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Court Finds Trustee Not Liable For Auction SNAFU

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June 17, 2022, US Bankruptcy Court for Colorado District – Colorado Bankruptcy Court grants Trustee Jeffrey L. Hill’s request for summary judgment declaring two Trustee’s Sale Deeds as void and unenforceable in the bankruptcy case of Kenneth C. Casey, Inc. (“Debtor”). The Court simultaneously denies the counterclaim for “grossly negligent breach of fiduciary duty” filed by Defendant Libori Loya Portillo (“Mr. Portillo”).

In 2016, Jeffrey L. Hill, as Chapter 7 Trustee of the Debtor, filed a “Sale Motion” in the Court seeking permission to sell certain real estate properties of the Debtor. The Court entered a “Sale Order” whereby the Court authorized the Trustee to sell the Authorized Sale Property.

The court found that the auctioneer in its auction offered to sell only part of the Authorized Sale Property (80 acres instead of 120 acres) but mistakenly added to the auction an additional 240 acres of property in Costilla County which were owned by the Debtor but which were not identified in the Sale Motion and which the Court did not authorize the Trustee to sell. The Defendant Mr. Portillo paid $23,000 for all the auctioned property. The Trustee mistakenly issued two Trustee’s Deeds, without comparing the auction results with the Sale Order, purporting to transfer title to all 320 acres to Mr. Portillo. 

The Trustee admitted his mistake in the Court and sought to set aside these transfers of title claiming that the sale of most of the real estate listed in the two Trustee’s Deeds was not authorized by the Court.

The Court agrees with the Trustee’s arguments that the Trustee’s Deeds executed by the Trustee and provided to Mr. Portillo are void because any purported sale to Mr. Portillo failed to comply with section 363(b)(1) of the Bankruptcy Code.

The Court rejects Mr. Portillo’s counterclaim which alleged that the Trustee’s act amounted to “grossly negligent breach of fiduciary duty”. The Court denies the existence of any federal common law claim of the nature of “grossly negligent breach of fiduciary duty”. The Court also finds that the Trustee owes fiduciary duty only to the bankruptcy estate and its beneficiaries. In the view of the Court, the Trustee, as the seller of real property of a bankruptcy estate, does not owe any general fiduciary duties to a potential purchaser of such property.

However, the Court finds Mr. Portillo entitled to a full refund of $23,000 he paid for the purchase of the real estate property and directs the Trustee to refund the amount with interest.

Hill v. Portillo (Kenneth C. Casey, Inc.), 2022 Bankr. LEXIS 1716

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