In re Highland Financial Corp.
| Citation | 216 BR 109 |
| Decision Date | 15 December 1997 |
| Docket Number | 95 B 45969(SMB).,Bankruptcy No. 95 B 45968 |
| Parties | In re HIGHLAND FINANCIAL CORPORATION and Highland Cotton Corporation, Debtors. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
Kent, Beatty & Gordon, L.L.P. (Jack A. Gordon, of counsel), New York City, for Thompson and Wallace of Memphis, Inc., Carl Nichols, III, Dawkins Trading Co., Inc., Jim Dawkins.
Cadwalader, Wickersham & Taft (H. Peter Haveles, Jr., of counsel), Law Offices of Alan J. Shmaruk, New York City, for Debtors.
The matter before me concerns the effect of the mandate issued by the Fifth Circuit Court of Appeals in a prior litigation between the same parties that involved the same issues. The creditors in this dispute, Thompson & Wallace of Memphis, Inc. and Carl G. Nichols, III (collectively "T & W") and Dawkins Trading, Inc. and Jim Dawkins (collectively "Dawkins Trading") (T & W and Dawkins Trading are sometimes referred to collectively as the "Claimants"), have moved in limine to limit the proof of damages at the trial of the debtors' objections to their claims. The Claimants contend that the Fifth Circuit Court of Appeals affirmed the jury's award of damages in the Claimants' favor, and under its mandate, I cannot revisit the issue. The debtors oppose the motion. For the reasons that follow, I conclude that I may hear evidence on damages, and accordingly, deny the motion.
The debtors, Highland Financial Corporation ("Financial") and Highland Cotton Corporation ("Cotton") were formerly engaged in certain aspects of the cotton lending business, operating respectively under the names Falconwood Financial Corporation and Falconwood Cotton Corporation.1 Financial made secured loans to cotton merchants for 80% to 90% of the value of the underlying collateral. Thompson and Wallace of Memphis, Inc. v. Falconwood Corp., 100 F.3d 429, 431 (5th Cir.1996) ("Falconwood"). Cotton advanced funds to customers by depositing money with Financial to adequately margin a merchant's loan. Id. The Claimants were cotton merchants who did business with the debtors from June 1990 to sometime in 1993.
In 1993, the Claimants filed an action in Texas state court which the debtors removed to the United States District Court for the Northern District of Texas.2 The complaint charged the debtors, inter alia, with (1) violations of the Texas Deceptive Trade Practices Act (the "Texas Act"), (2) negligence and (3) breach of fiduciary duty relating to the parties' joint venture. The debtors counterclaimed for unpaid loans, and asserted various affirmative defenses including contributory negligence and waiver.
In June 1995, the Texas federal district court conducted a ten day jury trial. At the conclusion of the trial, the district court instructed the jury to treat the two debtors as a single entity and determined, as a matter of law, that joint ventures existed between the debtors and each defendant. See Falconwood, 100 F.3d at 434. It also refused to charge the jury on the affirmative defenses of contributory negligence and waiver, in effect, granting directed verdicts against the debtors on these issues. Id. Finally, it does not appear that the district court instructed the jury regarding the claims asserted individually by Carl Nichols, III or Jim Dawkins.
The district court submitted special questions to the jury to facilitate its deliberations and verdict. In response to these questions, the jury determined that the debtors had violated the Texas Act (Question No. 1), and were also negligent (Question No. 2) The district court did not include separate questions relating to damages for violation of the Texas act and negligence, and instead, submitted a single question. It stated that if the jury found the debtors liable under either theory, it should determine the Claimants' damages "proximately caused by Falconwood's negligence." (Question No. 3) The jury returned a verdict in favor of T & W in the aggregate sum of $1.1 million ($600,000.00 in lost profits and $500,000.00 in damage to business reputation and good will) and $800,000.00 in favor of Dawkins ($300,000.00 in lost profits and $500,000.00 in damage to reputation or good will). The jury also awarded substantial exemplary damages on account of violations of the Texas Act, (see Question No. 5), but the parties agree that this award fell by virtue of the Fifth Circuit's disposition discussed below.
Having been instructed that a joint venture existed, the jury also found the debtors liable for breach of fiduciary duty. (Question No. 6) The jury awarded damages in the sum of $1,362,282.00 to T & W and $875,188.00 to Dawkins Trading. Thus, excluding the award for exemplary damages, the jury awarded a total of $2,462,282.00 to T & W (but not Nichols) and $1,675,188.00 to Dawkins Trading (but not Jim Dawkins).
Finally, the jury determined that the debtors were not entitled to recover on their counterclaims. Financial's approximate $1.4 million counterclaim against T & W involved an allegation that a T & W employee had submitted bogus proof of collateral thereby increasing T & W's borrowing base. Financial allegedly loaned $1,250,000.00 based upon the non-existent collateral, and T & W defended by arguing that the transaction fell outside the scope of its employee's authority. Hence, this aspect of the counterclaim depended upon the employee's authority, but the district court gave only a cursory charge on the law of agency. In addition, both debtors asserted that the Claimants owed substantial amounts on account of unpaid promissory notes.
Following the verdict and judgment, in December 1995, the debtors filed their chapter 11 petitions. It is undisputed that one of the purposes was to avoid the posting of a supersedeas bond to restrain collection of the judgment. I granted relief from the automatic stay, and the debtors prosecuted their appeal in the Fifth Circuit Court of Appeals. On December 4, 1996, the Court of Appeals affirmed the judgment dismissing the debtors' counterclaim against Dawkins Trading, but reversed and remanded the judgment in all other respects. The Court held that Texas law was inapplicable, and that there was no basis to impose liability under the Texas Act. Falconwood, 100 F.3d at 433. The Court of Appeals also agreed that the district court should have submitted the issues regarding the existence of the joint venture, contributory negligence and waiver to the jury. Id. at 433-34. In addition, the Court concluded that the jury charge pertaining to agency was inadequate. Id. at 434.
The most significant aspect of the Circuit Court's decision to the present dispute concerns the Claimants' damages. The debtors had argued that the district court should have dismissed the complaint as a matter of law because the Claimants' had failed to prove that they were damaged, or at a minimum, granted a new trial. The debtors characterized the Claimants' evidence as "unsubstantiated, and . . . based on speculation and conjecture." Brief of Defendants-Appellants at 23.
The Fifth Circuit undertook to "review `whether a reasonable person could find the profits were not speculative, but were proved with reasonable certainty.'" Falconwood, 100 F.3d at 435 (quoting Hiller v. Manufacturers Prod. Research Group of N. Am., Inc., 59 F.3d 1514, 1522 (5th Cir.1995)). The Court concluded that the Claimants had met their burden of proof. Falconwood, 100 F.3d at 435. The Claimants proffered evidence of cancellation penalties, profit margins, lost customers and historical sales information. While most of the evidence came in through the testimony of the Claimants' own corporate officers, the jury was entitled to believe them. Id.
The opinion concluded:
We affirm the judgment on the verdict on the counterclaim against Dawkins. We reverse the judgment on the verdict as to the Texas Act claim and direct a dismissal. We reverse the judgment on the verdict on the negligence claim, breach of fiduciary duty claim, and counterclaim against T & W. We instruct the district court to give contributory negligence and waiver instructions, to have the jury determine whether a joint venture exists, and to give a more detailed agency instruction.
Each of the four Claimants filed a proof of claim in the sum of $10,000,000.00. The claims rely on a variety of theories including some never raised in the district court. The debtors filed objections to all four claims on the merits, reiterated their affirmative defenses and also requested equitable subordination. In addition, the debtors asserted counterclaims against T & W and Mr. Nichols. Financial seeks $1,131,300.00 and Cotton seeks $1,690,388.00 in liquidated damages, in addition to interest, costs, attorneys fees, punitive damages, an accounting and equitable subordination.
The Claimants maintain, through this motion, that I should not retry the issue of damages. They contend that the mandate of the Fifth Circuit established the Claimants' damages, and I cannot revisit the matter. Thus, I should try the liability issues regarding negligence and breach of fiduciary duty, and if I determine liability, allow the claims in the amounts fixed by the Texas jury. Further, the Claimants acknowledge that I must try the issues of contributory negligence and waiver, but maintain that they are independent of the liability and other issues. Finally, while I must also try the issues surrounding the counterclaims against T & W, these, too, are admittedly independent of the amount of damages suffered by the Claimants.
The debtors disagree, and insist that they are entitled to offer evidence of damages. In the main, they argue that the damages issue is inextricably linked with the questions of contributory negligence and waiver which...
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