly affect the rights and interests of the public. There is usually intentional misconduct or negligence. Creditors have not shown sufficient cause for removal in this case. While the settlement proposed by the trustee and the many defendants has not been approved, sound reasons exist for the trustee to participate in settlement discussions. Litigation would have involved huge attorney fees as discovery would be very complex and time consuming. Furthermore, not all creditors support removing the trustee; there is a split in judgment about this matter. Trustees have wide discretion to resolve bankruptcy problems and will not be removed unless it is clear that removal is in the best interest of the bankrupt estate.

Citation In re EquiMed, 267 B.R. 530 (D. Mary., 2001)

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