This trustee negligence action and third-party complaint arises out of the liquidation of a failed restaurant in Juneau. I find for the defendant trustee on the primary issue of negligence: failure to liquidate and distribute funds in a timely manner. I     2 ABR 11  find for the plaintiff regarding the trustee's negligent failure to furnish information concerning the estate to herself and her attorney and award damages in the sum of $2,500.00. Rex Lauber's third-party complaint against Ellis Law Offices and its attorneys is dismissed with prejudice.

Facts

        Susan Kaufman was a successful restauranteur in the Juneau-Douglas area during the early 1980s. A state-wide recession and high overhead location forced her into a chapter 11 on July 27, 1985. Kaufman was represented by Daniel Bruce in her bankruptcy proceedings. She stipulated to conversion of the case to chapter 7 on September 9, 1985 and an order of conversion was entered September 12, 1985. Several employees had outstanding priority wage claims at the time of conversion. Rex Lauber, a resident of Wards Cove, Alaska, was appointed trustee on September 12, 1985. He served as trustee until February 22, 1990 when he was replaced in conjunction with the implementation of the United States Trustee system.

        The trustee sold the debtor's perishable food inventory soon after his employment. After the food was sold, there were two assets remaining for liquidation: A beer and wine license from the debtor's Bellezza Ristorante and a note payable to the debtor from the "Good Company", a partnership, secured by a second beer and

wine license. The debtor estimated the value of the Bellezza beer and wine license to be $30,000.00 in her schedules. The note had about $34,000.00 due at the time of the bankruptcy. The plaintiff's initial schedules also reflected priority tax liabilities to the City of Juneau, the IRS, and the State Department of Labor.

        Following their appointment as attorneys for the trustee, Ellis Law Office attorney David Rosendin demanded all payments from the Good Company restaurant be paid to the trustee. Several payments were made to the trustee. The restaurant was losing money, however, and eventually defaulted. A settlement was eventually negotiated and approved by Judge Ross in August of 1987.

        Following the sale of the food there was little liquidation activity by the trustee for several months. On February 13, 1986 Bruce requested "copies of all information concerning the estate and the estate's administration" from Rex Lauber. He also stated that he felt there were assets that could be liquidated and used to pay priority claims. Shortly thereafter, on February 18, 1986, David Rosendin filed an application to conduct a public auction for the sale of the Bellezza license. On March 19, 1986 Lauber appeared in Juneau to conduct a public auction. Only one bidder appeared. The bidder indicated that he was prepared to go no higher than $20,000.00 for the license. This was $10,000.00 less than the value ascribed to the license by

Kaufman in her schedules. As there were no other bidders, Lauber decided to postpone the auction. Lauber then advertised the license to owners of existing liquor licenses, liquor stores, wholesalers and restaurants in the Juneau area by a flyer. No one was interested in the license and he received no responses.

        In July of 1986 Kaufman, frustrated by Lauber's inability to sell the beer and wine license, wrote the Clerk of the Bankruptcy Court demanding action to liquidate estate assets. On August 30th, Kaufman again sent a second letter to the Clerk. She indicated in that letter that she had called Mr. Lauber but that he had not returned her calls. In September Lauber wrote to Kaufman and informed her that he had been trying to sell the Bellezza license.

        In the fall of 1986 Lauber negotiated with one Wolfgang Goller regarding the possible purchase of the license. Goller indicated he may pay as high as $15,000.00 for the license if he could receive terms. In October of 1986 Lauber received a letter from Scott Miller indicating that Miller was starting a new restaurant and desired a license. Miller offered $7,000.00 cash for the license. Daniel Bruce, now representing both Miller and Kaufman, negotiated with Lauber for purchase of the beer and wine license. Negotiations ensued and Miller eventually purchased the license in January of 1987 for $15,000.00. Kaufman worked for Miller in his new restaurant.

        On January 30, 1987 Bruce wrote Richard Shaffer, another Ellis Law Office attorney, a letter. He complained of the slow liquidation of estate assets. He also noted that the IRS was intending to levy against his client. In early February of 1987 Kaufman again wrote to the Bankruptcy Court Clerk's office complaining of the IRS's imminent actions against her.

        On June 29, l987 Bruce filed an application for an order providing for interim distribution of cash of the estate to priority claimants. On July 20, 1987 Lauber filed a first interim account. This account requested the entire amount of cash on hand be disbursed to the priority and tax claimants, including the IRS.

        On August 27, 1987 a hearing was held on Lauber's first interim account along with a proposed settlement on the Good Company note. I have taken judicial notice of the hearing. Lauber had not sent a copy of the interim account to either Bruce or Kaufman. Judge Ross refused to allow Lauber any compensation at that time, and reduced the Ellis Law Offices requested attorney's fees from in excess of $6,000.00 to approximately $2,000.00. He allowed the Good Company settlement. It provided $5,000.00 cash to the estate and a return of a beer and wine license without foreclosure. Daniel Bruce made an impassioned plea for payment of $2,000.00 to $3,000.00 to priority IRS tax claims. Rex Lauber agreed with the request. Judge Ross denied the request on several grounds. The first ground was that Ellis Law Offices' fee request     2 ABR 15  was for calendar year 1986. Therefore, there could be additional priority administrative expenses for eight months of 1987 that would have to have been paid prior to any distribution to priority creditors. Secondly, the trustee could not prefer the IRS over other priority creditors as there may have been other creditors, i.e. the City of Juneau and the State of Alaska, that shared an equal or higher priority. The trustee had not included the City or the State in his proposed interim dividend.

        Bruce wrote Shaffer on September 8, 1987 requesting Lauber to make arrangement for distribution to the Internal Revenue Service despite the specific order of Judge Ross on August 27th. On October 21, 1987 Kaufman again wrote Lauber stating that she had no information regarding a possible deal with the owners of the "Good Company" and wanted some information in regard to it. She also threatened litigation because of the estate's failure to pay the IRS priority claim.

        Lauber responded to Kaufman on October 27, 1987 stating that he could not disburse funds to the IRS. Lauber informed Kaufman that he had received $4,000.00 from the Good Company partnership and was in the process of transferring that license to the estate through the settlement approved by Judge Ross at the August 27, 1987 hearing. On November 3, 1987 Kaufman again wrote to Lauber requesting an accounting. On November 13, 1987 Mark Choate, a new attorney for Kaufman, threatened suit and demanded payment of $125,000.00 from Lauber.

        On February 10, 1988 Lauber filed a second interim report indicating that there was about $16,662.57 collected and the dollar value of the remaining assets was about $21,400.00. Lauber proceeded with the sale of the "Good Company" license to Don Harris. After further proceedings and an auction, the license was sold for $20,000.00 cash in July of 1988. Neither Bruce nor Kaufman were informed of the auction or its results. Kaufman finally initiated her adversary action for negligence and breach of fiduciary duties against Lauber on April 26, 1988.

Negligence

        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     2 ABR 17  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). (footnote omitted)

In the more recent case of Bennett v. Williams, 892 F.2d 822 (9th Cir. 1989) the court stated:

        Bankruptcy trustee's are entitled to broad immunity from suit when acting within the scope of their authority and pursuant to court order. See Mullis v. United States Bankruptcy Court, 828 F.2d 1385, 1390-91 (9th Cir. 1987), cert. denied, 486 U.S. 1040, 108 S.Ct. 2031, 100 L.Ed.2d 616 (1988); Lonneker Farms. Inc. v. Klobucher, 804 F.2d 1096, 1097 (9th Cir. 1986) . See also New Alaska, 869 F.2d at 1302-1305.

        However, a trustee may be liable for "intentional or negligent violations of duties imposed upon him by law." In re Cochise College Park. Inc., 703 F.2d 1339, 1357 (9th Cir. 1983), citing Mosser v. Darrow, 341 U.S. 267, 274, 71 S.Ct. 680, 683, 95 L.Ed. 927 (1951). A trustee has a duty to preserve the assets of an estate and must "exercise that measure of care and diligence that an ordinarily prudent person would exercise under similar circumstances." In re Rigden, 795 F.2d 727, 730 (9th Cir. 1986).

A trustee has a duty under 11 U.S.C. § 704 to:
        (1)collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest; . . .

        I do not find that Rex Lauber negligently breached his duties under § 704(1) to Susan Kaufman. While Lauber is a man slow in speech as well as manner, he reduced property of the estate to money and attempted expeditious dividends. Kaufman seems to forget the economics that led to her bankruptcy. As she herself noted, the Alaskan economy in 1985 - 1988 was in a severe recession. Recessions affect restaurants dramatically. It caused her bankruptcy. When restaurant business declines in substantial amounts, demand for beer and wine licenses necessarily falls. Juneau is a small community of approximately 30,000 people. The market for such a license is very limited. There's little interest for $30,000.00 beer and wine licenses in small communities during recessionary times. The value of such licenses falls in accordance with the general economic conditions of the industry and the laws of supply and demand. These adverse economic conditions caused Kaufman's demise and also hurt the "Good Company" which did poorly in the Juneau area.

        Additionally, the note and security interest possessed by Kaufman were not the same as cash. Her security interest had to be foreclosed, the beer and wine license sold, or a settlement pursued. Granted, the trustee could have sold both the note, security interest, and the Bellezza license early in the proceedings for a reduced sum. Lauber utilized his business judgment however and totally liquidated all of the assets of the     2 ABR 19  estate within a 33 month recessionary period. Liquidation of such an estate in recessionary times does not appear to be unreasonable to the court. Moreover, the sums that were obtained by Lauber for the assets were good. Even after limited payments of administrative claims, there is over $45,000.00 remaining in the estate.

        Lauber tried to make a distribution to priority claimants through his interim account. Judge Ross refused to allow such an interim distribution due to a number of factors including costs of administration that had not yet been determined and other priority tax claims. Lauber cannot be blamed for the estate's inability to immediately satisfy Kaufman's tax claims. The process of liquidation in bankruptcy is fraught with delays and administrative costs. Both Bruce and Kaufman were naive in assuming, given the economic conditions of the time, that all assets would be readily liquidated for full scheduled value and her priority claims promptly paid. Additionally, there were numerous wage claims which are paid prior to such tax claims. 11 U.S.C. § 507(a) (3).

        Moreover, the issue of reasonable care must be viewed in light of the realities of the trustee system. Trustees are not well paid for their work, particularly by Alaskan standards. Lauber lives and works in a remote area of Alaska. As a former Army cook, he has little background in the complexities of bankruptcy law. The plaintiff's expert, Daniel Bruce, seeks to employ a standard akin to attorney malpractice when reviewing his
    2 ABR 20  conduct. I will not ascribe such a high standard of care to a trustee in a remote area of southeastern Alaska. The plaintiff also failed to obtain any other expert testimony in support of its liability theory. Gordon Zerbetz, the chapter 7 trustee who replaced Lauber, declined to state that Lauber was negligent in liquidating the estate.

        While I remain convinced that Lauber was not negligent in either reducing to money the property of the estate or closing such estate expeditiously through the date of the complaint in this action, I find that he violated his duty to furnish information. 11 U.S.C. § 704(7) provides that the trustee shall:

(7)  unless the court orders otherwise, furnish such information concerning the estate and the estate's administration as is requested by a party in interest; . . .

        Lauber's repeated failure to respond to Kaufman's reasonable requests precipitated this lawsuit. The file in this case amply demonstrates that defendant Lauber failed to respond to letters sent from his own counsel in this proceeding. Such conduct appears consistent with his prior failure to respond to the reasonable requests of Kaufman and her attorney.

        Lauber's negligence caused Kaufman damages. She incurred thousands of dollars in needless attorney's fees occasioned primarily by Lauber's repeated failure to answer routine questions regarding the estate and properly advise Kaufman of what was occurring. Of the attorney's fees submitted by Daniel Bruce, I find that the sum of $2,500.00 was proximately caused by Rex Lauber's failure to carry out his statutory duty of furnishing information concerning the estate and estate's administration reasonably requested by Susan Kaufman. While Susan Kaufman did suffer mental distress as a result of Lauber's negligence, damages for such mental distress are not recoverable. Prosser, Law of Torts, § 54 at page 329 (4th Ed. 1973); Hancock v. Northcutt, 808 P.2d 251 (Alaska 1991).

        The plaintiff's third-party complaint also fails. Any liability of Lauber's attorneys was premised upon Lauber being found negligent. He was not negligent in the liquidation or the distribution of the estate through April 26, 1988. Lauber's attorneys are not responsible for Lauber's repeated failure to respond to the calls and letters of Susan Kaufman. Moreover, Lauber's "implied indemnity" theory is not allowable as a matter of law. Koehring Mfg. v. Earthtmovers of Fairbanks, 763 P.2d 499 (Alaska 1988). The plaintiff's third-party complaint against Ellis Law Offices and its attorneys must be dismissed.

Conclusion

        While I sympathize with the plaintiff Kaufman and her inability to obtain payment of priority claims some five years after the filing of the bankruptcy, her problems have been compounded by her errors of judgment. First of all, the complaint as framed was never a complaint that would apply to the trustee's bond. The bond does not apply to cases of negligence, it is not a trustee malpractice insurance policy. Secondly, by filing the lawsuit and making attorney's fees for the trustee an issue, Kaufman effectively put herself in a catch-22 situation. The final distribution to priority claimants cannot be completely determined until such time as costs of administration are fully known. Costs of administration usually cannot be fully known until such time as     2 ABR 23  the adversary action is resolved. This unfortunate situation has gone on and on. It will end at this point and a distribution will be made.

        Although it is mere dicta to this decision, it is the court's view that any attorney's fees incurred by Lauber for this proceeding should not be payable as a cost of administration of this estate. Lauber's failure to respond to Kaufman's reasonable concerns caused this lawsuit. Her creditors should not pay for his negligence.

        Therefore, it is hereby ordered:

        1.   Judgment shall be entered in favor of the plaintiff Susan Kaufman in the sum of $2,500.00 against the defendant Rex Lauber;

        2.   Each party shall pay their own costs and attorney's fees;

        3.   Insofar as plaintiff's complaint seeks damages for negligence arising out of the trustee's failure to liquidate and distribute funds in a timely manner prior to April 26, 1988, it is dismissed with prejudice; and

        4.   Third-Party plaintiff Rex Lauber's complaint against Ellis Law Offices, Inc., Peter R. Ellis, R.W. Shaffer, and David W. Rosendin as third-party defendants is dismissed with prejudice, each party to bear their own costs and attorney's fees.

        Let Judgment be entered and docketed accordingly.

        DATED:    June 3, 1991.

DONALD MacDONALD IV
United States Bankruptcy Judge

Serve:	M. Choate, Esq.
	D.Bruce, Esq.
	R.Blasco, Esq.
	E.LeRoy, Esq.
	G.Zerbetz, Trustee