The opinion of the court was delivered by: BECHTLE
Presently before the Court is an appeal from the July 13, 1976, order of the bankruptcy court, pursuant to Rule 801 of the Rules of Bankruptcy Procedure, which dismissed the application of Botany Industries, Inc. ("Botany"), and Michael Daroff for the removal and surcharge of the late Max Robb ("Robb"), the former trustee of all the bankrupt companies in this litigation. The jurisdiction of this Court to review the order of the bankruptcy court is based upon section 39(c) of the Bankruptcy Act, 11 U.S.C. § 67(c) (1966). For the reasons stated below, we will affirm the order of the bankruptcy court.
During the bankruptcy proceedings below, appellants Botany, one of the bankrupt companies, and Michael Daroff, a purported creditor of one or more of the bankrupts, filed an application with the bankruptcy court, pursuant to Rules 901(4) and 221(a) of the Rules of Bankruptcy Procedure, and 11 U.S.C. § 11(a)(17) (1966), to remove Robb from his position as trustee of the bankrupts and to surcharge him for alleged fraud and negligence in the performance of his duties. Judge Emil Goldhaber, the Bankruptcy Judge in these proceedings, found that the issue of the trustee's removal was moot because Robb died during the pendency of the application before the bankruptcy court and he, therefore, limited his July 13, 1976, opinion
to the question of whether the estate of the late trustee should be surcharged for Robb's alleged derelictions in the performance of his duties. The primary issue in this appeal is whether, at the two October, 1975, hearings concerning the adjudication of the application for the removal and surcharge of the trustee, the bankruptcy court erred when it refused, on the grounds of Res judicata and collateral estoppel, to admit into evidence testimony offered by the applicants regarding alleged acts of fraud, which arguably would have shown that prior decisions of the bankruptcy and appellate courts relating to the acts of the trustee in the performance of his duties were based upon inaccurate, misleading and fraudulent information. Specifically, appellants argue that the orders of the bankruptcy and appellate courts confirming the sales of the capital stock of three of Botany's wholly owned subsidiaries were entered without the courts' knowledge of a fraud amounting to over $ 3,000,000 and that further evidence regarding these sales should have been admitted at the October, 1975, hearings as additional support for Robb's removal and surcharge. In response, counsel for the late trustee argues that appellants' charges of fraud in the sales of the capital stock had been previously litigated and adjudicated and that Judge Goldhaber properly refused, under the doctrines of Res judicata and collateral estoppel, to hear and admit testimony and evidence with respect to such charges.
Rule 803 of the Rules of Bankruptcy Procedure provides that, unless a notice of appeal is filed with the bankruptcy court within ten days of the entry of the judgment or order that is being appealed, the judgment or order of the bankruptcy judge shall become final. See 11 U.S.C. § 67(c). The standard to be followed in reviewing an order of the bankruptcy court is stated in Rule 810 of the Rules of Bankruptcy Procedure, which permits the district court, in ruling upon an appeal, to affirm, modify or reverse a referee's judgment or order, or remand with instruction for further proceedings, but which requires the district court to accept the referee's findings of fact unless they are clearly erroneous. If there is a reasonable basis in the record for a bankruptcy judge's ultimate findings of fact, a reviewing court cannot substitute its own ultimate findings of fact simply because it regards its views as effecting a more desirable result than that reached by the bankruptcy judge. In Re Arbycraft Co., 288 F.2d 553, 556-557 (3d Cir. 1961).
In this case, we must determine whether the bankruptcy court was clearly erroneous when it determined that the doctrines of Res judicata and collateral estoppel barred the admission, at the hearings for Robb's removal and surcharge, of testimony alleging fraud and newly discovered evidence. Res judicata precludes litigation of the same cause of action between the same parties or their privies when there is a final, valid judgment rendered on the merits. Donegal Steel Foundry Co. v. Accurate Products Co., 516 F.2d 583, 587 (3d Cir. 1975). Res judicata bars not only matters actually presented to sustain or defeat the right asserted in the earlier proceeding, but also any other available matter which might have been presented to that end. Chicot County Drainage District v. Baxter State Bank, 308 U.S. 371, 378, 60 S. Ct. 317, 84 L. Ed. 329 (1940). Collateral estoppel provides that, when an issue of ultimate fact has once been determined by a valid and final judgment, that issue cannot again be litigated between the same parties in any future lawsuit. Harris v. Washington, 404 U.S. 55, 56, 92 S. Ct. 183, 30 L. Ed. 2d 212 (1971) (per curiam). The doctrines of Res judicata and collateral estoppel apply to the decisions of the bankruptcy courts. Katchen v. Landy, 382 U.S. 323, 334, 86 S. Ct. 467, 15 L. Ed. 2d 391 (1966).
Botany was a publicly owned holding company in which appellant Michael Daroff and his brother, Joseph Daroff, owned a 27% Controlling interest. On April 25, 1972, after suffering disastrous financial losses, Botany filed its petition for arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 Et seq., and Robb was appointed receiver. When all efforts failed to fund a plan of arrangement which had been accepted by a requisite majority of creditors, Botany and its manufacturing and retailing subsidiaries were adjudicated bankrupts on October 29, 1973, with Robb appointed as trustee. Three of Botany's subsidiaries which did not resort to relief under the Bankruptcy Act were the Mill Store, Inc. ("Mill Store"), Baltimore Luggage Company ("Baltimore") and Glenoit Mills, Inc. ("Glenoit"). The sales of the capital stock of Mill Store, Baltimore and Glenoit, pursuant to orders of confirmation of the bankruptcy court, constitute the source of appellants' allegations of fraud and newly discovered evidence, which in turn support their claim for a surcharge of the estate of the late trustee.
The pertinent facts underlying Robb's sales of the capital stock of Mill Store, Baltimore and Glenoit, in the performance of his duties as trustee for the bankrupts, are as follows: On April 26, 1974, nine days after a hearing upon notice to all creditors, the official Creditors' Committees and all previously interested persons, Judge Goldhaber authorized and directed Robb, as trustee, to sell the capital stock and accounts receivable of Mill Store to the Daroff Corporation for $ 1,200,000,
a bid found by the bankruptcy court to be fair and reasonable and more than could have been realized at a public sale. (Record 319; Order of Confirmation, dated April 26, 1974, at 2.) The bankruptcy court also found that there was no valid objection to the transfer of the trustee's right, title and interest in the stock to the Daroff Corporation, and that approval of the sale of the Mill Store assets was in the best interests of the creditors. Id.
On July 25, 1974, after a hearing upon notice to all creditors, the official Creditors' Committees and all previously interested persons, Judge Goldhaber authorized and directed Robb, as trustee, to sell the capital stock of Baltimore to Samuel J. Holtzman, President and Treasurer of Baltimore, for $ 1,250,000, a bid found by the bankruptcy court to be fair and reasonable and more than could have been realized at a public sale. (Record 525; Order of Confirmation, dated July 25, 1974, at 1.) At the hearing, Botany requested a continuance and objected to the sale because of the unavailability of time and comprehensive and current financial, legal and operating data necessary to conduct a physical audit to verify Baltimore's book figures.
Judge Goldhaber denied the bankrupt's request for a continuance, and noted that the hearing for the sale of the stock was being held nine months after an order of adjudication of bankruptcy, thereby making mandatory the liquidation of all of the bankrupt's assets. (Record 564-565; N.T. 1407-1408.)
Although appellants did not appeal either order confirming the sales of the capital stock of Mill Store and Baltimore, Botany did attack the validity of these sales in its August, 1974, petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C. § 501 Et seq. (See Record 362-371.) On September 27, 1974, after hearing testimony with respect to all of Botany's charges,
Judge Goldhaber, as Special Master, reported to Senior District Judge John Morgan Davis that there was no basis for Botany's assertion that the court-approved sales might be voidable and stated that the time for a challenge to the legality of the sales had passed. (Record 395; Report of Special Master, dated November 12, 1974, at 6.) In an unappealed order, Judge Davis overruled Botany's objections to the Special Master's report; approved, adopted and confirmed the Report; and dismissed Botany's petition for reorganization under Chapter X as not having been filed in good faith. (Record 407; Order Confirming Report of Special Master, dated December 2, 1974.)
Botany had pledged the capital stock of Glenoit to the First National Bank of Boston ("the Bank") to secure loans aggregating more than $ 14,000,000.
On October 7, 1974, after a hearing upon notice to all creditors, the official Creditors' Committees and all previously interested persons, Judge Goldhaber authorized and directed Robb, as trustee, to sell the capital stock of Glenoit to Clarence Hafford, Inc., for $ 6,487,500, payable to the Bank, and $ 250,000, payable to Robb, as trustee, in exchange for a release of any claims which Botany had against Glenoit. At the October 7, 1974, hearing, Michael Daroff objected to the sale of the stock (Record 610; N.T. 1545) and stated, in his written objections to the sale, that: the purchase price of $ 6,737,500 was grossly inadequate; the management of Glenoit deliberately understated its assets, overstated its liabilities and minimized its profits from operations; and, the bankruptcy court should continue the hearing until an independent audit of Glenoit's books and records had been made, in order to provide the true worth of Glenoit to prospective bidders. (Record 569.) The bankruptcy court declined Daroff's request for a continuance, denied his objections and confirmed the sale of the Glenoit capital stock. (Record 615; N.T. 1550.) Michael Daroff petitioned the district court to review the bankruptcy court's order of confirmation of the sale, raising all of the issues in his appeal, including nondisclosure and the fraudulent understatement of assets,
that had been advanced in the bankruptcy court. On December 2, 1974, Judge Davis affirmed the order of confirmation and dismissed with prejudice Michael Daroff's appeal. (Record 596.) On December 31, 1974, Botany and Michael Daroff appealed to the United States Court of Appeals for the Third Circuit, again advancing all of the charges which were made before the bankruptcy and district courts. (Record 295; Opinion, dated July 13, 1976, at 9.) After a hearing on February 13, 1975, the Court of Appeals affirmed, without opinion, the order of the district court, and subsequently refused appellants' motion for reargument. On October 6, 1975, the United States Supreme Court denied appellants' petition for a writ of certiorari.
In this case, it is clear from the record before us that Judge Goldhaber was not clearly erroneous in his finding that Botany and Michael Daroff were barred by the doctrines of Res judicata and collateral estoppel from raising the issue of fraud in their application to remove and surcharge the late trustee. Appellants had pleaded, argued and litigated the issue of fraud, in connection with the sales of the capital stock of Mill Store, Baltimore and Glenoit, before the bankruptcy, district and appellate courts and, therefore, under the rule of collateral estoppel, they could not relitigate this same issue in the subsequent proceeding for Robb's removal and surcharge.
Further, Judge Goldhaber correctly held that allegations of impropriety or fraud underlying the sales of capital stock were barred by Res judicata because the orders of confirmation are valid, final judgments under Rules Bankr. Proc. Rule 803, 11 U.S.C. In view of the applicability of Res judicata and collateral estoppel, at the October, 1975, hearings concerning the application for the removal and surcharge of the late trustee, Judge Goldhaber properly refused admission of any evidence of alleged fraud with respect to the sales of the capital stock of Mill Store, Baltimore and Glenoit.
We turn next to the three remaining issues raised in this appeal. First, appellants argue that the bankruptcy court was compelled, under 18 U.S.C. § 3057,
to request the United States Attorney to investigate the applicants' allegations of fraud and to review those findings before rendering a final decision with respect to the application for Robb's removal and surcharge. This argument is clearly without merit. Judge Goldhaber had no duty, under 18 U.S.C. § 3057, to report to the United States Attorney all the facts and circumstances underlying the sales of the capital stock of Mill Store, Baltimore and Glenoit because he did not have reasonable grounds for believing that any violations of the bankruptcy laws had been committed, and because the same issue of fraud had been pleaded, argued and litigated before the bankruptcy, district and appellate courts.
Second, appellants argue that the bankruptcy court, in the exercise of its equitable powers, should have admitted into evidence testimony alleging fraud in the trustee's performance of his duties and should not have excluded such testimony on the grounds of Res judicata. This argument is also without merit. Judge Goldhaber, while specifically addressing the equitable powers of the bankruptcy court, found that the applicants' delay, until June 6, 1975, in seeking the removal and surcharge of Robb, constituted a "classic case of laches" and inexcusable delay which, even if there were merit to the charges, would estop the applicants from asserting them. Judge Goldhaber's findings of laches was not clearly erroneous, and it provided grounds, in addition to Res judicata and collateral estoppel, for the refusal of evidence alleging fraud in the sales confirmed ten to fourteen months earlier.
Third, counsel for the late trustee argues that the bankruptcy court, in the exercise of its equitable powers, should have assessed counsel fees of $ 20,000 against appellants because the application to remove and surcharge the trustee was "frivilous (Sic ), abusive, irresponsible, scandalous and an abuse of the legal processes of a federal court." Although Judge Goldhaber did find that the application and brief of Botany and Michael Daroff were vexatious, he did not find that they had been filed in bad faith. (Record 304; Opinion, dated July 13, 1976, at 18.) Because Judge Goldhaber's finding was not ...