In re Reich
| Decision Date | 18 November 1985 |
| Docket Number | Adv. No. 84-9041.,Bankruptcy No. 81-00513 |
| Citation | 54 BR 995 |
| Parties | In re Kenneth F. REICH and Sophine J. Reich, Debtors. ESTATE OF Kenneth F. REICH, Deceased and Sophine J. Reich, Plaintiffs, v. James BURKE, Sr. and Travelers Indemnity Company, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
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R.F. Rhead, Lansing, Mich., for plaintiffs.
Sidney B. Schneider, Midland, Mich., for defendants.
The plaintiffs are the debtors Sophine J. Reich and the decedent's estate of her co-debtor husband, Kenneth F. Reich. The Reiches filed their voluntary petition for Chapter 7 relief on July 31, 1981. On March 12, 1984, they filed suit against the trustee of their Chapter 7 estate, and against his bond for the trustee's alleged negligence. Among the assets listed in their schedules was a parcel of real estate improved by two buildings, the larger of which housed an IGA grocery store and the other, a Dairy Mart. On March 10, 1982, the roof of the IGA store collapsed, destroying those premises. The plaintiffs allege that their grocery store was property of the Chapter 7 estate which was entrusted to the care, custody, and control of the defendant trustee; that he failed to perform his duties to insure the property against destruction by collapse and to remove or have removed the snow which accumulated on the roof; which negligence was the proximate cause of the collapse of the building, resulting in a loss of the plaintiffs' exempt equity of $15,250 ($7,500 each under § 522(d)(1) plus $125.00 each under § 522(d)(5)).
The defendant claimed that insurance was unavailable to him as a bankruptcy trustee because the property was vacant; that even if it were theoretically available, the estate lacked the means to make it insurable in fact and lacked the funds to pay the exorbitant premium; that he had no knowledge that it was necessary or customary to remove snow from roofs in the geographical location of this building; that the trustee is not suable for negligence in the performance of his duties; that even if he were, the debtors lack standing to sue for such negligence; that the property was abandoned by the estate prior to the collapse, and so he should not be held responsible for the loss; that since the trustee failed to assume the debtor's contract for the purchase of the land within the 60 days provided under § 365(d)(1), the contract was deemed rejected and the property was not property of the estate when the roof collapsed; that the proximate cause of the collapse was the unknown and unforeseeable structural weakness, design and construction of the roof supports coupled with an act of God; that the plaintiffs suffered no loss as there was no equity in the property; and that the plaintiffs are guilty of contributory negligence in that they also failed to insure their own alleged interest or to remove snow from the roof. Trial was conducted on August 9, 1985. The following constitutes my findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
In this cold cruel world, infants and incompetents may be sued; charitable institutions may be sued; doctors and hospitals may be sued; municipal, school, state, federal and foreign governments and their officials may be sued; and, worst of all, judges may be sued. Chapter 7 trustees possess no special immunity from one of life's less pleasant experiences, and no compelling reason has been shown why one should be created at this time.
Furthermore, no authority or reason is offered as to why this Court's prior authority is necessary before a party may institute suit against a Chapter 7 trustee. The only statutory provision which deals with this subject says simply that: "the trustee in a case under this title has capacity to sue and be sued." 11 U.S.C. § 323(b). Court approval is not mentioned as a prerequisite to such capacity. The implication is that none is required. In the event such prior authority is necessary, it is hereby given, retroactive to the day the suit was filed.1
A trustee who fails to exercise due diligence to conserve assets of the bankruptcy estate must account for assets dissipated through his negligence. Carson, Pirie, Scott & Co. v. Turner, 61 F.2d 693 (6th Cir.1932). The measure of care, diligence and skill required of a bankruptcy trustee is that of an ordinarily prudent man in the conduct of his private affairs under similar circumstances and of a similar object in view; and although a mistake of judgment is not a basis to impose liability on a trustee, a failure to meet the standard of care does subject him to liability. However, "a bankruptcy trustee is liable personally only for acts willfully and deliberately in violation of his fiduciary duties." Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 461 (6th Cir.1982).
In reaching the latter conclusion, Weaver relied on a line of cases which, we believe, incorrectly attempted to differentiate between when a trustee is liable in his "official" capacity and when he may be held personally liable. The case which first clouded this area was In re Johnson, 518 F.2d 246 (10th Cir.), cert. denied, sub. nom. Clark v. Johnson, 423 U.S. 893, 96 S.Ct. 191, 46 L.Ed.2d 125 (1975). There, the Tenth Circuit Court of Appeals reversed the district court's order approving the Chapter XII trustee's final account and refusing to surcharge him for losses occasioned by his alleged negligent failure to properly supervise his bookkeeper, which led to her embezzling funds from the estate. The court held that the case was controlled by Mosser v. Darrow, 341 U.S. 267, 71 S.Ct. 680, 95 L.Ed. 927 (1951), where the trustee was found personally liable for unlawful profits made by one of his employees from trading in certain estate securities. The Supreme Court there held that a trustee may be held personally liable not only for fraud or intentional wrongdoing but also for non-willful failure to perform duties required by law.
Indeed, the Supreme Court used the term "personal liability" three times in quick succession when discussing this topic. When criticizing the Court of Appeals' leniency toward the trustee, the Court stated:
It is argued, and the Court of Appeals appears to have been impressed by the argument, that this surcharge creates a very heavy liability upon a man who enjoyed no personal profit and must be condoned "`so as not to strike terror into mankind acting for the benefit of others and not for their own.\'" In re Federal Facilities Realty Trust, 184 F.2d 1, 8 (7th Cir.1950). Trustees are often obliged to make difficult business judgments, and the best that disinterested judgment can accomplish with foresight may be open to serious criticism by obstreperous creditors aided by hindsight. Courts are quite likely to protect trustees against heavy liabilities for disinterested mistakes in business judgment. But a trusteeship is serious business and is not to be undertaken lightly or so discharged. The most effective sanction for good administration is personal liability for the consequences of forbidden acts, and there are ways by which a trustee may effectively protect himself against personal liability.
Id., 341 U.S. at 273-274, 71 S.Ct. at 683 (emphasis added). As can be seen, the Supreme Court clearly equated the term "surcharge" with "personal liability". The Court went on to recommend a procedure by which a trustee can protect himself against personal liability. It then went on to state: "A further remedy of a trustee for limiting, if not avoiding, personal liability is to account at prompt intervals . . ." Id., 341 U.S. at 274, 71 S.Ct. at 683.
The Johnson court went astray when it inexplicably cited, in a footnote, a commentary from 3A Collier on Bankruptcy, ¶ 62.03, pp. 1407-08 (14th ed.), which included the following:
True, by acting in his official capacity the trustee does not incur a personal liability as does the trustee of an express trust . . . The bankruptcy trustee acts as the representative of a separate entity, the estate; he obligates this entity . . . The General Orders and § 62a constitute but a statutory application of a thoroughly recognized and time-honored mode of enforcing the court\'s supreme authority: the right to surcharge the accountable officer wherever the court finds that he misused his discretion. . . .
quoted in In re Johnson, 518 F.2d at 251, n. 5. (Emphasis in original). Similar language appears in 1985 Collier Handbook for Trustees and Debtors in Possession, ¶ 4.08, again without citation to authority. Quite simply, as it pointed to no authority for this proposition and since none could be found, we must conclude that Colliers was incorrect insofar as it meant to describe the trustee's liability to those involved in the bankruptcy case for failure to perform his statutory duties. Indeed, Mosser v. Darrow, supra, stands for a contrary principle of law. Further confusion lies in the Johnson court's continuing use of the term "surcharge", without explicating what this entailed, and in its reference to 76 Am. Jur.2d Trusts, §§ 325, 326, 510, (Lawyers Co-op 1975), which consistently refers to but nowhere defines the term "surcharge". When the term "surcharge" is confused in the above passage and then utilized without commentary in the Johnson opinion, it may be argued that the Tenth Circuit Court of Appeals held that the "surcharge" of the trustee meant something other than personal liability.
As stated above, the Supreme Court defined "surcharge" as the imposition of "personal liability" upon the trustee. Although Johnson does not explicitly say otherwise, it apparently is the source of the confusion picked up by the same court in a later case.
In Sherr v. Winkler, 552 F.2d 1367 (10th Cir.1977), the court int...
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