In re Legal Econometrics, Inc.

• Decision Date: 26 July 1994
• Docket Number: 393-36940-HCA-11. Adv. No. 393-3585,393-3412 and 394-3007.,Bankruptcy No. 393-35603-HCA-11
• Citation: 169 BR 876
• Parties: In re LEGAL ECONOMETRICS, INC., Debtor. LEGAL ECONOMETRICS, INC. and Malcolm M. Kelso, Plaintiffs, v. CHAMA LAND & CATTLE COMPANY, INC., et al., Defendants. In re Grady H. VAUGHN, III, Debtor. REGENCY SAVINGS BANK, F.S.B., Plaintiff, v. Grady H. VAUGHN, III, et al., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Texas

169 B.R. 876 (1994)

In re LEGAL ECONOMETRICS, INC., Debtor.

LEGAL ECONOMETRICS, INC. and Malcolm M. Kelso, Plaintiffs, v. CHAMA LAND & CATTLE COMPANY, INC., et al., Defendants.

In re Grady H. VAUGHN, III, Debtor.

REGENCY SAVINGS BANK, F.S.B., Plaintiff, v. Grady H. VAUGHN, III, et al., Defendants.

Bankruptcy Nos. 393-35603-HCA-11, 393-36940-HCA-11. Adv. Nos. 393-3585, 393-3412 and 394-3007.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

July 26, 1994.

Stephen Sakonchick, II, Austin, TX, for Regency Sav. Bank, F.S.B.

Robert Cook, Cook, Meda & Lane, Tishman Biltmore Office Park, Phoenix, AZ, for Grady H. Vaughn.

Stephen F. Malouf, Law Offices of Stephen F. Malouf, P.C., Dallas, TX, Steven D. Cundra, Thompson, Hine & Flory, Washington, DC, for Malcolm M. Kelso and Legal Econometrics, Inc.

Bruce W. Bowman, Jr., Vial, Hamilton, Koch & Knox, Dallas, TX, for Gary Vaughn.

Robert S. Harrell, Karl G. Dial, Fulbright & Jaworski L.L.P., Houston, TX, for Akin, Gump, Strauss, Hauer & Feld, L.L.P.

REVISED FINDINGS OF FACT AND CONCLUSIONS OF LAW AFTER TRIAL OF CLAIMS OF REGENCY SAVINGS BANK, F.S.B.

HAROLD C. ABRAMSON, Bankruptcy Judge.

BACKGROUND

The claims of Regency Savings Bank, F.S.B. ("Regency") that are the subject of these Findings of Fact and Conclusions of Law represent one relatively discrete phase of an epic mass of interrelated litigation, which includes at least 15 other adversary proceedings pending in this Court in connection with eight Chapter 11 bankruptcy cases. The Court feels obliged to set forth, for the benefit of any reviewing court, a very brief, broad overview of the facts relevant to this portion of the litigation.

Grady H. Vaughn, III, is the son of a wealthy businessman and is himself a long-time Dallas businessman. At one time Grady and his adopted brother Gary held a substantial inherited fortune. That fortune consisted of, inter alia, oil and gas holdings and a huge game ranch and hunting lodge in Chama, New Mexico. Grady, as one of the trustees of Gary's support trust, controlled Gary's share of the inherited assets as well as his own share.

At all times relevant to the litigation, Grady owed several million dollars to NCNB Texas National Bank ("NCNB") or NCNB's successors. The NCNB debt was secured by essentially all of Grady's property, including Grady's 2/3 share of the outstanding stock of Chama Land & Cattle Company, Inc. ("Chama"), which owned the game ranch.¹

In early 1989, federal and state authorities began an investigation of allegedly illegal wildlife trapping and other activities at the Chama ranch. Grady, looking for a way out of the Chama enforcement action as well as his personal financial problems, decided to enlist the aid of Legal Econometrics, Inc. ("LEI") and its principal Malcolm Kelso, a self-styled "crisis manager" and litigation consultant for troubled businesses. Kelso, LEI, Grady Vaughn, LEI's attorneys Akin, Gump, Strauss, Hauer & Feld, L.L.P. ("Akin Grump"), and others constructed a series of corporate transactions (the "1990 Transactions") that resulted in the installation of Kelso at the helm of the Chama business operation and the effective transfer of most of Chama's assets to separate Vaughn-related entities.² It is alleged that the 1990 Transactions greatly diminished the value of Chama's stock. It is also alleged that Grady siphoned substantial liquid assets from Gary's support trust, used those assets to fund litigation and pay LEI, and replaced the assets with less valuable, illiquid ownership positions in various closely held corporations. This treatment of Gary's trust assets led to the 1991 filing of Gary W. Vaughn, et al. v. Grady H. Vaughn, III, et al. v. Akin, Gump, Hauer & Feld in Dallas County Civil District Court — the first spark in this conflagration of lawsuits.

Meanwhile, in November 1991, NCNB transferred all of its interest in Grady's note and collateral to the FDIC pursuant to the terms of a 1988 "Assistance Agreement" between NCNB and the FDIC. The FDIC, in turn, sold all of its interest in the note and collateral to Regency in July 1992.

Grady Vaughn, LEI, and Kelso filed their respective Chapter 11 bankruptcy cases during June and October 1993 in three separate districts. (LEI filed its petition on June 10; Grady Vaughn on June 15; and Kelso on October 11, 1993.) All three cases are now pending before this Court. Several months later, five more Chapter 11 cases were filed in the District of New Mexico on behalf of five corporations involved in the 1990 Transactions: Chama, Antigone Corporation, American Elk Conservatory, Inc., American Elk Conservatory Holdings, Inc., and Lodge at Chama, Inc. (collectively, "Five New Mexico Corporations"). These cases have likewise been transferred to, and are now pending before, this Court. Various state-court lawsuits were removed to this Court as adversary proceedings in connection with the bankruptcy cases; several additional adversary complaints, including Regency's Adversary Proceeding No. 394-3007, were subsequently filed in this Court.

Chapter 11 trustees have been appointed in the bankruptcy cases of the Five New Mexico Corporations. Grady Vaughn, LEI, and Kelso continue to act as debtors-in-possession in their respective bankruptcy cases.

Regency has obtained an order modifying the automatic stay in Grady Vaughn's bankruptcy case and foreclosed on Grady's stock in Chama Land & Cattle Company, Inc.

THE "MASTER ADVERSARY": ADVERSARY PROCEEDING NO. 393-3585

LEI and Kelso filed Adversary Proceeding No. 393-3585 as a "Master Adversary," which LEI's counsel has described to the Court as LEI's attempt to bring all parties and claims together into one "umbrella" lawsuit. The Master Adversary has been administratively consolidated with several other lawsuits removed from state courts.

Trial in the Master Adversary began at the end of March 1994 but ended after only two days of testimony about the 1990 Transactions. At that point several of the parties, including Gary Vaughn, Grady Vaughn, LEI, Kelso, Akin Gump, and the Five New Mexico Corporations, announced to the Court their intention to settle their differences. Because Regency was not part of this semi-global settlement, the Court announced that Regency's claims would be "carved out" and tried at a later date. The Court subsequently entered a written order providing that "all evidence heard to date in Adversary No. 393-3585 and Adversary No. 394-3007 will be preserved and channeled for trial of Regency's claims in the nature of § 523 actions, which shall be tried as core matters together with Regency's interwoven claims against other parties remaining in Adversary Proceeding No. 394-3007."

THE REGENCY LAWSUIT: ADVERSARY PROCEEDING NO. 394-3007

In Adversary Proceeding No. 394-3007, filed January 6, 1994, Regency asserts the following causes of action against the following defendants:

Fraudulent transfer against Grady Vaughn, three of the Five New Mexico Corporations, and Kelso;

Civil conspiracy to defraud against, inter alia, LEI, Kelso, Grady Vaughn, and Akin Gump; and

Fraud and breach of contract against Grady Vaughn.

In addition to monetary damages, Regency seeks rescission of the 1990 Transactions, alleging that they amounted to fraudulent conveyances. Regency also requests a declaratory judgment that the 1990 Transactions were void ab initio.

In support of its claims, Regency argues that Grady Vaughn committed fraud by failing to disclose information that he had a duty to disclose to NCNB and its successors in interest — i.e., that the 1990 Transactions violated loan covenants between Grady Vaughn and NCNB by taking assets out of Chama and decreasing the value of the Chama stock held as collateral by the bank. In ¶ 4(kk), the Loan Agreement between Grady Vaughn and NCNB specifically forbade Vaughn from approving without the bank's prior written consent "the sale, exchange or other disposition of any material asset of Chama." Regency, as NCNB's successor in interest, seeks to recover the value of the Chama stock as it would have been if the 1990 Transactions had never taken place.

On April 29, 1994, the Court entered its Preliminary Conclusions of Law Regarding Claims of Regency Savings Bank, F.S.B. The Court therein concluded, inter alia:

(1) That all claims raised by Regency in Adversary Proceeding No. 394-3007 against Chapter 11 debtors are core proceedings within the meaning of 28 U.S.C. § 157(b)(2);³

(2) That Regency\'s claims regarding fraudulent transfers of the assets of Chama and the rest of the Five New Mexico Corporations could be asserted only by the Chapter 11 trustees of those estates, that Regency has no standing to assert such claims, and that Regency\'s fraudulent transfer claims should be dismissed; and

(3) That Regency\'s other claims against Grady Vaughn, Kelso, and LEI⁴ are in substance actions under 11 U.S.C. § 523, challenging the dischargeability of debts allegedly owed by those debtors to Regency.

The Court thus fashioned a framework to allow a fair trial of Regency's allegations against debtors LEI, Kelso, and Grady Vaughn and construed Regency's complaint "so as to do substantial justice" as Federal Rule of Bankruptcy Procedure 7008 and Federal Rule of Civil Procedure 8(f) require this Court to do. Regency's complaint as filed might otherwise violate the automatic stay and would result, at most, in the Court's estimation of Regency's allowable claims.

Because the claims against the various debtors are core proceedings, the Court has jurisdiction over them under 28 U.S.C. § 1334. Akin Gump, as a nondebtor defendant, has consented to this Court's jurisdiction over, and this Court's entry of final orders regarding, Regency's claims against Akin Gump. Several other defendants did not participate in the trial, which began May 18, 1994 and concluded two days later.⁵

MIXED FINDINGS OF FACT AND CONCLUSIONS OF LAW

The Court adopts the parties' written stipulation of facts, a copy...