UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

CORBIN DIVISION

 

 

IN RE:

WAYNE ENGLE

d/b/a M & W Coal Company

DEBTOR CASE NO. 80-00054

 

 

L.D. GORMAN and GORMAN

FUEL, INC. PLAINTIFFS

VS. ADV. NO. 89-0082

ROBERT J. BROWN, Trustee, et al. DEFENDANTS

 

MEMORANDUM OPINION

 

This matter is before the Court on the plaintiffs' Motion for Summary Judgment filed herein on June 13, 1995. The plaintiffs seek recission of a stock sales agreement on the grounds of mistake, failure of consideration and frustration of purpose. Defendant Bobby G. Wombles ("Wombles") filed a Response on July 17, 1995. Defendant Robert J. Brown ("the trustee") filed a Response on August 10, 1995. The plaintiffs filed a Reply to these Responses on August 11, 1995. This matter was submitted for decision by Order of this Court entered on September 28, 1995. This Court has jurisdiction of this matter pursuant to 28 U.S.C. 1334(b). The plaintiffs have alleged that it is a core proceeding pursuant to 28 U.S.C. 157(b)(2).

This matter was originally commenced by the filing of a Complaint captioned "L.D. Gorman and Gorman Fuel, Inc. v. Manuel Lujan, Secretary of Interior and Office of Surface Mining Reclamation & Enforcement and Robert J. Brown, Trustee." This Complaint was filed on April 14, 1989, and sought a finding of contempt and permanent injunction against the first two defendants, or, alternatively, for an Order setting aside and holding void ab initio, the subject sales agreement of April 28, 1980, and an Order of this Court of June 20, 1980. On February 2, 1990, the Court entered Findings of Fact and Conclusions of Law granting the defendants judgment on the pleadings.

The plaintiffs filed an Objection to Findings of Fact and Conclusions of Law on February 7, 1990. The Court entered its judgment on February 13, 1990, and the adversary proceeding was dismissed with prejudice. The plaintiffs filed a Motion to Alter or Amend Judgment on February 22, 1990. The defendants filed a Response thereto on March 8, 1990, and the plaintiffs filed a Reply on March 13, 1990. On March 19, 1990, the Court entered an Order which overruled the plaintiffs' objections and denying the Motion to Alter or Amend. The plaintiffs filed a Notice of Appeal on March 27, 1990.

The United States District Court for the Eastern District of Kentucky entered an Order on March 6, 1991, affirming the decision of the Bankruptcy Court in part, and reversing it in part. The case was remanded to the Bankruptcy Court for further consideration of count 2 of the appelants' Complaint. Count 2 of the Complaint concerned the request that the stock sale agreement be set aside and held void ab

initio. This Court ordered the submission of proposed findings of fact and conclusions of law in regard to count 2 on March 15, 1991. The plaintiffs filed a Motion to Dismiss defendants Manuel Lujan, Secretary of the Interior, and the Office of Surface Mining Reclamation and Enforcement on March 25, 1991. Those defendants responded to the Motion to Dismiss on April 11, 1991, and the plaintiffs filed a Reply on April 22, 1991. At a hearing on the matter on May 21, 1991, the parties agreed to move for clarification of the District Court Order, and all matters before this Court were placed in abeyance.

On December 11, 1991, the plaintiffs filed an Amended Complaint naming Albert Engle, Anna Mae Engle, and Bobby G. Wombles as defendants in addition to the trustee. Manuel Lujan and the Office of Surface Mining Reclamation and Enforcement were no longer included as defendants. The Amended Complaint seeks an order setting aside and holding void ab initio the agreement of April 28, 1980 and the Order of June 20, 1980, or a declaratory judgment adjudicating the rights of the parties. The trustee filed his Answer on December 18, 1991, and another Answer on January 15, 1992. Defendant Anna Mae Engle filed her Answer on January 30, 1992. Defendant Wombles filed an Answer and Counterclaim on January 31, 1992. The Counterclaim alleges that Wombles is owed money under the agreement for coal actually mined and for minimum tonnage for the life of the leases. The plaintiffs filed a Reply to the Counterclaim on February 12, 1992.

No further action was taken in this matter until an Order for Telephonic Status Conference was entered on December 14, 1994. The status conference was set for February 10, 1995. The plaintiffs moved to strike certain defenses of Anna Mae Engle on January 30, 1995. This Court entered an Order sustaining the plaintiffs' Motion on March 1, 1995. The plaintiffs filed a Motion for Summary Judgment on June 13, 1995. Defendant Wombles filed a Response on July 17, 1995. The trustee filed his Response on August 10, 1995. The plaintiffs filed a Response to Wombles on August 11, 1995.

On August 28, 1995, after a hearing on the plaintiffs' Motion for Summary Judgment, this Court entered an Order seting a schedule for the parties to provide supplemental briefing on the issueof mistake of law. The plaintiffs filed their supplemental brief on September 6, 1995, and the trustee filed his on September 14, 1995. This Court entered an Order of Submission on September 28, 1995.

The issue to be determined by this Court is whether the April 28, 1980, stock sales agreement should be declared void ab initio on the grounds of mutual mistake, recission, unenforceability and/or illegality, as requested in the Amended Complaint. The parties to the agreement were Wayne Engle, defendants Anna Mae Engle, Albert Engle, and Bobby G. Wombles as sellers, and plaintiff Gorman Fuel, Inc. as buyer. The agreement purported to sell 100% of the stock of M & W Sales, Inc., a coal mining company being reorganized under Chapter XI, Case No. 80-16 in this district. As consideration for the transfer of 100% of the stock, the buyer was to pay certain sums to each of the sellers, and a $.25 royalty on all coal mined and sold under any leases of the company. The agreement also provided that the buyer would not be held personally responsible for any debts or liabilities of M & W Sales, Inc., or personally liable for the debts of the company or any of the sellers. It is this provision, or the construction of it, that engendered this action.

In March 1989, the previous defendants herein had filed a Motion for leave to file an Amended Complaint in Civil Action No. 85-395, United States of America v. M & W Sales, Inc., et al. The Amended Complaint alleged that the plaintiffs herein were personally responsible and liable for the abatement of violations of the Surface Mining Control and Reclamation Act ("SMCRA") committed by M & W Sales, Inc. Copies of documents filed in this matter indicate that the significant time period in regard to these violations is 1979-80. The plaintiffs argued that the above-referenced provision of the agreement shielding them from personal responsibility or liability prevented OSMRE from pursuing them for these debts. Since this Court had approved the agreement, the plaintiffs sought in their original Complaint to have this Court hold the previous defendants in contempt.

As set out above, those defendants were granted judgment on the pleadings. In his Findings of Fact and Conclusions of Law, Judge Bare found, inter alia:

A. Plaintiffs' complaint misconstrues the scope of the June 20, 1980 order, the April 28, 1980 Sales Agreement, and the federal government's responsibility and authority to enforce SMCRA.

B. [T]he Sales Agreement and subsequent order cannot reasonably be interpreted to limit the federal government's authority to enforce SMCRA.

C. Plaintiffs and the other parties to the Sales Agreement cannot remove their transactions from the reach of dominant constitutional power merely by making contracts about them.

. . . . . . . . . . .

F. The conduct regulated by defendants ordinarily is excepted from bankruptcy protection.

When it thus became apparent that the agreement provided no protection from OSMRE's pursuit of the plaintiffs for violations of SMCRA, the plaintiffs were left to pursue their attempt to have the agreement declared void ab initio.

As stated above, the plaintiffs contend that the agreement should be declared void on the grounds of mutual mistake, recission, unenforceability and/or illegality. In this regard, the plaintiffs make several statements concerning what they characterize as the "breakdown" of the agreement. They state that Wayne, Albert, and Anna Mae Engle failed to transfer to M & W their interests in real property in Perry County in accordance with paragraph 3 of the agreement; Wayne Engle failed to lease rights to mine certain property which was adjacent to "the Ellison lease" in accordance with paragraph 4 of the agreement; the "Colwell" and "Ellison" leases expired and were released from the bankruptcy estate; three plans of reorganization were rejected by M & W's creditors; Gorman Fuel, Inc. did not pay minimum royalties; and efforts were made by OSMRE to hold the plaintiffs liable for the debts and obligations of M & W.

The plaintiffs further state that the sellers subsequently demanded that they return the M & W stock. They state that on August 17, 1984, defendant Wombles notified L.D. Gorman, president of Gorman Fuel, Inc., that the company was in default of the agreement for failure to make the minimum royalty payments. On September 10, 1984, Wombles notified Mr. Gorman that the stock certificates should be returned to their owners. On January 16, 1987, Wombles notified Mr. Gorman of a formal demand for delivery of the M & W stock certificates, endorsed in blank. On January 19, 1987, the stock certificates were delivered to Wombles. On February 23, 1987, Wombles delivered the stock certificates to the trustee. The trustee had been appointed in August 1985, when M & W's Chapter XI case was converted to a Chapter VII.

The plaintiffs maintain that the sellers' request for the return of the stock certificates, coupled with Gorman Fuel's compliance, was a rescission of the agreement. The Court understands this argument to be that the parties to the agreement effected a voluntary rescission as opposed to an argument for equitable rescission as a remedy in this action. This argument, that the parties voluntarily agreed to rescind the agreement, overlooks the fact that, at the time of the alleged rescission, Wayne Engle's proceeding had been converted to a Chapter 7 proceeding and thus the agreement of the Chapter 7 trustee would be necessary in the place of Wayne Engle since, as trustee, he controlled all non-exempt assets of the estate. No factual information is offered suggesting that the trustee agreed to the rescission.

The plaintiffs have not argued unenforceability or illegality. The only remaining theory under which the agreement might be declared void ab initio is mutual mistake.

The plaintiffs argue that a mistake existed at the time the agreement was entered into in two respects: first, in the understanding that this Court's approval of the agreement would shield the buyer from actions by third persons to pass through the obligations and liabilities of M & W, and second, in the understanding of who would be held responsible as an "owner or controller"of a violator under SMCRA. The plaintiffs represent that a 1988 regulation defining "owned or controlled" did not change the law as it existed at the time of the execution of the agreement, but merely provided an agency interpretation of the meaning of terms used in implementing regulation promulgated in 1979. They therefore maintain that the mistake of law existed on April 28, 1980, and that for that reason the agreement should be rescinded. They do not support their position with citations to case law.

Mistake was alleged in Sadler v. Carpenter et al., 251 S.W.2d 840, Ky. (1952),

wherein the court discussed the effect of a mistake of law:

Sadler's claim that he would not have signed the cancellation agreement had he known that he would remain liable for realtor's fees, in effect, pleads a mistake of law. As stated in 17 C.J.S., Contracts, 145(a), p. 500:

'"A mistake of law may be defined as an erroneous conclusion respecting the legal effect of known facts. It is laid down in general language in many cases that a mistake, in order that it may affect a contract, must be a mistake of fact, and that a mere mistake of law will not affect the enforceability of an agreement * * *."'

There are exceptions to this general rule as when a mistake of law is induced by fraud, undue influence or abuse of confidence. ....

At page 842. In contrast, the Court of Appeals found a mutual mistake of fact in Bradshaw v. Kinnaird, 319 S.W.2d 475, Ky. (1959). In that case, a tobacco farm was purchased and the records indicated that the farm had a 14.3 acre tobacco base under the Agricultural Adjustment Act. All parties to the transaction believed that the farm had such a tobacco base. Later, however, it was found that the correct base was 9.2 acres, a mutual mistake of material fact for which the purchaser was entitled to relief. The court stated:

From the record it is clear that both parties believed that the farm had a 14.3 acre tobacco base. .... There is no doubt that the mutual mistake was one of a material fact. To a substantial degree the value of a tobacco farm is determined by the tobacco acreage that the federal agency permits the farmer to raise. The record leaves us with no doubt that if in 1950 it were known that the tobacco base was 9.2 rather than 14.3 acres, the value of the farm would have been appreciably less. Thus there was existent a mutual mistake of material fact.

At page 477.

It is clear, therefore, that for a mutual mistake to be actionable it must be a mistake of material fact. The argument that the plaintiffs herein have made is very similar to the argument put forth by the appellant in Sadler v. Carpenter, supra. The parties to the agreement at issue here came to "an erroneous conclusion" concerning the effect of the law in regard to liability for SMCRA violations. This is, in their own words, a mistake of law. It is not, however, a mistake which requires that the agreement be declared void ab initio, or that allows any other relief from the burdens of the agreement.

In consideration of all of the foregoing, it is therefore the opinion of this Court that the plaintiffs' Motion for Summary Judgment should be overruled. An order in conformity with this opinion will be entered separately.

Dated:

By the Court -

 

 

________________________________

Judge

 

Copies to:

Debtor

Dean K. Hunt, Esq.

David M. Cantor, Esq.

Robert J. Brown, Esq., Trustee

Anna Mae Engle

Bobby G. Wombles, Esq.