Summary of a Recent
Judicial
Development in
Bankruptcy
Bankruptcy Trustees Must Be Completely Disinterested
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In In re Timmerman, No. 06-00168S, 2007 Bankr. LEXIS 1518 (Bankr. N.D. Iowa Apr. 25, 2007), the United States Bankruptcy Court for the Northern District of Iowa held that a trustee that served as a former creditor's attorney was not disinterested under 11 U.S.C. § 701(a)(1) and removed him from the case.
Background
Debtors filed their Chapter 12 petition on March 15, 2006. Id. at *1. Donald Molstad appeared on April 6, 2006 as an attorney for Iowa State Bank and Donald Wilson. Id. The Bank participated in the case as a creditor, and as trustee for three trusts, each of which was a landlord leasing farm ground to debtors. Id. at *2. Wilson was also a trustee for the three trusts and the landlord leasing two additional parcels of farm land to debtors. Id. Janet Reasoner of the U.S. Trustee's office approved Molstad serving as trustee in the case, on the grounds that the Bank appeared to be a fully secured creditor and that it had not received any transfers within 90 days of the filing of the case which might be avoidable. Id. at *2-3. The U.S. Trustee did not investigate beyond a discussion with Molstad, and on February 5, 2007, appointed Molstad as interim trustee. Id. at *3. When the court realized that the creditor's attorney had been appointed as trustee, they set a hearing to determine whether he should be removed for not being disinterested. Id. at *3.
Arguments
Molstad argued that he was qualified to serve as Trustee and that he had the approval of the U.S. Trustee's office. Id. at *2.
Analysis and Holdings
Under 11 U.S.C. § 701(a)(1), a trustee must be a disinterested person, meaning that he cannot have "an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason." Id. at *3-4. The court found that the trustee was not fully disinterested. Id. at *4. The court reasoned that the only benefit of Molstad serving as trustee was the convenience of his location in the city where the case was being tried, and the risk of Molstad being affected by his representation of a creditor was "too high a price to pay for geographical convenience." Id. Therefore the court ordered his removal. Id. at *5.
The case was decided on April 25, 2007.