Opinion ID: 416544
Heading Depth: 3
Heading Rank: 3

Heading: Ownership of Payments Received After August 6, 1973.

Text: 60 Payments made on an executory contract after rejection are not property of the bankrupt estate. The underlying contracts having been rejected and thus breached, these payments remain the property of the payors. 23 See In re Gravure Paper & Board Corp., 234 F.2d 928, 930, 932 (3d Cir.1956) (once trustee rejects lease, he no longer has any right, title or interest in lease or its proceeds); Green v. Finnigan Realty Co., 70 F.2d 465, 466-67 (5th Cir.1934) (once trustee rejects lease, trustee is trespasser and has no right to use or occupancy). 61 Where the trustee takes or retains possession of property that is not an asset of the estate, he is personally liable for damages arising from this illegal act, unless he acts both in good faith and with reasonable grounds for believing that his possession is proper. See Leonard v. Vrooman, 383 F.2d 556, 560-61 (9th Cir.1967) (trustee is personally liable for damages arising from his wrongful possession of property which is not asset of the estate); Green, 70 F.2d at 466-67 (trustee who occupies leasehold beyond date of rejection of lease is trespasser and is liable to lessor for reasonable worth of consideration conveyed to trustee after that date); cf. Gravure Paper, 234 F.2d at 930, 932 (trustee responsible for return of deposit on trustee's purported sale of lease, since lease had been rejected prior to purported sale and thus trustee had offered for sale and 'sold' a lease to which he had no 'right, title or interest' ). 62 Any payments on executory contracts received by Perry after August 6, 1973, the date upon which rejection of all of the executory contracts took place, never became property of the estate. The trustee was therefore obligated either to return these monies immediately to the payors, or, at a minimum, to set the monies aside in trust for them. Charged with knowledge of the principles of bankruptcy law, the trustee could not reasonably have believed that he was entitled to use the payments in the administration of the estate. 24 To the extent they have not been returned to the purchasers, these are monies (together with appropriate interest) for which the trustee is personally responsible. 25 63 III. Misconduct of the Trustee. 64 Appellants contend that to the extent that their recovery against the estate does not satisfy all of their claims against the estate, Perry should be held personally liable for such payments because he failed affirmatively to reject those contracts that were executory and induced all purchasers to continue making payments on the notes by misrepresentations. They argue that the trustee owed a fiduciary duty to the purchasers whose contracts were executory on June 5, 1972, requiring him to reject the contracts immediately upon his appointment as Chapter X trustee, since he should have realized that a successful reorganization of Cochise was impossible. They assert that the trustee's breach of this duty gives rise to his personal liability for any payments made after the date of filing. In addition, they argue that the trustee is personally liable for any payments made in reliance on the trustee's intentional or negligent misrepresentations. 65 The bankruptcy judge and the district court summarily rejected these contentions. We conclude that the bankruptcy judge and district court erred in granting summary judgment on appellants' claims because they evaluated Perry's conduct under incorrect legal standards. 66 A. Liability for Failure to Reject Executory Contracts. 67 A bankruptcy or reorganization trustee is a fiduciary of each creditor of the estate, including anyone who is a party to an executory contract with the bankrupt. See Wolf v. Weinstein, 372 U.S. 633, 650, 83 S.Ct. 969, 979, 10 L.Ed.2d 33 (1963); Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 461 (6th Cir.1982); Sherr v. Winkler, 552 F.2d 1367, 1374 (10th Cir.1977); Moulded Products, Inc. v. Barry, 474 F.2d 220, 224 (8th Cir.), cert. denied, 412 U.S. 940, 93 S.Ct. 2779, 37 L.Ed.2d 400 (1973). As such, he has a duty to treat all creditors fairly and to exercise that measure of care and diligence that an ordinarily prudent person under similar circumstances would exercise. Weaver, 680 F.2d at 461; Sherr, 552 F.2d 1374; In re Johnson, 518 F.2d 246, 251 (10th Cir.), cert. denied, 423 U.S. 893, 96 S.Ct. 191, 46 L.Ed.2d 125 (1975). Although a trustee is not liable in any manner for mistakes in judgment where discretion is allowed, Mosser v. Darrow, 341 U.S. 267, 273-74, 71 S.Ct. 680, 683, 95 L.Ed. 927 (1951); Weaver, 680 F.2d at 461; Sherr, 552 F.2d at 1375, he is subject to personal liability for not only intentional but also negligent violations of duties imposed upon him by law, see Mosser, 341 U.S. at 272, 274, 71 S.Ct. at 682, 683; Johnson, 518 F.2d 246, 251; cf. Leonard v. Vrooman, 383 F.2d 556, 561 (9th Cir.1967) (trustee is personally liable for acts which either are not taken in good faith or are unreasonable). 26 68 While a debtor is in reorganization and for the first 60 days of a bankruptcy proceeding, the decision whether to affirm or reject an executory contract is within the discretion of the trustee. 27 See Mohonk Realty Corp. v. Wise Shoe Stores Inc., 111 F.2d 287, 290 (2d Cir.), cert. denied, 311 U.S. 654, 61 S.Ct. 47, 85 L.Ed. 418 (1940); Bankruptcy Act Sec. 70b, 11 U.S.C. Sec. 110(b) (1976). Thus, as long as the trustee remains undecided on whether to affirm or to reject an executory contract and the decision remains in his discretion, the trustee has no duty to creditors to tell them that he is entitled by law to reject that contract. Once the trustee has finally decided to reject an executory contract and therefore not to perform his obligations under that contract, the trustee then comes under a duty to take formal steps to reject it. To fail to do so and thereby permit the creditor to continue to perform after the date of decision to reject directly and unnecessarily injures the creditor 28 and is not consonant with conduct of an ordinarily prudent person serving in the capacity of trustee. Such failure therefore gives rise to a claim for damages for which the trustee is personally liable. 69 The papers before the bankruptcy court do not disclose whether the trustee had or had not decided before August 6, 1973 to reject some if not all of the land sale contracts that were executory on June 5, 1972. Nevertheless, the bankruptcy court entered summary judgment for the trustee on appellant's claim of misconduct by the trustee on the ground that the trustee's conduct was authorized by federal statute. This was error. 70 If the trustee is found to have decided before August 6, 1973 to reject the executory land sale contracts, the trustee is personally liable to the Baldrian class for damages arising out of this violation of his fiduciary duty. Damages would consist of all payments made post-filing, after the trustee's decision to reject, less any amount received from the estate. 29 71 B. Liability for Misrepresentations. 72 Appellants claim that the trustee is personally liable for damages arising from fraudulent and negligent misrepresentations communicated to Baldrian class members regarding the use and status of payments made on the land sale contracts. The bankruptcy court concluded that the trustee bore no personal liability to the Baldrian class members since the statements were authorized and ordered by the court, were demanded of the trustee by congressionally authored statute and controlling case precedent, or were not made wilfully and deliberately. We disagree. 73 The Act shields the trustee from liability for a communication to a creditor of the bankrupt concerning the property of the bankrupt where the communication is uttered in good faith and with reasonable grounds for belief in its truth. Bankruptcy Act Sec. 21i, 11 U.S.C. Sec. 44(i) (1976) (emphasis added). Where these conditions do not obtain, however, the trustee is liable to the same extent as any other person for damages arising from misrepresentations actionable under the law of the state in which he acts. See Leonard v. Vrooman, 383 F.2d 556, 561 (9th Cir.1967). Thus, where a statement made by the trustee to a land purchaser is otherwise actionable under state law, the trustee is personally liable, despite section 21i of the Act, if the statement was uttered either in bad faith or without reasonable grounds for belief in its truth. 74 Under Arizona law a person is liable in an action in fraud for damages arising from an intentional misrepresentation where all of the following elements exist: (1) a representation; 30 (2) its falsity; (3) the materiality of representation; (4) the speaker's knowledge of its falsity or ignorance of its truth; 31 (5) his intent that it be acted upon and in a manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon, and (9) his consequent and proximate injury. Carrel v. Lux, 101 Ariz. 430, 434, 420 P.2d 564, 568 (1966) (footnotes added); Fridenmaker v. Valley National Bank of Arizona, 23 Ariz.App. 565, 568-69, 534 P.2d 1064, 1068 (1975). 75 Under Arizona law, liability may also arise if a person, in privity with another, makes a false communication without reasonable grounds for belief in its truth where the representation induces a justifiable reliance by the latter, even if the intent and knowledge required for an action in fraud do not obtain. See Van Buren v. Pima Community College District Board, 113 Ariz. 85, 87, 546 P.2d 821, 823 (1976); Arizona Title Insurance & Trust Co. v. O'Malley Lumber Co., 14 Ariz.App. 486, 491-93, 484 P.2d 639, 644-46 (1971). In light of the trustee's fiduciary status vis-a-vis the purchasers, we have no difficulty concluding that under Arizona law the trustee was in sufficient privity with the purchasers to justify their reliance on statements or intentionally false promises he made in the course of his administration of the estate. Cf. id. at 491-92, 484 P.2d at 644-45 (title insurer's function as disbursing agent for building contractors held to create requisite privity). 76 In granting summary judgment for the defendant, the bankruptcy court made no findings that the alleged misrepresentations had been made both in good faith and with reasonable grounds for belief in their truth. Nor did it find that the papers before it conclusively demonstrated a lack of liability under Arizona law for the allegedly fraudulent and negligent misrepresentations. 77 Rather, the bankruptcy court concluded that orders of the court, legal principles, or an absence of willful and deliberate conduct by the trustee required a grant of summary judgment for defendant. We disagree. 78 The record is devoid of any indication that any of the trustee's statements were authorized and ordered by the Court. 32 Nor should they have been, since no congressionally authorized statute or controlling case precedent of which we are aware affirmatively demand[s] a trustee to increase the size of an estate through fraudulent or negligent misrepresentations. Furthermore, our review of the answers to interrogatories and affidavits before the bankruptcy court convinces us that genuine issue of material fact remain concerning the trustee's liability under Arizona law for the allegedly fraudulent and negligent misrepresentations. 33 These issues could not properly have been determined on summary judgment. 34