Off. C. of Disputed Lit. Cr. v. McDonald Inv.
| Decision Date | 07 September 1984 |
| Docket Number | Civ. A. No. 7-84-103,Misc. A. No. 7-216,Bankruptcy No. 781-00059 to 781-00061. |
| Citation | 42 BR 981 |
| Parties | The OFFICIAL COMMITTEE OF DISPUTED LITIGATION CREDITORS, Appellant, v. McDONALD INVESTMENTS, INC., Orison F. McDonald, Orison F. ("Mack") McDonald II, Debtors-Appellees. |
| Court | U.S. District Court — Northern District of Texas |
Bryan D. Bruner, Fort Worth, Tex., for appellant.
Jay M. Vogelson, Dallas, Tex., for debtors-appellees.
The Official Committee of Disputed Litigation Creditors has appealed to this Court from an Order of the Bankruptcy Court authorizing the expenditure of funds from the commingled estates of two individuals and one corporation—Orison F. McDonald, Orison F. ("Mack") McDonald II, and McDonald Investments, Inc.,—currently in Chapter 11 bankruptcy, for the purpose of paying bail and retaining criminal counsel for one of the debtors, Orison F. ("Mack") McDonald II.
In August, 1981, McDonald Investments, Inc., Orison F. McDonald and Orison F. ("Mack") McDonald II, filed petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas, Wichita Falls Division. They are currently operating McDonald Investments as debtors in possession. The commingled assets of the three estates total just over $600,000.
Other than a few trade creditors with comparatively insignificant claims, all creditors of the estates are represented by the Official Committee. The "disputed litigation" consists of several civil suits filed in Minnesota and Texas by investors in the debtors' oil and gas operations. The suits allege numerous violations of both federal and state securities laws and seek recoveries far in excess of the combined assets of the three estates.
The Minnesota litigation ("the Hayden suit") dwarfs the Texas actions. The Hayden suit consists of four consolidated complaints brought by more than 50 plaintiffs in the United States District Court for the District of Minnesota. In December, 1982, that Court granted summary judgment to the plaintiffs and awarded them restitution, interest, attorneys' fees and costs totaling $3,270,292.78, for the debtors' violations of the Minnesota Blue Sky Act, Minn.Stat. Ann. §§ 80A.01-.31 (West Supp.1984). The debtors appealed.
On March 18, 1981, before the filing of the bankruptcy proceedings, Orison F. ("Mack") McDonald II was charged by the State of Minnesota with the sale of unregistered securities (four counts) and fraud in the sale of securities (five counts). The complaining witnesses in this criminal action are essentially the plaintiffs in the Hayden suit. Pursuant to a fugitive warrant issued on the basis of a complaint and information filed by a Minnesota prosecutor, he was arrested in Wichita County, Texas, on March 31, 1981. He was discharged on August 31 because no extradition warrant had been issued. The Governor of Texas issued a warrant on October 16 and Mack McDonald was again arrested on October 23. He sought habeas corpus from state court that same day.
The state district court granted the extradition request and its judgment was affirmed on appeal. Ex parte McDonald, 631 S.W.2d 222 (Tex.App.—Fort Worth 1982, pet. ref'd), cert. denied, 459 U.S. 1205, 103 S.Ct. 1193, 75 L.Ed.2d 438 (1983). McDonald then sought habeas relief in this Court, which denied him relief. The Fifth Circuit affirmed. McDonald v. Burrows, 731 F.2d 294 (5th Cir.1984). McDonald was directed to surrender voluntarily in the State of Minnesota not later than August 20, 1984.
On August 14, 1984, Jay Vogelson and the law firm of Moore & Peterson, then serving as special counsel to the debtors in the civil suits, filed a motion with the Bankruptcy Court seeking authorization for the debtors to employ them as special counsel in the Minnesota criminal proceedings, to employ criminal counsel in Minnesota, to post whatever sum was set as bail by the Minnesota court, and to advance a retainer of $25,000 to the Minnesota criminal counsel. The next day, August 15, 1984, the bankruptcy court held a hearing at which two witnesses testified, Mack McDonald and Jay Vogelson.
McDonald testified that the assets of the three estates had been commingled and that he had no assets other than those under the control of the bankruptcy court. He states that his take-home pay from McDonald Investments is just under $4,000 per month, all of which goes to pay his living expenses.
Vogelson, an attorney from Dallas, "testified" about his opinions concerning Minnesota law of collateral estoppel, the necessity of proving intent in a criminal prosecution under the Minnesota Blue Sky Act, McDonald's rights under the 5th, 6th, 8th and 14th Amendments to the United States Constitution, and the time it would take any other counsel to achieve Vogelson's understanding of the case.
The bankruptcy court granted the motion, finding:
The court reduced the requested retainer to $10,000.
The Official Committee moved for a stay pending appeal which was denied from the bench. The Official Committee next sought a stay from this Court, which was granted the next day, August 16, 1984. McDonald's request to the Fifth Circuit to vacate the stay was denied.
This Court then ordered an expedited briefing schedule and filing of the record. McDonald has specifically asked the Court not to hold oral argument in order to expedite consideration of the appeal. Since the facts and legal arguments are adequately presented in the briefs and record and the decisional process would not be significantly aided by oral argument, R.Bankr.P. 8012(3), this case is ready for disposition.
This Court has jurisdiction to hear this appeal under 28 U.S.C. § 158 (1984), as amended by the Bankruptcy Amendments of 1984, Pub.L. No. 98-353 (July 10, 1984). If leave to appeal is required, it is hereby granted. R.Bankr.P. 8003(c).
The Official Committee's first argument is that the bankruptcy court may not authorize the expenditure of funds of a debtor estate for the payment of fees for legal services rendered or to be rendered in defending the debtor from criminal charges.1 The few courts which considered this issue are split.
In In re Delk, 27 B.R. 86, 87 (Bankr.W. D.Okla.1983), the debtor in a Chapter 11 proceeding sought to use estate money to pay for his defense of a criminal indictment brought in federal court. Without discussion, the court found "that appointment of an attorney to defend against an indictment and use of funds of the Debtor's bankruptcy estate for those purposes is not authorized by 11 U.S.C. § 327(a) in that it does not relate to duties under Title 11 U.S.C." Similarly, the court in In re Pajarito American Indian Art, Inc., 11 B.R. 807, 811 (Bankr.D.Ariz.1981), found, without discussion, that "estate moneys cannot be used to pay the Debtor's attorney in representing him when he has been charged with a crime."
Conversely, in In re Duque, 33 B.R. 199, 200 (Bankr.S.D.Fla.1983), the court found "nothing in the Code which would deny this debtor the option to use the assets or property of his chapter 11 estate" to retain criminal counsel to defend the debtor in a pending prosecution. Although the court assumed that the debtor would be eligible for the appointment of defense counsel at public expense, it "could not believe that it was intended by the Code that as a condition to relief under chapter 11 (), the debtor's constitutionally protected right to counsel in a criminal proceeding be denied or restricted in any way."
Proper analysis of the question begins with the language of the Bankruptcy Code. In re Tashof, 33 B.R. 225, 226 (Bankr.D.Md.1983). Code § 327, 11 U.S.C. § 327 (1984), provides, in relevant part:
As noted in Duque, nothing in the express language of § 327 prohibits the employment of criminal counsel to defend the debtor in a pending criminal ...
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