By: Jonathan Grasso
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In Walden v. Walker (In re
the Eleventh Circuit Court of Appeals held that the bankruptcy court has the power to remove a trustee sua sponte. In
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The debtor moved for removal and the trustee responded by asserting that a debtor in an insolvent estate had no pecuniary interest and thus was not a party in interest and lacked standing to challenge the trustee’s appointment.
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The court found that she had lied under oath concerning her relationship with the creditor and removed her as trustee.
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On appeal, the Eleventh Circuit held that bankruptcy judges possess the power to remove a trustee for lying under oath, sua sponte, after notice and a hearing.
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The issue is whether a court has the power to remove a trustee sua sponte when cause exists. Bankruptcy Code § 324 states, “The court, after notice and a hearing, may remove a trustee, other than the
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In most cases, a “party in interest” makes the motion to remove a trustee.
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Further, Bankruptcy Code § 1109(b), which has been applied in Chapter 7, defines “party in interest” to include the debtor, trustee or creditor, but does not expressly include a judge.
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However, in an earlier case, the Bankruptcy Appellate Panel for the Eighth Circuit Morgan v. Goldman (In re Morgan)
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relied upon the fact that section 324 contains no language stating that a party in interest must request the removal to hold that the bankruptcy courts have the power to remove a trustee sua sponte.
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Walker gives the bankruptcy courts greater power to control the trustee in a bankruptcy proceeding. Although in general, a “party in interest” must raise issues in a Chapter 7 case,
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the court can determine for itself whether a hearing should be conducted to conclude whether the trustee should remain in place or be removed.
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See Westwood Community Two Ass’n, Inc. v. Barbee (In re Westwood Community Two Ass’n, Inc.), 293 F.3d 1332, 1336–37 (11th Cir. 2002); see also In re Oliveri, 45 F. Supp. 32, 32 (E.D.N.Y. 1942) (discussing application for removal by creditor); see also In re Rose Marine, Inc., 1990 WL 10007382, at *2 (Bankr. S.D.
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11 U.S.C. § 1109(b) (1978) (“A party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee, may raise and appear and be heard on any issue in a case under this chapter.”); see In re Westwood Community Two Ass’n, Inc., 293 F.3d at 1337 (holding chapter 11 definition should be applied to chapter 7 cases, since no definition under chapter 7 exists).
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