In re Vaughn

• Decision Date: 17 October 1978
• Docket Number: No. CA3-78-970-F.,CA3-78-970-F.
• Citation: 462 F. Supp. 1040
• Parties: In re Michael J. VAUGHN.
• Court: U.S. District Court — Northern District of Texas

462 F. Supp. 1040

In re Michael J. VAUGHN.

No. CA3-78-970-F.

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

September 13, 1978.

On Rehearing October 17, 1978.

COPYRIGHT MATERIAL OMITTED

James C. Tubb, Vial, Hamilton, Koch, Tubb, Knox & Stadley, Dallas, Tex., Fred Hagan, Bracewell and Patterson, Houston, Tex., for plaintiffs; William D. Neary, Daniel C. Stewart, Van Oliver, Thompson, Knight, Simmons & Bullion, Dallas, Tex., of counsel.

Hilton H. Howell, Naman, Howell, Smith, Lee & Muldrow, Waco, Tex., for bankrupt.

Michael E. Rohde, Geary, Stahl, Koons, Rohde & Spencer, L. E. Creel, III, Creel, Atwood & Chapman, Dallas, Tex., for trustee.

MEMORANDUM OPINION

ROBERT W. PORTER, District Judge.

In early 1976 Michael J. Vaughn and M.J.V., Inc. owed a note payable to the F.S.B. Liquidating Trust in the amount of $1,887,034.00. The note was secured by 30,300 shares of stock in the American Bank of Waco, Texas. Robert A. Mann and Walter J. Rusek, Trustee for certain trusts created for the three Mann children, controlled the F.S.B. Liquidating Trust and told Vaughn and M.J.V., Inc. that they would instruct the trust to refuse to extend the due date of said note and to foreclose on the collateral unless full payment was received immediately by the trust.

Mann and Rusek allegedly agreed to lend to Vaughn and M.J.V., Inc. $745,761.00 for a period of six months and one day on the condition that Vaughn and M.J.V., Inc. repay the $745,761.00 amount plus an additional $745,761.00 the transaction. Security for this alleged loan was an option of North American Coal Corporation to purchase 5,000 acres of land owned by Vaughn and M.J.V., Inc. (Vaughn and M.J.V., Inc. were allegedly to receive $2,684,174.00 if the option was exercised).

On June 11, 1976, Vaughn and M.J.V., Inc. brought a state court suit in Anderson County, Texas alleging that the transaction involved a charge of interest that exceeded the maximum rate permitted by law, and requesting judgment in the amount of $2,834,239.00 or in the alternative for title and possession of the 5,000 acres of land and $150,065.00.¹ Vaughn and M.J.V., Inc. also requested recovery of attorney's fees in the amount of $350,000.00. Mann and Rusek apparently took the position in the state court suit that the alleged loan was in reality a sale, and therefore Vaughn and M.J.V., Inc. were not entitled to recover under the Texas Usury Laws, Art. 5069, Tex.Rev.Civ. Stat.

On December 9 and 10, 1976, Mann and Rusek took the depositions of Vaughn and his attorney, Hilton Howell. During these depositions Vaughn indicated that he had entered into the February and May, 1976 transactions with some thought of subsequently filing a usury suit against Mann and Rusek.² Hilton Howell indicated in his deposition, however, that he believed the transactions were sales, and not loans, and he participated in their preparation.

On July 14, 1977, the state court case was tried to a jury, but resulted in a mistrial. Subsequent to that date, Vaughn was adjudicated a bankrupt upon the petition of several of Vaughn's creditors, filed on July 18, 1977. Vaughn's trustee was then substituted as a party in the state court action.

Mann and Rusek assert that the import of Vaughn's testimony concerning the transaction did not become fully apparent until they had had an opportunity to review Vaughn's bankruptcy schedules as part of their preparation for the retrial of the state case on September 18, 1978. These schedules were not available to Mann and Rusek prior to the first state court trial because Vaughn had not been adjudicated a bankrupt at that time. The Bankruptcy Court received copies of Vaughn's bankruptcy schedules on October 25, 1977. Creditors do not receive copies of these schedules, Bankruptcy Rule 108, and Mann and Rusek alleged that it was only when they began to prepare for the retrial of the state court case that they received these schedules and discovered Vaughn's other usury cases.

The schedules disclose a number of usury lawsuits filed by Vaughn shortly before his creditors placed him in bankruptcy. Mann and Rusek surmised that once Vaughn's financial difficulties became severe in 1976 and early 1977, Vaughn decided to employ a unique financing plan by entering into transactions with third parties with the intention of later suing them under the Texas Usury Statute, hoping to keep the transaction proceeds and receive as a windfall under the statute double the amount of interest allegedly charged.

On May 22, 1978, Mann and Rusek filed a complaint under Bankruptcy Rule 701 et seq. requesting permission from the Bankruptcy Court to file a counterclaim in the State Court action. The automatic stay provisions of Bankruptcy Rule 401(a) ordinarily prevent, without prior bankruptcy court approval, the initiation or continuation of any cause of action against the bankrupt. Bankruptcy Rule 401(a). Violation of the automatic stay provision can result in imposition of severe penalties. Fidelity Mortgage Investors v. Camelia Builders, Inc., 550 F.2d 47 (2nd Cir. 1976), cert. den'd., 429 U.S. 1093, 97 S.Ct. 1107, 51 L.Ed.2d 540 (1977). The proposed counterclaim would allege that Vaughn had violated the Texas Deceptive Trade Practices Act, D.T.C.A. Bus. and Com. Code, § 17.46(b)(12), and had committed tortuous fraud by entering into the transaction and other agreements with the intention of suing for usury as soon as the deals were completed in an effort to finance Vaughn's sagging fortunes.

On July 24, 1978, the Bankruptcy Court held that: (1) no complaint to determine dischargeability was before the Court, and therefore the Court assumed the claims and the proposed counterclaim were provable; (2) any recovery by Mann and Rusek on their counterclaim against Vaughn could not be offset under § 68 of the Bankruptcy Act against Vaughn's recovery against them on Vaughn's usury claim, and; (3) the Bankruptcy Court would not lift the Rule 401(a) stay to permit the filing of the counterclaim because Mann and Rusek had not shown either that the proposed counterclaim was a non-dischargeable debt or that the proposed counterclaim, as a provable debt, could be offset by any recovery by Vaughn in the state court usury suit. Mann and Rusek appealed and requested that this court permit an expedited appeal under Bankruptcy Rule 814. I granted the application for an expedited appeal.

DISCHARGEABILITY UNDER SECTION 17

Time to File Section 17(c)(1) Complaint

Plaintiffs' complaint filed May 22, 1978 sought in the prayer for relief: (1) modification of the Rule 401(a) stay to permit the filing of Plaintiffs' proposed counterclaim in the state court action; (2) a determination by the Bankruptcy Court that by filing the complaint to lift the stay, Plaintiffs were not subjecting themselves to the summary jurisdiction of the Bankruptcy Court, and; (3) an order extending the date to file complaints for determination of the dischargeability of the bankrupt's debts under Section 17(a)(2), (4) and (8) until sixty days following such time as a judgment was rendered in the state court proceeding.³ Plaintiffs, in the body of their complaint, requested that the Bankruptcy Court recognize that the claims asserted in the proposed counterclaim were not provable debts within the meaning of Section 63 of the Bankruptcy Act so as not to be dischargeable under Section 17 but then on page 5 of their complaint indicated that "(t)o the extent judgment is rendered in the state court action on the aforementioned counterclaim, your Plaintiffs herein intend subsequently to file an appropriate complaint with this Court to determine the dischargeability of such judgment debt."

Section 17(c)(2) of the Bankruptcy Act, 11 U.S.C. § 35(c)(2) provides that "(a) creditor who contends that his debt is not discharged under Clause (2), (4), or (8) of subdivision (a) of this section must file an application for a determination of dischargeability within the time fixed by the Court . . . and, unless an application is timely filed, the debt shall be discharged." (emphasis added) This section also provides that no application need be filed for a debt excepted by Clause (8) if: (1) a right to trial by a jury exists and (2) a timely demand for a jury has been made or the creditor submits a signed statement of his intention to do so. Bankruptcy Act § 17(c)(2), 11 U.S.C. § 35(c)(2).

The Bankruptcy Court's determination that "(n)o Complaint to determine dischargeability is before me . . . (therefore) . . . for the limited purpose of determining whether the stay should be lifted, I assume provability" was a clearly erroneous conclusion of law for three reasons.⁴ First, Plaintiff's complaint, read in its entirety, raised, albeit very ambiguously, the issue of dischargeability.⁵ See footnote 3. Second, no application for a determination of dischargeability is necessary under § 17(a)(8) when a jury has been demanded, so the Bankruptcy Court could not use that requirement to avoid a determination of § 17(a)(8) dischargeability. Finally, assuming that the complaint did not adequately raise the issue of dischargeability of the proposed counterclaim, Plaintiff's complaint adequately raised the issue of extending the deadline for filing complaints to determine dischargeability, and the Bankruptcy Court was clearly erroneous in failing to exercise one of the following options: (1) grant the requested extension of time for filing complaints to sixty days after judgment was rendered in the state court action; (2) decide the Plaintiff's complaint in a reasonable period of time before July 19, 1978, the cutoff date for filing dischargeability complaints; or (3) permit Plaintiffs a reasonable extension of time to file a complaint to determine dischargeability.

Dischargeability Complaint

The requirement of filing a timely complaint to determine dischargeability has been strictly construed by the Courts. Hubbard v. Hubbard, 577 F.2d 98 (9th Cir. 1978) (...