Bankr. L. Rep. P 69,327in Re Cochise College Park, Inc., Bankrupt,emma Demarco Hall, et al., Plaintiffs,andchristine Baldrian, et al., Intervenors-appellants, v. Wallace Perry, Bankruptcy Trustee and As Ex-receiver Inequity in Cause No. B-72-393 Phx Wpc, Defendant-appellee, 703 F.2d 1339 (9th Cir. 1983)

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 We have jurisdiction under 11 U.S.C. § 47(a) (1976) (repealed 1978).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 legal consequences might pertain if the contracts of the class members were executory, depending upon when the payments had been received. Since the answers to interrogatories and affidavits before the bankruptcy court appear to establish that at least some, if not all, of the contracts between Baldrian class members and Cochise were executory on June 5, 1972, and that some if not all of the payments were received after June 5, 1972, the case must be remanded for further proceedings. The trial court must determine, as to each land sale contract, whether the contract was executory on June 5, 1972, see infra Part I, and, if so, when payments, if any, on that contract were received, see infra Part II.

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 5, 1972, see infra Part I, and, if so, whether the trustee had in fact decided before August 6, 1973, to reject that contract, see infra Part III(A); and (2) whether, as to each land sale contract, the land purchaser made any payments on the contract in reliance on fraudulent or negligent misrepresentations by the trustee, see infra Part III(B).

I. Nature of the Land Sale Contracts.

The legal nature of the contractual relations between the members of the Baldrian class and Cochise on the date of the bankruptcy filing is of crucial importance in this case. If the contract between Cochise and a lot purchaser upon which payments were made was a fully executed contract on that date, then all payments on that note vested in the trustee. See infra Part II(A). If the contract was executory, however, other consequences follow. See infra Part II(B). Whether the land sale contracts were executed or executory also affects the liability of the trustee for misconduct. See infra Part III.

Without considering whether any of the land sale contracts were executory on June 5, 1972, the bankruptcy court entered summary judgment for defendant, even though the answers to interrogatories and facts sworn to in affidavits before the court tend to establish that some if not all of the contracts were executory. This being error, we reverse.

Seeking to sustain the grant of summary judgment, Perry argues that all of the contracts upon which payments were made were, as a matter of law, fully executed, not executory on June 5, 1972. We disagree.

Perry first contends that in each case the contract upon which payments were made comprised only the promissory note signed by the Baldrian class member, pursuant to which the class member promised to pay specified sums at times certain. Perry argues that any obligations of Cochise to convey a deed to the lot or to construct roads for and to provide utility connections to the purchased lot were commitments by Cochise that were not part of that promissory note "contract." We reject that argument.

A "promissory note" is itself merely a "promise or engagement, in writing, to pay a specified sum at a time therein limited ... to a person therein named, or to his order, or bearer." Black's Law Dictionary 1093 (rev. 5th ed. 1979). A "contract," by contrast, is an agreement between two persons "which creates an obligation to do or not to do a particular thing" and comprises promises by both parties to perform certain obligations. Id. at 291-92; see Shattuck v. Precision-Toyota, Inc., 115 Ariz. 586, 588-89, 566 P.2d 1332, 1334-35 (1977) (valid contract requires mutual irrevocable promises by both parties). A promissory note, standing alone, is not a contract at all, because, simply put, it embodies only one of the mutual promises necessary to create a contract. It evidences only one side of the bargain.

The existence of a promissory note on any given date, therefore, is not in and of itself proof that the payments on the note are in performance of an executed contract. Since payments on a promissory note are merely the performance of one side of the bargain, the note must be examined in conjunction with the other undertakings that, together with the promissory note, constitute the relevant contract of which the promissory note is but a part to determine what commitments remain to be performed by the parties. See, e.g., Smith v. Latourrette-Fical Co., 37 Ariz. 265, 270, 293 P. 973, 976 (1930) (contract to sell farm unit in subdivision determined to include not only note and mortgage but also covenant to furnish water to subdivision). Each land sale contract did not, and by definition could not, consist solely of the promissory note.³ 

Perry also argues that even if the contracts here between the members of the Baldrian class and Cochise encompassed both the promissory notes and various obligations of Cochise, in any event, the contracts with the purchasers were not "executory" contracts under the terms of the Act. We reject that argument.

An "executory" contract under the Act is one:

under which the obligations of both the bankrupt and the other party to the contract are so far unperformed [at the moment of filing] that the failure of either to complete performance would constitute a material breach excusing the performance of the other.

In re Select-A-Seat Corp., 625 F.2d 290, 292 (9th Cir. 1980) (per curiam) (quoting from Jenson v. Continental Financial Corp., 591 F.2d 477, 481 (8th Cir. 1979).⁴ 

Under this standard, the answers to interrogatories and affidavits raise a material issue of fact as to whether some if not all of the contracts between Cochise and the purchasers constituted executory contracts upon June 5, 1972, the date of the filing. The record shows that some if not all of the land sale contracts encompassed both obligations of the purchaser to make various payments at times certain and obligations of Cochise to deliver the deed to the lot to the purchaser, to release the mortgage, if any, on that lot upon completion of payments on the promissory note, and to construct various improvements. Under these circumstances, the failure of Cochise to develop the land as promised or to convey a warranty deed to the purchaser could each constitute a material breach excusing performance by the land purchaser of his remaining obligations.⁵  Likewise, the failure of any given land purchaser to make payments on his promissory note could constitute a material breach excusing Cochise from completing its performances under the land sale contract.⁶  Thus, in all likelihood, some if not all of the land sale contracts here were executory on June 5, 1972.⁷ 

The mere fact that the promissory notes presented to Cochise under the land sale contracts could be assigned to third parties does not change this conclusion. Although a real estate lessee typically is free to assign his leasehold interest to a third party, the ability of a lessee to assign the leasehold interest (i.e., the right to receive the use of certain real estate for a time certain) has never been thought to transform an unexpired real estate lease, a typical example of an executory contract, from an executory into an executed contract. See, e.g., Palmer v. Palmer, 104 F.2d 161, 162-63 (2d Cir.), cert. denied, 308 U.S. 590, 60 S. Ct. 120, 84 L. Ed. 494 (1939); 4A J. Moore & L. King, Collier on Bankruptcy p 70.44, at 539 (14th ed. 1978).

Since some if not all of the land sale contracts were probably executory on June 5, 1972, it is probable that the ownership of the payments received by the trustee as well as the trustee's conduct must be evaluated under the principles governing executory--as opposed to executed--contracts. Since under bankruptcy law, transactions involving executory contracts give rise to different legal consequences from those involving executed contracts, granting summary judgment on those issues without deciding whether the contracts were or were not executory was improper.

II. Ownership of Payments.

Appellants challenge the bankruptcy court's conclusion that title to all payments on the promissory notes signed as part of land sale contracts vested in the trustee. They contend that since title to executory contracts does not vest in the trustee until the trustee affirms those contracts and since the trustee here never affirmed any of the contracts, the trustee does not have title to the payments received pursuant to those contracts. Perry contends that since Cochise had title to the promissory notes, Perry was vested with title to the notes on June 5, 1972, the date of filing of the original petition in bankruptcy, and, ipso facto, has title to any funds generated on those notes.

The bankruptcy court's determination that ownership of the funds received on the contracts flowed from the trustee's purported taking of title to the promissory notes was incorrect. Rather, the ownership of payments depends on (a) whether the land sale contract on which the payments were made was executory on June 5, 1972; and (b), if so, when the payments were in fact received. Since the bankruptcy court made no distinction between executory and executed contracts, the case must be remanded for further proceedings. To guide the determinations on remand, we outline how payments made by the Baldrian class members must be treated, depending on the facts.⁸ 

A. Payments on Contracts That Were Non-Executory on June 5, 1972.

The trustee properly took title on behalf of the estate to all payments received on any land sale contract that was fully executed on June 5, 1972, regardless of whether payments were made before or after June 5, 1972.

Sections 70a(5), 186 of the Act provide that a reorganization or bankruptcy trustee is vested by operation of law as of the date of filing with title to all "property ... which prior to the filing of the petition [the bankrupt] could by any means have transferred, or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered." 11 U.S.C. §§ 110(a) (5), 586 (1976). Such property includes cash and the like possessed by the bankrupt on the date of filing, whether held by the bankrupt himself, e.g., In re Tudor, 100 F. 796, 797 (D. Colo. 1900) (money), or by an agent on the bankrupt's behalf, e.g., In re Tele-Tone Radio Corp., 133 F. Supp. 739, 744 (D.N.J. 1955) (bank account). On June 5, 1972, the trustee was vested with title to all cash held by Cochise or by Computer Graphics on Cochise's behalf.

Property passing to the trustee under section 70a(5) also includes executed contracts between the bankrupt and third parties and any proceeds or right to proceeds still due. E.g., Hudson v. Wylie, 242 F.2d 435, 447 (9th Cir. 1957) (contract right to collect money based on performance of services by bankrupt that were completed before filing); In re Hannan, 127 F.2d 894, 897 (7th Cir. 1942) (contract right to receive commissions for services of bankrupt rendered prior to filing); In re Duncan, 148 F. 464, 469 (D.S.C. 1906) (promissory note of bankrupt's employer based on services of bankrupt rendered prior to filing). On June 5, 1972, the trustee was vested with both executed land sale contracts, if any, and the right to further payments, if any.⁹ 

B. Payments on Contracts That Were Executory on June 5, 1972.

Payments received by Cochise, Perry, or Computer Graphics on land sale contracts that were executory at the time of filing did not necessarily vest in the trustee as property of the estate. The ownership and treatment of each of those payments, and claims arising therefrom, vary according to the date upon which the particular payment was received.

1. Payments Received Before June 5, 1972.

Payments received by Cochise or by Computer Graphics before June 5, 1972 on land sale contracts that were executory on June 5, 1972 were property of the bankrupt. Title to those payments vested in the trustee as of the date of filing of the original petition.¹⁰  Act Secs. 70a(5), 186 (1976). Compare In re Superior Motor Truck Co., 275 F. 623, 624 (N.D. Ga. 1921) (payments to seller received by seller prior to filing held by bankrupt seller as his property not "on any sort of trust, or as the property of the buyer," even though trucks not delivered prior to filing) with Gulf Petroleum, S.A. v. Collazo, 316 F.2d 257, 261 (1st Cir. 1963) (pre-filing payments to seller of land to be held in escrow by bankrupt seller until closing of sale must be returned to buyer, where trustee rejects executory land sale contract before closing).

While Perry has title to all pre-filing payments, appellants, of course, have claims against the estate arising from payments made prior to filing.¹¹  Since those payments are property of the estate, Perry had no duty to notify the payors before using those funds to pay administrative expenses or other claims against the estate.

2. Payments Received On or After June 5, 1972 and Before

August 6, 1973.

Payments received on executory contracts on or after the date of filing but prior to August 6, 1973 became property of the estate yet give rise to administrative expense claims against the estate in the amount of those payments.

An executory contract of the bankrupt vests in the trustee, if at all, only if the trustee affirms the contract. Palmer v. Palmer, 104 F.2d 161, 163 (2d Cir.), cert. denied, 308 U.S. 590, 60 S. Ct. 120, 84 L. Ed. 494 (1939); 4A J. Moore & L. King, Collier on Bankruptcy p 70.43, at 524-25 (14th ed. 1978). Until rejection, however, the executory contract continues in effect and the non-bankrupt party to the executory contract is not a creditor with a provable claim against the bankrupt estate. See Mohonk Realty Corp. v. Wise Shoe Stores, Inc., 111 F.2d 287, 290 (2d Cir.), cert. denied, 311 U.S. 654, 61 S. Ct. 47, 85 L. Ed. 418 (1940).

Where a bankrupt is in reorganization under Chapter X, the trustee need not affirm or reject an executory contract until a reorganization plan is submitted. 6 J. Moore & L. King, Collier on Bankruptcy p 3.23, at 580 (14th ed. 1978); see In re American National Trust, 426 F.2d 1059, 1064 (7th Cir. 1970); Mohonk Realty, 111 F.2d at 290. If the trustee fails to adopt the executory contract in the reorganization plan, the contract is deemed rejected, as of the date a petition was originally filed under the Act. See In re Gravure Paper & Board Corp., 234 F.2d 928, 930-31 (3d Cir. 1956).

Where the bankrupt estate is in liquidation, the trustee to affirm an executory contract must do so by the later of the date 30 days after the trustee's appointment and the date 60 days after the adjudication of bankruptcy. Bankruptcy Act Sec. 70b, 11 U.S.C. § 110(b) (1976). If the trustee fails to affirm the contract during that period, it is deemed rejected as of the date of the original filing of a petition under the Act. Bankruptcy Act Sec. 63c, 11 U.S.C. § 103(c) (1976); Gravure Paper & Board, 234 F.2d at 931.

The rejection of an executory contract, whether by law or by affirmative act of the trustee, constitutes "a breach of such contract ... as of the date of the filing of the petition initiating a proceeding under this title." Bankruptcy Act Sec. 63c, 11 U.S.C. § 103(c) (1976).¹²  The anticipatory breach gives rise to a claim provable against the bankrupt estate for damages arising from the breach. Bankruptcy Act Sec. 63a(9), 11 U.S.C. § 103(a) (9) (1976).¹³  The claim for damages is treated on a parity with other similar claims. In re Maryvale Community Hospital, Inc., 456 F.2d 414, 418 (9th Cir.), cert. denied, 409 U.S. 879, 93 S. Ct. 133, 34 L. Ed. 2d 133 (1972); see Matter of Greenpoint Metallic Bed Co., 113 F.2d 881, 884 (2d Cir. 1940) (arrangement proceeding).

Where the trustee does not submit a plan of reorganization and does not explicitly affirm the contract either during the period of reorganization or within the 60 days after the termination of reorganization, a contract that is executory on the date of the original filing under the Act is deemed rejected by operation of law on the later of the date 30 days after the appointment of the trustee and the date 60 days after the date of the adjudication of bankruptcy that terminates the reorganization period. Thus, in this case, all of the land sale contracts that were executory on June 5, 1972 were rejected by operation of law on August 6, 1973, effective June 5, 1972, and hence were breached by Cochise as of June 5, 1972.¹⁴  The lot purchasers whose contracts were executory on June 5, 1972 were therefore not obligated to make payments on the notes after June 5, 1972, the date of the breach of those contracts.¹⁵  Nevertheless, some of the purchasers here did continue to make payments on the executory contracts after the date of the breach of the underlying contract but before the date upon which the rejection took place.

Payments on a rejected executory contract made after the rejection takes place are not property of the estate. See infra Part II(B) (3). Since title to such contracts does not vest in the trustee, the trustee has no right to enforce them. The Bankruptcy Act does not address, however, the status of payments that are made to the trustee after the effective date of rejection but before rejection has occurred by action of the trustee or by operation of law.

Appellants contend that payments made on an executory contract in the period between the June 5, 1972 filing and the August 6, 1973 rejection should be treated not as property of the estate but as property held by the trustee in a constructive trust for the purchasers pending rejection. Under this approach, where the executory contract is affirmed, the payments at the moment of affirmance become property of the estate. On the other hand, where the executory contract is ultimately rejected, the interim payments are returned dollar-for-dollar to the purchasers. Under this theory, the use of such payments to pay the administrative expenses of the estate would be improper since the payments never become property of the estate.

Perry argues in response that payments made in the interim between the original filing and rejection or affirmance should be treated the same as payments on executed contracts. Under Perry's theory, the lot purchasers are as to these payments mere general creditors of the bankrupt estate.

We reject both positions. In light of the policies underlying the treatment of executory contracts under the Act, we conclude that payments received by the trustee on an executory contract during the period between the date of filing and the date of rejection do become property of the estate. However, these payments give rise to claims against the estate of an administrative expense priority in the amount of the reasonable value of the consideration tendered to the trustee. In reaching this conclusion, we find support both in previous case law and in the policies underlying the Act.

This treatment of executory contracts is supported by the well-settled principles governing treatment of creditors of a bankrupt who confer benefit on the bankrupt estate after the date of filing of a bankruptcy petition. Where the consideration supporting the claimant's right to payment is both supplied to and beneficial to the trustee in the operation of the bankrupt's post-filing business, the consideration becomes property of the estate but the right to payment is accorded first priority under section 64a(1) of the Bankruptcy Act.¹⁶  See 4A J. Moore & L. King, Collier on Bankruptcy p 70.43, at 524 (14th ed. 1978); cf. In re Health Maintenance Foundation, 680 F.2d 619, 621 (9th Cir. 1982) (denying priority to severance pay claims based on consideration that was neither supplied to nor beneficial to trustee, since services of claimant had been provided to bankrupt prior to bankruptcy); 120 Wall Associates v. Schilling, 266 F.2d 548, 550 (2d Cir. 1959) (denying claim for rent where trustee made no use of leasehold).

This rule is commonly applied in the situation arising when the trustee of a bankrupt lessee continues in possession of the leasehold during the period between the effective date of rejection and the date of the actual act of rejection of the lease. See generally Palmer, 104 F.2d at 162-63 (2d Cir.), cert. denied, 308 U.S. 590, 60 S. Ct. 120, 84 L. Ed. 494 (1939); 6 J. Moore & L. King, Collier on Bankruptcy p 3.23 [6.1], at 590-93 (14th ed. 1978). During the period between initial filing under the Act and the rejection of the lease, the trustee is not required to pay or to set aside in trust the rent due under the lease nor to refrain from using the leasehold for the benefit of the estate. See Palmer, 104 F.2d at 163; 4A J. Moore & L. King, Collier on Bankruptcy p 70.44, at 550-52 (14th ed. 1978). The lessor obtains, however, a claim with administrative expense priority in the amount of the reasonable value of the leasehold used during the interim period by the trustee for the benefit of the estate.¹⁷  S. & W. Holding Co. v. Kuriansky, 317 F.2d 666, 667-68 (2d Cir. 1963); see In re First Research Corp., 457 F.2d 331, 332 (5th Cir. 1972). This special administrative expense priority maintains parity among all of the creditors of an estate who confer benefits on the estate after the date of filing. If a lessor, or for that matter any individual, who confers economic benefit on a bankrupt estate, were not given such a priority, it is likely he would refuse to confer such benefits and would thereby jeopardize the orderly reorganization or administration of the estate.

Moreover, the Act gives the trustee the power to affirm or reject executory contracts on the theory that the value of the consideration still owed to the estate under some executory contracts exceeds the cost of the remaining obligations owed under the contract to the other party. The theory is that advantageous contracts should be affirmed by the trustee as a means of enhancing the likelihood of successful reorganization, or, if the estate is in liquidation, as a means of increasing creditor dividends.¹⁸  The Act provides that any claim arising from the trustee's post-filing obligations under the contract has an administrative expense priority where the trustee ultimately affirms,¹⁹  yet does not specify how payments made to the estate during the period while the trustee is deciding whether to affirm or to reject are to be treated if the trustee subsequently decides to reject.

We think the claim for return of such payments must receive a like priority. If payments made after the initial filing but before rejection were not given an administrative priority, a party who owes the bankrupt payments under an executory contract would face the risk that his claim for post-petition payments would be treated as a mere unsecured claim if the executory contract were rejected. A party placed in that situation would often be well-advised to cease making payments, even though he could be sued for breach of contract,²⁰  because he might well recover little or nothing as an unsecured claimant if the trustee rejects. Providing an administrative expense priority for post-filing payments in the event of rejection encourages parties to continue performance of their executory contracts with the debtor during the interim period and thus furthers the statutory policy of encouraging the continued performance of executory contracts which may be beneficial to the estate until the trustee makes his decision.²¹ 

In this case, the trustee was entitled to use post-filing payments in the administration of the estate. The lot purchasers have claims provable against the estate of administrative expense priority on parity with any other administrative expense claims against the estate.²² 

3. Ownership of Payments Received After August 6, 1973.

Payments made on an executory contract after rejection are not property of the bankrupt estate. The underlying contracts having been rejected and thus breached, these payments remain the property of the payors.²³  See In re Gravure Paper & Board Corp., 234 F.2d 928, 930, 932 (3d Cir. 1956) (once trustee rejects lease, he no longer has any "right, title or interest" in lease or its proceeds); Green v. Finnigan Realty Co., 70 F.2d 465, 466-67 (5th Cir. 1934) (once trustee rejects lease, trustee is trespasser and has no right to use or occupancy).

Where the trustee takes or retains possession of property that is not an asset of the estate, he is personally liable for damages arising from this illegal act, unless he acts both in good faith and with reasonable grounds for believing that his possession is proper. See Leonard v. Vrooman, 383 F.2d 556, 560-61 (9th Cir. 1967) (trustee is personally liable for damages arising from his wrongful possession of "property which is not asset of the estate"); Green, 70 F.2d at 466-67 (trustee who occupies leasehold beyond date of rejection of lease is trespasser and is liable to lessor for reasonable worth of consideration conveyed to trustee after that date); cf. Gravure Paper, 234 F.2d at 930, 932 (trustee responsible for return of deposit on trustee's purported sale of lease, since lease had been rejected prior to purported sale and thus trustee had "offered for sale and 'sold' a lease to which he had no 'right, title or interest' ").

Any payments on executory contracts received by Perry after August 6, 1973, the date upon which rejection of all of the executory contracts took place, never became property of the estate. The trustee was therefore obligated either to return these monies immediately to the payors, or, at a minimum, to set the monies aside in trust for them. Charged with knowledge of the principles of bankruptcy law, the trustee could not reasonably have believed that he was entitled to use the payments in the administration of the estate.²⁴  To the extent they have not been returned to the purchasers, these are monies (together with appropriate interest) for which the trustee is personally responsible.²⁵ 

III. Misconduct of the Trustee.

Appellants contend that to the extent that their recovery against the estate does not satisfy all of their claims against the estate, Perry should be held personally liable for such payments because he failed affirmatively to reject those contracts that were executory and induced all purchasers to continue making payments on the notes by misrepresentations. They argue that the trustee owed a fiduciary duty to the purchasers whose contracts were executory on June 5, 1972, requiring him to reject the contracts immediately upon his appointment as Chapter X trustee, since he should have realized that a successful reorganization of Cochise was impossible. They assert that the trustee's breach of this duty gives rise to his personal liability for any payments made after the date of filing. In addition, they argue that the trustee is personally liable for any payments made in reliance on the trustee's intentional or negligent misrepresentations.

The bankruptcy judge and the district court summarily rejected these contentions. We conclude that the bankruptcy judge and district court erred in granting summary judgment on appellants' claims because they evaluated Perry's conduct under incorrect legal standards.

A. Liability for Failure to Reject Executory Contracts.

A bankruptcy or reorganization trustee is a fiduciary of each creditor of the estate, including anyone who is a party to an executory contract with the bankrupt. See Wolf v. Weinstein, 372 U.S. 633, 650, 83 S. Ct. 969, 979, 10 L. Ed. 2d 33 (1963); Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 461 (6th Cir. 1982); Sherr v. Winkler, 552 F.2d 1367, 1374 (10th Cir. 1977); Moulded Products, Inc. v. Barry, 474 F.2d 220, 224 (8th Cir.), cert. denied, 412 U.S. 940, 93 S. Ct. 2779, 37 L. Ed. 2d 400 (1973). As such, he has a duty to treat all creditors fairly and to exercise that measure of care and diligence that an ordinarily prudent person under similar circumstances would exercise. Weaver, 680 F.2d at 461; Sherr, 552 F.2d 1374; In re Johnson, 518 F.2d 246, 251 (10th Cir.), cert. denied, 423 U.S. 893, 96 S. Ct. 191, 46 L. Ed. 2d 125 (1975). Although a trustee is not liable in any manner for mistakes in judgment where discretion is allowed, Mosser v. Darrow, 341 U.S. 267, 273-74, 71 S. Ct. 680, 683, 95 L. Ed. 927 (1951); Weaver, 680 F.2d at 461; Sherr, 552 F.2d at 1375, he is subject to personal liability for not only intentional but also negligent violations of duties imposed upon him by law, see Mosser, 341 U.S. at 272, 274, 71 S. Ct. at 682, 683; Johnson, 518 F.2d 246, 251; cf. Leonard v. Vrooman, 383 F.2d 556, 561 (9th Cir. 1967) (trustee is personally liable for acts which either are not taken in good faith or are unreasonable).²⁶ 

While a debtor is in reorganization and for the first 60 days of a bankruptcy proceeding, the decision whether to affirm or reject an executory contract is within the discretion of the trustee.²⁷  See Mohonk Realty Corp. v. Wise Shoe Stores Inc., 111 F.2d 287, 290 (2d Cir.), cert. denied, 311 U.S. 654, 61 S. Ct. 47, 85 L. Ed. 418 (1940); Bankruptcy Act Sec. 70b, 11 U.S.C. § 110(b) (1976). Thus, as long as the trustee remains undecided on whether to affirm or to reject an executory contract and the decision remains in his discretion, the trustee has no duty to creditors to tell them that he is entitled by law to reject that contract. Once the trustee has finally decided to reject an executory contract and therefore not to perform his obligations under that contract, the trustee then comes under a duty to take formal steps to reject it. To fail to do so and thereby permit the creditor to continue to perform after the date of decision to reject directly and unnecessarily injures the creditor²⁸  and is not consonant with conduct of an ordinarily prudent person serving in the capacity of trustee. Such failure therefore gives rise to a claim for damages for which the trustee is personally liable.

The papers before the bankruptcy court do not disclose whether the trustee had or had not decided before August 6, 1973 to reject some if not all of the land sale contracts that were executory on June 5, 1972. Nevertheless, the bankruptcy court entered summary judgment for the trustee on appellant's claim of misconduct by the trustee on the ground that the trustee's conduct was authorized by federal statute. This was error.

If the trustee is found to have decided before August 6, 1973 to reject the executory land sale contracts, the trustee is personally liable to the Baldrian class for damages arising out of this violation of his fiduciary duty. Damages would consist of all payments made post-filing, after the trustee's decision to reject, less any amount received from the estate.²⁹ 

B. Liability for Misrepresentations.

Appellants claim that the trustee is personally liable for damages arising from fraudulent and negligent misrepresentations communicated to Baldrian class members regarding the use and status of payments made on the land sale contracts. The bankruptcy court concluded that the trustee bore no personal liability to the Baldrian class members since the statements were "authorized and ordered by the court," were "demanded of the trustee by congressionally authored statute and controlling case precedent," or were not made "wilfully and deliberately." We disagree.

The Act shields the trustee from liability for a "communication" to a creditor of the bankrupt concerning "the property of the bankrupt" where the communication is uttered "in good faith and with reasonable grounds for belief in its truth." Bankruptcy Act Sec. 21i, 11 U.S.C. § 44(i) (1976) (emphasis added). Where these conditions do not obtain, however, the trustee is liable to the same extent as any other person for damages arising from misrepresentations actionable under the law of the state in which he acts. See Leonard v. Vrooman, 383 F.2d 556, 561 (9th Cir. 1967). Thus, where a statement made by the trustee to a land purchaser is otherwise actionable under state law, the trustee is personally liable, despite section 21i of the Act, if the statement was uttered either in bad faith or without reasonable grounds for belief in its truth.

Under Arizona law a person is liable in an action in fraud for damages arising from an intentional misrepresentation where all of the following elements exist: "(1) a representation;³⁰  (2) its falsity; (3) the materiality of representation; (4) the speaker's knowledge of its falsity or ignorance of its truth;³¹  (5) his intent that it be acted upon and in a manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon, and (9) his consequent and proximate injury." Carrel v. Lux, 101 Ariz. 430, 434, 420 P.2d 564, 568 (1966) (footnotes added); Fridenmaker v. Valley National Bank of Arizona, 23 Ariz.App. 565, 568-69, 534 P.2d 1064, 1068 (1975).

Under Arizona law, liability may also arise if a person, in privity with another, makes a false communication without reasonable grounds for belief in its truth where the representation induces a justifiable reliance by the latter, even if the intent and knowledge required for an action in fraud do not obtain. See Van Buren v. Pima Community College District Board, 113 Ariz. 85, 87, 546 P.2d 821, 823 (1976); Arizona Title Insurance & Trust Co. v. O'Malley Lumber Co., 14 Ariz.App. 486, 491-93, 484 P.2d 639, 644-46 (1971). In light of the trustee's fiduciary status vis-a-vis the purchasers, we have no difficulty concluding that under Arizona law the trustee was in sufficient privity with the purchasers to justify their reliance on statements or intentionally false promises he made in the course of his administration of the estate. Cf. id. at 491-92, 484 P.2d at 644-45 (title insurer's function as disbursing agent for building contractors held to create requisite privity).

In granting summary judgment for the defendant, the bankruptcy court made no findings that the alleged misrepresentations had been made both in good faith and with reasonable grounds for belief in their truth. Nor did it find that the papers before it conclusively demonstrated a lack of liability under Arizona law for the allegedly fraudulent and negligent misrepresentations.

Rather, the bankruptcy court concluded that orders of the court, legal principles, or an absence of willful and deliberate conduct by the trustee required a grant of summary judgment for defendant. We disagree.

The record is devoid of any indication that any of the trustee's statements were "authorized and ordered by the Court."³²  Nor should they have been, since no "congressionally authorized statute or controlling case precedent" of which we are aware affirmatively "demand [s]" a trustee to increase the size of an estate through fraudulent or negligent misrepresentations. Furthermore, our review of the answers to interrogatories and affidavits before the bankruptcy court convinces us that genuine issue of material fact remain concerning the trustee's liability under Arizona law for the allegedly fraudulent and negligent misrepresentations.³³  These issues could not properly have been determined on summary judgment.³⁴ 

CONCLUSION

The bankruptcy court must conduct fact-finding hearings to determine the factual matters that are predicate to a proper determination of the legal issues presented. The legal issues must be decided consistent with the principles set forth in this opinion.

The summary judgment is reversed. The case is remanded.