Landmark Finance Corp. v. Cox
| Decision Date | 22 January 1980 |
| Docket Number | Bankruptcy No. 377-25. |
| Parties | LANDMARK FINANCE CORPORATION, Appellant, v. Donald Edward COX, Appellee. |
| Court | U.S. District Court — Southern District of Georgia |
H. G. Bozeman, Dublin, Ga., for appellant.
Maurice Byers, Dublin, Ga., for appellee.
ORDER ON APPEAL
This is an appeal from an order of the Honorable Herman W. Coolidge, Bankruptcy Judge for this district. The appeal has been decided by the undersigned District Judge under Local Rule 2.1 regarding assignment of cases. The record on appeal is deficient. It does not even contain a copy of the contract on which the case turns. The contract is not absolutely essential to this Court's review however, and because of the age of the case, expansion of the record has not been directed. Bankruptcy Rule 806 casts the burden of preparation of the record on the parties. Nevertheless, it is transmitted by the Bankruptcy Judge, and it should contain the documentation necessary to afford the reviewing Court a complete understanding of the case. The Bankruptcy Judge should require amendments to the designation of contents of the record on appeal after careful inspection thereof.
Appellant, Landmark Finance Corporation, a creditor of the bankrupt, filed a complaint on February 14, 1978, seeking to have its debt excepted from discharge alleging the bankrupt's fraud under section 17a(2) of the Bankruptcy Act1, 11 U.S.C. § 35(a)(2). In denying the complaint on April 19, 1978, the Bankruptcy Judge determined that the issue of fraud was moot because the loan contract in question violated the Georgia Industrial Loan Act (GILA) and was therefore void in its entirety. Landmark appeals from the Bankruptcy Judge's order.
The original loan contract between the parties was dated February 11, 1976. Renewal contracts were dated November 18, 1976, and September 30, 1977. The validity of the contracts was never raised by the parties. Sua sponte the Bankruptcy Judge inquired whether the loan complied with the Georgia Court of Appeals decision in Consolidated Credit Corporation v. Peppers, 144 Ga.App. 401, 240 S.E.2d 922 (1977). On this issue Judge Coolidge said:
The penalty for violation of the GILA is prescribed in section 25-9903 of the Georgia Code. At the time the loan contracts were executed, this section provided in pertinent part that "any loan contract made in violation of the GILA shall be null and void." This provision was amended in its entirety effective March 14, 1978. The "null and void" language was retained with the added proviso that ". . . there shall be no forfeiture of the principal amount of the loan contract if the lender shows by a preponderance of the evidence that the violation is the result of a bona fide clerical or typographical error." Act of March 14, 1978, No. 1035, § 1(a), 1978 Ga.Laws 1033 codified at Ga.Code Ann. § 25-9903(a) (Cum.Supp.1979).
At issue in the Bankruptcy Court's ruling was subsection "c" of the amended statute which provides:
If a contract is made in good faith in conformity with an interpretation of the GILA by the appellate courts of this State or in a rule or regulation officially promulgated by the commissioner after public hearings, no provision in this section imposing any penalty shall apply, notwithstanding that after such contract is made, such rule or regulation is amended, rescinded, or determined by judicial or other authority to be invalid for any reason.
Appellant contended that this statute precludes application of the "null and void" penalty in a Peppers-type situation when the loan in question antedates Peppers. In response, the Bankruptcy Judge noted that all pertinent transactions in the controversy preceded the effective date of the amendment. The Bankruptcy Court determined that the Act was not retroactive in its application, and therefore the "null and void" penalty applied to the loan contracts.
In this appeal Landmark advances three arguments: (1) the Bankruptcy Court passed upon the validity of the loan contract when it issued an Order of Abandonment at the First Meeting of Creditors, hence the issue was res judicata between the parties; (2) since neither party questioned the validity of the contract, the bankrupt effectively waived this issue, and the court should not have raised it independently; (3) the 1978 amendment to the GILA, codified at section 25-9903(c) of the Georgia Code Annotated, insulates the loan contracts from the "null and void" penalty despite their non-conformance with Peppers.
Although this Court was not supplied with a copy of the Order of Abandonment, it appears from appellant's brief that Judge Coolidge issued the order in favor of Landmark at the First Meeting of Creditors on January 18, 1978. Peppers had been decided at this time, and Landmark asserts that the Order of Abandonment "based on the subject contract" determined the validity of the loan and was therefore res judicata between the parties.
This contention prompts consideration of the basic principle that "before res judicata can be invoked, a valid judgment, usually in another action, between the same parties or their privies must have adjudged some matter with finality." 1B Moore's Federal Practice ¶ 0.4091 at 1001. The summary abandonment of collateral security or burdensome property does not meet these criteria. It is not a final judgment, rather its purpose is to dispose of property "which is either worthless, or overburdened, or for any other reason certain not to yield any benefit to the general estate." 4A Collier ¶ 70.422 at 502. Thus, in entering an Order of Abandonment, the Bankruptcy Court performed an administrative function and did not finally adjudicate the validity of the loan contracts. Accordingly, the Bankruptcy Judge's action at the First Meeting of Creditors did not preclude later consideration of the validity issue.
In the order determining the dischargeability of the debt, the Bankruptcy Judge questioned the validity of the loan sua sponte. Appellant's second argument challenges the propriety of this action.
The statutory provisions for discharge are remedial in nature. 1A Collier ¶ 14.02 at 1262. As the Tenth Circuit Court of Appeals stated in Jones v. Gertz, 121 F.2d 782, at page 783-784 (10th Cir. 1941): "The bankrupt is entitled to have the Bankruptcy Act . . . liberally construed in his favor and is entitled to a discharge unless it clearly appears that he has committed some act which precludes this right . . / The reason for denying a discharge to a bankrupt must be real and substantial, not merely technical and conjectural." Adherence to this mandate requires that, as an initial inquiry in matters affecting discharge, the Bankruptcy Judge determine whether a valid debt exists. If the validity of the debt is an issue, the failure of the parties to raise it should not foreclose the bankrupt's entitlement to discharge. The law is the law regardless of what the parties argue or state it to be.
This obligation to ascertain validity has a further statutory basis in the mandated jurisdiction of the Bankruptcy Court to allow or to disallow claims. Bankruptcy Act § 2a(2), 11 U.S.C. § 11(a)(2). Applying section 2a(2), the Supreme Court stated: Lesser v. Gray, 236 U.S. 70, 74, 35 S.Ct. 227, 228, 59 L.Ed. 471 (1915) (emphasis added); see Katchen v. Landy, 382 U.S. 323, 329, 86 S.Ct. 467, 472, 15 L.Ed.2d 391, 396 (1966). Although the sole issue presented by the parties was fraud, they did not thereby delimit the normal authority of the Bankruptcy Court. In the performance of his duties, the Bankruptcy Judge properly considered the validity of the loan contract before reaching the issue of fraud.
The Bankruptcy Judge ruled that the loan contracts between Landmark and the bankrupt charged a fee in excess of that permitted by the GILA and were therefore void. Central to this finding is Consolidated Credit Corp. v. Peppers, 144 Ga.App. 401, 240 S.E.2d 922 (1977) (...
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