Title: DOUBLE X RANCH v SAVAGE BROS

State: montana

Issuer: Montana Supreme Court

Document:

No. 12927 I N THE S U P R E M E COURT O F THE STATE O F MONTANA D O U B L E X RANCH, INC. , a Delaware Corporation, and S T U A R T Me K A P L A N a s Trustee i n Bankruptcy f o r Great Western Ranches, Inc., P l a i n t i f f s and Respondents, S A V A G E BROTHERS, e t al., Defendants and Appellants. Appeal from: District Court of the Thirteenth Judicial District, Honorable Charles Luedke, Judge presiding. Counsel of Record: For Appellants : Arthur P. Acher argued, Helena, Montana For Respondents: Hauf, Forsythe and Richard A. Kramer, Billings, Montana John A. Forsythe appeared, Billings, Montana Richard A. Kramer argued, San Francisco, California Submitted: M a y 7, 1975 Decided : JUN 1 8 1975 Filed: 1 8 3975 M r . Justice Frank I. Haswell delivered t h e Opinion of t h e Court. P l a i n t i f f s f i l e d an a c t i o n i n t h e d i s t r i c t c o u r t , Yellowstone County, t o c o l l e c t on four promissory notes executed by defendants pursuant t o a corporate reorganization plan, under of t h e Chapter X /federal Bankruptcy Act. Defendants admitted execut- ing t h e notes but alleged f a i l u r e of consideration, fraud, and duress a s defenses and counterclaimed f o r damages based on alleged negligence and wrongful a c t s of t h e t r u s t e e i n bankruptcy. The d i s t r i c t c o u r t granted summary judgment t o p l a i n t i f f s on a l l i s s u e s . Defendants appeal. P l a i n t i f f s a r e Double X Ranch, Inc., t h e payee on t h r e e of t h e notes, and S t u a r t M. Kaplan, t h e t r u s t e e i n bankruptcy and payee on t h e f o u r t h note. Defendants a r e Savage Bros., a partnership, and t e n persons surnamed Savage who w e r e sued in- dividually and doing business a s Savage Land and Livestock Com- pany, Inc.; Savage Land and Livestock; and Savage Bros., Inc., a corporation. Defendants a r e t h e makers o r guarantors of t h e notes and w i l l be r e f e r r e d t o c o l l e c t i v e l y a s Savage B r a . I n 1969 a Nevada corporation, Great Western Ranches, Inc., was formed. The o b j e c t i v e was t o have various i n v e s t o r s convey t h e i r ranch p r o p e r t i e s t o Great Western i n exchange f o r shares of stock. Defendants, among o t h e r s , t r a n s f e r r e d t h r e e t r a c t s of land, personal property, and 150 thoroughbred and q u a r t e r horses with t h e i r r e g i s t r a t i o n c e r t i f i c a t e s t o Great Western, receiving shares of stock i n exchange. P l a i n t i f f Double X con- t r i b u t e d $1,000,000 cash t o Great Western and received shares of stock f o r its contribution. Great Western hoped t o a t t r a c t an a d d i t i o n a l $4,000,000 from European i n v e s t o r s but was unable t o do so. O n J u l y 1, 1970, Great Western f i l e d a p e t i t i o n f o r corporate reorganization under Chapter X of t h e f e d e r a l Bankruptcy Act with t h e United S t a t e s District Court i n San Francisco. 1 1 U.S.C.A. 55501-676. This reorganization c o u r t appointed p l a i n t i f f Kaplan a s t r u s t e e , and eventually approved a corporate reorganization plan f o r Great Western. The o v e r a l l purpose of t h e corporate reorganization plan was t o provide f o r an orderly unwinding of t h e t r a n s a c t i o n s involved i n t h e formation of Great Western and f o r t h e protection of i t s c r e d i t o r s . Among o t h e r things, i n v e s t o r s i n Great Western were permitted t o reclaim t h e i r property upon these s p e c i f i c conditions: (1) payment of 1 0 6 per share f o r t h e c o s t s of adminis- t e r i n g t h e reorganization; ( 2 ) payment of an a d d i t i o n a l 3 g ! o r 49! per share (depend- i n g on t h e t i m e of payment) t o Double X a s reimbursement f o r i t s $1,000,000 cash investment; (3) payment t o t h e t r u s t e e o r Double X, respectively, t h e amounts t h e i r property had been benefited, e i t h e r while held by Great Western o r by t h e cash contribution of Double X. Addi- t i o n a l l y , t h e corporate reorganization plan provided t h a t consent- ing reclaimants irrevocably waived "any r i g h t t o sue, l i t i g a t e , o r obtain o r execute upon a judgment a g a i n s t [Great Western] o r t h e t r u s t e e * * * i r r e s p e c t i v e of whether such r i g h t s a r e known o r suspected t o e x i s t by t h e consenting reclaimant a t t h e time t h e plan becomes e f f e c t i v e . " The plan a l s o provided t h a t t h e r e - organization c o u r t r e t a i n e d j u r i s d i c t i o n over " a l l questions a r i s i n g i n t h e course of consummation of t h e plan and not spec- i f i c a l l y provided f o r . " Defendants accepted and complied with t h e corporate re- organization plan by s a t i s f y i n g t h e conditions precedent t o re- claiming t h e i r property. They paid t h e cash assessments required and executed t h e four promissory notes sued upon f o r t h e balance. The trustee executed and delivered to defendants transfer doc- uments on their reclaimed property pursuant to the plan. Defendants defaulted on payment of the four promissory notes. Plaintiffs, as payees, filed suit in state district court in Billings, Montana, to collect the balances owing on the notes, with interest and attorney's fees. Defendants re- sponded with a pleading they characterized as an "answer, counter- claim and cross-complaint" in which they admit execution of the and notes but claim failure of consideration, fraud,/duress as affirmative defenses, and counterclaim for damages based on al- leged negligence and wrongful acts of the trustee. The facts underlying the three affirmative defenses and the counterclaim are intermingled and overlapping. For clarity of analysis, the basic factual contentions of defendants can be summarized as follows: (1) The trustee represented and warranted that defend- ants' 150 thoroughbred and quarter horses, with registration certificates, would be returned to them upon payment of the cash assessments and execution of the four promissory notes, which the trustee failed to do. (2) The trustee represented and warranted to defend- ants: (a) that the assessments for restitution to Double X were traceable to the $1,000,000 cash contribution of Double X to Great Western and benefited the property which defendants were reclaiming and (b) that the amounts payable by the reclaiming stockholders were correct; that notwithstanding these representa- tions and warranties by the trustee, defendants were charged with items not properly chargeable against them under the plan. (3) Plaintiffs exerted economic coercion on defendants in that defendants were compelled to execute the promissory notes because otherwise their property would be lost. Defendants had contracted t o sell t h e reclaimed property t o t h i r d p a r t i e s and were faced with o t h e r obligations a g a i n s t t h e property which could be foreclosed and thus could not g e t it back unless they executed t h e promissory notes. ( 4 ) Damages sustained by defendants by reason of t h e foregoing f a c t s more than o f f s e t t h e amounts due on t h e prom- i s s o r y notes. P l a i n t i f f s f i l e d an "Answer t o F i r s t Affirmative Defense, Counterclaim and Cross-Complaint" placing i n i s s u e a l l of de- fendants' contentions. Additionally, waiver by t h e defendants w a s alleged. P r e t r i a l discovery consisting of admissions, i n t e r r o g a t o r i e s and answers was had by both p l a i n t i f f s and defendants. P l a i n t i f f s then moved f o r summary judgment. Thereafter defendants moved f o r a d d i t i o n a l p r e t r i a l discovery, requiring p l a i n t i f f s t o (1) answer s i x i n t e r r o g a t o r i e s more f u l l y ; ( 2 ) r e q u i r e t h e t r u s t e e and an o f f i c e r of Double X t o appear i n B i l l i n g s f o r depositions; and ( 3 ) r e q u i r e p l a i n t i f f s t o produce f o r inspection unspecified "relevant records" i n t h e i r possession. The d i s t r i c t c o u r t denied defendants' motion f o r such f u r t h e r p r e t r i a l discovery and granted summary judgment t o plain- t i f f s . Thereafter defendants moved t o vacate o r amend t h e judg- ment, o r a l t e r n a t i v e l y f o r a new t r i a l . Following d e n i a l of these motions, defendants appealed. The c o n t r o l l i n g i s s u e s on appeal can be summarized i n t h i s manner: (1) A r e t h e i s s u e s r a i s e d by defendants r e s judicata? ( 2 ) D i d t h e s t a t e d i s t r i c t c o u r t have j u r i s d i c t i o n ? ( 3 ) A r e t h e r e genuine i s s u e s of material f a c t precluding summary judgment f o r p l a i n t i f f s ? ( 4 ) Should t h e d i s t r i c t court have permitted addition- a l p r e t r i a l discovery? Initially, defendants contend that the issues they have raised in this action, viz. failure of consideration, fraud, duress, and negligent or wrongful acts of the trustee in carrying out the corporate reorganization plan have not been adjudicated by the federal reorganization court, could not have been raised previously, and are not res judicata. Plaintiffs, on the other hand, contend that the issues raised by defendants are res judicata under Section 224(1) of the federal Bankruptcy Act. The gist of their contention is that once a corporate reorganization plan is confirmed by the federal reorganization court, all issues resolved by the plan and all questions that could have been raised relating to the plan are res judicata and cannot later be litigated in any court. Section 224(1) of the Bankruptcy Act, 11 U.S.C.A. S624, provides : "Upon confirmation of a plan-- (1) the plan and its provisions shall be binding upon the debtor, upon every other corporation issuing securities or acquiring property under the plan, and upon all creditors and stockholders, whether or not such creditors and stockholders are affected by the plan or have accepted it or have filed proofs of their claims or interests and whether or not their claims or interests have been scheduled or allowed or are allowable * * *". 6A Collier on Bankruptcy, para. 11.13[2], explains this provision in this language: "Thus 5 224(1) 'makes a plan binding upon all parties once it is confirmed', and all questions which could have been raised appertaining thereto become res judicata." See: In re Union League Club of Chicago, 203 F.2d 381 (7th Cir. 1953); Ely v. Donoho, 45 F.Supp. 27 (S.D.N.Y. 1942). The United States Supreme Court has held the reorganiz- ation plan, when confirmed, res judicata even where error in the plan is alleged. Stoll v. Gottlieb, 305 U.S. 165, 59 S.Ct. 134, 8 3 L.ed. 1 0 4 . The i s s u e s r a i s e d by defendants i n t h e i n s t a n t case, with one exception, could not have been r a i s e d i n t h e bank- ruptcy c o u r t a t t h e time of confirmation of t h e reorganization plan. They a r e bottomed on events t h a t arose t h e r e a f t e r . The f a c t s giving rise t o defendants1 claims and defenses have never been l i t i g a t e d i n any court. R e s Judicata cannot be used a s a t o o l t o deny defendants t h e i r day i n court. The exception is t h e claim by defendants t h a t t h e t r u s t e e charged them with i t e m s not properly chargeable a g a i n s t them under t h e provisions of t h e reorganization plan. E s s e n t i a l l y , defendants contend t h a t c e r t a i n i t e m s incurred i n t h e operation of t h e View Point Ranch i n Oregon should not have been charged a g a i n s t them, and t h a t Double X w a s not e n t i t l e d t o any reimburse- ment because t h e i r cash contribution was i n r e a l i t y a loan made t o secure l u c r a t i v e c o n t r a c t s from Great Western. However, t h e f e d e r a l reorganization c o u r t approved t h e assessment schedule. To t h e extent t h a t t h e t r u s t e e ' s charges r e f l e c t t h e p l a n ' s assessment schedule, defendants' claim is r e s judicata. The second i s s u e f o r determination is whether t h e s t a t e d i s t r i c t court has j u r i s d i c t i o n over t h e counterclaim and r e - maining defenses of defendants. P l a i n t i f f s argue t h a t consider- a t i o n of t h e s e i s s u e s by s t a t e c o u r t s i s precluded by t h e con- tinuing, exclusive j u r i s d i c t i o n of t h e bankruptcy c o u r t over t h e d e b t o r ' s property, c i t i n g Section 1 1 1 of t h e Bankruptcy A c t , 1 1 U.S.C.A. S 511. That argument ignores t h e f a c t t h a t t h i s s u i t f o r collec- t i o n on t h e notes was a plenary proceeding brought by t h e t r u s t e e i n s t a t e c o u r t , The applicable r u l e of law has been a p t l y s t a t e d i n 6 C o l l i e r on Bankruptcy, para. 3.21, p. 560: "If t h e t r u s t e e , receiver o r debtor i n posses- sion i n s t i t u t e s a plenary a c t i o n i n a s t a t e c o u r t , t h a t court has j u r i s d i c t i o n of a l l t h e i n c i d e n t s of t h e l i t i g a t i o n within i t s scope." Were it otherwise, a monstrous i n j u s t i c e would r e s u l t . The t r u s t e e , having chosen t h e s t a t e c o u r t a s h i s forum, could eliminate any defenses o r counterclaims t o h i s a c t i o n without regard t o t h e i r m e r i t s by t h e simple expedient of claiming ex- c l u s i v e j u r i s d i c t i o n i n t h e reorganization court. W e hold t h a t , while t h e state c o u r t must c l e a r l y enforce t h e t e r m s of t h e re- organization plan, it cannot r e f u s e t o e n t e r t a i n defenses o r r e l a t e d counterclaims which a l l e g e events occurring a f t e r con- firmation of t h e plan merely on t h e ground of exclusive j u r i s - d i c t i o n i n t h e reorganization court. For f u r t h e r a u t h o r i t y , see: Brown v. Gerdes, 321 U.S. 178, 6 4 S.Ct. 487, 88 L ed 659; Ohio O i l Co. v. Thompson, 1 2 0 F.2d 831 (8th C i r . 1 9 4 1 ) ; Dawson v. National L i f e I n s . Co., 156 Tenn. 306, 300 S.W. 567. W e next determine whether o r not t h e r e e x i s t genuine i s s u e s of material f a c t precluding summary judgment on t h e r e - maining issues. The f a c t u a l contentions of t h e defendants have already been summarized, and a l l r e l a t e t o t h e affirmative de- fenses and counterclaim. To s u s t a i n t h e summary judgment, p l a i n t i f f s must have established t h e absence of any i s s u e of material f a c t a s t o each of t h e defenses and t h e counterclaim. Roope v. The Anaconda Co., 159 Mont. 28, 4 9 4 P.2d 922; S t a t e ex r e l . City of Helena v. D i s t r i c t Court, Mont . I - - The defense of economic duress i s c l e a r l y s u s c e p t i b l e t o summary judgment i n favor of p l a i n t i f f s . There is simply no a l l e g a t i o n here of an unlawful detention of property, a s required by t h e s t a t u t o r y d e f i n i t i o n of duress contained i n s e c t i o n 13-305(2), R.C.M. 1947. Defendants1 a l l e g a t i o n s amount t o nothing more than a statement of t h e i r economic d i s t r e s s a t t h e time they executed t h e notes. That i s c l e a r l y not enough t o v a l i d a t e t h e defense. Pederson v. Thoeny, 88 Mont, 569, 295 P. 250; McNussen v. Gray- beal, 146 Mont. 173, 405 P.2d 447. The a f f i r m a t i v e defense of f a i l u r e of consideration was a l s o a proper subject f o r summary judgment i n favor of plain- t i f f s . The consideration f o r defendants1 promissory notes was b i l l s of s a l e from t h e t r u s t e e covering t h e i r reclaimed ranch and personal property s i t u a t e d thereon. I n accord with t h e terms of t h e plan, t h e t r u s t e e conveyed only h i s i n t e r e s t i n .the properties. The import of t h a t form of conveyance is evident i n a l e t t e r w r i t t e n t o t h e t r u s t e e by defendants1 attorney. I n t h a t letter, he wrote: " * * * Said B i l l s of Sale w i l l not be construed by t h e s a i d shareholders [defendants here] t o include any warranty by t h e Trustee t h a t those i t e m s of personal property l i s t e d on t h e Exhibits t o the B i l l s of Sale a r e a c t u a l l y physically located on t h e s a i d farms which a r e subject t o t h e Order of Rescission made a p a r t of t h e B i l l s of Sale, o r t h a t any o r a l l of such i t e m s of personal property ever e x i s t e d , and s a i d share- holders hereby waive any claim they may have o r t h a t may a r i s e a g a i n s t Great Western Ranches, Inc., a g a i n s t S t u a r t M. Kaplan, a s Trustee of Great Western Ranches, Inc., and each of them, r e l a t i n g t o t i t l e t o s a i d personal property, o r any of it." [Bracketed m a t e r i a l added.] (Emphasis added. ) Defendants received what they bargained for--the conveyance of t h e t r u s t e e ' s i n t e r e s t i n c e r t a i n personal property, including t h e thoroughbred and quarter horses, devoid of any assurance t h a t t h e property a c t u a l l y existed o r t h a t t h e t r u s t e e had any t i t l e t o convey. That was t h e e f f e c t of t h e B i l l of Sale, and was expressly recognized by t h e defendants. They cannot now be heard t o claim f a i l u r e of consideration. Defendants1 l a s t a f f i r m a t i v e defense i s t h e a l l e g a t i o n t h a t execution of t h e notes was induced by fraud. The elements of t h a t fraud a r e alleged t o be f a l s e representations t h a t t h e amounts assessed a g a i n s t defendants' stock were c o r r e c t ; t h a t assessments in favor of Double X were traceable to its cash contribution; and that 150 thoroughbred and quarter horses, with their registration papers, would be among the reclaimed property conveyed to the defendants. As already discussed, the confirmation of the reorganization plan by the reorgani- zation court made issues relating to the assessments res judi- cata, and therefore they cannot be relitigated in Montana courts. The only element of this defense which remains to be considered here is that which alleges false representations by the trustee concerning the horses and their registration papers. We note that these allegations have been denied by plaintiffs. The letter from defendants' attorney, alluded to here- tofore, belies this allegation. It evidences the defendants' understanding that the existence of and title to the horses was not being warranted by the trustee in his conveyance. Under the rules governing summary judgments, the letter established a sufficient absence of genuine factual issue on this point to shift the burden of demonstrating such issue to defendants. The record here is devoid of such evidence, the only allusion thereto was the bareallegation in the pleadings. Accordingly, the dis- trict court was correct ia awarding summary judgment to plain- tiffs on this issue. On the basis of the "wrongful acts" or negligence alleged in the affirmative defenses, defendants have also counterclaimed for damages. Since the defenses have proved faulty, as a matter of law, the counterclaim necessarily suffers the same deficiency. There are no genuine issues of material fact. The facts con- tained in the record demonstrate that plaintiffs are entitled to summary judgment on all issues, as a matter of law. The final issue raised by defendants concerns the district court's denial of their motion for further discovery to "seek evidence to support the allegations of the affirmative de- fense and Cross-Complaint." The district court, without objection, had ordered that all discovery be completed by June 15, 1974. Defendants1 motion for further discovery was made on June 19, 1974, offering no excuse for delay. The district court's refusal to grant that motion was not an abuse of discre- tion, for two reasons: (1) all parties had ample opportunity to conduct dis- covery, with knowledge of the date by which it must be completed, and (2) the affirmative defenses and counterclaim are de- fective, as a matter of law, and could not be salvaged by addi- tional facts, even if it were assumed that further discovery would produce additional, material facts. Responsibility for failure to discover facts supporting defendants' defenses and counterclaim must be assessed against the defendants, who failed to complete their discovery within the alloted time. The judgment of the district court is affirmed. We concur: J C/ Justices M r . Justice Wesley Castles specially concurring: I concur i n the result reached, but would not enter into the discussion on so-called issues which a r e not raised a s issues a t a l l . The only issue raised by appellants is whether there a r e genuine issues of material facts t o support a summary judgment. With that part of the opinion, I agree. ' . * - , r' " I L ---.,---#...4"2d"C j----*--16-r:-s--A-- Justice.