In re Leavell, Bankruptcy No. 85-40274
| Decision Date | 18 May 1992 |
| Docket Number | Adv. No. 90-0085.,Bankruptcy No. 85-40274 |
| Citation | 141 BR 393 |
| Court | U.S. Bankruptcy Court — Southern District of Illinois |
| Parties | In re Daniel Russell LEAVELL, Debtor. WHITE COUNTY BANK, Plaintiff, v. Daniel R. LEAVELL, Eva Lovene Leavell, et al., Defendants. v. Margaret KARNES, Independent Administrator of the Estate of Gibson Karnes, deceased, Terry Sharp, and Bruegge & Becker, Third Party Defendants. |
Darrell Dunham, Murphysboro, Ill., for debtor.
Thomas Schanzle-Haskins, Springfield, Ill., Mark Stanley, Carmi, Ill., for White County Bank.
William A. Alexander, Benton, Ill., for Margaret Karnes.
Mark Bauman, Belleville, Ill., for Terry Sharp.
Randall Scherck, St. Louis, Mo., for Fidelity & Dep. Co.
Before the Court is a consolidated case in which Daniel and Eva Leavell seek damages for an alleged breach of fiduciary duty by Gibson Karnes, who served as trustee in the Chapter 7 bankruptcy case of Daniel Leavell. The Leavells originally filed three separate actions against Karnes — an adversary proceeding in this Court, a state court lawsuit containing similar allegations, and a third party complaint in a mortgage foreclosure proceeding brought by the White County Bank in state court.1 The state court actions were removed to the United States District Court for the Southern District of Illinois, which referred the two cases to this Court with directions to consolidate them with the pending adversary proceeding.
The Leavells have filed an amended complaint alleging that trustee Karnes breached his fiduciary duty to them in four ways:2 first, Karnes allowed a mortgagee-in-possession, Northern Trust Company, to manage oil-producing properties in an unlawful manner, exposing Daniel Leavell to potential personal liability for the clean-up of that property; second, Karnes failed to close Daniel Leavell's bankruptcy case in a timely manner, increasing the debtor's personal liability for interest and penalties on nondischargeable tax claims; third, the trustee failed to object to an excessive administrative claim by the trustee's attorney, Terry Sharp, thereby reducing the amount that would have been paid on non-dischargeable tax claims and increasing the debtor's personal liability; and, finally, trustee Karnes failed to abandon certain real estate mortgaged by the Leavells to the White County Bank until the property value had declined below the mortgage balance, thereby subjecting Eva Leavell to personal liability for the deficiency.
Following the death of Gibson Karnes on July 5, 1991, his wife, Margaret Karnes, was substituted as defendant in her capacity as independent administrator of Gibson Karnes' estate. Margaret Karnes has filed a motion seeking summary judgment on the Leavells' amended complaint, which the Leavells oppose. In addition, both the White County Bank and the debtor have filed motions for summary judgment in the mortgage foreclosure action that is part of this consolidated case.
The Court will first consider the motion for summary judgment on the Leavells' fiduciary duty complaint. In her motion, Margaret Karnes argues that Gibson Karnes, as trustee, owed no duty to either Daniel Leavell, the chapter 7 debtor, or to Eva Leavell, a creditor whose claim was disallowed. She asserts that even if Karnes owed such a duty, the Leavells have alleged insufficient facts to support their claim of breach of fiduciary duty. Specifically, Karnes asserts with regard to operation of the debtor's oil wells that these properties were at all times in the possession and control of Northern Trust as mortgagee-in-possession and that the trustee is not liable for any lapse in bonding of these wells. Further, Karnes denies that the trustee unduly delayed closing the debtor's estate and asserts that the debtor by his own actions served to prolong the process of estate administration. Finally, Karnes asserts that the trustee had no basis to object to the administrative claim of Terry Sharp and notes that the debtor himself raised no objection to the claim until more than a year after it had been approved by this Court.
A. Factual Background
The debtor, Daniel Leavell, filed a Chapter 11 bankruptcy petition on July 17, 1985. His wife, Eva Leavell, did not file or join in this petition. On December 12, 1985, the Chapter 11 petition was converted to Chapter 7. Gibson Karnes was appointed as trustee and Terry Sharp was appointed as attorney for the trustee.
In his schedule of real property, the debtor listed three separate oil and gas interests. Two of the interests — the Gershbacher and McCardy leases (items 7 and 8) — are not at issue in this case. The third listing, item 10 of schedule B-1, referred to "oil and gas interests used as collateral in Northern Trust debt." These interests were identified in a twelve-page attachment to the petition setting forth the various oil and gas leases and the legal descriptions of land covered by the leases. The oil interests were valued at approximately $1.8 million and secured a debt to Northern Trust of $16.5 million.
Upon the debtor's bankruptcy filing, Northern Trust sought relief from the automatic stay to continue a state court foreclosure proceeding it had filed a few days earlier. On September 6, 1985, this Court granted Northern's motion to terminate the stay as to the debtor's oil and gas interests subject to its mortgage. Northern then filed in state court to be placed in possession of these oil and gas interests. On December 10, 1985, Northern became mortgagee-in-possession of the debtor's oil properties. The debtor's bankruptcy case was subsequently converted to Chapter 7, and Gibson Karnes accepted his appointment as Chapter 7 trustee on December 20, 1985.
In December 1987, the debtor filed a "Request for Adequate Protection" with this Court. The debtor alleged that Northern Trust, while acting as mortgagee-in-possession of the debtor's oil and gas wells, had failed to keep bonds posted on the wells as required by the state of Illinois. Asserting that Northern had not paid its bond in more than a year, the debtor surmised:
In the event the oil and gas wells are determined by the state to have caused salt water damage, failed any integrity test, or caused a contamination of the fresh water supply in the area where the oil and gas wells are being operated, . . . the Northern Trust Company will abandon its collateral and the debtor will then be the remaining lessor under the lease and the operator of the oil wells.
The debtor continued:
As mortgagee-in-possession, Northern has a fiduciary duty to the debtor and the creditors and the trustee of this estate to insure that the bonds remain current and further that the oil and gas wells are operated in a proper manner as sic to avoid any liability to this estate or to the debtor.
The debtor requested that Northern be removed as operator of the wells for having breached its duty as mortgagee-in-possession and, further, that Northern be required to obtain the necessary bond for operation of the oil and gas leases.
Attached to the debtor's request was a letter informing Northern's attorney that the Illinois Department of Mines and Minerals had contacted the debtor concerning a lapse in bonding of the debtor's wells. In this letter, debtor's counsel stated: "It is our understanding that Northern Trust was placed in receivership of the wells in Illinois and that it is their responsibility to over-see the running of these wells." A second letter from Northern's attorney to Terry Sharp, the trustee's attorney, referenced a fifteen-page list of wells that were to be shut down unless a replacement bond was furnished and a three-page list showing abandoned wells that had not been plugged according to state regulations. Northern's attorney stated:
The wells being operated by Delta Oil Company Northern\'s operator as mortgagee-in-possession will be covered by Delta\'s blanket bond. However, there are many wells on both lists which are not involved in the Northern Trust mortgages. This information is provided to you so that you will know that bonds have been provided as to those wells with which Northern is involved.
(Emphasis added.)
At hearing on the debtor's request held January 7, 1988, Northern again represented that a bond had been issued to "cover all of the leases which Northern has an interest in and which are currently being operated by Delta." The Court denied the debtor's request for adequate protection but ordered Northern to supply the debtor with proof of bond on the wells within 10 days.3
At this time the debtor also filed a motion in state court to have a receiver appointed as to the oil properties being foreclosed upon by Northern Trust. This motion similarly alleged that Northern had allowed the bond posted for operation of the oil and gas leases to lapse on the subject properties. On September 27, 1988, the state court denied the debtor's motion, finding that the debtor lacked standing to seek appointment of a receiver since the oil properties were part of the debtor's bankruptcy estate and had not been abandoned by the trustee.4
The debtor then filed a motion for abandonment in this Court. The debtor alleged that the oil interests listed in his petition were without value and burdensome to the estate. Northern responded by proposing to waive its claim against the debtor's oil interests to the extent of $50,000 if the trustee would sell these properties pursuant to 11 U.S.C. § 363. Both Northern and the trustee, citing this potential benefit to the estate, objected to the debtor's motion for abandonment. On October 13, 1988, the trustee filed his complaint to sell the oil properties free and clear of liens at the request of a secured creditor.
On November 7, 1988, while the abandonment motion was pending, the debtor filed a further motion in this Court to remove the Chapter 7 trustee or have an examiner appointed. The debtor alleged that the trustee...
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