## Facts

- Tradex Corporation, managed by its president and sole shareholder Charles Gitto, Jr., filed a voluntary Chapter 11 petition.
- The petition initially omitted required filings, including schedules of assets and liabilities and a statement of financial affairs, leading to a bankruptcy court order directing compliance and denial of an extension.
- The United States Trustee moved to appoint a Chapter 11 trustee under 11 U.S.C. § 1104(a)(1) and (a)(2), relying on documentary evidence and testimony.
- The record included allegations that Tradex failed to fully and accurately disclose assets, liabilities, and insider payments.
- Evidence indicated questionable internal transfers among related entities and commingling of Tradex’s affairs with an affiliate associated with Gitto.
- Tradex allegedly could not substantiate certain inventory and related transactions with confirming documentation.
- Tradex’s Chapter 11 filings reportedly conflicted with its tax returns.
- A grand-jury investigation into fraud allegations involving Tradex was ongoing, and creditors asserted credible claims of bad faith, fraud, and violations of law.
- Gitto was alleged to have received excessive management fees from Tradex.
- The bankruptcy court ordered appointment of a Chapter 11 trustee, and Tradex appealed to the district court.

## Issues

1. Whether the bankruptcy court properly found “cause” to appoint a Chapter 11 trustee under 11 U.S.C. § 1104(a)(1).
2. Whether appointment of a trustee was warranted under 11 U.S.C. § 1104(a)(2) as in the interests of creditors and the estate.
3. What standards of review govern a district court’s review of a bankruptcy court’s findings and discretionary decision to appoint a Chapter 11 trustee.

## Decision

- The district court affirmed the bankruptcy court’s order appointing a Chapter 11 trustee.
- The court held that the evidentiary record supported a finding of “cause” under § 1104(a)(1), including serious disclosure failures, questionable transactions, commingling, and substantial fraud concerns.
- The court also held that, independent of “cause,” appointment was justified under § 1104(a)(2) because a neutral trustee was in the interests of creditors and the estate given credibility and governance concerns.
- The court concluded the bankruptcy court’s factual findings were not clearly erroneous and its decision was not an abuse of discretion.

## Legal Principles

- A Chapter 11 trustee must be appointed under 11 U.S.C. § 1104(a)(1) upon a showing of “cause,” including fraud, dishonesty, incompetence, or gross mismanagement by current management.
- A trustee may be appointed under 11 U.S.C. § 1104(a)(2) when appointment is in the interests of creditors, equity security holders, and other interests of the estate.
- On appeal from a bankruptcy court order, factual findings are reviewed for clear error, legal questions are reviewed de novo, and the ultimate discretionary decision to appoint a trustee is reviewed for abuse of discretion.
- Patterns of incomplete or inaccurate disclosures, insider transactions, commingling with affiliates, and credible allegations of fraud can support trustee appointment to protect the estate and creditor confidence.

## Conclusion

The district court upheld appointment of a Chapter 11 trustee because the record supported findings of serious management and reporting failures and because placing the estate under neutral control served creditor and estate interests, with no clear error or abuse of discretion shown on appeal.


Tradex Corp. v. Morse, 339 B.R. 823 (D. Mass. 2006)