In re Vaughn

• Decision Date: 29 December 1978
• Docket Number: No. CA3-78-970-F.,CA3-78-970-F.
• Citation: 462 F. Supp. 1052
• Parties: In re Michael J. VAUGHN.
• Court: U.S. District Court — Northern District of Texas

462 F. Supp. 1052

In re Michael J. VAUGHN.

No. CA3-78-970-F.

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

December 29, 1978.

James C. Tubb, Vial, Hamilton, Koch, Tubb, Knox & Stadley, Dallas, Tex., William Hagan, Bracewell & 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.

OPINION

ROBERT W. PORTER, District Judge.

Plaintiffs in this case, Robert A. Mann and Walter J. Rusek, Trustee, are Defendants in a state court usury action filed by the Bankrupt Michael J. Vaughn (and assumed by the Trustee in bankruptcy). In the state court action, after the commencement of the Vaughn bankruptcy, Mann sought to file a counterclaim alleging three causes of action: (1) violation of the Texas Deceptive Trade Practices Act, V.T.C.A., Bus. & Comm.Code, § 17.46(b)(12); (2) statutory fraud (Bus. & Comm.Code, V.T.C.A., § 27.01); and (3) common law fraud.¹

Bankruptcy Rule 401(a) stays any action based upon an unsecured provable debt except for a claim not dischargeable under section 17(a)(2), (3), (4) or (8) from being pursued against the bankrupt unless the Bankruptcy Court lifts the stay. Compliance with Rule Rule 401(a) may be enforced through the imposition of substantial fines. Fidelity Mortgage Investors v. Camelia Builders Inc., 550 F.2d 47 (2nd Cir. 1976), cert. denied, 429 U.S. 1093, 97 S.Ct. 1107, 51 L.Ed.2d 540 (1977) ($20,000 fine.) Although Mann believed that Rule 401(a) did not prevent the filing of the counterclaim, Plaintiffs filed a complaint seeking the Bankruptcy Court's permission to file the counterclaim. Bankruptcy Rule 701. The Bankruptcy Court assumed that the three claims were provable, and rejected Plaintiffs' application to lift the stay.

On appeal this court remanded to the Bankruptcy Court because: (1) the Bankruptcy Court had only reviewed Plaintiffs' statement of what they intended to file as a counterclaim in the state court action and not an actual copy of the counterclaim; and (2) the Bankruptcy Court should have considered Plaintiffs' dischargeability claims. On rehearing this court indicated that although it would not be permissible for the District Court to consider additional evidence (the proposed counterclaim) on appeal, if the Bankruptcy Court felt that referral of the issue to the District Court would expedite resolution of the case, then this court would withdraw the issue from the Bankruptcy Court's consideration. Bankruptcy Rule 102(a).

The Bankruptcy Court recommended withdrawal of the provability/dischargeability issues in this case, and those issues are now withdrawn from the Bankruptcy Court's consideration. Bankruptcy Rule 102(a).

Plaintiffs have submitted a copy of their counterclaim for the court's consideration and I now decide the following issues:

(1) Are the proposed three causes of action asserted in the Mann counterclaim defenses under section 70(a)(6) of the Bankruptcy Act?

(2) Are the proposed three causes of action asserted in the Mann counterclaim provable debts?

(a) If the causes of action asserted in the counterclaim are provable, are they nevertheless not dischargeable under sections 17(a)(2), (3), (4) or (8)?

(b) If the causes of action asserted in the counterclaim are provable and dischargeable, are they nevertheless permissible offsets

under section 68 of the Bankruptcy Act?²

Defenses under Section 70(a)(6)

Section 70(a)(6) (11 U.S.C. § 110(a)(6)) provides that the trustee of the estate of the bankrupt is vested by law with the title of the bankrupt as of the date of the filing of the bankruptcy petition of all rights of action arising upon contracts, or usury, or the unlawful taking or detention of or injury to the bankrupt's property. ". . . (T)he general rule is that a trustee in bankruptcy is not an innocent purchaser, but takes the property of the bankrupt subject to all valid liens, claims, and equities existing against it in the hands of the bankrupt at the time the petition is filed . . ." Commercial Credit Co. v. Davidson, 112 F.2d 54, 56 (5th Cir. 1940); In Re Alikasovich, 275 F.2d 454, 457 (6 Cir. 1960).

A trustee stands in the bankrupt's shoes when he asserts the bankrupt's rights of action, and any defense, legal or equitable, which might have been raised against the bankrupt may be raised against the trustee. Seligson v. New York Produce Exchange, 378 F.Supp. 1076 (S.D.N.Y.1974); Buchman v. American Foam Rubber Corp., 250 F.Supp. 60 (S.D.N.Y.1965); 4A Collier on Bankruptcy § 70.28 p. 385 (14th Ed. 1976). The assertion of provable and allowable counterclaims and set-offs is governed by Section 68 (11 U.S.C. § 108) of the Bankruptcy Act.

Mann argues that the counterclaim represents a Section 70(a)(6) defense. The trustee argues that Commercial Credit and Alikasovich are cases wherein the court was considering a claim against particular property of the bankrupt, either a lien or a mortgage; thus, the Section 70(a)(6) defense concept does not apply where a general claim is asserted against the bankrupt himself. The trustee also questions Mann's assertion that the counterclaim is a "claim" or "defense".

Mann seeks affirmative recovery under the Texas Deceptive Trade Practices Act (DTPA), statutory fraud, and common law fraud. In the prayer for relief, Mann requests affirmative recovery in the amount of $250,000 for loss of use and income from certain deposited money in the Registry of the Court, $150,000 for reasonable attorney's fees, $150,000 exemplary damages for the allegedly intentional false, misleading and deceptive acts and practices of Plaintiffs MJV and Vaughn, and treble damages under the DTPA. Each of the three causes of action, although arising from the same or similar facts as the Plaintiffs' claim for usury, requires proof of specific elements, has a designated burden of proof and a stated degree of proof that may vary from the degree of proof in Vaughn's usury claim. Considering all of these characteristics, Mann and Rusek to file three causes of action that are "counterclaims" rather than "defenses", as the latter term is used in Section 70(a)(6). It is possible that Mann's claims for fraud might be "defenses" under Section 70(a)(6) to a claim for usury under the DTPA, but not as plead in the pleading presented to the court. (Mann styled the proposed pleading "Original Counterclaim . . . And Amended Counterclaim . . .", and while the label attached by Mann is not conclusive, at least Mann believed that under Texas Rules of Civil Procedure his pleading was a counterclaim).

Provability

Bankruptcy Rule 401(a) applies only to provable debts; non-provable debts and non-dischargeable debts under section 17(a)(2), (3), (4) or (8) are not stayed. Bankruptcy Rule 401(a).

Section 63 (11 U.S.C. § 103) of the Act determines whether a claim is provable. Section 63(a)(7) recognizes that tort claims not reduced to judgments at the time of the bankruptcy filing are not provable except those based on negligence and for which an action has been commenced and is pending on the date of bankruptcy. Section 63(a)(4) provides that debts founded upon an open account or a contract express or implied are provable. An "implied" contract under Section 63(a)(4) includes a contract implied in law (quasi-contract) and a contract implied in fact. Quasi-contracts are legal fictions formulated to justify the consequences that in fairness should follow from certain facts other than an expressed intent. 3A Collier on Bankruptcy § 63.24; Cowans Bankruptcy Law & Practice, § 171-229 (1978).

A liability based upon a quasi-contract is provable in bankruptcy as an implied contract. Brown v. O'Keefe, 300 U.S. 598, 606, 57 S.Ct. 543, 81 L.Ed. 827 (1937). There are two methods of asserting and proving an implied contract under Section 63(a)(4): (1) a showing of liability founded upon a statute; or (2) the existence of a tort supporting a quasi-contractual claim. In Brown the Defendant objected to enforcement of statutory liability imposing personal responsibility upon shareholders in national banks because liability was extinguished by a discharge in bankruptcy. The court held that the stockholder, once adjudicated a bankrupt, was not liable after bankruptcy for his share of an assessment made against the bank because that liability was created by statute as an incident to the contract of membership between shareholders and national banks. ". . . (T)he liability, created though it is by statute, is quasi-contractual in its origin and basis . . . It is an incident affixed by law to the contract of membership between shareholder and bank." Brown at 606, 607, 57 S.Ct. at 548.

The Second Circuit examined a Connecticut statute which provided that a person receiving care in a state mental hospital who, although at the time of his discharge, might not have funds with which to pay such bills, would be liable for them if he was later able to pay. In Re Crisp, 521 F.2d 172 (2nd Cir. 1975). The court characterized the obligation to repay as quasi-contractual because the provision of care to an incapacitated person is traditionally classified as quasi-contractual. See Restatement of Restitution §§ 112, 113 (1937). Back pay allowances due employees subjected to unfair labor practices under the National Labor Relations Act have been held to be quasi-contractual and thus provable. Nathanson v. NLRB, 344 U.S. 25, 27, 73 S.Ct. 80, 97 L.Ed. 23 (1952); NLRB v. Killoren, 122 F.2d 609, 612 (8th Cir. 1940), cert. denied, 314 U.S. 696, 62 S.Ct. 412, 86 L.Ed. 556 (1941).

The three causes of action in the Mann counterclaim are not quasi-contractual under Section 63(a)(4). Although the transactions involved in the state court action provide a contractual...