U.S. District Judge Lynn N. Hughes ()
In a particularly harsh opinion, U.S. District Judge Lynn Hughes of Houston denied an appeal by a former Chapter 7 bankruptcy trustee who challenged his removal from all 12 of his cases after the lawyer billed an estate $3,486 for his family’s four-night trip to New Orleans— a “breach of trust” that the judge wrote could not be explained away by “poor judgment.”
“Poor judgment can come in a variety of forms. Overpleading, excessive depositions and weak coordination are poor judgment. Defalcation—not losing it to inefficiency—purloining estate funds is poor judgment, but it is of a distinct character. 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,” Hughes wrote in the August 11 opinion denying W. Steve Smith’s appeal to retain his trustee position.
“Smith’s emphasis on his interest in the office suggests poor judgment. The inquiry is not about him; it is emphatically about the integrity of the administration of estates in bankruptcy,” Hughes said.
Smith said he’s done nothing wrong and will appeal the order this week to the U.S. Court of Appeals for the Fifth Circuit in New Orleans.
“We will appeal it because I did not spend the estate’s money. I requested reimbursement from the estate and was denied,” said Smith, a partner in Houston’s Smith & Smith.
Smith declined to comment further about the conclusions Hughes reached in the order.
“I would really prefer not to and let the Fifth Circuit decide,” Smith said.
The background to the case, according to Hughes’ opinion in W. Steve Smith v. Judy A. Robbins, is as follows.
Smith served as trustee in IFS Financial Corporation’s bankruptcy from 2002 until his removal in 2013. In an adversary case, the estate recovered about $1.5 million. When that judgment was appealed, Smith hired his law partner and wife as the estate’s lawyer for the appeal.
In November 2013, Smith and his family traveled to New Orleans. Smith said that he needed to arrive three days before the hearing to help his wife prepare, billing the estate $3,486 in travel expenses: $2,121 for four nights’ lodging, $900 for airfare, $245 for parking and taxis, and $220 for meals.
Blitz Holdings Corp.—a creditor of the estate and an intervenor on appeal— objected to the expenses for lodging and food, and a U.S. bankruptcy court removed Smith as trustee because it found that “his attempt to convert the estate’s assets was a willful breach of his fiduciary duty,” according to the order.
Smith then appealed the removal order and the bankruptcy court’s denial of a stay of removal to Hughes.
While Smith has been removed from all of his appointments, he still remains on the panel for trustees for Chapter 7 bankruptcies. Hughes also noted in the opinion that the U.S. Trustee has suspended him from taking cases pending his appeal and the “Trustee will probably ask him to resign from the panel if he loses.”
Hughes concluded his order stating that the U.S. bankruptcy judge made the correct call in removing Smith as a trustee.
“Trustees must be trustworthy,” Hughes wrote. “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.”
Kell Mercer, a partner in the Austin office of Husch Blackwell who represents Blitz Holdings, declined to comment.
David Gold, an attorney with the U.S. Department of Justice’s Executive Office for the U.S. Trustee, who filed a brief in the case supporting the U.S. bankruptcy court’s decision to remove Smith as a trustee, did not immediately return a call for comment.