### No. 12927 IN

### THE SUPREME COURT 

### OF THE STATE OF MONTANA



### DOUBLE 

### X RANCH, INC.

# ,a Delaware Corporation, and STUART

### Me KAPLAN as Trustee inBankruptcy forGreat Western Ranches, Inc., Plaintiffs and Respondents,

SAVAGE BROTHERS, etal., Defendants and Appellants.

Appeal from: District Court of the ThirteenthJudicial 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: May 

### 7, 1975

Decided

### :

### JUN

## 18

### 1975 Filed: 

### 18 

## 3975

### Mr. JusticeFrank I. Haswell delivered the Opinion of the Court.

Plaintiffs filed an action inthe districtcourt, Yellowstone County, tocollect on four promissory notes executed by defendants pursuant toa corporate reorganization plan, under of the Chapter X /federal Bankruptcy Act. Defendants admitted executing the notes but alleged failure of consideration, fraud, and duress asdefenses and counterclaimed for damages based on alleged negligence and wrongful actsof the trustee inbankruptcy. The districtcourt granted summary judgment toplaintiffs on all issues. Defendants appeal. Plaintiffs areDouble X Ranch, Inc., the payee on three of the notes, and StuartM. Kaplan, the trustee inbankruptcy and payee on the fourth note. Defendants are Savage Bros., a partnership, and tenpersons surnamed Savage who 

### were sued individually and doing business as Savage Land and Livestock Company, Inc.; Savage Land and Livestock; and Savage Bros., Inc., a corporation. Defendants arethemakers or guarantors of the notes and willbe referred tocollectively asSavage Bra. In 1969 a Nevada corporation, Great Western Ranches, Inc.,

was formed. The objectivewas tohave various investors convey their ranch properties toGreat Western inexchange for shares of stock. Defendants, among others, transferred three tracts of land, personal property, and 150 thoroughbred and quarter horses with their registration certificates toGreat Western, receiving sharesof stock inexchange. Plaintiff Double X contributed $1,000,000 cash toGreat Western and received shares of stock for its contribution. GreatWestern hoped toattractan additional $4,000,000 from European investorsbut was unable todo so. On July 1, 1970, Great Western filed a petition for corporate reorganization under Chapter X of the federal Bankruptcy Act with the United StatesDistrict Court inSan Francisco. 11 U.S.C.A. 55501-676. This reorganization court appointed plaintiff Kaplan astrustee, and eventually approved a corporate reorganization plan for Great Western.The overall purpose of the corporate reorganization plan was toprovide for an orderly unwinding of the transactions involved inthe formation of Great Western and for the protection of itscreditors. Among other things, investors inGreat Western

were permitted toreclaim their property upon these specific conditions: (1) payment of 106per share for the costs of administering the reorganization; (2) payment of an additional 3g! or 49! per share (depending on the 

### timeof payment) toDouble X asreimbursement for its $1,000,000 cash investment; (3) payment tothe trustee or Double X, respectively, the amounts their property had been benefited, eitherwhile held by Great Western or by the cash contribution of Double X. Additionally, the corporate reorganization plan provided that consenting reclaimants irrevocably waived "any right to sue, litigate,

or obtain orexecute upon a judgment against [Great Western] or the trustee

## * 

## * * irrespective of whether such rights areknown

or suspected toexistby the consenting reclaimant atthe time the plan becomes effective." The plan alsoprovided that the reorganization court retainedjurisdiction over "allquestions arising inthe course of consummation of the plan and not specificallyprovided for." Defendants accepted and complied with the corporate reorganization plan by satisfying the conditions precedent toreclaiming their property. They paid the cash assessments required and executed the four promissory notes sued upon for the balance.

### The trustee executed and delivered to defendants transfer documents on their reclaimed property pursuant to the plan. Defendantsdefaulted 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 responded with a pleading they characterized as an "answer, counterclaim 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 alleged 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 defendants' 150 thoroughbred and quarter horses, with registration certificates,would be returned to them upon payment of the cash assessmentsand execution of the four promissory notes, which the trustee failed to do. (2) 

### The trustee represented and warranted to defendants: (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 representations and warranties by the trustee, defendantswere 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 hadcontracted to sell the reclaimed property to third parties and

were faced with other obligations against theproperty which could be foreclosed and thus could not get 

### it back unless they executed the promissory notes. (4) Damages sustained by defendants by reason of the foregoing factsmore than offset the amounts due on the promissory notes. Plaintiffs filed an "Answer toFirstAffirmative Defense, Counterclaim and Cross-Complaint" placing in issue allof defendants' contentions. Additionally, waiver by the defendants



### was alleged. Pretrial discovery consisting of admissions, interrogatories and answers was had by both plaintiffs and defendants. Plaintiffs then moved for summary judgment. Thereafter defendants moved for additional pretrial discovery, requiring plaintiffs to (1)answer sixinterrogatories more fully; (2) require the trustee and an officer of Double X toappear in Billings for depositions; and (3) require plaintiffs toproduce for inspection unspecified "relevant records" in their possession. The districtcourt denied defendants' motion for such further pretrial discovery and granted summary judgment toplaintiffs. Thereafter defendants moved tovacate or amend the judgment, or alternativelyfor a new trial. Following denial of these motions, defendants appealed. The controlling issues on appeal can be summarized in thismanner: (1) Arethe issuesraised by defendants resjudicata? (2) Did the statedistrict court have jurisdiction? (3) Are there genuine issues of material factprecluding summary judgment for plaintiffs? (4) Should the districtcourt have permitted additionalpretrial 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 reorganizationcourt, 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 BankruptcyAct. 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 BankruptcyAct, 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 interestshave 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) 'makesa 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 reorganization plan, when confirmed, res judicata even where error in the plan is alleged. Stoll v. Gottlieb, 305 U.S. 165, 59 S.Ct. 134,83 L.ed. 104. The issues raised by defendants inthe instant case, with one exception, could not have been raised inthe bankruptcy court atthe time of confirmation of thereorganization plan. They arebottomed on events that arose thereafter. The facts giving 

### rise todefendants1 claims and defenses have never been litigated inany court. Res Judicata cannot be used as a tool todeny defendants their day incourt. The exception 

### is the claim by defendants that the trustee charged them with 

### itemsnot properly chargeable against them under the provisions of the reorganization plan. Essentially, defendants contend that certain 

### items incurred in the operation of theView Point Ranch in Oregon should not have been charged against them, and that Double X 

### was not entitled toany reimbursement because their cash contribution was inreality a loan made to secure lucrative contracts from Great Western. However, the federal reorganization court approved the assessment schedule. To the extent that the trustee's charges reflect the plan's assessment schedule, defendants' claim isres judicata. The second issue for determination is whether the state district court has jurisdiction over the counterclaim and remaining defenses of defendants. Plaintiffs argue that consideration of these issuesby statecourts isprecluded by the continuing, exclusive jurisdiction of the bankruptcy court over thedebtor's property, citing Section 111 of the Bankruptcy Act, 11 U.S.C.A. 

### S 511. That argument ignores the fact that this suitfor collection on the notes was a plenary proceeding brought by the trustee in statecourt, The applicablerule of law has been aptly stated in 6 Collier on Bankruptcy, para. 3.21, p. 560:"If the trustee, receiver or debtor inpossession institutes a plenary action ina state court, that court has jurisdiction of allthe incidents of the litigationwithin its scope." Were it otherwise, a monstrous injusticewould result. The trustee, having chosen the statecourt ashis forum, could eliminate any defenses orcounterclaims tohis action without regard totheir

### meritsby the simple expedient of claiming exclusivejurisdiction inthe reorganization court. Wehold that, while the 

### state courtmust clearly enforce the termsof the

### reorganization plan, it cannot refuse toentertain defenses or related counterclaims which allege events occurring after confirmation of the plan merely on the ground of exclusivejurisdiction inthe reorganization court. For further authority,

see: Brown v. Gerdes, 321 U.S. 178, 64 S.Ct. 487, 88 L ed 659; Ohio OilCo. v. Thompson, 120F.2d 831 (8th Cir. 1941); Dawson

v. National Life Ins. Co., 156 Tenn. 306, 300 S.W. 567. We next determine whether or not there exist genuine issues of material factprecluding summary judgment on the remaining issues. The factual contentions of the defendants have already been summarized, and allrelate tothe affirmative defenses and counterclaim. To sustain the summary judgment, plaintiffs must have established the absence of any issueof material factas toeach of the defenses and the counterclaim. Roope 

### v. The Anaconda Co., 159Mont. 28, 494 P.2d 922; State

ex rel. City of Helena v. District Court, Mont

# . I 

## --

The defense of economic duress isclearly susceptibleto summary judgment infavor of plaintiffs. There is simply no allegation here of an unlawful detention of property, asrequired by the statutorydefinitionof duress contained in section 13-305(2), R.C.M. 1947. Defendants1allegations amount tonothing more than

a statement of their economic distress atthe time they executedthe notes. That isclearly not enough tovalidate the defense. Pederson v. Thoeny, 88 Mont, 569, 295 P. 250; McNussen v. Graybeal, 146 Mont. 173, 405 P.2d 447. The affirmativedefense of failureof consideration was alsoa proper subject for summary judgment infavor of plaintiffs. The consideration for defendants1promissory notes was billsof salefrom the trusteecovering their reclaimed ranch and personal property situated thereon. In accord with the terms of theplan, the trustee conveyed only his interest in .theproperties. The import of that form of conveyance is evident ina letter written tothe trustee by defendants1attorney. In that 

### letter, he wrote: 

## " 

## * 

## * * Said Billsof Sale

### willnot be construed by the said shareholders [defendants here] to include any warranty by the Trustee that those 

### itemsof personal property listed on the Exhibits tothe Billsof Sale areactuallyphysically located on the said farms which are subject to the Order of Rescission made a part of the Bills of Sale, or that any or allof such itemsof personal property ever existed, and said shareholders hereby waive any claim they may have or that may arise against Great Western Ranches, Inc., against Stuart M. Kaplan, as Trustee of Great Western Ranches, Inc., and each of them, relating totitleto said personal property, or any of it." [Bracketed material added.] (Emphasis added.) Defendants received what they bargained for--the conveyance of the trustee's interest incertainpersonal property, including the thoroughbred and quarter horses, devoid of any assurance that the property actually existed or that the trusteehad any 

### title toconvey. That was the effect of the Billof Sale, and

was expressly recognized by the defendants. They cannot now be heard toclaim failure of consideration. Defendants1last affirmativedefense is the allegation that execution of the notes was induced by fraud. The elements of that fraud are alleged tobe falserepresentations that the amounts assessed against defendants' stock were correct; that

### 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 reorganization courtmade issues relating to the assessments res judicata, and therefore they cannotbe relitigated in Montana courts. The only element of this defense which remains to be considered here is that which alleges false representationsby 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 heretofore,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 district court was correct ia awarding summary judgment to plaintiffs on this issue. On the basis of the "wrongfulacts" or negligence alleged in the affirmative defenses, defendants have also counterclaimed for damages. Since the defenseshave proved faulty,as a matter of law, the counterclaim necessarily suffers the same deficiency. There are no genuine issues of material fact. The facts contained 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 defense and Cross-Complaint." The district court,without objection,had ordered that all discovery be completed by June 15, 1974. Defendants1motion for further discovery was made

on June 19, 1974, offering no excuse for delay. The district court's refusal to grant thatmotion was not an abuse of discretion, for two reasons: (1) all parties had ample opportunity to conduct discovery, with knowledge of the date by which itmust be completed, and (2) 

### the affirmative defenses and counterclaim are defective, as a matter of law, and could not be salvaged by additional 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

### Mr. JusticeWesley Castles specially concurring:



### I concur in the result reached, but would not enter into the discussion on so-called issueswhich arenot raised as issues atall. The only issue raised by appellants 

### iswhether there are genuine issues 

### of material facts to support a summary judgment. With that part of the opinion, 

### I agree.

'. *-, r' " I L ---.,---#...4"2d"C j----*--16-r:-s--A-- 

### Justice.