Cochise College Park, Inc., In re

Decision Date11 March 1983
Docket NumberNo. 80-5890,No. B-72-393,B-72-393,80-5890
Citation703 F.2d 1339
PartiesBankr. L. Rep. P 69,327 In re COCHISE COLLEGE PARK, INC., Bankrupt, Emma DeMarco HALL, et al., Plaintiffs, and Christine Baldrian, et al., Intervenors-Appellants, v. Wallace PERRY, Bankruptcy Trustee and as Ex-Receiver in Equity in CausePHX WPC, Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Don Gladden, Fort Worth, Tex., for intervenors-appellants.

James M. Marlar, Ryley, Carlock & Ralston, Phoenix, Ariz., Marion Smoker, Phoenix, Ariz., for defendant-appellee.

Appeal from the United States District Court for the District of Arizona.

Before WRIGHT and FLETCHER, Circuit Judges, and MEREDITH, Senior District Judge. *

FLETCHER, Circuit Judge:

This is an appeal from an order of the district court affirming the bankruptcy court's grant of summary judgment for the appellee Wallace Perry, the bankruptcy trustee of a bankrupt land development corporation, Cochise College Park, Inc. (Cochise). 1 The judgment relieves the trustee from liability for his actions in collecting and using payments under installment land contracts between Cochise and a nationwide class of land purchasers. We have jurisdiction under 11 U.S.C. Sec. 47(a) (1976) (repealed 1978). We conclude that the bankruptcy court's analysis of the complex transactions involved in this case may have led to improper conclusions about the ownership of the payments received on the land sale contracts and that it applied incorrect legal standards in evaluating the trustee's alleged misconduct. We reverse and remand for further proceedings.

FACTS

In the late sixties, Cochise, an Arizona corporation, acquired an equity interest in several thousand acres of "barren desert land" in southwestern Arizona. DeMarco v. Security Planning Service, Inc., 462 F.Supp. 1066, 1069 (D.Ariz.1978). Naming the area Cochise College Park, Cochise platted subdivisions of the property but made only minimal improvements, failing to provide such necessaries as roads, streets, water, and electricity. Cochise then conducted a nationwide sales campaign to induce individuals to purchase lots in the various subdivisions. The sales were almost all on the installment basis with small downpayments and five-to-eight year terms to pay the balance in monthly payments. Id.

Before its bankruptcy in mid-1972, Cochise entered into thousands of land sale contracts, in each of which Cochise promised to transfer a warranty deed to a particular real estate lot and to construct certain improvements. In return, the purchaser promised to pay sums of money at times certain. Until final payment, Cochise held on to the deed or, where the deed had been delivered prior to final payment, took a mortgage on the lot. The operative documents for each sale included a land sale contract, a promissory note, a warranty deed, and in some cases a mortgage.

In some instances, Cochise sold and assigned the promissory notes and mortgages executed in connection with the land sale contracts to other persons. The assignee-purchasers of these promissory notes comprise the Hall class, which is not a party to this appeal.

In other cases, Cochise retained the notes and mortgages and collected payments on the notes, either directly or through an independent collection service, Computer Graphics, Inc. The land sale vendees whose promissory notes and mortgages were retained comprise the Baldrian class, the appellants.

Despite Cochise's promises to the land sale vendees to improve the Cochise College Park to support the construction of livable residential dwellings, Cochise never provided any of the services or amenities common to residential property. 462 F.Supp. at 1069. By mid-1972, after five years of development and the sale of over 4,000 lots, no streets and none of the improvements necessary to support livable houses had been installed in Cochise College Park. Only 20 homes were built on the entire tract of land. Id. at 1071.

On June 5, 1972, a petition for involuntary bankruptcy was filed against Cochise. The next day, June 6, 1972, Cochise filed a voluntary petition for corporate reorganization under Chapter X of the Act. Soon after, Perry was appointed trustee and attempted to continue the operations of Cochise under Chapter X. On June 7, 1973, the reorganization proceedings were dismissed, and Cochise was adjudicated a bankrupt.

As trustee, Perry came into possession of the contractual documents respecting the land sale transactions between members of the Baldrian class and Cochise. Perry soon recognized the uncertainty and instability of the Cochise operations and reported to the court on September 1, 1972 that "his investigation ... revealed that there is unknown an extremely sizable obligation due to a large number of prospective purchasers of lots of the debtor who were sold with rights of rescission." Nonetheless, from the date of his appointment until well after the adjudication of Cochise as a bankrupt on June 7, 1973, Perry repeatedly told members of the Baldrian class that they had to continue making payments on the promissory notes to protect their rights and threatened to foreclose on the mortgaged lots if payments were not made. Perry stated to at least some of the Baldrian class members that payments were being held in a separate "trust" account, were not being disbursed to any third parties, and were being applied against the outstanding obligations of the vendees. He stated that he was "making every effort to have the company operate on a normal basis." Members of the Baldrian class paid a total of at least $134,000 on the notes before and after the bankruptcy filing on June 5, 1972.

Initially, Perry apparently had some doubts about the ownership of funds received on the unassigned notes. On June 16, 1972, he obtained a restraining order enjoining Computer Graphics and others from disbursing any funds "until appropriate litigation can be instituted to determine the rights of the trustee in and to any promissory notes, and any funds collected in connection with said notes." Nevertheless, on October 24, 1972, without notice to the Baldrian class members, Perry requested and obtained an order requiring Computer Graphics to turn over to the estate all payments it had collected on the notes, less annual collection fees. Subsequently, in the liquidation proceeding, Perry obtained an ex parte order permitting him to pay administrative expenses with funds in his possession and proceeded to use the monies received on the notes to pay costs of administering the estate, including his own trustee's fee.

On October 6, 1975, the Hall class filed a complaint against Perry, seeking a determination of "the propriety, right and authority" of Perry to "use, appropriate, or disburse funds in his custody or under his control that comprised ... payments by lot purchasers" on notes that had not been assigned to members of the Hall class.

The Baldrian class moved to intervene in the Hall class action. The bankruptcy court, agreeing with Baldrian that common issues of law and fact were presented, permitted intervention. 2 The Baldrian class alleged that Perry did not have title to payments made on the unassigned notes and also that he was personally liable for fraud, negligence, and conversion with respect to the collection of the note payments. The class sought return to it of all payments made on the promissory notes, together with interest.

Perry moved for summary judgment against the Baldrian class. The bankruptcy court granted summary judgment for Perry, holding that title to all of the funds was vested in the trustee and that the trustee was not liable to the Baldrian class on grounds of fraud, negligence, or conversion. The district court affirmed, and the Baldrian class now appeals.

STANDARD OF REVIEW

A grant of summary judgment is proper only if no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law. Bankr. Rule 756 (effective October 1, 1973) (making Fed.R.Civ.P. 56 applicable in all bankruptcy adversary proceedings); In re Southland Supply Inc., 657 F.2d 1076, 1080 (9th Cir.1981). The evidence and inferences that may be drawn from it must be construed in the light most favorable to the party opposing summary judgment. Beckham v. Safeco Insurance Co. of America, 691 F.2d 898, 902 (9th Cir.1982).

ANALYSIS

The Baldrian class, in their first set of claims, allege that Perry is wrongfully withholding from members of the class payments made on promissory notes signed by them as part of their land sale contracts with Cochise. The bankruptcy court held that the appellants had raised no issue of material fact as to the ownership of the payments, since as a matter of law the trustee "had title to all funds received as paid-in on unassigned notes from whatever time, for all purposes." The bankruptcy court's grant of summary judgment for the trustee on this ground was plainly incorrect, since the court failed to recognize that different The second set of claims allege affirmative misconduct by the trustee. Here, again, the bankruptcy court granted summary judgment for the trustee. The court held that the answers to interrogatories and affidavits before it raised no genuine issue of material fact concerning the personal liability of the trustee to the appellants for misconduct, because his acts either were not willful or were authorized by statute or by the court. This conclusion was unwarranted, since the answers to interrogatories and affidavits before the bankruptcy court raise genuine questions of material fact regarding the trustee's compliance with his fiduciary duty to the Baldrian class and concerning the existence of actionable misrepresentations by the trustee. The case must be remanded for further proceedings. The bankruptcy court must determine (1) whether, as to each land sale contract, the contract was executory on June...

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