2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 Moshe Mortner, Esq. Mortner Law Office, PC 130 William Street, 5 th Floor New York, NY 10038 Telephone 646-783-7544 [email protected]Attorney for Debtor Lenny K. Dykstra (Pro Hac Vice Application Sub Judice) UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA SAN FERNANDO VALLEY DIVISION In re LEY KYLE DYKSTRA, Debtor. CASE NO.: 1:09-bk-18409-GM Chapter 7 OTICE OF MOTIO; AD DEBTOR’S MOTIO FOR ORDER FOR TRUSTEE TO SHOW CAUSE WHY A ORDER SHOULD OT BE ISSUED REMOVIG TRUSTEE FOR CAUSE UDER BAKRUPTCY CODE 324, AD MEMORADUM OF POITS AD AUTHORITIES; AD DECLARATIO OF MOSHE MORTER I SUPPORT Date: August 6, 2010 Time: 10:00 a.m. Ctrm: 303
Transcript
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1
Moshe Mortner, Esq.
Mortner Law Office, PC
130 William Street, 5th Floor New York, NY 10038 Telephone 646-783-7544 [email protected] Attorney for Debtor Lenny K. Dykstra (Pro Hac Vice Application Sub Judice)
UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA SAN FERNANDO VALLEY DIVISION
In re LE��Y KYLE DYKSTRA,
Debtor.
CASE NO.: 1:09-bk-18409-GM Chapter 7
�OTICE OF MOTIO�; A�D
DEBTOR’S MOTIO� FOR ORDER FOR
TRUSTEE TO SHOW CAUSE WHY A�
ORDER SHOULD �OT BE ISSUED
REMOVI�G TRUSTEE FOR CAUSE
U�DER BA�KRUPTCY CODE 324, A�D
MEMORA�DUM OF POI�TS A�D
AUTHORITIES; A�D
DECLARATIO� OF MOSHE MORT�ER
I� SUPPORT
Date: August 6, 2010 Time: 10:00 a.m. Ctrm: 303
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Table of Contents
I. TABLE OF LEGAL AUTHORITIES.................................................................................... 3
II. �OTICE .................................................................................................................................... 5
III. MOTIO� ................................................................................................................................... 7
A. PRELIMINARY STATEMENT............................................................................................ 7
B. STATEMENT OF FACTS .................................................................................................... 8
1. Appointment of Arturo Cisneros as Trustee ...................................................................... 8
2. The Trustee’s Failure to Disclose Connections with Creditor JP Morgan Chase in his
Verified Statement of Disinterestedness ................................................................................................. 9
C. MEMORANDUM OF LEGAL AUTHORITIES ................................................................ 11
1. The Disinterestedness Requirement for Trustee to be Eligible to Serve ..................... 11
2. Removal of Trustee Under 11 USC § 324(a) .............................................................. 12
3. The Ninth Circuit’s “Totality-of-Circumstances Approach” to § 324 “Cause” .......... 13
a. Trustee’s Ongoing Representation of Creditor ......................................................... 14
b. Trustee’s Representation of Creditor as an “Institutional Client” .......................... 15
c. Trustee’s Review of Creditor’s Claim ....................................................................... 16
d. Trustee’s Abuse of Professional Confidence ............................................................ 17
e. Trustee’s Failure to Disclose Connections ............................................................... 17
f. Trustee’s Appearance of Impropriety ........................................................................ 18
4. Forfeiture of the Trustee’s Fees is Appropriate .......................................................... 19
D. CONCLUSION .................................................................................................................... 21
IV. DECLARATIO� OF MOSHE MORT�ER........................................................................ 22
V. PROPOSESD ORDER TO SHOW CAUSE ........................................................................ 24
TO THE HO�ORABLE GERALDI�E MU�D, U�ITED STATES BA�KRUPTCY
JUDGE, THE OFFICE OF THE U�ITED STATES TRUSTEE, A�D OTHER PARTIES-
I�-I�TEREST:
�OTICE IS HEREBY GIVE� that pursuant to an order of the Court, on August 6, 2010
at 10:00 a.m., in Courtroom 303 of the above-entitled Court located at 21041 Burbank Boulevard,
Woodland Hills, California, 91367-6606, before the Honorable Geraldine Mund, United States
Bankruptcy Judge, LENNY KYLE DYKSTRA (“Debtor”), the debtor in the above-captioned
Chapter 7, pursuant to 11 U.S.C. 324, will bring this motion (“Motion”) for an order that notice be
served upon Arturo Cisneros, trustee, to show cause, at such time as may be fixed by the court,
why an order should not be issued removing trustee for cause from the position of trustee,
forfeiting the trustee fees, awarding Debtor’s counsel fees and cost of this motion.
The Motion is based upon this Notice of the Motion, the Motion and Memorandum of
Legal Authorities in Support thereof, the Mortner Declaration, the pleadings and files in the
Debtor’s bankruptcy case, and upon such further oral and documentary evidence as may be
presented to the Court in support of the Motion.
Attached below is a true and correct copy of the proposed form of the Order to Show
Cause.
�OTICE IS HEREBY FURTHER GIVE� that, pursuant to an order of the Court, any
opposition or other responsive paper to the Motion must be filed with the Clerk of the above-
entitled Court and a copy served on the following parties by fax or email by August 5, 2010 at 12
noon.
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�OTICE IS HEREBY FURTHER GIVE� that failure to file a timely response may be
deemed as consent to the relief requested in the Motion. SEE, LOCAL BA�KRUPTCY RULE
9013-1(h).
DATED: August 3, 2010 THE MORT�ER LAW OFFICE, PC
By:__________________________ Moshe Mortner Attorney for Debtor
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III. MOTIO�
The motion of LENNY KYLE DYKSTRA (“Debtor”), respectfully represents that it is in
the interest of the estate of the debtor that Arturo Cisneros, appointed trustee of the estate, should
be removed as trustee for cause.
In support of the Motion, the Debtor respectfully represents as follows:
A. PRELIMI�ARY STATEME�T
This motion seeking the removal of the trustee for cause offers a mountain of evidence in
support that creates an overwhelming appearance of impropriety on the part of the trustee.
At the time Mr. Cisneros was approved as trustee herein he had 53 past and current cases
in which he represented creditor JP Morgan Chase before this Court. Since his appointment as
trustee Mr. Cisneros has taken on another 252 new cases in which he represents JP Morgan Chase
before this Court.
At no time in this case has the trustee disclosed his relationship with JP Morgan Chase.
At the same time that the trustee has taken on 252 new cases from JP Morgan Chase, he
has reviewed JP Morgan Chase’s claim for over $13,000,000 in this case; and the trustee has
adopted a position in favor of a settlement that will likely result in a full recovery for JP Morgan
Chase. The debtor has argued that the settlement is not in the best interest of the Estate or the
other creditors.
As shown below at length, the trustee’s conduct in this matter violates the standards and
guidelines established in the Code for a bankruptcy trustee, as elaborated and interpreted by the
U.S. Court of Appeals for the Ninth Circuit. As a result removal of the trustee and forfeiture of
his fees is appropriate and necessary.
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B. STATEME�T OF FACTS
1. Appointment of Arturo Cisneros as Trustee
On August 7, 2009, the U.S. Trustee filed in this proceeding a Request for Appointment of
a Chapter 11 Trustee, pursuant to 11 USC §1104(e), or in the alternative, the US Trustee
requested conversion of the case to a chapter 7 proceeding. See Exhibit A of the Mortner
Declaration submitted herewith.
Thereafter, on or about September 4, 2009, the US Trustee filed his Application for
Approval of Chapter 11 Trustee and Fixing Bond. The Application sought approval of the US
Trustee’s appointment of Arturo M. Cisneros as Trustee in this case. See Exhibit B of the Mortner
Declaration submitted herewith.
Filed along with the US Trustee’s Application for Approval on September 4, 2009, was the
verified Statement of Disinterestedness of Arturo Cisneros. The sole disclosure in Mr. Cisneros’
verified Statement of Disinterestedness stated as follows:
[T]hat Malcolm & Cisneros, A Law Corporation (“MC”), to which I am a shareholder, has represented certain secured lenders, including Countrywide Bank, Bank of America, Washington Mutual Bank and Wachovia Mortgage in unrelated matters. However, MC does not, and will not in the future represent said lender with regard to the within matter.
See Exhibit C of the Mortner Declaration.
Notably, JP Morgan Chase, the largest creditor in Lenny Dykstra’s bankruptcy was not
included in Mr. Cisneros’ disclosure of lenders his firm has represented.
The U.S. Trustee’s Application for Approval of Chapter 11 Trustee, submitted by S.
Margaux Ross, Attorney for the United States Trustee, also contained a representation regarding
Mr. Cisneros’ connections to creditors and other interested parties, stating:
To the best of the United States Trustee’s knowledge, the Chapter 11 Trustee’s connections with the debtor, creditors, any other parties in interest, their respective attorneys and accountants, the United States Trustee, and persons employed in the Office of the
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United States Trustee are limited to the connections set forth in the
Chapter 11 trustee’s verified Statement of Disinterestedness filed by the Chapter 11 Trustee with the court.
See Exhibit B of the Mortner Declaration.
Ms. Ross’s statement was based upon consultations she conducted with parties in interest,
which included an attorney from Levene, Neale, Bender, Rankin & Brill LLP, counsel for JP
Morgan Chase in this case. Thus, JP Morgan Chase, acting through its counsel, confirmed Mr.
Cisneros’ verified Statement of Disinterestedness, in which Mr. Cisneros in essence declared that
he had no connections with JP Morgan Chase. See Exhibit B of the Mortner Declaration.
Based on these representations of disinterestedness, the Court, on September 8, 2009,
entered an Order approving the appointment of Arturo Cisneros as trustee in this case. See Exhibit
B of the Mortner Declaration.
On September 24, 2009, just weeks after his appointment, the trustee moved to convert this
case to Chapter 7. On November 20, 2009, the Court granted the motion, and with that Mr.
Cisneros became a Chapter 7 trustee. See Exhibit D of the Mortner Declaration.
Subsequently, on March 23, 2009, Mr. Cisneros, as trustee in this case filed a motion for
approval of a settlement between, inter alia, the Estate and JP Morgan Chase Bank. The Debtor
has objected to this settlement on various grounds, including that the deal struck by the trustee
amounts to a huge give-away of the Estate’s most valuable asset to JP Morgan Chase,
notwithstanding the fact that JP Morgan Chase’s claim is subject to substantial defenses.
2. The Trustee’s Failure to Disclose Connections with Creditor JP Morgan
Chase in his Verified Statement of Disinterestedness
Prior to executing his verified Statement of Disinterestedness, on September 4, 2009, Mr.
Cisneros had represented creditor JP Morgan Chase in 50 cases. All of these 50cases were in the
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U.S. Bankruptcy Court for the Central District of California, however, only one of them was
before the Honorable Geraldine Mund. See Exhibit E of the Mortner Declaration.
On the very same day that Mr. Cisneros executed his verified Statement of
Disinterestedness in this case, September 4, 2009, Mr. Cisneros also filed appearances as counsel
for JP Morgan Chase in 3 other cases. These 3 appearances were in the U.S. Bankruptcy Court
for the Central District of California, however, none of them were before the Honorable Geraldine
Mund. See Exhibit F of the Mortner Declaration.
Subsequent to the Court’s approval of Mr. Cisneros’ appointment as trustee, on September
8, 2009, Mr. Cisneros commenced representations of JP Morgan Chase in new 252 cases. All of
these 252 new cases were in the U.S. Bankruptcy Court for the Central District of California. See
Exhibit G of the Mortner Declaration.
In total, Mr. Cisneros has appeared 305 times as lead counsel for JP Morgan Chase in this
Court, including both prior and current representations.
Yet, at no time has the trustee disclosed these representations in this case, nor has JP
Morgan Chase or its counsel Levene, Neale, Bender, Rankin & Brill LLP disclosed these
connections. Indeed, the trustee overtly concealed his relationship with JP Morgan Chase in his
Statement of Disinterestedness by naming other financial institutions for whom he has acted as
secured lender’s counsel, but leaving JP Morgan Chase off of the list. The disclosure of those
other lenders mislead the Court into believing that Mr. Cisneros had properly fulfilled his
disclosure obligation and that there were no conflict issues effecting Mr. Cisneros’ appointment as
trustee.
Moreover, at no time subsequent to his appointment has the trustee disclosed his
appearance as JP Morgan Chase’s counsel in 252 new cases.
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Indeed, since his appoint as trustee in this case, and his offer of settlement to JP Morgan
Chase in connection with JP Morgan Chase’s claim of over $13,000,000, Mr. Cisneros has
enjoyed a rise of 504% in new legal business coming from JP Morgan Chase.
C. MEMORA�DUM OF LEGAL AUTHORITIES
1. The Disinterestedness Requirement for Trustee to be Eligible to
Serve
In a chapter 7, 11 USC § 701(a)(1) provides that the U.S. Trustee “shall appoint one
disinterested person ... to serve as interim trustee in the case.” 11 U.S.C. § 701(a)(1) (emphasis
added).
Here, the Court approved the US Trustee’s appointment of Mr. Cisneros as trustee on
September 8, 2009, while this case was a Chapter 11. However, thereafter, by motion of the
trustee, the Court converted the case to chapter 7, and the trustee continued on as an interim
Chapter 7 trustee pursuant to 11 U.S.C. §701(a)(1). Since the creditors did not elect a chapter 7
trustee pursuant to § 702, Mr. Cisneros continues to this day to serve as trustee in this case. See §
702(d).
As the Court of Appeals has stated regarding § 701(a)(1), “The plain language of the
statute requires that the appointed interim trustee be “disinterested” in order to be eligible to
serve.” AFI Holding, Inc., 530 F.3d 832, 844 (9th Cir. 2008), see also United States v. Ron Pair
Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). Thus, the
disinterestedness requirement of § 701(a)(1) applies to the trustee here.
Expanding on the duties of the trustee, the 9th Circuit in AFI Holding explained, “The title
‘trustee’ has ‘fiduciary significance in the equity sense,’ and thus the trustee ‘may not be the
representative of any particular creditor, but must represent all creditors without partiality.’” AFI
Holding Inc., at 844, quoting Gross v. Russo (In re Russo), 18 B.R. 257, 270-71
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(Bankr.E.D.N.Y.1982) (under Bankruptcy Act) (citing 2 Remington on Bankruptcy § 1117, at 580
(1956)). (Emphasis supplied.) So the Ninth Circuit concluded that it a bankruptcy trustee “is an
independent person with no prior connection to either the debtor or the creditors…” AFI Holding
Inc., at 844, quoting U.S. Trustee v. Joseph (In re Joseph), 208 B.R. 55, 60 (9th Cir. BAP 1997).
2. Removal of Trustee Under 11 USC § 324(a)
Pursuant to 11 U.S.C. § 324(a)1, a trustee can be removed from a pending case if the
bankruptcy court finds “cause” after notice and a hearing. Brooks v. United States, 127 F.3d 1192,
1193 (9th Cir.1997).
In AFI Holding the Court of Appeals observed, “It is well established that “cause” may
include trustee incompetence, violation of the trustee's fiduciary duties, misconduct or failure to
perform the trustee's duties, or lack of disinterestedness or holding an interest adverse to the
estate.” AFI Holding Inc., at 845, citing 3 Collier on Bankruptcy ¶ 324, 02, at 324-3 to 324-4
(Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev.2006).
In pertinent part, the Code, at 11 U.S.C § 101(14)(E) , defines a “disinterested person” as
one that:
(E) does not 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. (Emphasis supplied.)
To elaborate on the meaning of § 101(14)(E), the Ninth Circuit in AFI Holding employed a
definition of “adverse interest” as follows: “the (1) possession or assertion of an economic interest
1 11 U.S.C. § 324. Removal of trustee or examiner
(a) The court, after notice and a hearing, may remove a trustee, other than the United States trustee, or an examiner, for cause. (b) Whenever the court removes a trustee or examiner under subsection (a) in a case under this title, such trustee or examiner shall thereby be removed in all other cases under this title in which such trustee or examiner is then serving unless the court orders otherwise.
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that would tend to lessen the value of the bankruptcy estate; or (2) possession or assertion of an
economic interest that would create either an actual or potential dispute in which the estate is a
rival claimant; or (3) possession of a predisposition under circumstances that create a bias against
the estate.” AFI Holding Inc., at 844. (Emphasis supplied.)
The AFI Holding referred to § 101(14)(E), as a “catch all” provision and noted that it “is
broad enough to exclude a trustee with some interest or relationship that ‘would even faintly color
the independence and impartial attitude required by the Code.’” AFI Holding Inc., at 846, quoting
Kravit, Gass & Weber, S.C. v. Michel (In re Crivello), 134 F.3d 831, 835 (7th Cir.1998).
Thus, it is possible to summarize the foregoing to say that sufficient “cause” for the
removal of a trustee under § 324(a) is the lack of disinterestedness, as defined in 11 U.S.C §
101(14)(E) , which includes the possession of an “adverse interest.” An “adverse interest” has
been held to mean the “possession of a predisposition under circumstances that create a bias
against the estate,” and such bias exists where there is a relationship that “would even faintly color
the independence and impartial attitude required by the Code.” AFI Holding Inc., at 844 and 846.
Based on the foregoing, it is clear why the Court of Appeals holds that a bankruptcy trustee
“is an independent person with no prior connection to either the debtor or the creditors…” AFI
Holding Inc., at 844, quoting U.S. Trustee v. Joseph (In re Joseph), 208 B.R. 55, 60 (9th Cir. BAP
1997). (Emphasis supplied.)
3. The �inth Circuit’s “Totality-of-Circumstances Approach” to § 324
“Cause”
In crafting an approach to determining cause for removal under§ 324 the Ninth Circuit has
eschewed such formula based approaches such as removal of the trustee only where there is actual
injury to the estate or fraud (see In re Freeport Italian Bakery, Inc., 340 F.2d 50, 54 (2d
Cir.1965)), or per se disqualification under the plain terms of §§ 101(14)(A)-(D) (see See, e.g.,
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Michel v. Fed'd Dep't Stores, Inc. (In re Fed'd Dep't Stores, Inc.), 44 F.3d 1310, 1318-19 (6th
Cir.1995)). AFI Holding Inc., at 846 and 847.
Rather, the Court in AFI Holding held, “Cause for removal of an appointed panel trustee
under § 324(a) is not susceptible to sharp definition, but is determined on a case-by-case, totality-
of-circumstances approach, subject to the bankruptcy court’s broad discretion.” AFI Holding Inc.,
at 852.
In AFI Holding the Court held, “[T]he factors, which are relevant to our case, include the
likelihood that a potential conflict might turn into an actual one, the influence the conflict might
have in subsequent decision making, and how the matter is perceived by creditors and other parties
in interest.” AFI Holding Inc., at 847. However, the Court concluded its analysis by noting, “We
do not subscribe to a rigid application of factors, however, but view them as aids for the court's
discretionary review.” Id, at 849.
Based on the foregoing, the Court must analyze the particular circumstance of this case to
determine whether cause for removal under § 324(a) is present. Based on similar circumstances in
prior removal cases, which are discussed below, the Court will undoubtedly conclude that the
totality-of-circumstances in the instant case present unabated cause for the trustee’s immediate
removal.
a. Trustee’s Ongoing Representation of Creditor
The fact that arguably the trustee is handling only unrelated matters for JP Morgan Chase
at this particular time is irrelevant. In a comparable case the bankruptcy court responded, the
“short answer to this is that [the law firm] should be presumed to be loyal to its client” no matter
how “relatively insignificant” that client is. In re Leslie Fay Cos., Inc., 175 B.R. 525, 539.
(Bankr.S.D.N.Y.1994). See also Tevis v. Wilke, Fleury et al. (In re Tevis), 347 B.R. 679, 691 (9th
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Cir. BAP 2006) (law firm could not have simultaneously represented clients with adverse
interests, even on unrelated matters).2
Here, of course, JP Morgan Chase is not a relatively insignificant client of Mr. Cisneros’,
with 305 cases having been handled by him only since May 2009. Thus, as in In re Leslie Fay,
the ongoing representation of JP Morgan Chase by Mr. Cisneros in 305 cases militates in favor of
a finding of conflict of interest and that the trustee has not been disinterested in this case.
b. Trustee’s Representation of Creditor as an “Institutional Client”
In re Hammer, BAP No. WW-06-1373-MoDJ, (9th Cir. Bankr. Appeals Panel Aug. 17,
2007)3 provides this Court with additional guidance in considering the totality-of-circumstances in
this case. In re Hammer involved a claim by creditors objecting to the law firm employed by a
chapter 7 trustee because the law firm belatedly and inadequately disclosed its connections with
the City of Sultan, Washington. The City was a creditor in the case, and the debtor had asserted
tort claims against the City and had filed two state court actions against the City. The Court of
Appeals held that the bankruptcy court clearly erred in ruling that the law firm had no conflict of
interest and had been disinterested throughout the bankruptcy case.
In reaching its holding, the BAP in In re Hammer, noted that the chapter 7 trustee’s law
firm had ongoing representation of the City, and that there was substantial evidence that the City
was an “institutional client” that consults the trustee’s law firm on an “on-call basis.” The Panel
found that the law firm had interests that were materially adverse to the estate, pursuant to 11
U.S.C. §§ 101(14)(E) and 327(a), because the law firm had “an incentive not to jeopardize its
2 In AFI Holding Inc., at 845, ft.9, the Court of Appeals observed that 11 U.S.C. § 327(a) establishes that
professionals employed by the estate and approved by the bankruptcy court must be disinterested. The Court than noted, “It would be an odd rule, indeed, if a trustee's professional must be disinterested, while the trustee need not.”
3 Regarding this decision the Court of Appeals stated, “This disposition is not appropriate for publication.
Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value.” A copy of In re Hammer is annexed to the Mortner Declaration as Exhibit -.
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future relationship with a client who has paid it approximately $180,000 in recent years.” The
Panel opined, “Law Firm cannot represent one client against another. Even if City was not Law
Firm’s client at all relevant times, Law Firm has incentives not to jeopardize its valuable
relationship with City.” Id.
Here, as in In re Hammer, there also exists substantial evidence that JP Morgan Chase is
an “institutional client” for the trustee, and that JP Morgan Chase refers bankruptcy matters to Mr.
Cisneros on an “on-call basis.” Thus, the institutionalized nature of the Mr. Cisneros’
representation of JP Morgan Chase militates in favor of a finding of conflict of interest and that
the trustee has not been disinterested in this case.
c. Trustee’s Review of Creditor’s Claim
In Fondiller v. Robinson (In re Fondiller), 15 B.R. 890, 892 (9th Cir. BAP 1981) appeal
dism., 707 F.2d 441 (9th Cir. 1983), the BAP noted that reviewing claims “to determine which
should be disputed” is a function that by its very nature is “adverse” to the creditors holding such
claims.
Similarly the BAP in In re Hammer, found that the trustee’s law firm had reviewed the
City’s claim at the same time as it was representing City in other matters. The Panel emphatically
held, “That is impermissible.”
Debtor herein has objected to JP Morgan Chase’s claim with substantial defenses and
asserts claims against JP Morgan Chase for recoupment. and has opposed the settlement with
which the trustee has sought approval for. However, having reviewed JP Morgan Chase’s claim
the trustee has opted to settle with JP Morgan Chase by granting the bank virtually its entire claim
in excess of $13 million. Based on the foregoing, the trustee’s review of JP Morgan Chase’s claim
was impermissible due to the fact that at the same time as the trustee was representing JP Morgan
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Chase in great number of other cases. Thus, the trustee’s activity has been to review of JP
Morgan Chase’s claim was improper, and this is an additional factor in the totality-of-the-
circumstances that requires the Court to find cause for the removal of the trustee.
d. Trustee’s Abuse of Professional Confidence
In Chugach Elec. Ass'n v. U.S. Dist. Ct., 370 F.2d 441, 442-43 (9th Cir.1966) the Ninth
Circuit has held that disqualification was appropriate where the trustee’s counsel previously
represented an electric company and had a potential conflict of interest in pursuing a cause of
action against the electric company on behalf of the estate. The court concluded:
Where conflict of interest or abuse of professional confidence is asserted, the right of an
attorney freely to practice his profession must, in the public interest, give way in cases of doubt.
(Emphasis supplied.)
Here, due to the trustee’s prior and current representation of JP Morgan Chase, the trustee
had a clear conflict of interest in pursuing the Debtor’s objections against JP Morgan Chase’s
claim. The trustee’s decision not to pursue the objections, but rather to allow the claim via a one-
sided settlement, casts doubt on the unbiasedness of the trustee’s decision making. Accordingly,
trustee’s pursuit of his function in connection with the JP Morgan Chase claim was improper.
e. Trustee’s Failure to Disclose Connections
A fiduciary has a duty to disclose any connections with the debtor, creditors, or any other
party in interest. See In re Haldeman Pipe & Supply Co., 417 F.2d 1302, 1304 (9th Cir.1969);
Movitz v. Baker (In re Triple Star Welding, Inc.), 324 B.R. 778, 789 (9th Cir. BAP 2005). The
Court of Appeals in AFI Holding held, “Failure to do so, even if inadvertent, can be a relevant
factor for the bankruptcy court's consideration of “cause” for a panel trustee's removal.
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Thus, here, the failure of the trustee to disclose his relationship with JP Morgan Chase in
and of itself is an important factor in the totality-of-circumstances approach that argues for
removal.
Moreover, Rule 2014 has been interpreted to impose an ongoing duty of disclosure. In re
West Delta Oil Co., Inc., 432 F.3d 347, 355 (5th Cir. 2005); see also Kravit, Gass & Weber, S.C.
v. Michel (In re Crivello), 134 F.3d 831, 836 (7th Cir. 1998) (“Though [Rule 2014] allows the fox
to guard the proverbial hen house, counsel who fail to disclose timely and completely their
connections proceed at their own risk because failure to disclose is sufficient grounds to revoke an
employment order and deny compensation.”).
Here, throughout this bankruptcy case the trustee has taking on new cases for JP Morgan
Chase. In fact since his appointment as trustee here, the trustee appeared in 252 new cases for JP
Morgan Chase. Thus the trustee also violated his duty to make ongoing disclosure.
f. Trustee’s Appearance of Impropriety
In AFI Holding the Ninth Circuit held, “Lack of disinterestedness, as § 324 cause, may
also consist of an appearance of impropriety or the trustee's failure to make disclosures of
connections, factors which were also properly considered by the bankruptcy court under its
totality-of-circumstances approach.” AFI Holding at 851. See also In re Paolino, 80 B.R. 341,
345 (Bankr.E.D.Pa.1987); see also In re Martin, 817 F.2d 175, 180-81 (1st Cir. 1987) (“Section
327 is intended, however, to address the appearance of impropriety as much as its substance, to
remove the temptation and opportunity to do less than duty demands.”); In re Vebeliunas, 231
B.R. 181, 191-92 (Bankr.S.D.N.Y.1999) (“[t]o be disinterested is ‘to prevent even the appearance
of a conflict’).
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Here a strong appearance of impropriety arises from the fact that the trustee has
represented JP Morgan Chase, the Estate’s largest creditor, in 305 cases and the trustee failed to
disclosure these cases.
Moreover, Subsequent to the Court’s approval of Mr. Cisneros’ appointment as trustee, on
September 8, 2009, Mr. Cisneros commenced representations of JP Morgan Chase in new 252
cases. See Exhibit G of the Mortner Declaration. At no time subsequent to his appointment has
the trustee disclosed his appearances as JP Morgan Chase’s counsel in 252 new cases.
The appearance of impropriety is overwhelming when the Court considers that in the time
since Mr. Cisneros’ appoint as trustee in this case, Mr. Cisneros has enjoyed a rise of 504% in
new legal business coming from JP Morgan Chase, .i.e., 252 new cases. The appearance of
impropriety here dwarfs the concerns of the BAP in In re Hammer, where the Panel was
concerned that unrelated representation of a creditor by the trustee’s law firm might create for the
law firm “incentives not to jeopardize its valuable relationship” with its client. Here, Mr.
Cisneros’ valuable relationship with JP Morgan Chase is absolutely thriving at the same time that
he is taking a position in this case that is favorable to JP Morgan Chase’s claim for over
$13,000,000.
Based on all of the foregoing, the Court should find that based on the totality-of-
circumstances, and pursuant to 11 U.S.C. § 324(a), cause exists for the removal of the trustee from
this pending case.
4. Forfeiture of the Trustee’s Fees is Appropriate
Section 328(c) of the Code provides that violations of bankruptcy conflict rules can result
in fee forfeitures. Moreover, section 328(c) has been held to apply to disclosure violations. Thus,
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in addition to nondisclosure being a relevant factor in finding “cause” for removal under § 324,
nondisclosure may also result in penalties, which can include disallowance of all fees. =eben &
Starrett, Inc. v. Chartwell Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877, 882 (9th Cir. 1995);
In Re Hammer, BAP No. WW-06-1373-MoDJ, (9th Cir. Bankr. Appeals Panel Aug. 17, 2007)
(Law firm’s nondisclosure of prior and concurrent representation of creditor warranted sanctions
even if it was not otherwise disqualified from employment or compensation.) In re EToys, Inc.,
331 B.R. 176 (D. Del. 2005)(Failure to disclose conflicts cause partial fee forfeiture for debtor's
counsel and for creditors' committee counsel.); In re Congoleum Corp., 03-51524 (D.N.J. Feb. 7,
2006)(A bankruptcy judge ordered 45-lawyer Gilbert Heintz & Randolph LLP to forfeit some $13
million in fees for failure to disclose all its relationships to the various parties when it was retained
as “special insurance counsel” for the debtor.)
The Court in In re Leslie Fay Cos., Inc., 175 B.R. 525, 539. (Bankr.S.D.N.Y.1994)
directed a nondisclosing law firm to pay fees and costs incurred by other parties in investigating
its conflicts.
Based on the foregoing, the Court should enter an order of forfeiture with regard to the
trustee’s fees in this case and should award debtor’s counsel fees and costs in connection with the
investigation and bring of this motion.
Finally, although no wrongdoing has been alleged here against the trustee’s counsel,
Shulman Hodges & Bastian LLP, under the circumstances it would not be appropriate for the
Estate to incur those fees. Therefore, it is respectfully requested that to the extent that the Court
will approve fees for the trustee’s counsel, such fees should be charged to the trustee rather than
the Estate as a further penalty against the trustee.
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D. CO�CLUSIO�
WHEREFORE, based upon the foregoing, the Debtor, Lenny Kyle Dykstra respectfully
submit that cause exists to grant this Motion and requests that the Court enter the Order in the
form as shown on Exhibit H to the Mortner Declaration, ordering that notice be served upon
Arturo Cisneros, trustee, to show cause, at such time as may be fixed by the court, why an order
should not be issued removing trustee from the position of trustee, forfeiting the trustee’s fees,
awarding Debtor’s counsel fees and cost of this motion, and for such other and further relief as the
Court deems just and proper.
DATED: August 3, 2010 THE MORT�ER LAW OFFICE, PC
By:__________________________ Moshe Mortner Attorney for Debtor
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IV. DECLARATIO� OF MOSHE MORT�ER
I, Moshe Mortner, declare and state as follows:
1. I am counsel for Lenny Kyle Dykstra (“Debtor”) (as of this writing pro hac vice
application sub judice). I have personal knowledge of the facts set forth herein and could, if called
as a witness, competently testify thereto.
2. I make this Declaration in support of the Debtor’s Motion for an order directing the
trustee to show cause why he should not be removed as trustee for cause.
3. I have read and I am aware of the contents of the Motion and the accompanying
Statement of Facts and Memorandum of Legal Authorities. The facts stated in the Motion and the
points and authorities are true to the best of my knowledge.
4. A copy of the U.S. Trustee’s Request for Appointment of a Chapter 11 Trustee,
pursuant to 11 USC §1104(e) is annexed hereto as Exhibit A.
5. A copy of the US Trustee’s Application for Approval of Chapter 11 Trustee and
Fixing Bond is annexed hereto as Exhibit B.
6. A copy of the verified Statement of Disinterestedness of Arturo Cisneros is
annexed hereto as Exhibit C.
7. The Court’s Order approving the appointment of Arturo Cisneros as trustee in this
case is annexed hereto as part of the S Trustee’s Application for Approval of Chapter 11 Trustee
and Fixing Bond, which is annexed hereto as Exhibit B.
8. A copy of the Order converting this case to Chapter 7, dated November 20, 2009, is
annexed hereto as Exhibit D.
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9. Copies of the List of Attorneys, downloaded from PACER4, from each of the 50
cases in which Mr. Cisneros represented JP Morgan Chase before this court, prior to his executing
his verified Statement of Disinterestedness in this case on September 4, 2009, are annexed hereto
as Exhibit E.
10. Copies of the List of Attorneys, downloaded from PACER, from each of the 3 cases
in which Mr. Cisneros appeared as counsel for JP Morgan Chase before this Court, on the same
day that he executed his verified Statement of Disinterestedness in this case, September 4, 2009,
are annexed hereto as Exhibit F.
11. Copies of the List of Attorneys, downloaded from PACER, from each of the 252
new cases in which Mr. Cisneros represented JP Morgan Chase before this court, subsequent to his
appointment as trustee in this case, are annexed hereto as Exhibit G.
12. For all of the foregoing reasons set forth in the Motion, I believe that removal of
the trustee will benefit the Estate and its creditors as described in the Motion.
I declare under penalty of perjury under the laws of the United States of America that the
foregoing is true and correct.
Executed on July 30, 2010 at New York, New York.
________________________ Moshe Mortner
4 PACER refers to the PACER website, which contains a description of itself as follows: “Public Access to
Court Electronic Records website (PACER) is an electronic public access service that allows users to obtain case and docket information from federal appellate, district and bankruptcy courts, and the PACER Case Locator via the Internet. PACER is provided by the federal Judiciary in keeping with its commitment to providing public access to court information via a centralized service.” See http://www.pacer.gov/.
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V. PROPOSESD ORDER TO SHOW CAUSE
Moshe Mortner, Esq.
Mortner Law Office, PC
130 William Street, 5th Floor New York, NY 10038 Telephone 646-783-7544 [email protected] Attorney for Debtor Lenny K. Dykstra (Pro Hac Vice Application Sub Judice)
UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA SAN FERNANDO VALLEY DIVISION
In re LE��Y KYLE DYKSTRA,
Debtor.
CASE NO.: 1:09-bk-18409-GM Chapter 7
ORDER FOR TRUSTEE TO SHOW CAUSE
WHY A� ORDER SHOULD �OT BE
ISSUED REMOVI�G TRUSTEE FOR
CAUSE U�DER BA�KRUPTCY CODE 324
Date: August 6, 2010 Time: 11:00 a.m. Ctrm: 302
The Motion for an Order for Arthur Cisneros, trustee, to show cause why an order should
not be issued removing trustee for cause under Bankruptcy Code 324” (“Motion”), filed by Lenny
Kyle Dykstra (“Debtor”) submitted to the Court, the Honorable Geraldine Mund, United States
Bankruptcy Judge presiding,
The Court having considered the Motion, the arguments and representations of counsel,
and the record in this case; the Court having found that proper notice has been given, and it
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appearing that the relief requested by the Motion is in the best interests of the Debtor’s Estate and
its creditors; and good cause having been shown, it is hereby
ORDERED that the Motion is granted as follows:
Let Arthur Cisneros, trustee, show cause on ___________, 2010 at _____ _.m., in
Courtroom 301 of the above-entitled Court located at 21041 Burbank Boulevard, Woodland Hills,
California, 91367-6606, before the Honorable Geraldine Mund, United States Bankruptcy Judge,
why an order should not be issued removing trustee from the position of trustee in the above-
captioned Chapter 7, pursuant to 11 U.S.C. 324 and forfeiting the trustee’s fees in this case
pursuant to 11 U.S.C. 328(c).
# # #
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PROOF OF SERVICE
I, Dorothy Van Kalsbeek, declare: I am over the age of 18 years and not a party to the within action or proceeding. My
business address is in the city of Los Angeles, County of Los Angeles, State of California. On August 3, 2010, I served a true copy of the foregoing;
DEBTORS MOTION UNDER 11 U.S.C. § 701(a) FOR VOLUNTARY DISMISSAL OF BANKRUPTCY
[ ] E-mail: By transmitting said document(s) via e-mail before 5:00 p.m. on this date
to the e-mail address(es) set forth below. The transmission was reported as complete and
without error.
[ ] Facsimile: By transmitting said document(s) via facsimile before 5:00 p.m. on
this date to the fax number(s) set forth below. The transmission was reported as complete and
without error.
[X] By Mail: By placing said document(s) in a sealed envelope, with postage thereon
fully prepaid, addressed as set forth below, and on this date depositing said envelope in the
United States mail at Los Angeles County, California. I am aware that on motion of the party
served, service by mail is presumed invalid if postal cancellation date or postage meter date is
more than one day after the date of deposit for mailing as set forth herein.
See Attached List
I declare under penalty of perjury under the laws of the State of California and the United States of America that the foregoing is true and correct; and that this Proof of Service was executed on August 3, 2010, at Los Angeles, California.
__________________________
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PROOF OF SERVICE I�STRUCTIO�S
Serve by first class mail:
Hon. Geraldine Mund
United States Bankruptcy Court - Central District of California
21041 Burbank Boulevard, Suite 342
Woodland Hills, CA 91367
S. Margaux Ross Atty for US Trustee 21051 Warner Center Ln. #115 Woodland Hills, CA 91367 M. Jonathan Hayes 9700 Reseda Blvd. Suite 201 Northridge, CA 91324 Arturo Cisneros 2112 Business Center Drive 2nd Floor Irvine, CA 92612 Leonard M. Shulman Robert E. Huttenhoff Shulman Hodges & Bastian LLP 26632 Towne Center Dr. Suite 300 Foothill Ranch, CA 92610 Evan B Sorensen Tressler, Soderstrom, Maloney & Priess 3070 Bristol Street, Suite 450 Costa Mesa, CA 92626 David Neale JP Fritz Levene, Neale, Bender, Rankin & Brill LLP 10250 Constellation Blvd, Suite 1700 Los Angeles, CA 90067
I. Bruce Speiser Pircher, Nichols & Meeks 1925 Canterbury Park East, Suite 1700 Los Angeles, CA 90067
Richard P Towne
3625 Thousand Oaks Blvd Ste 267 Westlake Village, CA 91362
David Vigliano 405 Park Avenue, Ste. 1700 New York, NY 10022 K & L Gates 10100 Santa Monica Blvd., 7th Floor Los Angeles, CA 90067 O'Melveny & Myers c/o Daniel Petrocelli 1999 Ave of the Stars Los Angeles, CA 90067 Sherwood Country Club 320 W. Stafford Road Westlake Village, CA 91361
