Gibson v. Rotunno

UNITED STATES COURT OF APPEALS
Filed 12/20/96
FOR THE TENTH CIRCUIT

JAMES GIBSON,

Appellant,

v. No. 96-4076
(D.C. No. 95-CV-28)
VITO ROTUNNO, JR.; JOAN (D. Utah)
ROTUNNO,

Appellees.

ORDER AND JUDGMENT *

Before PORFILIO, ALARCON, ** and LUCERO, Circuit Judges.

After examining the briefs and appellate record, this panel has determined

unanimously that oral argument would not materially assist the determination of

*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
**
Honorable Arthur L. Alarcon, Senior Circuit Judge, United States Court of
Appeals for the Ninth Circuit, sitting by designation.
this appeal. See Fed. R. App. P. 34(a); 10th Cir. R. 34.1.9. The case is therefore

ordered submitted without oral argument.

Appellant James M. Gibson (Gibson) appeals from an order of the district

court affirming a bankruptcy court judgment against him. We affirm.

I.

Appellees Vito Rotunno, Jr. and Joan Rotunno 1 (Rotunnos) filed this

adversary proceeding against Gibson and Janet Henel, trustee of the Gibson

Family Trust (Trust). The Rotunnos contended that Gibson fraudulently induced

Vito Rotunno to execute a contract (the “1986 Agreement”) to sell Gibson and the

Trust his interest in the debtor, I.A. Corporation (I.A. Corp.). Their complaint

requested, among other things, rescission of the 1986 Agreement, damages for

breach of contract, and determination of ownership of I.A. Corp. Gibson

counterclaimed for return of alleged overpayment on the 1986 Agreement.

After an extended trial, the bankruptcy court rescinded the 1986 Agreement

on grounds of fraud and breach of contract. It awarded Gibson and the Trust

restitution of $92,800, but offset this amount by $20,800 discovery sanctions

owed by Gibson and the Trust and an additional $72,050 for reduction in value on

1
Joan Rotunno, Vito Rotunno’s ex-wife, purchased all of Vito Rotunno’s
rights to this action from his bankruptcy trustee. The bankruptcy court therefore
entered its final judgment in favor of Joan Rotunno.

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a note which it determined should have accrued to Vito Rotunno, for a net award

to Joan Rotunno from Gibson and the Trust of $50. It declared that upon

rescission, neither the Trust nor Gibson had any interest in the debtor. It further

dismissed Gibson’s counterclaim, and awarded attorney’s fees and costs against

the defendants. 2

II.

“In reviewing a district court’s decision affirming the decision of a

bankruptcy court, this court applies the same standards of review which governed

the district court. The bankruptcy court’s findings of facts will be rejected only if

clearly erroneous. Its conclusions of law, however, are reviewed de novo.”

Broitman v. Kirkland (In re Kirkland), 86 F.3d 172, 174 (10th Cir. 1996)(further

citations omitted). We apply California law to interpretation of the 1986

Agreement, as provided therein.

2
Prior to the filing of this action, Gibson created the Trust and transferred
all of his assets into it, including his rights under the 1986 Agreement. During
the pendency of this action, he filed a personal bankruptcy petition. Therefore,
the bankruptcy court in this action initially entered judgment only against the
Trust. It certified this judgment as final, the Trust appealed to the district court,
and its appeal was dismissed. Relief from the automatic stay was then granted
against Gibson, and the bankruptcy court entered final judgment against him, as
well.

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 III.

Gibson first argues that neither the bankruptcy court nor the district court

had jurisdiction over this proceeding. 28 U.S.C. § 1334(b) grants federal district

courts “original but not exclusive jurisdiction of all civil proceedings . . . arising

in or related to cases under Title 11.” The statutes further provide that the

bankruptcy court has jurisdiction to enter final judgment in such “related” matters

with consent of the parties. See 28 U.S.C. § 157(c)(2).

The parties, including Gibson, gave their consent to entry of judgment by

the bankruptcy court. Gibson argues, however, that his consent did not confer

jurisdiction and that he is therefore free to raise lack of jurisdiction on appeal.

He contends that this proceeding is not sufficiently “related to” I.A. Corp.’s

Chapter 11 reorganization to fall within § 1334(b). We disagree. A proceeding is

“related to” a bankruptcy, “if the outcome could alter the debtor’s rights,

liabilities, options, or freedom of action in any way, thereby impacting on the

handling and administration of the bankruptcy estate.” Gardner v. United States

(In re Gardner), 913 F.2d 1515, 1518 (10th Cir. 1990)(discussing former

28 U.S.C. § 1471(b)). The outcome of this proceeding determined the ownership

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of the debtor, I.A. Corp., and therefore had a direct impact on its liabilities and

administration of its estate. 3

IV.

Gibson next argues that the bankruptcy court erred in determining that upon

rescission, neither he nor the Trust 4 holds any further interest in I.A. Corp.

Gibson contends that the Trust holds an original 50% interest in I.A. Corp.,

independent of the interest he sought to purchase from Vito Rotunno.

The bankruptcy court’s findings on this issue may be summarized as

follows. I.A. Corp. was organized as a successor to Park City Limited (PCL), a

3
Gibson argues that since I.A. Corp.’s Plan of Reorganization cancels the
ownership interests of interest holders, it is unnecessary to determine who these
interest holders were. However, the Plan provides the former interest holders
with certain rights and entitlements to distributions. Appellant’s App., tab 1 at
12, ¶ 5.9. The trustee needed to know who the owners of the canceled interests
were in order to properly administer the Plan.
4
Appellees argue that Gibson lacks standing to raise this issue, because the
Trust, not Gibson, owned the interest in PCL, and hence, any resulting interest in
I.A. Corp. belonged to the Trust, not Gibson. Gibson, conversely, argues that
since the interest belonged to the Trust, he could not alienate it. The bankruptcy
court found that both Gibson and Janet Henel, trustee of the Trust, ignored the
separate existence of the Trust in Gibson’s business dealings, that PCL’s assets
were in fact transferred to I.A. Corp., and that the agreement provided that
Gibson (not the Trust) was to receive the shares in I.A. Corp. after the $400,000
was paid. Neither party has shown that these findings are clearly erroneous. If
they were, Gibson would lack standing to raise this issue, and the result would be
the same as that reached here: affirmance of the district court as to this issue.
Cf. generally Restatement (Second) of Trusts § 280 (1959), comments e and j
(trustee is proper party to seek rescission of transaction involving trust property).

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partnership in which Gibson owned a fifty percent share. PCL’s assets were

transferred to I.A. Corp. The owners of PCL agreed that Gibson would receive a

fifty percent share in I.A. Corp., but not until he repaid $400,000 which he owed

to PCL. Since he never repaid the money, he never became a shareholder of I.A.

Corp.

Gibson has failed to show that these findings of fact are clearly erroneous.

He contends, however, that the agreement to forego his shares in I.A. Corp. until

he repaid the debt was unsupported by consideration. We disagree. Gibson

promised to wait to receive his shares until he had made repayment, and the

shareholders promised to reserve a fifty percent interest for him. These promises

served as consideration for each other. See Bleecher v. Conte, 698 P.2d 1154,

1156 (Cal. 1981)(mutual promises in consideration of each other form bilateral

contract). We do not inquire into the adequacy of that consideration. See Harris

v. Time, Inc., 237 Cal. Rptr. 584, 587-88 (Cal. Ct. App. 1987).

V.

Gibson next argues that the Rotunnos were not entitled to rescission

because they were unable to restore the benefits which they received under the

1986 Agreement. Gibson’s argument is moot in light of the bankruptcy court’s

ultimate judgment. Vito Rotunno received only money under the contract. The

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bankruptcy court offset his obligation to restore this money by Gibson’s own

obligations to the Rotunnos, to arrive at a net amount due from Gibson of $50.

Such offsets are permitted in rescission cases. See Runyan v. Pacific Air Indus.,

Inc., 466 P.2d 682, 685-86 (Cal. 1970)(en banc). Where the plaintiff has been

damaged by defendant in excess of the amount received, it is unnecessary for the

plaintiff to restore the sums received under the contract to obtain rescission. See

Peterson v. Wagner, 198 P. 25, 29 (Cal. Ct. App. 1921).

VI.

Gibson takes issue with the offsets ordered by the bankruptcy court. He

contends the Rotunnos were not entitled to damages for diminished value of the

“Stroup note.” The Stroup note was an obligation owed to Salt Lake City, Ltd.

(SLCL), a limited partnership. Vito Rotunno sold his fifty percent interest in

SLCL to Gibson as part of the 1986 Agreement. The bankruptcy court found that

after the sale, Gibson received and endorsed payments under the Stroup note, and

that he later forgave the balance of the Stroup note. 5 It found that the total

5
Gibson argues that forgiveness of the debt was a reasonable business
decision, for which he should not be penalized. He asserts that the obligor had
filed bankruptcy in 1983 and was insolvent at the time the debt was forgiven. The
bankruptcy court noted that the obligor made payments on the Stroup note to
Gibson in 1986, 1988 and 1989. It found that Rotunno would have been able to
receive at least $72,050 on the note, if the 1986 Agreement had not been
(continued...)

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benefit received by Gibson on the Stroup note was $144,100, half of which

($72,050) it allocated to the Rotunnos as damages.

Gibson argues that he could not be held liable to the Rotunnos for this sum,

because the Stroup note belonged to SLCL, not the Rotunnos. This argument

ignores the Rotunnos’ fifty percent interest in SLCL. Since rescission was

ordered, Gibson had to return the interest in SLCL to the Rotunnos; however, that

interest had been diminished by the reduction in value of the Stroup note, which

was attributable to Gibson. Where the defendant in a rescission action cannot

restore the full value of the property he has received, the court has the power to

award consequential damages in order to provide complete relief to the plaintiff.

See Cal. Civ. Code § 1692 (West 1982). The bankruptcy court properly awarded

damages in proportion to Rotunnos’ interest in SLCL.

Gibson next argues that the bankruptcy court could not use discovery

sanctions to offset amounts due from the Rotunnos. He cites no authority for this

proposition, and we have found none. Section 1692 allows the court to “adjust

the equities between the parties.” Given the permissive nature of § 1692's

statutory language, we review the district court’s adjustment of the equities for

abuse of discretion. Dollar Sys., Inc. v. Avcar Leasing Sys., Inc., 890 F.2d 165,

5
(...continued)
executed. Gibson has failed to show that these findings are clearly erroneous.

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174 (9th Cir. 1989). The bankruptcy court did not abuse its discretion in ordering

the offset, considering the broad power granted under the statute.

Finally, Gibson argues that the discovery sanctions were unsupported by

proper findings. As this argument was not raised in the district court, we do not

consider it here. See Walker v. Mather (In re Walker), 959 F.2d 894, 896 (10th

Cir. 1992).

VII.

Gibson next argues that Vito Rotunno breached the 1986 Agreement in two

respects and was therefore not entitled to rescission. He argues that Rotunno

pledged the proceeds due him from the sale of his interest in I.A. Corp. to secure

a loan from William Stuart. The bankruptcy court found that the pledge did not

encumber the underlying assets and therefore did not breach the 1986 Agreement.

Gibson has not shown that this finding is clearly erroneous.

Gibson now presents a transcript of judgment showing that Stuart

purportedly obtained a judgment against I.A. Corp. after Rotunno failed to pay the

underlying obligation. Gibson fails to show, however, that this transcript of

judgment ever was made part of the record before the bankruptcy court; we

therefore do not consider it. Cf. Branding Iron Motel, Inc. v. Sandlian Equity,

Inc. (In re Branding Iron Motel, Inc.), 798 F.2d 396, 399 (10th Cir.

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1986)(appellate court reviewing bankruptcy court decision may not receive new

evidence).

Gibson next argues that Rotunno failed to prepare and deliver an $850,000

promissory note from I.A. Corp. to Rotunno to evidence the debt owed to

Rotunno by I.A. Corp. and assigned by him to Gibson under the 1986 Agreement.

This argument is raised for the first time on appeal, and so we do not consider it.

See Walker, 959 F.2d at 896. Gibson argues in his reply brief, however, that the

argument should be considered in order to prevent a miscarriage of justice. See

Tele-Communications, Inc. v. Commissioner, 12 F.3d 1005, 1007 (10th Cir.

1993). We disagree. Gibson does not state any compelling reason for his failure

to raise this argument before the district court. Even if he is correct in his

assertion that Rotunno failed to prepare and deliver the note, Gibson also has not

shown that this alleged failure constituted a material breach of the contract.

VIII.

Finally, Gibson argues that the bankruptcy court erred in awarding

attorney’s fees to Rotunno. He contends that the 1986 Agreement allows the

prevailing party attorney’s fees only in actions for enforcement and interpretation,

not rescission. The bankruptcy court gave three reasons for awarding attorney’s

fees: (1) attorney’s fees were required to afford complete relief to the Rotunnos;

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(2) the principle of reciprocity required the award of attorney’s fees for rescission

because the contract called for attorney’s fees for its enforcement; and (3)

attorney’s fees are available in an action for fraud in the inducement. We have

reviewed the authorities upon which the bankruptcy court relied, and conclude

that it did not abuse its discretion in awarding attorney’s fees to the Rotunnos.

IX.

The judgment of the United States District Court for the District of Utah is

AFFIRMED. Appellant’s motion to supplement the record on appeal is DENIED.

Entered for the Court

John C. Porfilio
Circuit Judge

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