In re Born
| Decision Date | 20 February 1981 |
| Docket Number | Bankruptcy No. 80-00147-HP,Adv. No. 81-0021-HP,81-0022-HP and 81-0023-HP. |
| Citation | 10 BR 43 |
| Parties | In re Sidney L. BORN, Debtor. HOYT, INC., Plaintiff, v. Sidney L. BORN, Defendant. G.C.R.E.A., LTD., NO. 12, Plaintiff, v. Sidney L. BORN, Defendant. Albert E. KUEHNERT, Plaintiff, v. Sidney L. BORN, Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Richie & Greenberg, P.C., Houston, Tex., for plaintiffs.
Morris, Campbell & Seikel, Houston, Tex., for defendant.
On the 13th day of February, 1980, Sidney Born filed a voluntary petition seeking reorganization under Chapter 11 of the United States Bankruptcy Code. On the 13th day of January, 1981 these three adversary proceedings were filed by secured creditors, each of whom seeks to annul or modify the automatic stay of § 362 of the Bankruptcy Code so as to allow the plaintiff to exercise rights of foreclosure. On the 27th day of January, 1981 the defendant filed identical responses to each of these complaints. Each of these responsive pleadings contain identical counterclaims. The plaintiffs have now moved the court to order separate trial of the counterclaims from the trial of the complaints seeking to modify the stay. The defendant opposes these motions.
There is thus posed what the court perceives to be an important and fundamental issue under the Bankruptcy Reform Act of 1978. It is appropriate to first review the basic concepts of the automatic stay of 11 U.S.C. § 362, the concept of adequate protection as set forth in 11 U.S.C. § 361 and the procedural as well as substantive problems that arise in connection with the application of these concepts.
Section 362 provides generally that upon the filing of a petition for relief an automatic stay goes into effect to stay any acts of secured creditors to exercise their contractual rights against the debtor or the debtor's property. Subsections (d) and (e) of § 362 provide that a creditor who is thus stayed may seek a termination or modification of the stay. It is clear that Congress intended a creditor so stayed be entitled to a prompt determination of the question of whether the stay should be modified or annulled. Subsection (e) provides that within 30 days of the date the creditor requests relief the court must conduct a preliminary hearing. If the stay survives the preliminary hearing a final hearing on the annulment or modification of the stay must be commenced within 30 days after such preliminary hearing. Rule 4001 of the Suggested Interim Bankruptcy Rules, which has been adopted by this court as a local rule, provides that the stay expires within 30 days after the final hearing is commenced unless the court determines that the stay be continued. Bankruptcy Rule 701 provides that a proceeding to obtain relief from a stay is an adversary proceeding.
Thus, when a creditor initiates an adversary proceeding as here seeking to modify the stay and the defendant debtor requests a hearing the court must conduct a preliminary hearing within 30 days. If the stay is continued as a result of the preliminary hearing a final hearing must be commenced within the next 30 days and determined within the following 30 day period. If there is no counterclaim involved the issues on both the preliminary hearing and the final hearing are the same and, as was done here, the preliminary hearing and final hearing may be consolidated. If it is established that the defendant debtor has no equity in the property and if the property is not necessary to an effective reorganization, the court must dissolve the stay. However, even if those conditions are not met the court may continue the stay if the creditor is given "adequate protection." 11 U.S.C. § 362(d). Adequate protection as used in § 361 means that there must be assurance given by the debtor to the secured creditor that the latter's interest in the collateral will not be lost even though such creditor is denied the right, for the present, to take possession of the collateral. In the ordinary case the issues involved in a trial under § 362 are (1) does the plaintiff creditor have a valid lien? (2) What is the amount of the indebtedness against the collateral? (3) What is the value of the collateral? (4) Is the property necessary to an effective reorganization? (5) Is the creditor adequately protected? However, when the debtor files a counterclaim the issues to be determined may become much more complex if the counterclaim must be tried simultaneously. In each of the three cases now before the court the defendant debtor seeks by its counterclaim to resolve extremely complex factual and legal issues.
In answer to the plaintiffs' complaints to modify the stay the defendant has filed identical answers and counterclaims in 19 page pleadings. Summarized briefly it is alleged by the defendant debtor that over a period of about 18 months the three plaintiffs, acting together and in conspiracy, induced the defendant to purchase several tracts of land for a consideration of about $4,000,000. Some of the consideration was cash, but it also involved the transfer of two Rolls Royce cars, another expensive car, a motor home, an interest in mineral property, notes and assumptions of obligations. It is further alleged that the plaintiffs were engaged in a conspiracy covering ten years, that there were thirty-two specific acts of misrepresentation and nine specific instances of failure to disclose material facts to the debtor. The counterclaims further allege common law fraud resulting in actual damages of over $2,000,000 and punitive damages of $2,000,000 plus attorneys fees. It is also alleged that there was statutory fraud based on violations of the Texas Business Code which brought about damages of $38,000,000. It is alleged that there are violations of the Texas Deceptive Practice and Consumer Protection Act resulting in damages of $115,000,000. It is further alleged that there is a cause of action based on breach of fiduciary duties arising from seven specific breaches and for such breaches there are sought actual damages of over $2,000,000 and over $2,000,000 in punitive damages because of lost profits and lost partnership opportunities. The counterclaims also allege violations of Texas and Federal Security Laws and seek return of consideration, damages, attorneys fees and punitive damages. The counterclaims further allege a cause of action based on violation of the Federal Racketeering and Corrupt Organization Statute as well as mail fraud, with a prayer for damages for such conduct in the amount of $38,400,000. The final prayer is for actual damages of $38,400,000 and punitive damages of $115,575,000.
Relying on the same factual allegations defendant pleads by way of affirmative defenses that the plaintiffs are not entitled to modification of the stay because the defendant was induced to execute loan and transfer documents by virtue of economic coercion, that because of the misrepresentations and fraud plaintiffs are estopped from asserting lien rights to the property, that the conduct of plaintiffs was so unconscionable as to render the documents unenforceable, and that the plaintiffs have no rights to the collateral because of their fraudulent conduct.
The court must at this point assume that the affirmative defenses and counterclaims are asserted in good faith, and that they have some merit to them. As pointed out by the defendant in his response to the motion of plaintiffs to order separate trials, Judge Schultz of this district in a related adversary proceeding, Born v. Kuehnert, et al., Adversary No. 80-0702-HS, ruled that there was a bona fide dispute raised by the very allegations here asserted by the debtor. It is obvious that because of the magnitude of the issues raised by the affirmative defenses and counterclaims it would be impossible to conduct an efficient and orderly trial of these issues within the time provided by law for the trial or modification of stay issues. Although the plaintiffs have agreed that the commencement of the final hearings could be extended about a week past the statutory deadline, these few days are of no real consequence in these particular cases.
It would seem clear beyond dispute that a trial of the complex matters raised by the defendant in his affirmance defenses and counterclaims would involve a multitude of issues that are not directly involved with the question of modification of the stay. Based on the present pleadings it would be a reasonable assumption that the trial would take at least two to three weeks, even after adequate discovery and pre-trial procedures to define the issues. It would be almost a denial of due process and totally disruptive of the court's docket to wade into a trial of this complexity without stringent pre-trial procedures to develop facts and define the issues. The affirmative defenses asserted invoke the same facts for their resolution as do the counterclaims which seek affirmative relief. The only realistic solution is to try the allegations of the complaint that directly involve the modification of the stay totally apart from the affirmative defenses and counterclaims.
This does not contravene the concept of adequate protection. The secured creditor has a contractual right in the property which is constitutionally protected until the defendant debtor meets his burden of establishing to the contrary. See discussion in Collier on Bankruptcy, 15th Edition, Vol. 2, ¶ 361.01, pp. 361-2 et seq. The concept of adequate protection is to assure the secured creditor that his constitutional rights in the property are not dissipated while the reorganization proceedings run their course. Part of the reorganization process in this case is the debtor being able to establish his causes of action against the plaintiffs who he claims have defrauded him. These causes of...
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