In re Wellington Resources Corp., Bankruptcy No. 382-00016-F
| Decision Date | 30 April 1982 |
| Docket Number | 382-0064 and 382-0065.,Adv. No. 382-0011,382-00017-F,Bankruptcy No. 382-00016-F,382-0034 |
| Citation | 20 BR 64 |
| Parties | In re WELLINGTON RESOURCES CORPORATION and Whitehall Mining Company, Inc., Debtors. In re WELLINGTON RESOURCES CORPORATION and Whitehall Mining Company, Inc., Plaintiffs, v. STATE OF TEXAS, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
Philip I. Palmer, Jr., Dallas, Tex., for plaintiffs.
Robert Yaquinto, Jr., Dallas, Tex., trustee.
Jeffery L. Hart, Asst. Atty. Gen., Austin, Tex., for defendant.
The issue decided in the case at bar is whether the State of Texas or the Federal Bankruptcy Court has exclusive jurisdiction over the assets of these Debtors. It is the position of this Court that the filing of Chapter 11 Petitions by these related Debtors immediately invokes the exclusive jurisdiction of this Court over the assets of these Debtors pursuant to the provisions of the Bankruptcy Code.1
This Memorandum and Opinion of Law supercedes the Preliminary Findings of Fact previously filed and sets out Findings of Fact and Conclusions of Law pursuant to Bankruptcy Rule 752.
Wellington Resources Corporation, ("Wellington"), and Whitehall Mining Company, Inc., ("Whitehall"), were engaged in the business of marketing shares in gold mines scattered throughout the Southwestern United States. Wellington and Whitehall are related companies with bifurcated operations and responsibilities. Wellington is primarily a marketing unit while Whitehall secures and develops mining properties. Both companies are presently inactive pending the resolution of a securities fraud case brought in State Court and the release of operating funds held in the registry of the United States District Court for the Northern District of Texas.
Wellington's marketing program is readily ascertainable from their professionally produced prospectus entitled, "Wellington Resources Corporation—Ore Purchase For the Miner." According to testimony offered in a hearing held February 9, 1982, Wellington paid in excess of $25,000.00 to a Dallas law firm to produce the prospectus and accompanying supplementary material. From the very first page of the prospectus, it is clear that Wellington sought to attract well-heeled investors looking for a surefire tax shelter. In an introductory letter addressed to "Dear FELLOW TAXPAYER", Arthur Espy, the President of Wellington, touts Wellington's Ore Purchase For the Miner as an answer for those people seeking to use current taxable income to build future capital while preserving their future purchasing power against the ravages of inflation. The letter goes on to describe how a $10,000.00 cash expenditure may create a $60,000.00 deduction from taxable income, and establish the investor in a major gold and silver mining position, involving 2,500 tons of ore that will be developed, mined, and processed over approximately the next seven to ten years. The investor, denominated by Wellington as a "miner", paid a nominal sum to Wellington for the 2,500 ton ore block. They then paid $10,000.00 cash and signed a recourse promissory note for $50,000.00 to Whitehall for the development of the ore blocks. In addition, Whitehall took a 40% overriding royalty interest in the production. The tax advantages for an investor supposedly arise out of the investor's ability to store the extracted ore and not declare it as income until it is actually sold. As a "miner" all costs of production, including the $10,000.00 cash payment and $50,000.00 recourse promissory note, could be deducted in the current tax year as costs of engaging in the "mining business." Hence, for a paltry $10,000.00 cash payment, a "miner" could theoretically derive a $60,000.00 deduction which, if the "miner" is in the 50% tax bracket, could amount to a $30,000.00 cash savings in taxes paid. To facilitate taking the deduction, Wellington's prospectus gave each "miner" the option of mining his own ore, finding an independent contractor to do it for him, or contracting with Whitehall to do the mining. However, due to the far-flung locations of the mining sites, Whitehall was assured of receiving virtually all of the mine development contracts.
All went well for Wellington and Whitehall during the fall of 1981 as investors in search of a golden tax writeoff signed up by the droves to become miners in a latter day Sutter's Folly. The coffers of Wellington and Whitehall grew daily until by late fall they contained more than one million dollars.
The story might have ended with happy miners exultantly counting their ever-increasing hoards of gold if not for the intervention of the State of Texas. The State Securities Commission began to investigate the Wellington and Whitehall program sometime during the early fall of 1981. Several aspects of the Wellington/Whitehall program caused great concern to the State Securities people. None of the principals of Wellington or of Whitehall had registered as brokers nor had the program itself been registered or passed upon by the State Securities Board. Two investors living in Houston complained to the Board that they were unable to obtain refunds from the Wellington/Whitehall companies once they decided to back out of the program. The Securities Board decided that the sale of 500 ton blocks of ore in scattered gold mines was a sale of a security, and the failure of Wellington/Whitehall to register with the State was a fraud committed upon the public. Moreover, the promise of tax benefits without any assurance that the same would be permitted by the Internal Revenue Service undermined the legitimacy of the offering literature and transformed the entire program into one offering nothing more than a share in a highly speculative gold mining operation.
The State of Texas finally moved to halt the operations of Wellington/Whitehall when it was discovered that Wellington/Whitehall were on the verge of selling the recourse promissory notes to a discount purchaser. The State Securities Commissioner certified the case to the Office of the Attorney General, who in turn presented the case to Judge Farris of the 151st Judicial District Court of Harris County, Texas. On December 28, 1981, Judge Farris entered a Temporary Restraining Order enjoining Wellington/Whitehall and the principals thereof from engaging in any activity or action to further promote or develop the mining program. In addition, Judge Farris set a hearing on the State's application for Temporary Injunction for January 6, 1982. The effect of the T.R.O. and the subsequently granted Temporary Injunction was devastating to Wellington/Whitehall's continued operations. All bank accounts of Wellington/Whitehall were frozen and all business operations ground to a halt. The State's pending charges of fraud cast a pall over everyone involved.
On January 5, 1982, after engaging new legal counsel, Wellington/Whitehall filed petitions for relief pursuant to Chapter 11 of the Bankruptcy Code. Concurrently, an Application for Removal was filed with this Court and served upon all adverse parties and Judge Farris. Said application sought to remove the proceeding then pending in Judge Farris' Court to this Court. The nature and significance to be attributed to the notification of the removal given Judge Farris is hotly disputed. At the hearing before Judge Farris held on the morning of January 6, 1982, an attorney dispatched from the law firm representing Wellington/Whitehall in the bankruptcy proceedings sought to advise Judge Farris of the removal. Judge Farris, presumably annoyed by such unexpected news, ignored the notice given by the attorney and proceeded to grant the State's application for Temporary Injunction. The State contends that the appearance of the attorney amounted to a general appearance and consent by the Debtors to the issuance of the Temporary Injunction. The State's argument on this issue barely rises to the level requiring a response. Suffice to say that the notice of removal given to Judge Farris could be nothing other than a special appearance contesting the jurisdiction of the 151st Court by the very nature and operation of the Application for Removal.
The issuance by Judge Farris on January 6, 1982, of the Temporary Injunction enjoining Wellington/Whitehall immediately cast into confusion the jurisdiction of this Court and Judge Farris' Court. On the one hand, Judge Farris clearly was enjoining the Debtors from engaging in any activity connected with the further promotion or operation of the gold mining investment program. On the other hand, this Court was immediately vested with exclusive jurisdiction over the assets of these Debtors pursuant to the operation of the Bankruptcy Code provisions brought into play by the filing of the Chapter 11 petitions on January 5, 1982. The added element of the removal, and Judge Farris' defiance of same, further complicated the question of which Court ultimately has control of the assets of these Debtors.
On January 27, 1982, this Court first began the task of unraveling the complicated jurisdictional issues presented by the case at bar. After hearing testimony and convening a short, informal session in chambers, I ordered from the bench the remand of the removed proceeding back to the 151st Court while retaining that part of the proceeding dealing with the assets of these Debtors. The partial remand was ordered in deference to the continued investigation being conducted by the State of Texas into the allegedly fraudulent practices of the Debtors. I made it very clear, both in chambers and in the courtroom, that I would countenance no evasion of any civil or criminal investigation being conducted by the State of Texas. The partial remand was also ordered, in part, because of an agreement arrived at in chambers between the Assistant Attorney General, the Debtors' attorney and the...
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