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BANKRUPTCY - removal of trustee; notice and procedure; partial concurrences & dissents

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
____________________
07-6010/6016EA
____________________
In re: James Morgan and Linda Morgan, *
*
Debtors **
James Morgan and Linda Morgan, **
Plaintiffs *
* Appeals from the United States
v. * Bankruptcy Court for the
* Eastern District of Arkansas
Jo-Ann L. Goldman, *
*
Defendant - Appellant *
*
Bank of America; Capitol One Bank; *
AR Specialty Care Centers; *
eCAST Settlement Corporation; *
DeWitt Bank & Trust Company; *
DeWitt City Hospital; Discover Bank; *
St. Vincents Health System; and *
Kyle Havner, *
*
Defendants *
_________________________________
In re: Janet Lavern Dedmon, *
*
Debtor *
*
1 In re Morgan, Case No. 03-12580 (the Morgan case), and In re Dedmon, Case
No. 05-17166 (the Dedmon case). Hereafter, we refer to the judges in Morgan case and
the Dedmon case as the Morgan judge and the Dedmon judge, respectively.
2 Judge Mahoney joins in the portion of this opinion reversing the Order in the
Dedmon case. Judge Kressel joins in the portion affirming the Order in the Morgan case.
Therefore, this opinion represents the majority opinion as to both appeals.
2
Jo-Ann L. Goldman, **
Trustee - Appellant *
_________________________________
The National Association of *
Chapter Thirteen Trustees, *
*
Amicus on Behalf of Appellant *
____________________
Submitted: August 15, 2007
Filed: September 24, 2007
____________________
Before KRESSEL, Chief Judge, FEDERMAN and MAHONEY, Bankruptcy Judges
FEDERMAN, Bankruptcy Judge
Appellant Jo-Ann L. Goldman is one of three standing Chapter 13 trustees for
the Bankruptcy Court in the Eastern District of Arkansas. In these consolidated
appeals, Ms. Goldman appeals from orders entered in two cases in which two of the
bankruptcy judges sitting in the Eastern District of Arkansas removed her as trustee
in all pending cases.1 For the reasons that follow, we reverse the Order entered in the
Dedmon case and affirm the Order entered in the Morgan case.2
3
I. THE MORGAN CASE
James and Linda Morgan filed a voluntary Chapter 13 petition on March 3,
2003, and Ms. Goldman was appointed as the trustee in their case. On July 30, 2003,
the Morgan judge confirmed an amended plan which provided for monthly payments
of 5 for 58 months. The Morgans residential mortgage lender (their only secured
creditor at the time) was to be paid the full value of its claim, ,500, with interest,
through the plan. General unsecured claims, which totaled ,456.57, were to
receive a pro rata dividend from funds remaining after payment of administrative,
secured, priority, child support, and special nonpriority unsecured claims. There
were no priority, child support, or special nonpriority unsecured claims. Thus, out of
the regular monthly payments, it was anticipated that the costs of administration and
the home mortgage would be paid first by the trustee, with any remaining funds being
paid to unsecured creditors. However, the plan further provided that all of the
Morgans projected disposable income received during the first 36 months of the plan
would be paid in for the benefit of unsecured creditors in accord with 1325(b)(1).
This latter provision became important because the Morgans settled a personal injury
tort claim during those first 36 months.
A. The Tort Claim
On March 29, 2005, the Morgans moved for court approval to settle a tort claim
which they had listed in their schedules as an unliquidated claim with an unknown
value. After payment of attorneys fees and costs, the settlement was to generate
,056.03 in net proceeds. The Morgans motion to approve the settlement stated,
in relevant part, [f]unds to be remitted to the Chapter 13 Trustee to be distributed
pursuant to the debtors confirmed plan, with the exception that debtors will be
allowed to request a refund in a sum sufficient to replace the roof on their home and
repair debtors vehicle.
4
After the motion to approve the settlement was filed, and before the Morgan
judge entered an order approving such motion, Ms. Goldman and the Morgans
attorney, Jeremy Bueker, discussed the distribution of the settlement proceeds in a
series of e-mail and telephone conversations. In addition to requesting a refund of a
portion of the proceeds for roof and vehicle repairs, the Morgans wanted all of the
remainder to be used to pay off their home mortgage. Ms. Goldman, on the other
hand, took the position with Mr. Bueker that the funds not being refunded to the
debtors were projected disposable income which, under the plan, should be paid by
the trustee to unsecured creditors. Therefore, she asked that the order approving the
settlement provide either that she pay such funds directly to unsecured creditors, or
that future payments continue so that an equivalent amount would be made available
to such unsecured creditors. As to the distribution of the portion not to be refunded
to the Morgans, the following e-mail exchange occurred between Ms. Goldman and
Mr. Bueker on April 25 and 26, 2005:
From Ms. Goldman to Mr. Bueker:
Jeremy
I need you to revise this Order. If a case is under 36 months we
consider proceeds of this nature disposable income only to the
extent that the debtor does not get a refund that is reasonably
necessary for her to live so, any proceeds from a settlement that
we dont refund to the debtor would be paid as such, i.e., they
would be paid to unsecured creditors, or the base balance would
be raised by the amount of the proceeds (if we elect to go ahead
and let the secured get paid.) The way your order reads, you want
it to be paid towards the base (disbursed pursuant to the plan) as
if they were in place of regular monthly payments. So, I need you
to simply revise the Order that states that the proceeds will come
to the trustee.
5
From Mr. Bueker to Ms. Goldman:
My intention was to be certain that secured and priority creditors
are paid in full before money is disbursed to unsecured creditors
and to make certain that debtors can request a refund. If the base
needs to be raised to accomplish this, that is fine. What language
do you suggest that I use to make sure that is how money is
disbursed? Mr. and Mrs. Morgan understand that their payments
to the Trustees office are to continue.
From Ms. Goldman to Mr. Bueker:
The problem is that is not how extra disposable income is
supposed to work that money is for unsecured creditors I can
do that, but the base will have to be raised. Just state the money
is coming to my office period. We put the money on hold for 30
days for the debtor to request the refund.
From Mr. Bueker to Ms. Goldman:
If I state that the money comes to your office period, will you first
pay off secured and then priority claims before money is disbursed
to unsecured creditors? If not, I think the debtors are better off
dismissing or converting to Chapter 7. I advised them to proceed
this way so that their house would be paid off.
From Ms. Goldman to Mr. Bueker:
I will pay it out but add whatever the amount is to the base, so the
unsecured creditors are being paid with the monthly payments.
From Mr. Bueker to Ms. Goldman:
Attached is the revised Order.
On April 26, 2005, having received no objections to the motion to settle, the
Court entered the Order which was referenced in the e-mails, as prepared by Mr.
6
Bueker and modified at Ms. Goldmans request. Such Order stated that there had been
no objection to the March 29, 2005 Motion, and that the Motion appears proper, and
the same is GRANTED. It went on to state that the ,056.03 in proceeds were to
be utilized as follows: Said funds shall be paid to the Chapter 13 Trustee Jo-Ann
Goldman and Debtors may apply for a refund from said funds. Notably, the Order
does not state anything as to whether, or how, Ms. Goldman was to distribute the rest
of the proceeds, other than the refunded portion. Thus, despite any intervening emails
or telephone conversations between Mr. Bueker and Ms. Goldman, the Order
served to grant a Motion stating that the funds not being refunded were to be
distributed pursuant to the debtors confirmed plan.
On May 5, 2005, Ms. Goldman received ,056.03 in net proceeds from the
settlement.
Apparently, at that time, it was customary in the Eastern District of Arkansas
for debtors to request refunds from the trustee, and for the trustee to grant or deny
such requests based on his or her own judgment. No court approval was required, no
matter how large the request, unless the trustee decided that the request was not
necessary for the debtors reasonable living expenses. Hence, the provisions in the
motion to settle and the accompanying Order which allowed for a refund meant that
the Morgans needed only to ask Ms. Goldman for the refund.
On May 6, 2005, the Morgans did ask Ms. Goldman for a refund of ,094.17
to replace their roof and repair a vehicle, and supported their request with written
estimates of costs. On May 18, 2005, Ms. Goldman refunded more than they had
requested, ,000, without notice to creditors or a court order.
As to the ,056.03 in proceeds remaining after the refund (sometimes
referred to as the ,000 amount), Ms. Goldman later testified, as described more
fully below, that she intended to make a notation in her files not to distribute the funds
7
to unsecured creditors, but she neglected to do so. Accordingly, when the next
monthly disbursement day came around, her office distributed the ,000 amount to
general unsecured creditors pursuant to the offices established procedures, instead of
using those funds to pay off the Morgans home mortgage.
B. The Morgans Action Against Goldman and Others and
The Morgan Judges Order to Show Cause on the Refund
On August 30, 2005, the Morgans filed an adversary proceeding for turnover
against Ms. Goldman personally, as well as against the unsecured creditors who
benefitted from the distribution of the ,000 amount. The Morgans asserted that the
distribution to unsecured creditors violated the plan provision requiring that unsecured
creditors would receive a dividend from funds remaining after payment of
administrative and secured claims. Further, the Morgans asserted, the distribution
violated an agreement between Mr. Bueker and Ms. Goldman to distribute the money
to the mortgage lender. In her Answer, filed September 9, 2005, Ms. Goldman stated
that her office had properly distributed the funds under the terms of the plan and the
Bankruptcy Code.
Thereafter, and while the adversary proceeding was pending, on March 16,
2006, the Morgans filed another amended plan, reducing the plan length from 58
months to 36 months. Neither Ms. Goldman nor any creditor objected, and the
amended plan was confirmed.
The Morgan judge held a hearing in the adversary action on May 10, 2006.
During the hearing, the Court observed that the plan had inconsistent provisions it
provided for payment to unsecured creditors after payment of administrative and
expense claims, but it also required the Morgans to pay all projected disposable
income received in the first 36 months for the benefit of unsecured creditors. The
issue at the hearing was whether Ms. Goldman had agreed with Mr. Bueker to pay the
,000 amount to the mortgage creditor, rather than to the unsecured creditors. As
8
discussed more fully below, Ms. Goldman testified as to her understanding coming
from the e-mails and telephone conversations. At the conclusion of the hearing, the
Morgan judge took the matter under advisement and suggested that the parties might
consider settling the matter.
The parties did propose a settlement, in which Ms. Goldman agreed to recover
enough of the payments from the unsecured creditors to pay off the mortgage. In
proposing such a settlement, she effectively took the position that the distribution to
unsecured creditors was an error on her part. In taking this position, she proposed a
settlement which, if approved, would have relieved her of any personal liability she
may have had to the Morgans. The unsecured creditors were not parties to this
proposed settlement, although they were notified of it.
On June 22, 2006, the Morgan judge issued an Order to Show Cause in the
Morgans main bankruptcy case why the Morgans and Ms. Goldman should not be
required to jointly or individually reimburse the estate for the ,000 refund which
had not been authorized by court order. The Morgans were also ordered to provide
a detailed accounting of where the ,000 went.
On July 5, 2006, the Morgan judge held a hearing on the proposed settlement
in the adversary action, and the Order to Show Cause concerning the ,000 refund.
At that hearing, the Morgan judge announced that he would not approve the settlement
because, among other things, there was no authority under which Ms. Morgan could
go after the unsecured creditors for the money she had distributed according to the
confirmed plan in place at the time of the distribution. The Morgan judge expressed
concern over the fact that the alleged agreement between Ms. Goldman and Mr.
Bueker concerning distribution of the ,000 amount had occurred through what he
referred to as secret communications, and also that complying with the Morgans
request to distribute the money to the mortgage lender would have required Ms.
Goldman to violate her duties as trustee to faithfully distribute monies according to
9
the plan. The Morgan judge said he would likely have approved the distribution to
the secured lender, if the Morgans had modified their plan to provide that they stay in
the case long enough for the unsecured creditors to be paid what they should by the
end of the plan. But, because they did not request Court approval of the scheme, the
Morgan judge found that the Morgans were estopped from requesting turnover of
those funds from either Ms. Goldman or the unsecured creditors.
The Morgan judge then inquired about the ,000 refund approved by Ms.
Goldman. Among other things, the Morgan judge learned that, although the Morgans
used some of the money to repair a vehicle and patch the roof, they used the majority
of the refund, not for a new roof, but for, inter alia, gambling, travel, paying credit
cards, and making their plan payments. The Morgan judge took under advisement the
question of whether to require the Morgans or Ms. Goldman to pay back the ,000
refund.
On October 3, 2006, the Morgan judge entered an Order and Memorandum
Opinion in the adversary action, finding that the Morgans were not entitled to recover
the ,000 amount from either Ms. Goldman or the unsecured creditors. The
Morgan judge found the Morgans plan to be poorly drafted and inherently
contradictory with regard to distributions. Further, the Morgan judge found that
distributing the money as the Morgans requested to the mortgage lender, without an
amendment of the plan to commit the Morgans to stay in for 58 months, would have
violated the best interests of creditors test under 1325(a)(4). Paying the tort
proceeds to unsecured creditors was, according to the Morgan judge, more consistent
with the Code and more reasonable, considering the poorly drafted plan, than paying
the entire sum to the mortgage lender. Accordingly, the Morgan judge said, the
adversary action requesting turnover of those funds would be dismissed.
On October 10, 2006, the Morgan judge issued an Amended Order finding that
Ms. Goldman had violated her fiduciary duties in authorizing the ,000 refund. The
10
Morgan judge ordered her to reimburse the estate for that money and to distribute it
to the unsecured creditors pro rata. The Morgan judge also found that the Morgans
had committed a fraud on the Court by requesting and spending the refund as they did,
and ordered them to reimburse the trustee for the ,000 refund. The parties
appealed that Order to the District Court. The Morgan judge did not take any steps
to remove Ms. Goldman based on the breach of fiduciary duties he found to have
taken place in connection with the ,000 refund.
The Morgans filed a motion to amend the October 3 Order dismissing the
adversary action or for new trial, arguing, among other things, that the plan language
and practices criticized by the Morgan judge were customary in that district, and it
was not equitable to punish the Morgans when this practice had been going on there
for many years. The Morgan judge set this motion for hearing on November 7, 2006,
at which time Ms. Goldman testified again about the purported agreement with Mr.
Bueker regarding the distribution of the ,000 amount. The substance of her
testimony is discussed more fully below, but the crux of her testimony at this hearing
was that she had not entered into any agreement with Mr. Bueker regarding
distribution of the ,000 amount. The Morgan judge again took the matter under
advisement.
On November 20, 2006, the Morgan judge entered an order denying the relief
sought by the Morgans in their motion to amend. The Morgan judge found that
whether or not Mr. Bueker and Ms. Goldman had an agreement as to the distribution
of funds was beside the point because she had no authority to distribute funds except
as provided in a confirmed plan or authorized by court order. Also on November 20,
2006, the Morgan judge entered an Order directing Ms. Goldman to show cause why
she should not be removed as trustee in the Morgan case only, due to what the Morgan
judge perceived to be false testimony at the November 7 hearing. Specifically, the
Morgan judge commented that Ms. Goldmans testimony at the November 7 hearing
was that she had no agreement with Bueker, but that this differed from her testimony
11
at the May 10 hearing. The Morgan judge also found that the e-mails showed that she
had, in fact, made an agreement with Mr. Bueker and, therefore, her testimony that she
had no agreement to pay the mortgage lender was false. On December 15, 2006, the
Morgan judge expanded the scope of his show cause Order to include removal in all
cases, and further ordered Goldman to show cause why she should not be suspended
from practice before the bankruptcy court or referred to the Arkansas Committee on
Professional Conduct. The expanded scope of the show cause Order followed the
entry of an Order to Show Cause by the Dedmon judge, discussed below. The
Morgan judge held a hearing on his Orders to Show Cause on January 19, 2007.
II. THE DEDMON CASE
One day after the Morgan judge had issued his November 20 Order to show
cause regarding Goldmans removal from the Morgan case, the bankruptcy judge
presiding over the Dedmon case issued an Order to show cause why Ms. Goldman
should not be removed as trustee in all of her cases, and be sanctioned, suspended, or
disbarred from practice before the Court, based on the events that occurred in the
Morgan case. In response to the Dedmon judges Order to Show Cause, the United
States Trustee filed a motion asking the Dedmon judge to abstain, since the matters
involving the Morgan case were pending before the Morgan judge. The Dedmon
judge denied the U.S. Trustees motion. The Dedmon judge held a hearing on his own
Order to show cause on February 22, 2007, at which a transcript of the January 19
hearing on the Morgan judges Order to Show Cause was incorporated into the record.
III. THE ORDERS OF REMOVAL
On March 15, 2007, while the Morgan judge still had his Orders to Show Cause
under advisement, the Dedmon judge issued an Order removing Ms. Goldman from
all of her cases, based solely on her conduct in the Morgan case. In addition, the
Dedmon judge referred Ms. Goldman to the Arkansas Supreme Courts Committee
3 In re Miller, 302 B.R. 705, 708 (B.A.P. 10th Cir. 2003) (citing In re BH & P,
Inc., 949 F.2d 1300, 1313 (3d Cir. 1991); In re Woods, 173 F.3d 770, 778 (10th Cir.
1999)).
4 DeBold v. Case (In re Tri-River Trading), LLC, 329 B.R. 252, 263 (B.A.P. 8th
Cir. 2005) (citations omitted).
12
on Professional Conduct, as well as the U.S. Attorney, for disciplinary review.
Thereafter, on April 3, 2007, the Morgan judge issued his own Order removing Ms.
Goldman as trustee in all of her cases in that Court, based on the findings made by the
Dedmon judge in his March 15 Order. Finding that removing her from her cases as
trustee was sufficient sanction for her conduct, the Morgan judge did not suspend Ms.
Goldman from practice in the Bankruptcy Court, nor did he refer her to the Committee
on Professional Conduct.
Ms. Goldman appeals both Orders removing her as trustee.
IV. DISCUSSION
A. Standard of Review
Removal of a trustee is a matter committed to the sound discretion of the
bankruptcy court.3 An abuse of discretion occurs when the reviewing court has a
definite and firm conviction that the lower court made a clear error of judgment or
exceeded the bounds of permissible choice in the circumstances.4 To the extent that
the removal is based on a finding of fact, the standard is clear error.
B. Standard for Removal
Section 324 of the Bankruptcy Code provides:
5 11 U.S.C. 324.
6 United States Trustee v. Repp (In re Sheehan), 185 B.R. 819, 822 (Bankr. D.
Ariz. 1995).
7 Id.
8 In re Waller, 331 B.R. 489, 493 (Bankr. M.D. Ga. 2005) (quoting 3 Collier on
Bankruptcy 324.02 (15th ed. rev. 2004)).
9 See, e.g., In re Sheehan, 185 B.R. at 824 (citations omitted).
10 See 3 Collier on Bankruptcy 324.02 at 324-4 (15th ed. rev. 2004), and cases
cited therein.
11 In re Sheehan, 185 B.R. at 824 (citation omitted).
13
(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.5
Removal of a trustee is an extreme remedy.6 What constitutes sufficient cause for
removal is not defined in the Bankruptcy Code, but is instead left for the courts to
determine on a case-by-case basis.7 Causes for removal include situations in which
the trustee is found to be incompetent or unwilling to perform the duties of a trustee;
the trustee is not disinterested or holds an interest adverse to the estate; the trustee
violates the fiduciary duty to the estate; and where the trustee is guilty of misconduct
in office or personal misconduct.8 Some courts have held that actual injury or fraud
must be shown.9 Others have found that removal can be based not only [on] actual
impropriety, but [on] the appearance of impropriety as well.10 Mistakes in
discretionary judgment, which are reasonable, do not warrant removal.11 Courts must
12 Id.
13 11 U.S.C. 324(b); See Richman v. Straley, 48 F.3d 1139, 1143 (10th Cir. 1995)
(recognizing that, through the addition of 324(b) to the Code, Congress explicitly added
a presumption that removal in one case would constitute removal in all current cases)
(citing H.R.Rep. No. 764, 99th Cong., U.S. Code Cong. & Admin. News 1986, 5227,
5236 (1986)).
14 11 U.S.C. 102(1)(A).
14
also consider the best interest of the estate when determining whether to remove a
trustee.12
The statute notably omits any requirement that removal be based on a request
by a party in interest; hence, a court can remove a trustee for cause sua sponte.
Further, removal of a trustee from one case automatically constitutes removal of that
trustee in all other cases in which the trustee is serving, unless the court orders
otherwise.13 Since a bankruptcy courts removal from a single case for cause is
reviewed under an abuse of discretion standard, a courts decision whether, or not, to
limit removal to the single case would likewise be reversed only for an abuse of
discretion.
C. Adequacy of Notice
The phrase after notice and a hearing is defined in 102 of the Code to mean
after such notice as is appropriate in the particular circumstances, and such
opportunity for a hearing as is appropriate in the particular circumstances.14 Both the
Morgan judge and the Dedmon judge issued Orders to Show Cause to Ms. Goldman
regarding her removal, and each provided her with a hearing. The question, however,
is whether Ms. Goldman had sufficient notice as to what the two judges considered
to be the cause for her removal, such that she had an opportunity to address those
issues in responsive pleadings and hearings.
15 Alexander v. Jensen-Carter (In re Alexander), 289 B.R. 711, 714 (B.A.P. 8th
Cir. 2003).
16 Id. Accord In re Waller, 331 B.R. at 493 (holding that conclusory allegations of
cause for removal will not suffice).
17 Richman v. Straley, 48 F.3d at 1143 (holding that chapter 13 trustee had no
property right in being a standing trustee; 324 implies that no property right vests until
actual assignment of a case) (cited in 3 Collier on Bankruptcy 324.03 at 324-5 (15th ed.
rev. 2007)).
18 Fed. R. Bankr. P. 9011(c)(1)(B).
19 Halverson v. Funaro (In re Funaro), 263 B.R. 892, 903 (B.A.P. 8th Cir. 2001).
20 Thornton v. General Motors Corp., 136 F.3d 450, 454 (5th Cir. 1998) (reversing
a district courts order or sanctions because the show cause order cited general conduct
15
When a party moves for removal of a trustee, the movant bears the burden of
establishing cause by setting forth specific facts which support such removal.15 A
conclusory contention unsupported by specific facts does not constitute sufficient
grounds for the removal of a trustee.16 We believe that the same sort of notice,
setting forth specific facts forming the basis for removal, is required when a court
considers removal sua sponte. Further, although the right to be a trustee is not a
property right, removal from a particular case, or from all cases in which the trustee
is acting, arguably deprives a trustee of a property right in specific employment.17
Under such circumstances, the type of notice required should be similar to that
provided for a Rule 9011 violation or court disciplinary action.
Under Rule 9011, when a court issues an Order to Show Cause why a person
should not be sanctioned for violating Rule 9011(b), the order must describe the
specific conduct that appears to violate [that provision].18 The notice must specify
the conduct alleged to be sanctionable, the standard by which the conduct will be
assessed, and the authority under which sanctions are being considered.19 An order
that describes general conduct is not sufficient.20 Similarly, in a disciplinary
in failing to produce evidence in support of [a claim] and, therefore, did not sufficiently
clarify what conduct the attorney needed to explain and justify in his response to the
court).
21 In re Crayton, 192 B.R. 970, 978 (B.A.P. 9th Cir. 1996) (citing In re Ruffalo,
390 U.S. 544, 552, 88 S.C.t 1222, 1226, 20 L.Ed.2d 117 (1968)).
16
proceeding, an attorney must receive prior notice as to the reach of the grievance
procedure and the precise nature of the charges leveled against him.21
C1. Notice in the Dedmon Case
In the Dedmon case, the November 21, 2006 Order to Show Cause reads, in
relevant part:
Comes now the Court, sua sponte, and orders Jo-Ann Goldman, the
chapter 13 trustee in the above captioned proceeding, to appear and
respond or show cause to this Court why she should not be removed for
cause as trustee in this case and all other cases under this title in which
she is now serving. This Order is issued pursuant to 11 U.S.C. 105,
324, 1302 and 28 U.S.C. 586. Further, Ms. Goldman is directed to
appear, respond, or show cause why she should not be sanctioned,
suspended, or disbarred from practice before this Court for cause
pursuant to Local Rule 2090-2 of the Local Rules of the United States
Bankruptcy Court for the Eastern and Western Districts of Arkansas.
The findings of fact and conclusions of law by the United States
Bankruptcy Court for the Eastern District of Arkansas, Pine Bluff
Division, in the case of James and Linda Morgan, No. 5:03-bk-12580M,
including but not limited to that certain adversary proceeding, James and
Linda Morgan v. Jo-Ann Goldman, Chapter 13 Trustee et al., No. 5:05-
ap-1244, constitute the basis for this Order and possible removal and/or
sanctions.
17
The Dedmon Order to Show Cause does not specify which of the Morgan judges
findings and conclusions formed the basis for removal and sanctions. Accordingly,
we find that it did not provide Ms. Goldman with adequate notice, such that she could
explain or justify her actions to the Dedmon judge. For that reason, we REVERSE
the order of the Dedmon judge.
C2. Notice in the Morgan Case
In the Morgan case, the November 20, 2006 Order to Show Cause, in which the
Morgan judge directed Ms. Goldman to show cause why she should not be removed
as trustee in the Morgan case only, provided, in relevant part:
Comes now the Court, sua sponte and orders Jo-Ann Goldman, Chapter
13 Trustee, to appear before the undersigned . . . . Jo-Ann Goldman is
ordered to show cause why she should not be removed as Trustee in this
case, pursuant to 11 U.S.C. 105(a); 11 U.S.C. 324; 11 U.S.C. 1302,
and 28 U.S.C. 586, for cause in that she has given false testimony
under oath at a hearing held in Pine Bluff, Arkansas, in a proceeding in
this case (5:05-ap-1244) on November 7, 2006. Specifically, Jo-Ann
Goldman testified that she had no agreement with counsel for the
Debtors to distribute the sum of ,150.37 to the [secured mortgage
lender] from the proceeds of a post-petition settlement of a tort claim
when, in truth and fact, she had made such an agreement, which she
acknowledged in previous testimony. Her previous testimony was also
corroborated by e-mails, the Debtors testimony and the testimony of the
Debtors counsel, Jeremy Bueker. Excerpts of her testimony are
attached hereto as Exhibits A and B.
Further cause exists to remove Ms. Goldman as Trustee because she has
a conflict of interest. She is a named defendant in her individual
capacity in case number 5:05-ap-1244, and her interests are adverse to
the interests of the estate over which she is Trustee.
22 We find another reason, besides inadequate notice, for concluding that the
,000 refund could not have formed a basis for Ms. Goldmans removal. Specifically,
several witnesses, including the other Chapter 13 trustees in the district, testified (and it
appears to be undisputed) that such refunds without court authorization were, at the time,
the established practice of all of the Chapter 13 trustees, and their predecessor(s) in the
Eastern District of Arkansas. Therefore, we do not think they should have formed a basis
for a particular trustees removal.
18
Portions of the May 10, 2006, and November 7, 2006 transcripts were attached. The
Morgan judges December 15, 2006 Order to Show Cause, which expanded the scope
of the sanction to removal in all pending cases assigned to her, suspension of practice,
and referral to the Committee on Professional Conduct, contained similar language
concerning the false testimony, but omitted the language concerning the conflict of
interest.
Again, in his Order removing Ms. Goldman, the Morgan judge expressly found
that she had given false testimony at the November 7 hearing. The Morgan judge also
concurred with the findings and statements of law in the Dedmon judges Order
removing Ms. Goldman, in which the Dedmon judge removed her for the false
testimony, her conflict of interest, and in making the unauthorized ,000 refund to
the Morgans. The Morgan judges Orders to Show Cause did provide Ms. Goldman
with adequate notice that the Court was considering removal based on her false
testimony and conflict of interest in the adversary action. It mentioned nothing,
however, regarding the ,000 refund. Accordingly, we find that the Orders to Show
Cause in the Morgan case did not provide Ms. Goldman with adequate notice that the
refund could be grounds for her removal, and we will, therefore, not consider it as
such a basis.22 However, the Orders to Show Cause in the Morgan case did provide
Ms. Goldman with adequate notice that the false testimony and conflict of interest
were grounds being considered for her removal.
In sum, although the Morgan judge did not, on his own, make an express
finding that Ms. Goldman had a conflict of interest, we can affirm the Morgan judges
23 Rodgers v. U.S. Bank, 417 F.3d 845, 853 n. 6 (8th Cir. 2005) (an appellate court
may affirm a district courts order . . . on any basis supported by the record, even if that
ground was not considered by the district court.). See also In re Law, 336 B.R. 780
(B.A.P. 8th Cir. 2006).
24 Clark v. Kansas City Missouri School Dist., 375 F.3d 698 (8th Cir. 2004) (The
fundamental requirement of due process is the opportunity to be heard at a meaningful
time and in a meaningful manner.) (citations and internal quotemarks omitted).
19
decision to remove Ms. Goldman on any ground supported by the record.23 We
conclude, discussed more fully below, that the record reveals two such bases for
removal, namely the false testimony and the conflict of interest, as to both of which
the Morgan judge had provided Ms. Goldman with adequate notice.
D. Opportunity for Hearing
In addition to notice, Ms. Goldman was entitled to an appropriate hearing under
the circumstances. Due process requires that the hearing provided be a fair one.24 The
NACTT, as amicus, argues that because it was the Court, and not the U.S. Trustee or
a creditor, which initiated the proceeding, the Court acted as both prosecutor and
adjudicator and thereby violated Ms. Goldmans due process right to a fair hearing.
We disagree. The Morgan judge had ample reason to remove Ms. Goldman based on
events that occurred as matters of record in the Morgan case. It was those matters
which formed the basis for the Morgan judges Orders to Show Cause. The purpose
of the notice and hearing in that case was to provide Ms. Goldman with an opportunity
to convince the Morgan judge that those matters (the events which occurred in the
presence of the Morgan judge) should not have formed the basis for her removal.
Thus, the Morgan judge did not act as prosecutor in his case; he simply determined
that a basis existed for finding that Ms. Goldman had acted inappropriately in the case
before him and gave her the opportunity to prove otherwise. The fact that the U.S.
Trustee did not take any action to have Ms. Goldman removed did not relieve the
Morgan judge of his obligation to do so, based on actions taken by her in the Morgan
25 In re LeMaire, 898 F.2d 1346, 1349 (8th Cir. 1990) (quoting Anderson v. City of
Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985)).
26 Id.
27 Id.
28 Id.
20
case. We therefore find that the proceeding in the Morgan case complied with 324
and Ms. Goldmans due process rights.
E. The False Testimony as a Basis for Removal
The question of whether a trustees false testimony constitutes cause for
removal is a matter we review de novo, and we agree with the Morgan judge that such
false testimony would be cause. The question of whether Ms. Goldman actually gave
false testimony is a question of fact we review for clear error. A finding is clearly
erroneous when although there is evidence to support it, the reviewing court on the
entire evidence is left with the definite and firm conviction that a mistake has been
committed.25 The clearly erroneous standard does not entitle a reviewing court to
reverse the trier of fact simply because it would have decided the case differently.26
[W]hen there are two permissible views of the evidence, we may not hold that the
choice made by the trier of fact was clearly erroneous.27 We give even greater
deference to the trier of fact when the factual findings call for an assessment of
witness credibility.28
Generally speaking, Ms. Goldmans testimony at each of the hearings,
including the Morgan judges Order to Show Cause hearing, was unclear and was
sometimes evasive and contradictory. Although a complete review of each of the
transcripts is necessary in order to get the entire picture, certain exchanges highlight
the evasive nature of her testimony and the contradictory statements she made. For
example, at the May 10 hearing in the adversary action, Ms. Goldman expressly
21
agreed that the e-mails to Mr. Bueker were clear that the money was to be paid to the
mortgage lender:
Q (By Greg Niblock, attorney for the Morgans) Okay. But you
agree that the e-mail is very clear as
A Yes.
Q that you would disburse the money to the secureds first?
A Yes.
Q All right. All right. Would you agree that if the money had been
first applied to the secured creditors that, number one, that would
have stopped the interest on the secured debt?
A Well, the principal balance would have been paid on the secured
debt at that time, yes.
She then testified that she was willing to grant Mr. Buekers request to pay the money
to the mortgage lender, if the Morgans agreed to stay in the case for 58 months, but
that she neglected to make the notation in her files so as to hold the money:
Q But your e-mail with Mr. Bueker was that you would pay it to
secured?
A As a professional courtesy, and with the meeting of the minds that
the debtor intended on staying in 58 months, I was willing to grant
his request.
Q Okay. But then it didnt happen?
A Unfortunately, I didnt docket that in the docket.
Q Okay.
22
A And my staff, it disbursed as it normally would pursuant to office
procedure.
Later in the same hearing, the Morgan judge directly questioned Ms. Goldman about
the agreement, at which point she reiterated that she had neglected to make the
notation in the file, but then changed her position as to whether she had made an
agreement with Mr. Bueker that she would pay the money to the mortgage lender if
the Morgans would stay in for 58 months:
THE COURT: Okay. So what happened here is you agreed to, with
Mr. Bueker, if he would give you the money you would disburse it to the
secured creditor and then you didnt make that proper note or something
in the docket, and the money went out contrary to your agreement?
[MS. GOLDMAN]: Well, realize though this wasnt to get the money.
THE COURT: Okay. I understand.
[MS. GOLDMAN]: I knew I was going to get the money.
THE COURT: Thats right.
[MS. GOLDMAN]: So it was just under the terms we dont want that
to be a restrictive order telling the Trustee how to disburse, so we always
request that it come in and it be disbursed pursuant to the confirmed
plan.
And had these e-mails not been exchanged or I had docketed it correctly
I was that would have been a professional courtesy to do that for him
because the net result would have been the same, would have been the
only reason why. I rarely ever by e-mail agree to do that.
THE COURT: And the answer to my question is, Yes, then thats
what happened?
[MS. GOLDMAN]: Yes. Yes, thats what happened.
23
THE COURT: All right. Okay. And then you agreed to that under the
assumption that he would continue to pay the plan over the balance of
the 58 months?
[MS. GOLDMAN]: Thats right.
THE COURT: Was that ever expressly agreed to between you and Mr.
Bueker
[MS. GOLDMAN]: Well
THE COURT: as a quid pro quo that you would agree to do this if he
would stay for 58 months?
[MS. GOLDMAN]: We were having banter back and forth, and in
particular I remember a telephone conversation where I said, Why does
it matter if the unsecured
THE COURT: No, no. Listen to my question. Was that specifically
agreed to that you would pay the secured claims with that money if he
would stay in for 58 months?
[MS. GOLDMAN]: No.
THE COURT: There was no specific?
[MS. GOLDMAN]: No.
THE COURT: It was just discussed?
[MS. GOLDMAN]: No. It was just discussed.
THE COURT: Okay. And you sort of assumed that he would do that?
[MS. GOLDMAN]: I sort of assumed and hoped that he would
THE COURT: Okay.
24
[MS. GOLDMAN]: not
Ms. Goldmans overall testimony at the May 10 hearing on the question of whether
she had an agreement with Mr. Bueker to pay the money to the mortgage lender (i.e.,
whether they had had a meeting of the minds, as she phrased it) was unclear, at best.
However, at this hearing, she unquestionably testified that, at a minimum, she had
agreed to put a notation in her files and hold the money, pending resolution of
something (although it is not clear what), but that she failed to make the notation and
the money was mistakenly disbursed by her office to unsecured creditors.
Later, at the November 7 hearing on the Morgans motion to reconsider the
dismissal of their adversary action, the Morgan judge again questioned Ms. Goldman
about the agreement with Mr. Bueker:
THE COURT: If [the Morgans] complaint is granted, why wouldnt
[unsecured creditors] receive the money?
[MS. GOLDMAN]: Well, if the complaint is granted, then I would have
to get the money back from the unsecured creditors, and then theres a
modification in place that prohibits me from disbursing further.
So I suppose I would just need clarification ordered to only get
back the money that pays off the house, I guess.
THE COURT: Oh, I see. So if
[MS. GOLDMAN]: But if I get it all back, I dont know if I can disburse
with that confirmed plan in place. That would be
THE COURT: Because if a judgment against you personally for the
20,000, and you had to put that into the estate, then youd have to
disburse it pursuant to the modified plan which says: Unsecureds get
zero? Thats what youre saying?
25
[MS. GOLDMAN]: I guess.
THE COURT: Okay. I think thats right. Because there is a
modification that got confirmed that says unsecureds get no more money.
So if more money flowed into the estate, it would have to go to the
secured creditors pursuant to the plan?
[MS. GOLDMAN]: I believe thats the case.
THE COURT: That the plan is modified?
[MS. GOLDMAN]: And thats what I was afraid of originally, which is
why I required unsecured creditor money to go to unsecureds at the
beginning of the case.
THE COURT: Okay. But now, do I understand your testimony to be
that you deny that you had an that you made an agreement with Mr.
Bueker that you would distribute that 20,000 to the secured claim at the
Bank of DeWitt?
[MS. GOLDMAN]: Thats correct.
THE COURT: Did you
[MS GOLDMAN]: I have e-mail and phone conversations with attorneys
everyday about how the plans are interpreted. And without a
modification of the plan, I would disburse the money as the plan is
interpreted.
THE COURT: You dont recall those e-mails where you where they
purport to show that you agreed to do that?
MS. GOLDMAN: Yes, I recall the e-mails. I had numerous phone
conversations with him and numerous e-mails about how the money
would be disbursed. And I explained to Mr. Bueker on numerous
occasions, and I testified to this in the original hearing, and that was that
thats not the way I read the plan, thats not the way my office regularly
disburses the money.
26
I suppose that if what hes saying is true, it could be interpreted
that way. But if he was arguing to me, it wouldnt make a difference
because the unsecured creditors would get the benefit of the money.
The end result of my last conversation was: Then why do you
care? Whats the difference?
But none of that I do not send e-mails and modify plans by
virtue of e-mails. I cant do that. I have no power to do that.
The only thing I can modify a plan, is a modification of the plan.
THE COURT: So you deny his allegation that you agreed to pay the
20,000?
[MS. GOLDMAN]: Yes.
THE COURT: With him?
[MS. GOLDMAN]: Yes.
THE COURT: Okay.
At this hearing, Ms. Goldman flatly denied that she had any agreement, whatsoever,
with Mr. Bueker and testified that she had properly distributed the money to the
unsecured creditors. The Morgan judge found this testimony to be false because she
had previously testified, and the e-mails substantiated, that she had made at least some
agreement with Mr. Bueker. At the Morgan judges January 19, 2007 hearing on his
Orders to Show Cause, Ms. Goldman attempted to reconcile her contradictory
testimony by saying that she meant to say in November that she had not reached a
final agreement with Mr. Bueker. The Morgan judge found this explanation to be
contrived and after-the fact.
29 See Ark. Rule of Prof. Conduct 3.3 (regarding candor to the tribunal).
30 See In re Waller, 331 B.R. at 493 (involving motion of debtors to remove trustee
in their Chapter 13 case) (quoting 3 Collier on Bankruptcy 324.02 (15th ed. rev. 2004)).
27
We cannot say that we have a definite and firm conviction that these findings
by the Morgan judge were erroneous. As the Morgan judge found, her testimony at
the November 7 hearing was unwavering that she had had no agreement with Mr.
Bueker, but she had previously testified that she did have an agreement with him, even
if it was just to make a notation in her file to hold the money pending resolution of the
issue. At best, her testimony was evasive and contradictory, and she certainly lacked
candor with the Morgan judge.29 This, we conclude, constitutes cause for her removal.
F. The Conflict of Interest as a Basis for Removal
As stated, causes for removal of a trustee include situations in which the trustee
is disinterested or holds an interest adverse to the estate, or in which a trustee breaches
her fiduciary duty to creditors.30 Here, once the Morgans sued Ms. Goldman in her
personal capacity, she was obligated to determine whether she at that point had a
conflict of interest. Clearly she did, since she proposed a settlement which would have
relieved her of personal liability at the expense of the unsecured creditors.
We recognize that meritless suits are sometimes brought against trustees and we
do not mean to say that the simple filing of a lawsuit against a trustee means that that
trustee should resign or be removed. But, once it appears that such a lawsuit against
a trustee has merit, the trustee has a duty to take steps to protect creditors and avoid
self-preserving decisions in the case. Resignation from the case, or hiring independent
counsel to defend the trustee, may be appropriate. In this case, the Morgans suit
against Ms. Goldman was obviously not a meritless action, since Ms. Goldman herself
proposed a settlement which gave the Morgans virtually everything they sought. Prior
28
to proposing that settlement, which was in her own best interest, and not in the interest
of unsecured creditors, she should have resigned from the case or asked the Morgan
judge to allow her to hire independent counsel. Failing to do so, and continuing to act
as trustee in the case despite her conflict of interest, constitutes cause for her dismissal.
V. CONCLUSION
There are many troubling aspects to this case. The plan proposed by the
Morgans and confirmed by the Court was far from clear as to how the personal injury
proceeds were to be handled. When the personal injury case was settled, the Morgans
attorney sought to make a side agreement with Ms. Goldman as to how to interpret
contradictory language in the plan, rather than asking the Court to do so. The Morgans
themselves misrepresented what they were going to do with the funds to be refunded
to them. The United States Trustee, which is charged with supervision of the trustee
system, failed to take steps to remove Ms. Goldman from the case when it was
apparent that she had a clear conflict with the interests of the unsecured creditors. But
the central problem here is that Ms. Goldman did represent to Mr. Bueker that she
would use the proceeds to pay off the Morgans home mortgage, but failed to do so.
At the May 10, 2006 hearing, Ms. Goldman honestly admitted that she did not take
steps to inform her staff that these proceeds should not be paid to unsecured creditors.
There would have been no reason for her to have needed to make the notation in the
file, or inform her staff, if she had not had some agreement with Mr. Bueker. While
she did admit her error at that time, she did not offer to accept responsibility for the
damage that error caused the Morgans, who have since lost their home. Instead, at a
later hearing she changed her position and denied having any agreement with Mr.
Bueker. Ms. Goldman was obligated to distribute the funds to unsecured creditors, she
testified, because that is what the confirmed plan provided. Yet, in the meantime, she
had asked the Court to approve a settlement under which she would have been
authorized to get those funds back from the unsecured creditors, leaving them with no
recovery at all under the plan. The settlement she had proposed was thus directly
31 I refer to Judge Federmans opinion as the majority opinion. In his
opinion, Judge Federman speaks for me and for himself in affirming the order
entered in the Morgan case. Judge Federman speaks for Judge Mahoney and
himself in reversing the order in the Dedmon case. Simple arithmetic indicates that
that opinion represents the judgment of the court as to both appeals.
29
contrary to her own interpretation of the plan. Her actions throughout were motivated
by her desire to protect herself from having to make good for her error, and not to
protect the integrity of the Chapter 13 process. Accordingly, the Morgan judges
decision to remove her as trustee was not an abuse of discretion.
For the reasons stated, the Order of the Morgan judge is AFFIRMED, and the
Order of the Dedmon judge is REVERSED.
KRESSEL, Chief Judge, concurring in part and dissenting in part.
I join in the majority31 opinion with the exception of Part C1, from which I
dissent. As the majority indicates, there is no requirement of a request of a party in
interest before the court can remove a trustee. I take that omission to be intentional and
relevant. Numerous provisions of the Bankruptcy Code require both the request of a
party in interest and notice and a hearing. Many require notice and a hearing, but no
request of a party in interest and a few require neither. By carefully using those
phrases, Congress signaled its grant of authority to bankruptcy judges to remove
trustees sua sponte. Regarding the phrase after notice and a hearing Congress tells
us that that requires such notice as is appropriate in the particular circumstances, and
such opportunity for hearing as is appropriate in the particular circumstances . . . .
The Supreme Court has not promulgated any specific rules dealing with the removal
of a trustee, so judges who wish to proceed sua sponte are left somewhat to their own
devices. The judges in these two cases chose to proceed by order to show cause, but
there is no rule that requires that. The statute only requires the trustee receive such
notice as is appropriate in the particular circumstances. Under the circumstances,
30
because of the long history of the proceedings in the Morgan case, the earlier, albeit
by a day, entry of the order to show cause in the Morgan case and the reference in the
Dedmon order to show cause to the Morgan order and case all would lead me to
conclude that notice was appropriate under the circumstances. Certainly Goldman
knew that it was her conduct in the Morgan case that led the judge in the Dedmon case
to issue his order to show cause. It was, in fact, her conduct in the Morgan case which
lead the Dedmon judge to remove her.
I think the majority is being entirely too punctilious in concluding that the notice
in the Dedmon case was insufficient. I would affirm both orders.
MAHONEY, Bankruptcy Judge, concurring in part and dissenting in part.
I concur in the decision of the majority to reverse the order in the Dedmon case,
but not only for the reasons stated by the majority. I will explain further in my dissent.
I dissent from the reasoning and conclusion of the majority with regard to the
Morgan order.
The standard of review with regard to findings of fact is clear error. I cannot say
that the Morgan judges findings that Goldmans testimony at the May hearing and
November hearings was inconsistent and that she had a conflict of interest with the
unsecured creditors when she attempted to settle the Morgan lawsuit by pursuing
repayment from the unsecured creditors are clearly erroneous. However, I believe that
under the circumstances of these cases the judges abused their discretion and I write
in dissent because I believe the process was fatally flawed and totally unfair to
Goldman.
The majority may be correct that 11 U.S.C. 324(a) can be invoked by a
bankruptcy judge without a third-party motion to create a contested matter, but I doubt
31
it. The majority cites no cases in which the bankruptcy judge sua sponte removed a
trustee under 324 without a motion by the U.S. Trustee, a creditor or a debtor. See,
e.g., Richman v. Straley, 48 F.3d 1139, 1144 (10th Cir. 1995) (congressional intent
in giving U.S. trustee, rather than court, authority to appoint and remove standing
trustees was to free courts from administrative role in order to better perform judicial
functions); Dye v. Brown (In re AFI Holding, Inc.), 355 B.R. 139 (B.A.P. 9th Cir.
2006) (debtors investors moved for removal of Ch. 7 trustee); Miller v. Miller (In re
Miller), 302 B.R. 705 (B.A.P. 10th Cir. 2003) (debtor moved for removal of Ch. 7
trustee); U.S. Trustee v. Repp (In re Sheehan), 185 B.R. 819 (Bankr. D. Ariz. 1995)
(U.S. trustee moved for removal of Ch. 7 trustee); In re Drinkwater, 178 B.R. 590
(Bankr. D. Mass. 1995) (U.S. trustee moved for removal of standing Ch. 13 trustee);
In re Lundborg, 110 B.R. 106 (Bankr. D. Conn. 1990) (debtor and creditor both moved
for Ch. 7 trustees removal). The majority, on page 14, correctly states that [W]hen
a party moves for removal of a trustee, the movant bears the burden of establishing
cause by setting forth specific facts which support such removal. That language is
taken directly from a decision of a panel of this very court, Alexander v. Jensen-Carter
(In re Alexander), 289 B.R. 711, 714 (B.A.P. 8th Cir. 2003).
The word movant, as used in the law, means one who makes a motion to the
court. The Dictionary of Modern Legal Usage 575 (2d ed. 1995); Blacks Law
Dictionary 1035 (7th ed. 1999). The word itself contemplates a third party making a
motion to the court. In these cases, the bankruptcy judges each made their own motion
to the court, a procedure not recognized by rule or statute. Even so, each judge then
shifted the burden of proof away from the movant and onto the trustee. In section
IV.D., Opportunity for Hearing, of the majority opinion, it clearly states that the
Morgan judge shifted the burden of proof to Ms. Goldman on the issue of her removal
for cause. Slip op. at 19 (Thus, the Morgan Judge did not act as prosecutor in his case;
he simply determined that a basis existed for finding that Ms. Goldman had acted
inappropriately in the case before it and gave her the opportunity to prove otherwise.)
(emphasis mine). That burden-shifting is also made clear by the language of the show32
cause orders. In each order, the judge directed Ms. Goldman to show cause why she
should not be removed. According to our own jurisprudence, as shown by the
Alexander decision, such burden-shifting is impermissible.
Both judges were understandably concerned about the inconsistent testimony of
Ms. Goldman. Because the inconsistent testimony was given under oath in the
bankruptcy court in the Morgan case, the judge in the Morgan case had a legitimate
basis for taking some action. However, rather than becoming the movant as well as
the trier of fact, other, fair procedures could have been followed. For example, the
Office of the United States trustee could have been requested to investigate the matter
and make a report and recommendation to the court. After all, it is the statutory duty
of the United States trustee to appoint and supervise Chapter 13 standing trustees. 28
U.S.C. 586(b) and (d). Alternatively, because Ms. Goldman is an attorney, the state
bar disciplinary proceedings or the local federal district court attorney disciplinary
proceedings could have been instituted by a referral from the judge. There are
probably many other procedures that a judge concerned about the activities or
testimony of a trustee could take to assure fairness to the trustee and yet protect the
integrity of the court and the legal process.
Because I firmly believe that the process itself was tainted in both the Morgan
and Dedmon cases, I would reverse both orders.
 

 
 
 

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