911 F.2d 820 (1st Cir. 1990), 90-1038, In re Plaza de Diego Shopping Center

Docket Nº:90-1038, 90-1163.
Citation:911 F.2d 820
Party Name:In re PLAZA de DIEGO SHOPPING CENTER, INC., Debtor. Appeal of Robert L. COLEY, Esquire. In re Petition of Robert L. COLEY, etc.
Case Date:August 14, 1990
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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911 F.2d 820 (1st Cir. 1990)


Appeal of Robert L. COLEY, Esquire.

In re Petition of Robert L. COLEY, etc.

Nos. 90-1038, 90-1163.

United States Court of Appeals, First Circuit

August 14, 1990

Heard May 8, 1990.

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Jennifer H. Zacks, Appellate Staff, Civ. Div., Dept. of Justice, with whom Stuart M. Gerson, Asst. Atty. Gen., William Kanter and Dwight G. Rabuse, Appellate Staff, Civ. Div., Dept. of Justice, John E. Logan, Gen. Counsel, Washington, D.C., and Martha L. Davis, Charleston, W.Va., Executive Office for U.S. Trustees, were on petition for a writ of mandamus and brief for petitioner, appellant.

Arturo J. Garcia-Sola, with whom Manuel Fernandez-Bared and McConnell Valdes Kelley Sifre Griggs & Ruiz-Suria, Hato Rey, P.R., were on brief and response to petition for a writ of mandamus for respondent, appellee City Sav. Bank, F.S.B., in Conservatorship, Resolution Trust Corp., Conservator.

Sergio A. Ramirez de Arellano, Hato Rey, P.R., on brief for operating trustee Pedro J. Fuste.

Before CAMPBELL and SELYA, Circuit Judges, and ROSENN, [*] Senior Circuit Judge.

LEVIN H. CAMPBELL, Circuit Judge.

The United States Trustee ("U.S. Trustee") has appealed from an order of the District Court for the District of Puerto

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Rico appointing a trustee in bankruptcy for the Plaza de Diego Shopping Center, Inc. ("Plaza"), which had filed for bankruptcy under Chapter 11 of the Bankruptcy Code. The U.S. Trustee alleges that the district court acted ultra vires in making this appointment because under the statute, 11 U.S.C. Sec. 1104(c), the power to appoint trustees in bankruptcy is vested solely in the U.S. Trustee. As we agree that the district court exceeded its authority, we vacate the court's appointment of the trustee and remand.


Immediately after the September 23, 1988 bankruptcy filing by Plaza, City Federal Savings Bank ("City Federal"), 1 the principal secured creditor of Plaza (holding a first mortgage over the real property of the shopping center and an assignment of the center's rents), commenced negotiations with Plaza's management for a stipulation for the appointment of a trustee and for the use of City Federal's cash collateral (the rents). When negotiations with Plaza deadlocked, on January 27, 1989, City Federal requested the bankruptcy court to order the appointment of an operating trustee for Plaza. 2 On February 9, 1989, the case was transferred to the district court for the District of Puerto Rico after the two bankruptcy judges for the district of Puerto Rico recused themselves. The case was assigned to Chief District Judge Perez-Gimenez, who proceeded on the assumption that he was sitting as a bankruptcy judge. On May 12, 1989, the U.S. Trustee filed a motion for the court to dismiss the case, convert to a Chapter 7 proceeding, or order the appointment of a trustee. City Federal joined in the request for a trustee, but opposed the request to dismiss or convert. A hearing was scheduled for June 15, 1989. Extensive discovery by City Federal ensued, in which it uncovered evidence of gross mismanagement both before and after the bankruptcy filing, fraud to secured creditors both before and after the filing, multiple instances of bankruptcy fraud, and serious conflicts of interest in Plaza's management. At the hearing, several of the interested parties, including the U.S. Trustee, argued for the appointment of an "examiner with expanded powers" rather than a trustee, 3 but after extensive argument, Plaza itself stipulated the existence of "cause" for the appointment of a trustee. 4

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On June 19, 1989, pursuant to 11 U.S.C. Sec. 1104(a), the judge ordered the appointment of a trustee. 5 He further ordered the U.S. Trustee to submit within five days the names of three candidates for trustee so that the court could approve the appointment of one of them. The order stated that the court would review the U.S. Trustee's candidates--together with any candidates suggested by "any party in interest"--and that the court would then "approve the appointment of one of the candidates." The court, although recognizing that this procedure differed from that established by statute, adopted it anyway in order to avoid the delay in the reorganization of the estate that would result from holding approval hearings for one candidate at a time.

The representative of the U.S. Trustee had indicated in court that she would comply with the court's order to submit three candidates as soon as possible. Shortly thereafter, however, the U.S. Trustee voiced his objection to the court's order, and, on June 26, filed a motion to alter or amend the order on the ground that under 11 U.S.C. Sec. 1104(c) the U.S. Trustee, not the court, is to appoint the trustee, subject only to the court's approval. 6 Simultaneously with this motion, the U.S. Trustee submitted a Notice of Appointment naming Roberto Lopez Alvarez as trustee, subject to the court's confirmation. On June 29, the court denied approval to the appointment of Mr. Lopez Alvarez. Chief Judge Perez-Gimenez again directed the U.S. Trustee to submit three candidates for the court's consideration.

On June 30, 1989, unhappy with the U.S. Trustee's failure to comply with the June 19 order or to give serious consideration to its preferred candidate for trustee--Pedro J. Fuste--City Federal filed a motion recommending Mr. Fuste for appointment as trustee for Plaza. Another creditor, Banco Nacional, later joined City Federal's recommendation. Both City Federal and Banco Nacional argued that the U.S. Trustee had failed to comply with its statutorily mandated obligation to consult the parties in interest with respect to the appointment of a disinterested party as trustee. 7

On July 10, 1989, in view of the controversy that had arisen over the appointment of a trustee, the creditors' committee filed an emergency motion requesting provisional remedies to protect the estate from the debtor in possession until the final appointment was made. A hearing on this motion was held on July 13, 1989, and all the parties in interest, including the U.S. Trustee, were in attendance. City Federal objected to the motion, arguing that the immediate appointment of a trustee would better serve the parties' interests. The creditors' committee agreed to withdraw the motion for provisional remedies if a trustee were appointed. Other parties in interest also argued for the appointment of a trustee. The court, over the objections of the U.S. Trustee, then expanded the scope of the hearing to consider the appointment of a trustee for Plaza. Because the court had denied approval to the appointment of Mr. Lopez, the only candidate before the court at that time was City Federal's nominee, Mr. Fuste. The parties in interest were given the opportunity to consult among themselves on the appointment of Fuste and to examine him on his qualifications and on whether he was a "disinterested party." The parties in interest then unanimously expressed their approval of the appointment of Mr. Fuste. The representative of the U.S. Trustee indicated that she was willing to reevaluate the appointment of Fuste, and the court gave the U.S.

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Trustee until July 17 to express his final position on Fuste. The court, however, indicated its intent to appoint Fuste as trustee by July 18, in view of the fact that all of the creditors and parties in interest had approved him. The U.S. Trustee's ultimate response was again to object to the appointment. He reminded the court that, under federal bankruptcy law, 11 U.S.C. Sec. 1104(c), only the U.S. Trustee has authority to appoint trustees. On July 18, the court entered an order appointing Fuste as trustee for Plaza. An opinion and order followed on July 20, 1989, explaining in detail the reasons for the appointment. In re Plaza de Diego Shopping Center, Inc., 103 B.R. 14 (D.P.R.1989).


In its opinion and order, the district court explained that the rapidly deteriorating state of the debtor's affairs had made quick action in appointing a trustee imperative, and that it had chosen to ask for candidates and make the appointment itself "in order to expedite the process of selecting a qualified trustee." The court rejected the U.S. Trustee's appointment of Mr. Lopez not only because it did not comply strictly with the terms of the court's order to submit three names for consideration, but also because City Federal and Banco Nacional had claimed that the U.S. Trustee had not adequately consulted with them in making the appointment.

The court rejected the U.S. Trustee's argument that its method of appointing the trustee violated 11 U.S.C. Sec. 1104(c). Although "the statute does speak of the submission of 'one disinterested person' " by the U.S. Trustee, the court concluded, it was not "meant to preclude the submission of more than one qualified candidate so as to expedite the procedure in a particularly urgent case." The court believed that it had not usurped the U.S. Trustee's appointment power, because "the appointment power remained at all times in the U.S. Trustee, while the power of approval remained at all times in the Court." Accordingly, stated the court, its appointment was merely "a time saving measure with the success of the Chapter 11 reorganization in mind," made pursuant to its statutory authority under 11 U.S.C. Sec. 1104(c) to approve the U.S. Trustee's appointment, together with its statutory authority as a court of equity to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [Title 11]." 11 U.S.C. Sec. 105(a). That the U.S. Trustee's uncooperative posture had compelled the court to invoke its equitable power was unfortunate, the court concluded, but...

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