Dye v. Brown

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In the Matter of: AFI HOLDING, 

INC.,

Debtor,

CAROLYN A. DYE, Former Chapter

7 Trustee,

Appellant,

v. No. 06-56621

J. GREGORY BROWN; CECILIA A. BAP No.

BROWN; LOUIS CARFORA; MARTIN

COHEN; DENNIS EISENBERG;

 CC-05-01247-

MaPaK

DOROTHY FIELDING; MARJORIE

WARREN GOLDSTEIN; JOEL GOTLER; ORDER

BETH BRODAY; PATRICIA LYNN

LEROY; JEANNE LEYTUS; WILLIAM

MACK; JOAN M. MACK; GARY

MUSSER; JANET RICHMOND;

ADELAIDA SAN DIEGO; THADDEUS

STANECKI; RANETTE STANECKI; AFI

HOLDING, INC.,

Appellees.



Appeal from the Ninth Circuit

Bankruptcy Appellate Panel

Pappas, Klein, and Marlar, Bankruptcy Judges, Presiding

Argued and Submitted

May 8, 2008—Pasadena, California

Filed June 17, 2008

6951

6952 IN THE MATTER OF: AFI HOLDING, INC.

Before: Kim McLane Wardlaw and Sandra S. Ikuta,

Circuit Judges, and Ralph R. Beistline,* District Judge.

Order by Judge Wardlaw

COUNSEL

Joseph A. Dumas, Jr., Dumas & Associates, Los Angeles,

California, for the appellant.

Paul J. Laurin, Encino, California, Werner & Laurin, LLP, for

the appellees.

ORDER

WARDLAW, Circuit Judge:

Carolyn A. Dye appeals from a decision of the United

States Bankruptcy Appellate Panel (“BAP”) for the Ninth Cir-

cuit affirming the order of the bankruptcy judge removing her

as Trustee for cause pursuant to 11 U.S.C. § 324 in this Chap-

ter 7 proceeding.

I. Jurisdiction

We must first address the question whether we have juris-

diction over an order removing a trustee from an ongoing

bankruptcy proceeding, a question of first impression in our

circuit. The BAP concluded, and the parties agree, that the

removal of a Bankruptcy Trustee is a final, appealable order.

Our consideration of our jurisdiction does not rest there, how-

ever, as we must consider the question of our own jurisdic-

*The Honorable Ralph R. Beistline, United States District Judge for the

District of Alaska, sitting by designation.

IN THE MATTER OF: AFI HOLDING, INC. 6953

tion. 28 U.S.C. § 158(d) vests jurisdiction in the Courts of

Appeals over appeals only from all “final decisions, judg-

ments, orders, and decrees entered” either by the district

courts or the BAP.

We have “adopted a pragmatic approach to finality in bank-

ruptcy cases.” In re Lazar, 237 F.3d 967, 985 (9th Cir. 2001)

(internal quotation marks and citation omitted). “[A] bank-

ruptcy court order is final and thus appealable where it 1)

resolves and seriously affects substantive rights and 2) finally

determines the discrete issue to which it is addressed.” Id.

(quoting In re Lewis, 113 F.3d 1040, 1043 (9th Cir. 1997)

(internal quotation marks omitted).

The Eleventh Circuit has recently considered, also for the

first time, whether the removal of a trustee is a final order

over which the courts of appeals have jurisdiction. The Elev-

enth Circuit explained that “[i]n the bankruptcy context, this

Court has concluded that it is generally the particular adver-

sary proceeding or controversy that must have been finally

resolved rather than the entire bankruptcy litigation,” and con-

cluded that the “removal of a bankruptcy trustee is a ‘final’

order appealable to this Court.” In re Walker, 515 F.3d 1204,

1210-11 (11th Cir. 2008) (internal quotation marks and cita-

tion omitted).

In so concluding, the Eleventh Circuit relied heavily upon

the Third Circuit’s reasoning in In re Marvel Entm’t Group,

Inc., 140 F.3d 463, 470-71 (3d Cir. 1998). There, the Third

Circuit considered the finality of an order appointing a trustee.

The Third Circuit reasoned that “[w]ere we to put off hearing

an appeal of the district court’s order appointing a trustee until

after the entire bankruptcy proceeding, allowing the possibil-

ity of an order returning this bankruptcy to its very beginning

for a second round, the concept of judicial efficiency would

be effectively turned on its head.” It also noted that “[l]iberal

finality considerations in orders appointing bankruptcy trust-

ees are necessary because these orders cannot be meaning-

6954 IN THE MATTER OF: AFI HOLDING, INC.

fully postponed to the bankruptcy’s conclusion.” Id. at 470.

The Third Circuit therefore held that the order appointing a

bankruptcy trustee is a final order vesting it with jurisdiction.

Similar finality considerations apply to an order removing

the trustee. Although the bankruptcy proceedings may con-

tinue, and here, in fact they have, the removal order resolves

and seriously affects the substantive rights of the parties to a

disinterested trustee and finally determines the discrete issue

to which it is addressed—whether the bankruptcy court’s

finding of a lack of disinterestedness was cause for the trust-

ee’s removal under § 324.

Thus we, like our sister circuits, conclude that an order

removing a bankruptcy trustee is a “final order” over which

we have jurisdiction pursuant to § 158(d). See In re BH & P,

Inc., 949 F.2d 1300, 1307 (3d Cir. 1991) (concluding that the

district court’s order removing the trustee due to a conflict of

interest is “final”); Turshen v. Chapman, 823 F.2d 836, 839-

40 (4th Cir. 1987) (holding that removal order is “final”

because “[f]inality in the sense of 28 U.S.C. § 1291 is not

required either for purposes of appeal or for the application of

collateral estoppel to unappealed bankruptcy court rulings”);

Matter of Schultz Mfg. Fabricating Co., 956 F.2d 686, 691-92

(7th Cir. 1992) (treating the denial of a motion to remove a

trustee as a final order).

While we have found some decisions to the effect that

appointment of a Trustee is not a “final order,” In re Delta

Servs. Indus., 782 F.2d 1267, 1272 (5th Cir. 1986); Matter of

Cash Currency Exch., Inc., 762 F.2d 542, 546 (7th Cir. 1985);

but see Matter of Cajun Elec. Power Co-op., Inc., 69 F.3d

746, 748 (5th Cir. 1995), we have found no decision that

holds that an order removing a trustee for cause under § 324

is not final.

Here it appears that a remaining issue to be determined in

IN THE MATTER OF: AFI HOLDING, INC. 6955

the proceedings is the trustee’s entitlement to fees.1 That deci-

sion is necessarily affected by the outcome of this appeal.

This only further demonstrates the efficiency and necessity

for a final determination as to the propriety of the removal. A

similar situation existed in In Re BH & P, Inc., where the dis-

trict court had issued an order removing for cause the trustee

while remanding the issue of interim compensation to the

bankruptcy court. “In approaching this finality question,” the

Third Circuit recognized that “[t]he unique characteristics of

bankruptcy cases have led us to consistently consider finality

in a more pragmatic and less technical way in bankruptcy

cases than in other situations” and concluded that the district

court’s order removing the trustee due to a conflict of interest

was final, despite the necessity to consider fees on the earlier

remand. 949 F.2d at 1306 (internal quotation marks and alter-

ation omitted).

II. Merits

We have not previously addressed the standard for removal

of a trustee due to a conflict of interest under § 324. The BAP

thoroughly and carefully considered what constitutes cause

for removal under § 324 in its well-reasoned opinion pub-

lished at 355 B.R. 139 (B.A.P. 9th Cir. 2006). The BAP held

that (1) “cause” may include a lack of disinterestedness; (2)

the catch-all provision of 11 U.S.C. § 101(14)(E) defining a

“disinterested person” is “broad enough to include a trustee

with some interest or relationship that ‘would even faintly

color the independence and impartial attitude required by the

Code,’ ” Id. at 149 (quoting In re Crivello, 134 F.3d 831, 835

(7th Cir. 1998); (3) the First Circuit’s “full panoply of events

1

Among the factors considered in the allocation of fees is “whether the

services were necessary to the administration of, or beneficial at the time

at which the service was rendered toward the completion of, a case under

this title.” 11 U.S.C. § 330(a)(3)(C). Services that were, among other

things, not “reasonably likely to benefit the debtor’s estate” or not “neces-

sary to the administration of the case” will not be compensated. Id. at

§ 330(a)(4)(A).

6956 IN THE MATTER OF: AFI HOLDING, INC.

and elements” test or “totality of the circumstances” to deter-

mine whether a particular conflict is “materially adverse” to

the estate sufficient to find a lack of disinterestedness is the

appropriate standard, id. at 151; see In re Martin, 817 F.2d

175, 182 (1st Cir. 1987); and (4) the bankruptcy court did not

abuse its discretion in concluding removal was proper due to

the Trustee’s past affiliations with insiders that created a

potential for a materially adverse effect on the estate and an

appearance of impropriety resulting in ongoing disharmony in

the estate’s administration. The BAP also concluded that the

bankruptcy court properly considered the trustee’s failure to

disclose these prior affiliations to the U.S. Trustee. We are

persuaded by the BAP’s analysis, adopt it as our own, and

attached it as Appendix A. In re Peters, 101 F.3d 618, 619

(9th Cir. 1996).

As the BAP noted in its opinion, our circuit has not previ-

ously ruled on the standard to determine cause for removal,

and three divergent approaches to the standard for removal

existed nationwide. That there was no clear standard articu-

lated in our jurisprudence either at the time the Trustee filed

her statement of disinterestedness or when she was removed

for cause is a factor that should bear on the question whether

she is entitled to fees for the time she served as Trustee, and

as to the amount of any such fees awarded. Our holding does

not address the issue of fees; we merely hold that on the ques-

tion of first impression before us the Trustee’s removal for an

appearance of conflict of interest was proper and remand to

the bankruptcy court for a determination of the related issues

as to fees.

Affirmed, remanded for further proceedings.

PRINTED FOR

ADMINISTRATIVE OFFICE—U.S. COURTS

BY THOMSON REUTERS/WEST—SAN FRANCISCO

The summary, which does not constitute a part of the opinion of the court, is copyrighted

© 2008 Thomson Reuters/West.