Sherr v. Winkler

• Decision Date: 01 April 1977
• Docket Number: No. 76-1144,76-1144
• Citation: 3 BCD 193,552 F.2d 1367
• Parties: Arthur SHERR and Richard Rubin, Appellants, v. L. W. WINKLER, Jr., Individually and as Trustee of Sierra Trading Corporation, a corporation in proceedings for reorganization, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1367

552 F.2d 1367

Arthur SHERR and Richard Rubin, Appellants, v. L. W. WINKLER, Jr., Individually and as Trustee of Sierra

Trading Corporation, a corporation in proceedings

for reorganization, Appellee.

No. 76-1144.

United States Court of Appeals, Tenth Circuit.

Submitted Jan. 27, 1977.

Decided April 1, 1977.

Paul B. Rodden and Robert R. Marshall, Jr., Rodden & Marshall, Denver, Colo. (Marilyn S. Bonner, Denver, Colo., on the brief), for appellants.

Robert J. Kapelke, Gorsuch, Kirgis, Campbell, Walker & Grover, Denver, Colo. (Frederic L. Kirgis and John S. Pfeiffer, Denver, Colo., on the brief), for appellee.

Before SETH, McWILLIAMS and BARRETT, Circuit Judges.

BARRETT, Circuit Judge.

Arthur Sherr and Richard Rubin, plaintiffs below, hereinafter referred to as plaintiffs, appeal from a judgment dismissing their action and complaint in a diversity suit in tort brought against L. W. Winkler, Jr., individually and as Trustee (Winkler) of Sierra Trading Corporation (Sierra). (On July 7, 1970, Sierra had filed for a Chapter X Reorganization, pursuant to 11 U.S.C.A. § 501, et seq., of the Bankruptcy Act.)

The complaint of plaintiffs alleged that Winkler, while serving as trustee for Sierra, (a) negligently and wrongfully caused the Reorganization Court to issue an ex parte Turnover Order resulting in delivery to the trustee of funds realized from production of oil belonging to plaintiffs, and (b) negligently failed to ascertain plaintiffs' interest in the subject properties, which was a matter of public record. Plaintiffs contend that as a result of Winkler's misconduct, they were required to intervene in the Reorganization proceedings in order to protect their interest in the properties. Plaintiffs sought damages allegedly incurred from Winkler's negligence: (a) $40,000.00 as attorneys' fees expended from the necessity to intervene in the Reorganization Court proceedings, (b) $7,200.00 as special damages for loss of use of the monies taken and used by Winkler, and (c) $150,000.00 in punitive damages, and interest and costs.

This case represents one segment of a saga which commenced in 1968, from which considerable litigation resulted. During that year Sierra owned a one-half (1/2) interest and American Petrofina Corporation (Petrofina) owned a one-half (1/2) interest in certain oil and gas leases known as the 'Ute Leases," situate in Campbell County, Wyoming. On December 16, 1968, Sierra assigned 75 percent of its one-half (1/2) interest in the Ute Leases to Rapp Oil Company (Rapp). Thereafter, Rapp mortgaged its entire interest in the Ute Leases to plaintiffs, and assigned to plaintiffs its entire interest in production from the Ute Leases to secure a loan from plaintiffs of $1,000,000.00, bearing per annum interest of twenty percent (20%).

The mortgage and assignment documents from Rapp to plaintiffs were duly filed and recorded in the office of the County Clerk of Campbell County, Wyoming, in compliance with Wyoming recording statutes. Both a Division Order and a Title Opinion reflected the interest of Rapp in the Ute Leases following the 75 percent assignment from Sierra. These documents were in being when Winkler was appointed trustee on August 18, 1970. It is uncontradicted that Winkler did not check for any recorded interests, including those of Sierra, Rapp or plaintiffs to oil proceeds from the Ute Leases prior to the Reorganization Court Turnover Order hearing on September 4, 1970. A check of such records would have revealed the recorded rights of plaintiffs to all of Rapp's interest in oil proceeds realized from the "Ute" production. The Turnover Order of September 4, 1970, approved by Petrofina's attorney, directed that Winkler, as trustee, hold the proceeds until the further order of the Reorganization Court.

On September 30, 1970, the Reorganization Court ordered that a show cause hearing be held on October 9, 1970, with respect to authorizing Winkler, as trustee, to use the funds turned over from Petrofina. Winkler did not send notice of the hearing to plaintiffs although the court directed that he give notice by mail to creditors, co-tenants, and other interested persons. Even so, at the October 9, 1970, hearing on Winkler's application for use of the funds, attorneys for plaintiffs appeared (having received actual notice), but the Court ruled that they lacked standing in the proceedings. An order was entered authorizing Winkler to use the funds for the operation, maintenance, and preservation of the assets of Sierra for a period of 90 days. Pursuant to that Order, total proceeds from production of the Ute Leases were delivered to Winkler. On January 6, 1971, an Order was entered extending the October 14, 1970, order for an additional six-month period, which was thereafter further extended to January 15, 1972.

On January 13, 1971, plaintiffs petitioned to intervene on a limited basis to protect their rights, if any, to any funds being held by trustee (Winkler) derived from the production of oil or gas. On April 19, 1971, plaintiffs were granted leave to intervene. On May 27, 1971, plaintiffs filed their "Petition to Reclaim Monies and to Modify Turnover Order." In their pre-trial statement and in the pre-trial order, plaintiffs sought recovery of their funds with "interest at the prevailing rate plus reasonable attorney's fees." (R., Vol. I, p. 30; R., Vol. II, pleadings 19 and 20, pp. 3 and 4)

Following proceedings in the Reorganization Court, Winkler filed a report on February 23, 1972, allocating $91,821.08 as the sum due plaintiffs. The report was adopted and ordered by the Reorganization Court. Appeal was taken to this Court. We reversed the Reorganization Court, in part, holding that plaintiffs should have been charged with only 371/2 percent rather than 50 percent of the costs of development of the Ute Leases. Accordingly, plaintiffs were awarded an additional sum of $58,788.74, together with interest earned upon certificates of indebtedness purchased by Winkler. At this point, it is to be noted that plaintiffs had recovered all monies they claimed to be then due and owing to them. Upon receipt of these funds, plaintiffs executed and filed a Satisfaction of Judgment.

The trial court, in the instant case, found that Winkler acted "in a fair and proper way in marshalling the assets" of the estate located in numerous states and even though personal notice of the October 9, 1970, hearing had not been given to plaintiffs, "it is significant they were represented at said hearing by counsel and detailed their interest in property to the Reorganization Court." (R., Vol. III, p. 66.) The Court reasoned, in reviewing the evidence, that Winkler acted in good faith, and without negligence in connection with the turnover proceedings and that his actions in the matters following the turnover orders were upon advice of counsel and with express approval and authorization of the Reorganization Court and pursuant to its orders. The Court found and/or concluded: "The alleged negligence consisted of acts pursuant to court authority. We expressly find no acts of negligence as alleged by plaintiffs." (R., Vol. III, pp. 86, 87.) The trial court also found that even though this Court enlarged upon the Reorganization Court's ruling relative to the amount of funds plaintiffs were entitled to as mortgagee-assignee of Rapp, that the acts of Winkler relating the turnover of the proceeds, their investment pending court proceedings and their ultimate disposition, were all taken in good faith, with court authorization, and "may not be the subject of any personal liability of Winkler to plaintiffs." (R., Vol. III, p. 87.) The Court found that Winkler's adverse position to plaintiffs throughout the detailed litigation "does not constitute negligence, bad faith, evil motive or reckless disregard of the rights of the plaintiffs." (R., Vol. III, p. 87.) In conclusion, the trial court found that Winkler had not violated his fiduciary responsibilities; that he had no justification to capitulate to the position taken by the plaintiffs in the Reorganization Court and several appeals to this Court; that Winkler's steps taken to marshal, collect, and preserve assets of Sierra were in good faith and that no personal liability can be imposed in respect to his efforts, which were not a sham, evil or without legal justification. (R., Vol. III, p. 88.)

Some additional background, both in relation to Chapter X proceedings and other facts may be helpful. The duties of a trustee in bankruptcy are detailed pursuant to 11 U.S.C.A. § 75. It is provided under § 75a(1) that the trustees "shall (1) collect and reduce to money the property of the estates for which they are trustees, under the direction of the court, and close up the estates as expeditiously as is compatible with the best interests of the parties in interest." A corporate reorganization pursuant to Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501, et seq., is intended by the Congress to preserve the status quo, thus permitting amicable adjustment by debtor and creditors under supervision of the bankruptcy court, and avoiding liquidation with view to rehabilitating and maintaining a "going concern" for all parties in interest. Claridge Apartments Co. v. Commissioner of Internal Revenue, 323 U.S. 141, 65 S.Ct. 172, 89 L.Ed. 139 (1944); Claybrook Drilling Company v. Divanco, Inc., 336 F.2d 697 (10th Cir. 1964). The proceeding under Chapter X is for purposes of rehabilitating and reorganizing the corporation, in contradistinction to a bankruptcy proceeding where liquidation of the corporation and distribution of its assets is the goal. Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972).

The trial court found that Winkler acted in a fair and proper way in marshalling the assets of the estate located in numerous states and that following the hearing on October 9, 1970, Winkler acted properly, in good...