Hester, Matter of, 90-1227

• Decision Date: 13 April 1990
• Docket Number: No. 90-1227,90-1227
• Parties: 23 Collier Bankr.Cas.2d 567, 20 Bankr.Ct.Dec. 679, Bankr. L. Rep. P 73,374 In the Matter of Bayless Milton HESTER, III and Evalynn Jordan Hester, Debtors. Bayless Milton HESTER, III, a/k/a B.M. Hester and Evalynn Jordan Hester, Appellants, v. NCNB TEXAS NATIONAL BANK, Appellee. Summary Calendar.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 361

899 F.2d 361

23 Collier Bankr.Cas.2d 567, 20 Bankr.Ct.Dec. 679,

Bankr. L. Rep. P 73,374

In the Matter of Bayless Milton HESTER, III and Evalynn Jordan Hester, Debtors Bayless Milton HESTER, III, a/k/a B.M. Hester and Evalynn Jordan Hester, Appellants, v. NCNB TEXAS NATIONAL BANK, Appellee.

No. 90-1227

Summary Calendar.

United States Court of Appeals Fifth Circuit.

April 13, 1990.

St. Clair Newbern, III, Paula C. Conley, Law Offices of St. Clair Newbern, III, Ft. Worth, Tex., for appellants.

John D. Penn, Hayes & Boone, Fort Worth, Texas; Jack Banner, Steve Briley, Banner & Briley, Wichita Falls, Texas for NCNB Texas National Bank.

John A. Leonard, Russell, Tate & McGowan, P.C., for John A. Leonard, Trustee.

Victoria Tutterrow, Office of United States Trustee, Dallas, Texas.

John D. Penn, Hayneyes & Boone, Fort Worth, Texas; Jack Banner, Steve Briley, Banner & Briley, Wichita Falls, Texas for NCNB Texas National Bank.

Appeal from the United States District Court for the Northern District of Texas.

Before REAVLEY, KING and JOHNSON, Circuit Judges.

KING, Circuit Judge:

Evalynn Jordan Hester, Individually and as Executrix of the Estate of Bayless Milton Hester, III (collectively, the "Debtors"), appealed to this court the order (the "Order Denying Stay") of the district court entered on March 27, 1990, denying the Debtors' motion for stay of a bankruptcy court order pending appeal. The order that the Debtors are appealing to the district court is styled "Order for Disgorgement of Funds and for Appointment of Chapter 11 Trustee" (the "Disgorgement Order") and was entered by the bankruptcy court on February 12, 1990. Presently pending before this panel is a motion by the Debtors for stay of the Disgorgement Order pending its appeal to the district court.

I. Facts and Procedural Background.

The Debtors' bankruptcy case has been pending for more than two years in the Wichita Falls Division of the Northern District of Texas. The bankruptcy case was filed by Bayless Manning Hester, III and Evalynn Jordan Hester, his wife. During the pendency of the case, Mr. Hester died. The case was filed under Chapter 11 of the Bankruptcy Code, and the Debtors continued in possession to conduct their family-owned and operated business, which consists of the production of oil and gas. The Debtors filed in 1987 and ever since have pursued what appears to be a lender liability action against the predecessor in interest of NCNB Texas National Bank (the "Bank"), the Federal Deposit Insurance Corporation, and Joseph N. Prothro, individually, in the District Court for the Northern District of Texas. The Bank is a secured creditor of the Debtors with a claim in excess of four million dollars. Substantially all of the Debtors' income-producing oil and gas properties are pledged to the Bank. The Debtors' Chapter 11 case appears to have moved along. Two plans of reorganization and related disclosure statements have been filed, one by the Debtors and one by the Bank.

The Bank's Amended Motion for Disgorgement of Unauthorized Payments (the "Disgorgement Motion") was filed in the bankruptcy court on January 4, 1990. It alleged that the Debtors had transferred to James Craig Dodd ("Dodd"), a lawyer, during October and November of 1989, a total of approximately $30,000. The Disgorgement Motion recognizes that the transfers were reflected in the Debtors' operating reports for those months. The Disgorgement Motion alleges that the transfers were improper because they were not preceded by a fee application as required by the Bankruptcy Code. The Disgorgement Motion further alleges that the Debtors' request to employ Dodd in the case had been disallowed by the bankruptcy court. ¹ Finally, the Disgorgement Motion alleges that the funds used to pay Dodd, in all likelihood, constitute cash collateral of the Bank that cannot be distributed to pay administrative claims absent compliance with the Bankruptcy Code. Respecting the cash collateral problem, the motion states:

Therefore, the payment to Mr. Dodd constitute [sic] other abuses of the cash collateral of NCNB Texas in violation of 11 U.S.C. Sec. 363. Other abuses are outlined in the Motion to Restrict Debtor's Use of Cash Collateral [the Cash Collateral Motion referred to infra ] and other relief filed by NCNB Texas. The repeated violations of the requirements and protections of the Bankruptcy Code clearly constitute cause for the appointment of a Trustee pursuant to 11 U.S.C. Sec. 1104.

Insofar as relief is concerned, the Disgorgement Motion asks the following: first, that Dodd be required to refund all post-petition payments that he received from the Debtors; second, that Dodd be required to show cause why he should not be held in contempt of court for his participation in the unauthorized transfers; third, that the Bank be authorized to prosecute any litigation against Dodd that may be required to return the funds to the estate; and fourth, for such other and further relief to which the Bank may show itself justly entitled. Conspicuously absent from the Disgorgement Motion is a specific request for the appointment of a trustee for the Debtors' estate.

The Debtors' answer admits the factual allegations of the Disgorgement Motion regarding the payments to Dodd and the lack of authorization thereof and claims that the amounts transferred were expenses incurred by Dodd in representing the estate in its lender liability suit against the Bank. ² The answer asserts that the payments were made inadvertently and emphasizes that they were disclosed in the Debtors' operating reports. Finally, the answer denies that cause exists to appoint a trustee.

At the hearing held on February 1, 1990, on the Disgorgement Motion, counsel for the Bank began by stating simply that the Disgorgement Motion asks for disgorgement of payments to Dodd. Mrs. Hester testified that she had made the payments to Dodd in reimbursement of his expenses in connection with the Debtors' suit against the Bank and that she had not understood that the Debtors had to get permission from the bankruptcy court before it could reimburse those expenses. She testified that she now understood that and that no further payments would be made without the requisite approval. Testimony from two other witnesses, daughters of the Debtors who performed bookkeeping functions for the Debtors, addressed payments made by the Debtors to Dodd and to other professionals (an engineer and a geologist) in connection with the Debtors' oil and gas operations. At the conclusion of the testimony, the court ordered disgorgement of approximately $36,000 from Dodd.

The court went on to state that the Disgorgement Motion "request[s] appointment of a Trustee under Section 1104 of the Bankruptcy Code" and ordered the United States Trustee to name a trustee immediately. Somewhat later, the court stated that "[t]here has been every indication there's been use of unauthorized cash collateral and all three people said they had no idea what that means." Counsel for the Debtors objected to the appointment of a trustee on the ground that it would seriously injure the Debtors and on the further ground that none of the usual reasons for appointing a trustee, other than the payment of approximately $36,000 in expenses to Dodd, had been heard. The court responded as follows [E]verytime we come to Wichita Falls, we have three to four hours of extremely complicated hearings where alleged misdealings and misappropriations out of the estate funds are made....

. . . . .

I've got to have somebody that I can look to tell me, A, B, C, tell me what's being done, what's not being done, what's proper, what's not proper in this case.

Otherwise, we're going to have to add another day a month to come up here just to have Hester hearings, and I'm not going to do that.

During oral argument with a member of this panel, counsel for the Debtors and the Bank advised that the next item on the bankruptcy court's docket on February 1, 1990, was a motion (the "Cash Collateral Motion") filed by the Bank in November 1989 alleging that the Debtors had violated the terms of a cash collateral order entered by the bankruptcy court in August 1988 by making unauthorized payments to administrative priority claimants and to attorneys and other professionals without seeking prior court approval. Included in the alleged improper payments are several to the Debtors' bankruptcy counsel. The Cash Collateral Motion asks the court to segregate the Bank's collateral and to prohibit the Debtors from using the collateral without the Bank's specific prior authorization. The Cash Collateral Motion also asks for an accounting by the Debtors of their use of cash collateral, for the return of any unauthorized payments and, last of all, for the appointment of a trustee. This court was advised that the Debtors and the Bank were prepared to go forward on the Cash Collateral Motion and to present evidence, pro and con, on the matters covered by it and the various types of relief sought, including the appointment of a trustee. Needless to say, the hearing on the Cash Collateral Motion was aborted when the bankruptcy court appointed a trustee following the hearing on the Disgorgement Motion.

The trustee was appointed shortly after the entry of the Disgorgement Order and approximately 45 days before the Debtors' suit against the Bank was set for trial. A motion to the bankruptcy court for a stay of the Disgorgement Order was denied.

The Debtors turned then to the district court, filing a motion for a stay pending appeal of the Disgorgement Order. The motion began by noting that under section 1104 of the Bankruptcy Code, a trustee may be appointed in a Chapter 11 case only on motion of a party in interest or the United States Trustee and only after notice and hearing and only "for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, ......