In re Monument Record Corp.

Decision Date13 March 1987
Docket NumberNo. 383-00747,383-00766 and 383-00748,Adv. No. 386-0242.,383-00747
Citation71 BR 853
PartiesIn re MONUMENT RECORD CORPORATION, Fred L. Foster, and Lisa L. Foster, Debtors. Lawrence POLLACK, Trustee for Monument Record Corporation, Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORP., Hooker Investments, Ltd., Arthur B. Hancock, III, Fred L. Foster, Federal Land Bank of Louisville, Defendants.
CourtU.S. Bankruptcy Court — Middle District of Tennessee

Robert Ziegler, Kevin J. Jones, Loewenstein, Ziegler & Buffaloe, Nashville, Tenn., for debtors.

Russell H. Hippe, Jr., Trabue, Sturdivant & DeWitt, Nashville, Tenn., for F.D.I.C.

Wm. Caldwell Hancock, Nashville, Tenn., for trustee.

Bradley MacLean, Farris, Warfield & Kanaday, Nashville, Tenn., for Hooker/Hancock.

William Lamar Newport, Nashville, Tenn., for Unsecured Creditors' Committee.


KEITH M. LUNDIN, Bankruptcy Judge.

At issue is the preclusive effect of a Chapter 11 debtor-in-possession's agreed order for relief from the stay in subsequent litigation between the Chapter 11 trustee and the original moving creditor. The trustee is precluded to relitigate issues decided in the prior order.

The following constitute findings of fact and conclusions of law. Bankr.R. 7052.


These Chapter 11 cases were filed in March of 1983. Monument Record Company produces and markets recorded music. Fred Foster owns and is the force behind Monument.

At the filing, Monument and the Fosters were indebted to the Federal Deposit Insurance Corporation ("F.D.I.C.")1 and to Hooker Investments Limited and Arthur B. Hancock ("Hooker/Hancock"). The F.D.I.C. and Hooker/Hancock have large claims and each asserts security interests in assets of Monument and the Fosters, including a "stock pledge agreement". The agreement hypothecates Monument's ownership of stock in the Combine Music Corporation and affiliated companies (the "Combine collateral"). The Combine collateral has substantial value. From the filing, the validity and extent of the security interests of the F.D.I.C. and Hooker/Hancock in the "Combine collateral" have been central to reorganization.

The committee of unsecured claim holders is active in the Monument case. Counsel for the committee was appointed in August of 1983 and has participated extensively in and out of court.

By "agreed order" entered November 20, 1984, approved by counsel for the debtors and counsel for the creditors' committee, Hooker/Hancock was denied relief from the stay conditioned upon confirmation of a plan before March 1, 1985. During 1984, at least three plans were proposed, each offering substantial payment of all claims. By early 1985 all plans had evaporated. Hooker/Hancock received relief from the stay.

On March 27, 1985, the F.D.I.C. moved for relief from the stay. The motion was served on the debtor-in-possession and the creditors' committee. The pretrial order set a preliminary hearing for April 25, 1985 and ordered the parties to prepare a joint pretrial statement. The stay was continued to a final hearing on June 18, 1985.

On June 14, 1985, the debtors and the F.D.I.C. submitted their joint pretrial statement. The F.D.I.C. argued lack of equity, lack of adequate protection and the failure of all reorganization efforts. That Hooker/Hancock asserted a security interest in the F.D.I.C.'s collateral and had been granted relief from the stay was cited as "cause" for relief. Among the assets the F.D.I.C. sought to foreclose upon was described "the stock of Combine Music Corporation (plus varying percentages of stock in related corporations) (hereinafter the "Combine stock")."

The debtors' portion of the pretrial statement argued that the F.D.I.C.'s notes were unenforceable for lack of consideration. The debtors attacked the F.D.I.C.'s security interests as preferences under § 547 and as fraudulent transfers under § 548. The failure to pay sufficient recording taxes was asserted to invalidate the security interests under state law.

At the final hearing on June 18, 1985, counsels were present for the debtors, the F.D.I.C., Hooker/Hancock, the creditors' committee, and for other interested parties. The affidavit of counsel for the creditors' committee states the perception that the debtor-in-possession was unable to seriously contest the F.D.I.C.'s motion and the F.D.I.C. was likely to prevail "across the board . . . the ball game appeared to be about over. . . . what was about to happen was that the F.D.I.C. was going to get complete stay relief in both the Foster and the Monument cases, that the F.D.I.C. would then simply foreclose upon all assets in both cases and bid in the amount of its debt, and that, in consequence, for all practical purposes, the Monument Chapter 11 case was about to end with no distribution to anyone except the F.D.I.C." Affidavit of William Lamar Newport, Exhibit 4, at p. 4.

During an early recess in the final hearing, counsels commenced settlement negotiations. After discussions that day and subsequent days and the exchange of proposed orders, an "agreed order" was entered on June 21, 1985. The order was approved for entry by the F.D.I.C., the debtors, the creditors' committee and Hooker/Hancock.

The order of June 21, 1985, recites that the F.D.I.C. asserts a security interest in the "Combine collateral" and the order validates that security interest as follows:

IT IS ACCORDINGLY ORDERED that the debtors and each of them are indebted to F.D.I.C. pursuant to the above referenced promissory notes and said aggregate indebtedness is secured by a valid first lien security interest in the Combine collateral and proceeds derived therefrom, subject only to the possible liens of Arthur B. Hancock, III, and Hooker Investments, Ltd. discussed herein below and it is further ORDERED that the stay of 11 U.S.C. § 362 as to the Combine collateral is hereby terminated for cause. . . .

In detail, the order requires application of the proceeds from the sale of the Combine collateral to retirement of identified notes. The parties agreed that the Combine collateral would be sold first and, if not paid in full, the F.D.I.C. would be required to seek further stay relief as to other collateral. The order acknowledges the competing lien of Hooker/Hancock and "the relative priority of the F.D.I.C. and Hooker/Hancock's security interest in the Combine collateral is hereby reserved for later resolution. . . ." The final paragraph states:

IT IS FURTHER ORDERED that copies of this order shall be served on all creditors in these cases and shall become final if no objection and request for a hearing is filed within 10 days of its entry.

Notice was given to all creditors. There were no objections. See Bankr.R. 9019.

On October 17, 1985, the Monument creditors' committee moved for the appointment of a trustee. Monument filed a written response in opposition. At the hearing, Monument withdrew its objection and a trustee was appointed on November 1, 1985.

On June 6, 1986, the trustee filed a "verified motion" under Bankruptcy Rule 9024 and Rule 60(b) of the Federal Rules of Civil Procedure seeking relief from the order of June 21, 1985. The motion relates that on June 4, 1986 the trustee reviewed records at Fred Foster's home and found stock certificates representing ownership interests in several companies included in the "Combine collateral." The trustee alleged that these stock certificates were in Mr. Foster's possession at the Monument filing, thus "the June 21, 1985 Agreed Order was entered based upon either `mistake, inadvertence, surprise or excusable neglect . . . fraud, misrepresentation . . . or other misconduct' . . . and in any event good reason exists to set aside the order. . . ." The trustee requested an expedited hearing because the F.D.I.C. was in final preparation for sale of the Combine collateral.

After several days of evidence, including testimony by counsel for the creditors' committee, the F.D.I.C. and others, the trustee's Rule 60(b) motion was denied.2 This court found that the validity and extent of the F.D.I.C.'s security interest in the Combine collateral was at issue at the final hearing on the F.D.I.C.'s request for relief from the stay. The stock certificates later found by the trustee were identified in the pretrial statement. No party claimed or proved misrepresentation or fraud. There were no deficiencies of notice or lost opportunity to participate in the relief stay process. Counsel for the creditors' committee and others conducted discovery and examined the collateral files of the F.D.I.C. and its predecessor bank. The evidence demonstrated "there was a mistaken assumption that the F.D.I.C. had the stock." This was a mistake as to a matter which the parties contemplated and which the parties knowingly assumed the risk. Detrimental reliance by the F.D.I.C. on the finality of the June 1985 order was demonstrated.

The order denying Rule 60(b) relief was appealed. The United States District Court for the Middle District of Tennessee affirmed. Pollack v. FDIC (In re Monument Records Corp.), No. 8-86-0675 (M.D. Tenn. November 25, 1986).

On July 2, 1986 the Monument trustee filed this adversary proceeding complaining that the F.D.I.C.'s security interest in the "Combine collateral" was unperfected at the filing and is defeated by 11 U.S.C. § 544. The trustee asserts that the F.D.I.C.'s lien is voidable pursuant to 11 U.S.C. § 506(d). The trustee attacks the F.D.I.C.'s security interest under 11 U.S.C. § 548. The trustee requests "marshalling orders" to adjust the liquidation of collateral. In the alternative, the trustee seeks "reconsideration" of the F.D.I.C. and Hooker/Hancock claims pursuant to 11 U.S.C. § 502(j).

The F.D.I.C. moved for partial summary judgment that the order of June 21, 1985 precludes relitigation of its rights in the Combine collateral.


The United States Court of Appeals for the Sixth Circuit states the conditions for application of res judicata and collateral estoppel in...

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