Hutchinson, In re

• Decision Date: 16 September 1993
• Docket Number: No. 92-1988,92-1988
• Citation: 5 F.3d 750
• Parties: , 24 Bankr.Ct.Dec. 1111 In re John Everett HUTCHINSON and Ruth Laura Davis Hutchinson, a/k/a Johnny's Roofing, Debtors. YADKIN VALLEY BANK & TRUST CO.; John Everett Hutchinson; Ruth Laura Davis Hutchinson, Plaintiffs-Appellants, v. Linda McGEE, Trustee, Defendant-Appellee, and Northwestern Bank; Chore-Boy, Inc.; Dairymen, Inc., Defendants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 750

5 F.3d 750

62 USLW 2230, 24 Bankr.Ct.Dec. 1111

In re John Everett HUTCHINSON and Ruth Laura Davis

Hutchinson, a/k/a Johnny's Roofing, Debtors.

YADKIN VALLEY BANK & TRUST CO.; John Everett Hutchinson;

Ruth Laura Davis Hutchinson, Plaintiffs-Appellants, v. Linda McGEE, Trustee, Defendant-Appellee, and Northwestern Bank; Chore-Boy, Inc.; Dairymen, Inc., Defendants.

No. 92-1988.

United States Court of Appeals, Fourth Circuit.

Argued June 10, 1993.

Decided Sept. 16, 1993.

Daniel Joseph Park, Daniel J. Park, P.A., Elkin, NC, argued, for plaintiffs-appellants.

R. Bradford Leggett, Allman, Spry, Humphreys, Leggett & Howington, P.A., Winston-Salem, NC, argued, for defendant-appellee.

Before POWELL, Associate Justice (Retired), United States Supreme Court, sitting by designation, and HAMILTON and WILLIAMS, Circuit Judges.

OPINION

WILLIAMS, Circuit Judge:

This appeal concerns allegations of negligence made against a bankruptcy trustee in her official capacity. The debtors, John Everett Hutchinson and Ruth Laura Hutchinson, contend that the trustee, Linda McGee, failed to sell their dairy farm as expeditiously as possible. They argue that McGee should have quickly accepted and obtained court approval of an offer she had received that would have covered all encumbrances on the property. While acceptance of this offer was pending, third parties entered the property and removed the Hutchinsons' milking and feeding equipment in violation of the automatic bankruptcy stay. As a result of the removal of the equipment, the prospective buyer lowered his offer to an unacceptable price that the trustee refused to accept. Because the price at which the property was sold at foreclosure did not cover a second deed of trust held by Yadkin Valley Bank and Trust Company, the Bank joined the Hutchinsons in bringing this suit in 1983 based on McGee's allegedly dilatory behavior. Appellants also alleged that McGee had failed to preserve the property and had failed to take steps to obtain the return of the removed equipment.

Initially, the bankruptcy court found that McGee was absolutely immune from suit. We rejected that view and remanded. Yadkin Valley Bank & Trust Co. v. McGee, 819 F.2d 74 (4th Cir.1987) (Yadkin I ). On remand, the bankruptcy court concluded after a bench trial that McGee had not violated her statutory duties and hence was not liable. Yadkin Valley Bank & Trust Co. v. Northwestern Bank (In re Hutchinson), 132 B.R. 827 (Bankr.M.D.N.C.1991) (Yadkin II ). The district court affirmed.

In this appeal, the Hutchinsons and the Bank contend that the bankruptcy court's findings were clearly erroneous. They also contend that they were entitled to a jury trial and that the bankruptcy court erred in trying the negligence claims brought against McGee separately from the cross-claims that McGee brought against the parties who removed the milking and feeding equipment. We find no reversible error with regard to these contentions.

Appellants also contend that the bankruptcy court did not address their claim that McGee failed to preserve the property of the bankruptcy estate. We agree and remand for further fact-finding on this issue.

I. Background

On July 15, 1981, when the Hutchinsons filed their petition for bankruptcy, they owned a fully equipped ninety-one acre dairy farm that they valued at $150,000. In their petition, the Hutchinsons listed three encumbrances upon their property: Mr. and Mrs. R.A. Newman held a note secured by a deed of trust for $62,054; Yadkin Valley Bank held a note secured by a second deed of trust for $34,000; and Northwestern Bank held a lien for $16,596.00 on the dairy and feeding equipment that the Hutchinsons had purchased and installed on the property. Together, these liens totalled $112,650.

In a letter dated September 2, 1981, Bert Holbrook offered to purchase the farm for $135,000. The offer specifically included the dairy and feeding equipment as well as the real property. Yadkin II, 132 B.R. at 830. Following this offer, the Hutchinsons moved the bankruptcy court to allow them to amend their claim for property exemptions because Holbrook's offer was higher than the price they had expected to receive. Having received no objections to the proposed amendment, the bankruptcy court allowed the Hutchinsons to claim $15,000 in exemptions as allowed under 11 U.S.C. Sec. 522(d)(1) (Supp. II 1978) (allowing each debtor to claim a $7,500 exemption in property). The liens and exemptions together totalled $128,030.

McGee informed Holbrook in a December 14, 1981, letter that his offer would be presented to the bankruptcy court for approval. When he received the letter, Holbrook inspected the property and discovered that the dairy equipment secured by Northwestern Bank's lien had been removed in violation of the automatic bankruptcy stay. As a result, in early January 1982 he reduced his offer to $122,000. McGee approved the sale at the lower price and on April 1, 1982, submitted the necessary documentation to the bankruptcy court for approval. On April 14, 1982, the court approved the sale.

Shortly thereafter, McGee learned that additional equipment (mostly feeding equipment) had been removed from the property on March 26. As a result, Holbrook lowered his price to $80,000, which McGee refused to accept. The Hutchinsons' farm was released for foreclosure and the Newmans, the holders of the first deed of trust, sold the property to Yadkin Valley Bank at a foreclosure sale. The Bank was ultimately able to sell the property at a higher price than it had paid at the foreclosure sale, but it was unable to recover the full amount due under the Hutchinsons' note and second deed of trust. Yadkin II, 132 B.R. at 830. The Bank and the Hutchinsons sought to recover their losses from McGee.

II. The Scope of Trustee Liability

We begin with a review of the nature and scope of a bankruptcy trustee's liability. Although the Bankruptcy Code imposes specific duties on bankruptcy trustees, see, e.g., 11 U.S.C. Sec. 704 (Supp. II 1978) (amended 1984 & 1986), the Code does not explicitly make trustees liable for breach of those duties. The source of trustee liability lies in the Supreme Court's decision in Mosser v. Darrow, 341 U.S. 267, 272, 71 S.Ct. 680, 682, 95 L.Ed. 927 (1951), and its progeny.

Mosser concerned a bankruptcy trustee's breach of his fiduciary duty of loyalty. The trustee in Mosser hired two employees to help administer the bankruptcy estate and expressly agreed that the employees could "continue to trade in securities of the debtors' subsidiaries." 341 U.S. at 269, 71 S.Ct. at 680. The Supreme Court concluded that the arrangement with the employees amounted to a "willful and deliberate setting up of an interest in employees adverse to that of the trust." Id. at 272, 71 S.Ct. at 682. Because "[e]quity tolerates in bankruptcy trustees no interest adverse to the trust," id. at 271, 71 S.Ct. at 682, the Court held that the district court had not erred in surcharging the trustee (i.e., holding the trustee personally liable) for the profits of his two employees, see id. at 269-70, 71 S.Ct. at 680-82.

Mosser did not directly address to what extent, if any, bankruptcy trustees are liable for negligent breaches of their duties as trustee. The circuits have divided on this question. The Sixth and Tenth Circuits have held that a trustee is "(a) not liable, in any manner, for mistake in judgment where discretion is allowed, (b) liable personally only for acts determined to be willful and deliberate in violation of his duties and (c) liable, in his official capacity, for acts of negligence." Sherr v. Winkler, 552 F.2d 1367, 1375 (10th Cir.1977); accord Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 461 (6th Cir.1982); see also In re Chicago Pac. Corp., 773 F.2d 909, 915 (7th Cir.1985) (limiting bankruptcy trustee's personal liability to willful and deliberate violations of fiduciary duties). In contrast, the Second and Ninth Circuits have held that "[a]lthough a trustee is not liable in any manner for mistakes in judgment where discretion is allowed, he is subject to personal liability for not only intentional but also negligent violations of duties imposed upon him by law." Hall v. Perry (In re Cochise College Park, Inc.), 703 F.2d 1339, 1357 (9th Cir.1983) (citations omitted); accord In re Gorski, 766 F.2d 723, 727 (2d Cir.1985); see also Red Carpet Corp. v. Miller, 708 F.2d 1576, 1578 (11th Cir.1983) (per curiam) (noting that bankruptcy trustee is personally liable for negligence).

In Yadkin I, 819 F.2d at 76, and United States ex rel. Julien P. Benjamin Equipment Co. v. Sapp, 641 F.2d 182, 184-85 (4th Cir.1981) (per curiam), this court adopted a modified version of the Sixth and Tenth Circuits' approach. See also Turshen v. Chapman, 823 F.2d 836, 839 (4th Cir.1987) (applying Yadkin I ). In addition to the tripartite liability scheme adopted in Sherr, Yadkin I recognized that trustees are completely immune from suit where the trustee acts pursuant to the explicit instructions of the bankruptcy court. 819 F.2d at 76. In this regard, Yadkin I merely expanded on a limitation on liability previously identified by the Supreme Court in Mosser. The Court in Mosser had recognized that trustees could "seek instructions from the court, given upon notice to creditors and interested parties, as to matters which involve difficult questions of judgment" and thereby avoid any resulting liability. 341 U.S. at 274, 71 S.Ct. at 683.

McGee did not act under an explicit court order approving her actions, and in Yadkin I, we noted a serious factual question whether she had negligently breached her duties as trustee. There was no question regarding McGee's personal liability because Appellants had not claimed that she deliberately violated her fiduciary duties. However, because McGee could be held liable in her official capacity for negligence, we remanded the case for further proceedings.

III. Breach of Duty

A. ...