John Olson, U.S. Bankruptcy Judge

A second jurist has undone a ruling by U.S. Bankruptcy Judge John Olson in a long-running case in which litigants claimed the judge had improperly favored a firm that hired his spouse during the case.

U.S. District Judge Federico Moreno set aside Olson's final judgment in favor of bankruptcy trustee Soneet Kapila, whose lawyers hired litigator George Steven Fender. The attorney was engaged to Olson and later married the judge—while three related cases had been assigned to Olson.

Moreno also remanded the case to the summary judgment phase, undoing a nearly $77,100 attorney-fee sanction Olson had imposed in Kapila's favor. He also set aside Olson's findings of facts and conclusions of law, and orders denying various motions by an attorney representing the appellant, the Matthew Wortley Trust.

"Public trust and confidence in the judiciary depend upon the appearance of integrity and independence of judges, which must be carefully safeguarded," Moreno wrote. "Only reversal and remand in this case will restore that appearance."

The ruling is the second time in two months that a federal judge overturned Olson in the Kapila-Wortley litigation, which was an offshoot of litigation that has spanned more than a decade and resulted in three adversary proceedings as the bankruptcy trustee attempted to recover assets in the dissolution of Pennsylvania-based Trafford Distribution Center.

It follows an Aug. 9 ruling by U.S. District Judge Cecilia M. Altonaga, who found Olson should have recused himself to avoid any appearance of impropriety after his spouse accepted the job with the firm representing the trustee in multiple cases before him.

Rules of judicial conduct prevent Olson from commenting on pending litigation. His husband, Fender, did not respond to requests for comment, and neither did bankruptcy trustee Kapila and trustee's counsel Michael Bakst, Morris Miller, Rilyn Carnahan and Paul A. Avron.

Meanwhile, opposing counsel celebrated Moreno's decision.

"I personally expected this result from day one. … The judgments were entered in 2010, but the writing's been on the wall ever since then," said Trafford Distribution Center attorney Robert J. Hauser, shareholder with Pankauski Hauser in West Palm Beach. "The circumstances and facts were compelling and egregious. I just think it's obvious the judgment had legal problems that were built in, which helped amplify why the judge had an ethical problem. And the two sets of errors go hand in hand."

The dispute stemmed from Trafford's insolvency in 2008, when sole shareholder Barbara Wortley filed for Chapter 7 bankruptcy protection. The case was assigned to Olson, who appointed Kapila as bankruptcy trustee. Kapila in turn hired West Palm Beach attorney Bakst to bring three cases against Wortley and other debtors.

One of these cases resulted in Altonaga's reversal last month, which undid a $200,000 ruling that had initially fallen in Kapila's favor.

Another is pending before U.S. District Judge Ursula Ungaro, with a dispute over $2.5 million that Olson awarded to Kapila for Trafford's bankruptcy estate.

The third case led to Moreno's new decision in litigation that had seen the Matthew Wortley Trust unsuccessfully battle Kapila. The two sides have sparred for years over whether the Matthew Wortley Trust owned an account receivable—about $231,000 that ketchup maker H.J. Heinz Co. owed the debtor company, Trafford—or whether that money should go to Kapila to help the bankruptcy estate pay Trafford's creditors.

"Despite evidence … Judge Olson held that appellant did not have a claim to the Heinz receivable since the lien was unperfected," Moreno found.

The ruling showed Olson had entered a permanent injunction that would prohibit Wortley's trust from collecting the Heinz payment. It also showed he had sanctioned the trust for willfully violating the automatic stay, finding its efforts were "fabrications designed to drain the brankruptcy estate."

Olson had also ordered the Wortley trust to pay the bankruptcy trustee's attorney fees and court costs.

The trustee's lawyer, Bakst, submitted an affidavit showing those fees and costs stood at nearly $77,100. Bakst, formerly with Ruden McClosky Smith Schuster & Russell, is now a partner with Greenspoon Marder.

The affidavit of fees and costs sparked protest from the opposing side, which alleged the bankruptcy trustee seemed to be seeking to recover expenses not just for that offshoot case, but for others as well.

Wortley's trust sought reconsideration, and Olson partially vacated his order on the ownership of the incoming Heinz payment. But he did not alter the permanent injunction or the attorney-fee sanction, according to a recitation of facts in Moreno's ruling.

"The court agrees with Judge Altonaga that the most conservative course of action is to revert the proceedings back to the summary judgment phase, before any new bankruptcy court may make a finding regarding the alleged violation of the automatic stay," Moreno wrote. "In this way, appellant and appellee need not return all the way to the starting blocks when resuming litigation."