Tedlock Cattle Co., Inc., In re

• Decision Date: 02 May 1977
• Docket Number: No. 75-3511,75-3511
• Citation: 552 F.2d 1351
• Parties: In re TEDLOCK CATTLE COMPANY, INC., a California Corporation as such and d/b/a Andahl Cattle Company, Alleged Bankrupt. OFFICIAL CATTLE CONTRACT HOLDERS COMMITTEE, Creditor-Appellant, v. David COMMONS, Trustee in Bankruptcy, Trustee-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1351

552 F.2d 1351

In re TEDLOCK CATTLE COMPANY, INC., a California Corporation

as such and d/b/a Andahl Cattle Company, Alleged Bankrupt.

OFFICIAL CATTLE CONTRACT HOLDERS COMMITTEE, Creditor-Appellant, v. David COMMONS, Trustee in Bankruptcy, Trustee-Appellee.

No. 75-3511.

United States Court of Appeals, Ninth Circuit.

May 2, 1977.

Bruce H. Spector, Stutman, Treister & Glatt, Los Angeles, Cal., argued, for creditor-appellant.

Edith R. Warkentine, Gendel, Raskoff, Shapiro & Quittner, Los Angeles, Cal., argued, for trustee-appellee.

Appeal from the United States District Court for the Central District of California.

Before HUFSTEDLER, GOODWIN and ANDERSON, Circuit Judges.

PER CURIAM:

The contest in this bankruptcy appeal is between two theories for measuring recovery for defrauded investors: out-of-pocket loss, or benefit of the bargain.

This Ponzi investment scheme created different classes of losers: investor creditors and commercial, or supplier, creditors. The claims of the commercial or supplier creditors are not before us on this interlocutory appeal, but the existence of these claims and equitable considerations arising out of the varieties of claims complicate the case.

The claims of the investor creditors fall into three general groupings: those who were in, and out of, the investment scheme early and suffered no net loss; those who let their paper "profits" ride and received some payments but also realized net losses on their investment; and those who entered the scheme late and lost all of their original investment when the scheme collapsed.

This particular fraud utilized an appeal to the cupidity of those interested in becoming cattle-feedlot millionaires. But it could have been based upon fictitious mangrove marinas or desert condominium mirages. The early investors, as usual in such plans, received financial reports showing large "profits" which they were invited to let ride. Most did. Those who took their "profits" and got out are not before us, but their good fortune explains in part what happened to the money of later subscribers.

The trustee of the bankrupt promoter's estate decided to apportion the assets to all the investor-creditors on the basis of restitution of a share of their original investments. This cash-in-cash-out plan was called the "equity" theory. The creditors committee, mostly investors who got in early enough to have a claim to the paper "profits" included in their accounts, would prefer the "benefit of the bargain" as the measure of their recovery.

Under the equity theory, no investor creditor will receive the benefit of his bargain, but all will share some recovery. Under the benefit-of-the-bargain theory, some of the early subscribers who received cash dividends and also let some of their paper "profits" ride theoretically could recover more than they invested.

Under California law, which is stipulated to govern these contracts, creditors are generally entitled to benefit-of-the-bargain damages. This comports with the principle of contract law that a defrauded party to a contract may either rescind the contract and sue for fraud, or affirm the contract and sue for damages. Indeed, the trustee does not dispute the state-law theory of damages.

The difficult question is whether state law should apply. The Supreme Court, in Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 67 S.Ct. 237, 91 L.Ed. 162 (1946), held:

" * * * What claims of creditors are valid and subsisting obligations against the bankrupt at the time a petition in bankruptcy is filed is a question which, in the absence of overruling federal law, is to be determined by reference to state law * * * ." 329 U.S. at 161, 67 S.Ct. at 239.

Appellant has also cited us to several other cases applying this doctrine to contract situations. See In re Oscar Nebel Co., 117 F.2d 326 (3d Cir. 1941); In re Riverview Products, D.C., 34 F.Supp. 482, aff'd, 34 F.Supp. 733 (W.D.N.Y.1940); 3A W. Collier, Bankruptcy P 63.02, at 1764 ("The federal court, in determining the validity of the obligation on a claim, will normally have recourse to the law of the state applicable to the debt in question."); P 63.23, at 1885 ("The validity of a (contract) claim is an issue to be determined by * * * (state) law.")

The trustee, however, argues that this is one of those cases in which overriding federal law must be applied. Indeed, in Vanston, the Court held that equitable principles in a bankruptcy situation overrode state law. 329 U.S. at 162, 67 S.Ct. 237. In Vanston, the issue was the validity of a claim of interest upon interest, and the Court held that its allowance would not be in accord with the equitable principles governing bankruptcy distributions.

Here, the trustee argues that the payment of benefit-of-the-bargain damages would not be in accord...