Trustee can use estate fees to fight debtor's friend's defamatory statements

The U.S. District Court for the Northern District of affirmed a bankruptcy court's ruling allowing a trustee to fund a defamation lawsuit with bankruptcy estate funds against a friend of the debtor who was continually posting defamatory posts about the trustee on the internet.

Arden Van Upp filed for Chapter 11 bankruptcy on July 10, 2009.  She had three pieces of property in San Francisco including one at 2550 Webster Ave. Which is shown above.  Ms. Van Upp mad a marketing plan to sell the property.

In August 2009, several secured creditors objected to debtor’s marketing plan for the Webster Street Property, calling her proposed listing price “unrealistic given the rundown condition of the . . . property.”

The secured creditors wanted the trustee to take over the marketing plan.  The Bankruptcy Court granted the motion and put Trustee David A. Bradlow in charge of the marketing plan.  He then tried to evict the tenants including Samuel Sloan, a friend of Ms. Van Upp.  Mr. Sloan then began to get involved in the bankruptcy proceeding.

Sloan describes himself in Bankruptcy Court filings as a “close personal friend of Arden VanUpp” who resided at the Webster Street property from 1991 until sometime after debtor filed for bankruptcy. []The Bankruptcy Court described Sloan as “an officious . . . meddler, to say the least,” declared him to be a vexatious litigant on debtor’s motion, and imposed a filing injunction against him in the bankruptcy case. [Notably, the] Bankruptcy Court also found that Sloan “at all relevant times had very close connections with the debtor.”

So, there is a difference of opinion, what's the big deal.

Around the same time that debtor filed her motion to declare Sloan a vexatious litigant, trustee requested permission to use estate assets to file a complaint against Sloan for defamation. Although the Bankruptcy Court issued a tentative ruling against trustee before the hearing on his motion, see Tentative Ruling (Bankr. Doc. 293), ultimately the Bankruptcy Court gave him permission to file acomplaint for declaratory and injunctive relief in an adversary proceeding in the Bankruptcy Court usingestate assets, see Feb. 2010 Transcript 61:17–61:21 (Appellees’ Appendix 135) (“I’m inclined to allow you a reasonable amount of fees to try to get this . . . carefully-tailored relief.”)

The entire issue is whether the trustee can do this.  Judge Susan Illston went with some decisions from the Southern District of California for guidance and determined that it did.

Section 330(a)(4) of the Bankruptcy Code provides that a trustee or employed professional person may not be compensated for services that were not reasonably likely to benefit the debtor’s estateor otherwise necessary to the administration of the case. “The absence of a monetary benefit to theestate is not determinative of whether compensation for . . . attorneys is awarded or denied.” In re HCSCorp., (Bankr. S.D. Cal. 1986). As one bankruptcy court explained:

HCS, (citing In re Nucorp Energy, Inc., (9th Cir. 1985)). On the basis of this reasoning, bankruptcy courts have determined that “[a] representative of the bankruptcy estate in otherwise good standing is entitled to defend him or herself from allegations of malfeasance by a creditor, and, unless malfeasance is established, the estate shall bear the reasonable costs of suchdefense.” See In re Yelow Cab, Co., (Bankr. S.D. Cal. 1997) (explaining that thisis the rule established by HCS , and that the rule is “correct”). The same logic applies to defense of claims of malfeasance made by the debtor.

Trustees are an integral part of the successful operation of the bankruptcy laws. If thisCourt required the trustee to pay for his or her own representation, given the relatively modest compensation the Code provides for trustees, the practical effect would be that fewtrustees would be willing to serve. This is especially true regarding non-attorney trustees.The Ninth Circuit has expressly recognized the concern that absent provisions for adequate compensation of bankruptcy professionals, highly qualified professionals would abandon bankruptcy work in favor of more remunerative kinds of work. 

 The Case is Van Upp v. Wendell Rosen Black and Dean LLP and the opinion is below the jump.


Van Upp v. Wendell Rosen Black and Dean LLP Bankruptcy Appeal