In re Wellington Resources Corp., Bankruptcy No. 382-00016-F
| Decision Date | 28 September 1982 |
| Docket Number | Bankruptcy No. 382-00016-F,382-00017-F. |
| Citation | 23 BR 596 |
| Parties | In re WELLINGTON RESOURCES CORPORATION, Debtor. In re WHITEHALL MINING COMPANY, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
Philip I. Palmer, Jr., Dallas, Tex., Robert Yaquinto, Trustee, Dallas, Tex., for Wellington Resources Corp.
Jeffery Hart, Asst. Atty. Gen., Austin, Tex., for State of Tex.
On August 24, 1982, a hearing was held in the Bankruptcy Court to determine whether assets were fraudulently acquired by the Debtors prior to the commencement of these proceedings. If assets were acquired by fraud, then a trust ex maleficio in the nature of a constructive or involuntary trust would take those assets out of the Court. Assuming the cestui que trust could successfully identify and trace the fraudulently acquired assets, then the Court would be obligated to release the assets to the rightful equitable owners. In the case at bar, it is the finding of this Court that the subject assets were not acquired by fraud. The following Findings of Fact and Conclusions of Law are presented in accordance with Bankruptcy Rule 752.
This proceeding is just one in a number of complicated controversies arising out of the Chapter 11 cases filed by the Debtors on January 5, 1982. A previous decision in this case, styled In re Wellington Resources Corporation, et al. v. State of Texas, 20 B.R. 64 (Bkrtcy., N.D.Tex.1982), contains detailed background information about the Debtors which will be incorporated into this opinion.
The State of Texas brought an Application to Release Funds alleging that the Debtors, Wellington Resources Corporation ("Wellington"), and Whitehall Mining Co., Inc. ("Whitehall"), acquired funds of investors by fraudulent means. Specifically, the State of Texas alleges that the gold mining investment program conducted by the Debtors until shortly before these proceedings were commenced, was a fraudulent scheme to lure money out of the pockets of innocent investors by willful misrepresentation and other illegal means. The State alleges also that the failure of the Debtors to register the investment program with the State Securities Board constituted, along with the failure of the Debtors' salesmen to register as security salesmen, a violation of the State Securities law. The State further contends that findings of fraud by this Court will take the assets in question out of the jurisdiction of the Bankruptcy Court for disposition elsewhere.
The instant controversy was brought before the Court on the First Amended Application to Release Property filed by the State of Texas. Paragraphs five and six of the State's amended application recite that the determination of fraud is to be made under Texas law. In addition, the State says that under the Bankruptcy Code, the existence of a constructive trust, or trust ex maleficio, is determined according to Texas law. The Court agrees and finds that the State's pleadings require an evidentiary hearing as to allegations of fraud to be made by this Court pursuant to Texas law. At the hearing on August 24, 1982, after announcing ready, the State of Texas contended that the only question before the Court was a question of law. The Court disagrees. The State must be held to the pleadings filed with the Court. Those pleadings are clear and unequivocable as to the necessity for a evidentiary hearing to determine the allegations of fraud. As soon as the Court made known its intention to proceed with the evidentiary hearing, the State of Texas withdrew its announcement of ready. After reciting into the record the facts leading up to the August 24th hearing, I then proceeded to allow the Debtors to put on testimony. I took this step despite the withdrawn announcement of ready because the State of Texas had several months in which to prepare for the hearing in this case. The pleadings in this case are clear as well as the fact that the State of Texas had ample opportunity to prepare and present its case. Moreover, on August 11, 1982, I had held a hearing to determine the State's Motion to Stay the August 24, 1982 hearing and decided to deny the requested relief. I then gave the State of Texas leave to file a Notice of Appeal of the interlocutory order, which was heard and decided by the District Court on August 13, 1982. In deciding to allow the August 24 hearing to proceed and to deny the State's Application for leave to Appeal, the District Court stated that "the State has made no showing that any harm will result from allowing the August 24 hearing to proceed as scheduled." The Debtors presented five witnesses and introduced twenty exhibits into the record at the August 24 hearing. The State of Texas was provided ample opportunity to cross-examine the witnesses and did so.
According to testimony by Arthur Espy, President of Wellington, the premise behind the Wellington/Whitehall program is to reopen mines which had been closed around the turn of the century. Espy, who is president of Wellington, proposed the idea that when gold was selling for twenty dollars an ounce it was not profitable to operate mines that required complicated or expensive extraction processes to recover mineral ore. However, with gold selling today for well above the four hundred dollar mark per ounce it was thought that played-out mines could be reworked to provide a sizeable return on investment.
At the hearing, evidence was presented that the Debtors were organized in the Spring or early Summer of 1981 by Mr. Espy and Mr. Thomas. On two separate occasions, Espy and Thomas put into the business money aggregating a total of $30,000.00 each in order to start up the business. Both Espy and Thomas had been associated with a similar mining operation known as Omni which had operated in several states including New Mexico. Although the record is somewhat vague on this point, it appears that Omni was shut down by the New Mexico State Securities Commission for various violations of the New Mexico securities laws. Wishing to avoid similar problems in Texas, Espy and Thomas approached the Dallas law firm of Baker, Miller, Phillips & Murray to discuss their proposed plans to offer the Wellington/Whitehall investment program. For a sizeable fee in excess of ($200,000.00) Two Hundred Thousand Dollars, Baker, Miller proceeded to draft and finalize a brochure entitled "Ore Mining for the Miner" and provide letter opinions concerning various tax, securities and legal questions about the program. At this same time, the Debtors contracted with an economic analyst for the preparation of an economic study of mining and also prepared a list of contractors and suppliers of mining operations in the Southwestern United States. In addition to the aforesaid preparations, the Debtors retained the national accounting firm of Alexander & Grant to handle the accounting procedures of the Debtors.
Office space was obtained in Campbell Center in Dallas whereupon Espy and Thomas began...
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