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In re Stolkin

decided: January 16, 1973.


Duffy, Senior Circuit Judge, Pell, Circuit Judge, and Durfee, Senior Judge.*fn*

Author: Pell

PELL, Circuit Judge.

Stolkin, the debtor in Chapter XI bankruptcy proceedings, appeals from the district court order confirming the referee's order which denied Stolkin's petition to reconsider the allowance in full of the claim of his divorced wife, Ruth Stolkin March.*fn1

The facts presented to us constitute a tale of wheeling-dealing high finance, the telling of which to a considerable extent projects the result which we reach. Before such recounting, however, certain preliminary matters require disposition.

Respectable authority, 3 Collier on Bankruptcy para. 57.23[6], at 370 (14th ed. 1971), states that whether or not a petition for reconsideration will be granted is within the sound discretion of the referee and "a review or an appeal may not be taken from a denial thereof." The text cites contrary authority and, while we recognize the possibility of policy factors which might militate against allowing an appeal because of the resultant delay in the completion of the bankruptcy procedures, we question whether the exercise of discretion which would result in the payment of a substantial amount of the estate's assets, here approximately three and a half million dollars, should not be reviewable in the posture of the case here involved. Stolkin has arguably presented matters in the petition which were not known to him at the time the claim originally was allowed and which presumably therefore would have had the effect of causing him not to appeal directly from the allowance of the claim. We accordingly consider the appeal.

In so doing, however, we confine the scope of the review to whether there was an abuse of discretion. For that purpose, we are primarily concerned with the assertions in the petition since the referee's order of denial concluded "as a matter of law" that the petition failed to state a claim upon which relief could be granted and that there was not cause alleged, according to the equities of the case, for reconsideration. While the four corners of the petition are the primary object of consideration, we may properly assume that the referee had knowledge of pertinent developments in the Stolkin bankruptcy arrangement proceedings. This assumption pertains to that which was before the referee in the form of the file in the case even though referee Tieken, who entered the order in question, had been assigned to the case only about five months.

Further, prior to argument in this court, March filed a motion for leave to supplement the record by the inclusion of certain pleadings filed by Stolkin in a California civil action in which he sought to recover substantial damages from March and others for alleged fraud and deceit, breach of contract, and interference with contract. The basis for the California pleadings was the same factual syndrome involved in the petition before the referee. The referee, of course did not have this information before him in making his ruling. We therefore initially examine the case without regard to the supplemental materials. On the other hand, since Stolkin has stated he had no objection to the granting of the motion to supplement, we will consider the proffered pleadings insofar as they have materiality in our determination of whether there is a necessity for remanding this case for an evidentiary hearing.

Looking first then at the Stolkin petition for reconsideration we find the following allegations, which we present in summary form as asserted by Stolkin, without regard to the fact that the lack of verity of a substantial part of the allegations could not have been other than obvious to the referee.

After a marriage of some 22 years, Stolkin and March separated in 1964. Ultimately, divorce proceedings were instituted in both Illinois and California. Negotiations were conducted through attorneys and an oral settlement was arrived at, which March refused to honor upon learning that Stolkin was planning a remarriage. March caused the delay in consummating a written agreement by insisting upon having a conference with her father, her adviser, which conference was to occur on her next monthly visit with him. Eventually, in April 1967, Stolkin and March entered into a written property settlement agreement a copy of which was attached to the petition. This was typified in the petition as a conditional agreement. Stolkin, inter alia, agreed to pay March the sum of $3,400,000 on May 1, 1968, upon the occurrence of certain conditions, which conditions were not included in the written agreement. One was that his shareholdings in National Video Corporation (NVC), then valued in excess of $20,000,000, should appreciate to its former worth of approximately $100,000,000. His shareholdings in NVC would not in any event decrease in value from its then worth in excess of $20,000,000. March would accept 151,000 shares of NVC as security. March would make no attempt to dispose of the shares of NVC in the event of the failure of the conditions. Between May 1, 1968, the due date on the payment, and August 1968, the date of the filing of the Chapter XI proceeding, March, "fully aware of the failure of consideration," failed to make demands for the payment, failed to enforce her security rights by sale of the collateralized stock, and failed to file any action to enforce payment. Debtor's obligation to pay the specified amount was voided between May 1968 and January 1969 (the date of the allowance of the claim) because Stolkin's holdings of NVC became severely depreciated and decreased by over $10,000,000 and at the time of the January 14, 1969, hearing was valued at less than $6,000,000. NVC had filed a Chapter X bankruptcy proceeding. The property settlement agreement allegedly was entered into and signed by the parties under "the foregoing mutual mistakes of fact," said mistakes consisting of erroneous information about the then present state of and prospects for the color television industry, more particularly as those facts related to the present state of and prospect for NVC.

The second ground in Stolkin's petition was categorized as undue influence and duress. It is based upon the alleged fact that after the parties had already agreed orally upon a $1,000,000 payment to March, she, learning of Stolkin's proposed remarriage, as to which he was under extreme pressure, took advantage of him and "his anxiety with respect to protecting his fiancee from unfavorable publicity and delay." While it is not explicitly alleged, the inference is that the more favorable written agreement of April 24, 1967, was not only forced upon Stolkin but his attorneys as well.

The final factual situation in which Stolkin finds numerous and diverse grounds for reconsideration of the allowance of the claim and which is the most extensive of the bases word-wise, and which was the principal contention on this appeal, is that a new agreement was entered into between him and March between May of 1968 and January 14, 1969.

The agreement of April 24, 1967, was in writing and provided, inter alia, the following:

"18. This agreement embodies the entire understanding of the parties. It may not be altered or terminated except by written instrument executed by the parties and shall be governed by the law of the State of Illinois applicable to agreements entirely to be performed therein. The parties agree that this agreement shall be enforceable in any state, the courts of which have jurisdiction over the parties."

The alleged new agreement was oral. The background was said to be as follows. During the particular period of time, March and Stolkin were on very friendly terms and were mutually interested in the welfare of their children, only one of whom apparently was a minor. March had great confidence in Stolkin's business judgment and frequently expressed her desire to be helpful and cooperative. She had instructed her attorney to cooperate completely with Stolkin and his attorney. Stolkin held a controlling interest in M P I Industries, Inc. (MPI), a valuable holding. A merger into another company was indicated as being a wise course. Stolkin devoted all of his time to securing the most advantageous terms for a merger agreement. He thought at first that March's attorney was being cooperative; however, he became apprehensive when the attorney belittled the merger possibilities by phrases such as "pie in the sky."

Expressing these apprehensions to March and her father, Stolkin was repeatedly assured that the attorney would cooperate. Stolkin assured March that it was still his desire to give her the entire $3,400,000 if it was economically feasible even though he was under no legal obligation to do so, presumably referring to the fact that he had been overreached and there was a mutual mistake of fact regarding NVC. Exploration developed two possibilities of mergers, one with DeSoto, Inc., owned 51% by Sears, Roebuck, who would be a principal customer of DeSoto as it had theretofore been.

Arrangements were made to the end that Stolkin would be able to purchase the Sears shares. Stolkin was reasonably certain that an analysis of the proposed transaction would result in an opinion that a merger with DeSoto would provide the most stability and future growth potential with the least risk and best dividend income return on capital invested. This would provide a very solid foundation on which to rebuild not only Stolkin's future but also that of the parties' children. Stolkin, however, in favoring the DeSoto deal did not do so casually but only after comparing it with other possibilities which he had explored. One of these was with Holiday Inn which allegedly would have resulted in an immediate $18,000,000 recovery by him. Stolkin apparently favored the stability of the long haul and was not tempted by the lure of the immediate substantial cash increment although at all times he indicated unless March cooperated with him he might have to go the Holiday Inn route.

The cooperation he suggested was that she accept $1,000,000 in cash and $2,400,000 in DeSoto stock. Stolkin would vote the shares but the stock would be placed in trust and March would get all of the dividends which would amount to approximately $60,000 per year for her life, with the stock then to go to the children. March was told by Stolkin that if the change in the agreement was acceptable to her he would not oppose "the proving up of her claim." March and her father agreed wholeheartedly to the terms of the new agreement and on divers occasions assured Stolkin that not only they but their attorney would cooperate. Further ramifications of the merger with DeSoto then developed. Stolkin had the possibility of getting a loan from Sears which would require selling some of the DeSoto stock or he could get a firm commitment for a multimillion dollar loan from a consortium of European bankers which would allow him to keep all of the DeSoto stock. While Stolkin was busy arranging the financing and the mechanics thereof, March's attorney was apparently busy harpooning the arrangements, the upshot of which was that the attorney refused to grant a few days time to let the European loan come through and even refused to go across the street for the purpose of receiving an assurance that the loan was in process.

The attorney insisted that the DeSoto stock resulting from the merger be sold immediately, and in fact it was sold, at great loss to Stolkin. Stolkin was threatened by the attorney with being put in jail for failure to comply with a federal court order and was told that the Chapter XI proceedings would be thrown into ordinary bankruptcy adjudication proceedings unless he bowed to the demands of the attorney. March's attorney at this time was also the attorney for the creditor's committee.

In addition to those terms hereinbefore mentioned of the alleged oral agreement, $2,400,000 of DeSoto stock would be pledged as security to the European bankers and, in the event that Stolkin was unable to obtain control of the merged company and was forced to sell his holdings or should his holdings in NVC further depreciate, then March's claim would be determined by the bankruptcy court on the basis of all the equities and circumstances. A voting trust of the shares would be created for the benefit of Stolkin. Because March agreed to all of these provisions, Stolkin raised no objection to the approval of the $3,400,000 claim in the form in which it was specified in the written property settlement agreement. Because of the actions of the attorney, Stolkin ultimately had to sell almost all of the resulting DeSoto shares.

Finally, it is asserted that because of the drastic changes of circumstances, considering the equities of the case (and we do not intend to ignore equities), the referee was urged ...

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