In re Morrow, Bankruptcy No. LA 95-14358. Adv. No. 95-04174-ES.

CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California
Decision Date22 November 1995
Docket NumberBankruptcy No. LA 95-14358. Adv. No. 95-04174-ES.
PartiesIn re Howard C. MORROW, Debtor. Howard C. MORROW, Plaintiff, v. TORRANCE BANK, David Bretoi, Constantine Farmans, Dustin Brown, Neil Stoltz, Richard Pierce, Commissioner of the Department of Savings and Loan, and Does 1 Through 20, Inclusive, Defendants.

189 B.R. 793 (1995)

In re Howard C. MORROW, Debtor.
Howard C. MORROW, Plaintiff,
v.
TORRANCE BANK, David Bretoi, Constantine Farmans, Dustin Brown, Neil Stoltz, Richard Pierce, Commissioner of the Department of Savings and Loan, and Does 1 Through 20, Inclusive, Defendants.

Bankruptcy No. LA 95-14358. Adv. No. 95-04174-ES.

United States Bankruptcy Court, C.D. California.

November 22, 1995.


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Richard H. Loomis, Keith Alan, Horn & Loomis, Los Angeles, CA, for Debtor and Plaintiff Howard C. Morrow

Jon E. Drucker, Hill, Wynne, Troop & Meisinger, Los Angeles, CA, for Defendants Torrance Bank, David Bretoi, Constantine Farmans, Dustin Brown, Neil Stoltz and Richard Pierce.

Herbert A. Levin, Raymond B. Jue, Deputy Attorneys General of the State of California, for Defendant Interim Commissioner of the Department of Savings and Loan of the State of California.

MEMORANDUM OF DECISION RE: TRIAL ON INJUNCTION AND DECLARATORY RELIEF

ERITHE A. SMITH, Bankruptcy Judge.

This Memorandum of Decision constitutes this Court's findings of fact and conclusions of law pursuant to Fed.R.Bankr.P. 7065, Fed.R.Civ.P. 65, Fed.R.Bankr.P. 7052, and Fed.R.Civ.P. 52(a). This Court has jurisdiction over the instant adversary proceeding

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pursuant to 28 U.S.C. §§ 157(b)(1), 1334(b). See Fed.R.Bankr.P. 7001(7), (9).1

I. FACT SUMMARY

State Court Actions

Howard C. Morrow (the "Debtor" or "Morrow") served as Chairman of the Board and Chief Executive Officer of Torrance Bank (fka Torrance Savings and Loan Association) (the "Bank"), and (at least at the time of the incidents complained of) held voting rights to 19.4% of the issued stock in South Bay Holding Company, the 100% owner of the Bank. On February 17, 1995, Morrow filed a voluntary chapter 7 petition in this Court, commencing case number LA 95-14358-ES (the "Case").

On June 19, 1995, Morrow filed a "Complaint for: 1. Declaratory Relief; and 2. Injunction;" (the "Morrow State Court Complaint") in the Superior Court of the State of California for the County of Los Angeles (Case No. YC023661) (the "Morrow State Court Action"), commencing litigation against the Bank and various members of its board of directors (the "Board"). In the Morrow State Court Complaint, the Debtor accused various members of the Board of trying to remove him from the Board and of attempting to use the bankruptcy filing as a means of terminating his participation on the Board. Specifically, Morrow accused defendant and Board member David Bretoi of contacting the Department of Savings and Loans of the California State Business, Transportation, and Housing Agency, allegedly in an effort to solicit the department's assistance in effecting Morrow's removal from the Board.

On May 17, 1995, Keith Paul Bishop, the Interim Commissioner of the Savings and Loan Department (the "Commissioner") issued a letter to the Board directing their attention to Cal.Fin.Code § 6152(a), which provides that:

. . . A director shall automatically cease to be a director upon being adjudicated as bankrupt or upon conviction of a criminal offense involving dishonesty or a breach of trust.

Cal.Fin.Code § 6152(a) (Emphasis added).

The letter focuses on the meaning of the archaic term "adjudicated as bankrupt" and the use of new terminology designating the commencement of a bankruptcy case as entry of an "order for relief". The Commissioner concluded:

The order for relief, generally speaking, has the same effect as an "adjudication" under prior law.
It is our interpretation of Financial Code Section 6152(a) that the reference to "being adjudicated a bankrupt" means the filing of a voluntary petition in bankruptcy, which is its current legal equivalent. Accordingly, a director ceases to be a director upon the filing of a voluntary petition, automatically and without the necessity of any action by the board of directors or any other person.
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Eight days later, Alan Spatz of Hill, Wynne, Troop & Meisinger, counsel for the Bank, forwarded a letter to the Board regarding Morrow's status as a director of the Bank. Acknowledging the Commissioner's letter, Spatz's communication similarly contemplated the issue of "whether the filing of a voluntary petition in bankruptcy is tantamount to be adjudicated as bankrupt." Noting the absence of any "regulation or case" addressing the issue, the Board's attorney recommended that the Board take the position that Morrow ceased to be a director of the Bank. Spatz indicated that if Morrow sought a judicial determination of his status as a director, Spatz assumed that the Bank "would remain neutral and would abide by whatever judicial determination was made." On May 31, 1995, apparently in response to the Commissioner's letter and the opinion of its counsel, the Board unanimously voted to prohibit the Debtor from participating in further meetings of the Board.

The Morrow State Court Complaint sought a judicial determination of the various parties to the action "with reference to the impact of . . . section 6152(a) and the interpretation thereof by the . . . Commissioner with regard to" Morrow as well as an injunction against the Bank and Board barring them "from denying Morrow the right to continue to participate and serve as a member of the Board . . .". Concurrently with the filing of the Morrow State Court Complaint, the Debtor filed an "Ex Parte Application for Temporary Restraining Order" and "Order to Show Cause re: Preliminary Injunction and Temporary Restraining Order". The Bank filed a response, essentially echoing the statements of its counsel noted above. Morrow was granted an ex parte temporary restraining order and preliminary injunction enjoining the Board from prohibiting him from attending and participating in the meetings of the Board.

On June 28, 1995, the Commissioner, in In the Matter of Howard C. Morrow a Savings and Loan Holding Company of Torrance Bank, S.S.B., a California Savings and Loan Association, issued an "Order Financial Code 8200" (the "Cease and Desist Order") in which he found Morrow ceased to be a member of the Board by operation of law under Cal.Fin.Code § 6152(a) on the date he filed his petition. The Commissioner found that Morrow's continuing attempts to assert himself as a member of the Board and participate in its activities violated section 6152(a). The Commissioner ordered that Morrow "cease and desist, immediately and in the future, from participating in the business of Torrance Bank as a member of its board . . . ".

On behalf of the Commissioner, the Attorney General of the State of California filed an "Ex Parte Application for Order Enforcing Regulatory Order to Cease and Desist Participation as a Director of Savings and Loan Association" (the "Application") on July 12, 1995. The Application was made concomitantly with the commencement of a new Superior Court case entitled Commissioner of the Department of Savings and Loan v. Howard C. Morrow, Case No. BS 034650 (the "Commissioner State Court Action") and pursuant to Cal.Fin.Code § 8200(f) whereby the Commissioner is authorized to

apply for enforcement of the order to the superior court in the county in which the home office of the association or the person is located. The order shall be enforced ex parte and without notice by the court. The proceedings shall be given precedence over other cases pending in court, and shall in every way be expedited.

Cal.Fin.Code § 8200(f). In the Application, the Commissioner asked that the court issue an order mandating Morrow's compliance with the Cease and Desist Order. In relevant part, the Commissioner employed the legislative history of the Bankruptcy Code to argue the validity of his Cease and Desist Order, based upon the premise that "adjudication as bankrupt" as used in Cal.Fin.Code § 6152(a) should be construed to mean the simple act of filing a bankruptcy petition in light of changes in the Bankruptcy Code abolishing the use of the term.2

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Morrow responded to the Application with his own "Ex Parte Application for an Order Quashing the Cease and Desist Order, or in the Alternative, Granting Plaintiff a Stay in Accordance with the June 29, 1995 Preliminary Injunction Issued in this Case" and a "Supplemental Memorandum of Points and Authorities in Support of Ex Parte Application" (the "Supplement"), urging the court instead to confirm its prior injunction barring interference with Morrow's directorship at the Bank. By contrast, Morrow argued that the phrase "adjudicated as bankrupt" should be tantamount to "entry of discharge", as evinced by certain California caselaw,3 and semantics.4 On the last page of the July 24, 1995 Supplement, the Debtor first addressed the issue of whether the Bankruptcy Code itself precludes what Cal.Fin.Code § 6152(a) explicitly authorizes.5

The Superior Court denied the Debtor's request to quash or stay the Commissioner's Cease and Desist Order on July 14, 1995 and continued hearings on the Commissioner's own application to July 25, 1995. Notably, in his "Memorandum of Points and Authorities in Support of Order Enforcing Cease and Desist Order Financial Code § 8200(f) and (g)", the Commissioner responds to Morrow's argument based on 11 U.S.C. § 525(a) by arguing its inapplicability on the grounds that neither the Commissioner nor the Department of Savings and Loan, nor the State of California employed Morrow. The Commissioner maintained that in issuing the Cease and Desist Order, he was not discriminating against Morrow, but "was manifestly carrying out his statutory responsibilities to enforce the law regulating the savings and loan industry in California." In his "Opposition

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of Howard C. Morrow to Motion of the Commissioner of the Department of Savings and Loan for Order Enforcing Cease and Desist Order Financial Code § 8200" (the "Opposition"), the Debtor reiterated his definitional arguments involving...

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