Clancy v. Mather, (10th Cir. 2002)
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UNITED
STATES COURT OF APPEALS
TENTH CIRCUIT
In re: HONEY CREEK
ENTERTAINMENT, INC., d/b/a
Arbuckle Wilderness,
Debtor.
LENA CLANCY,
Appellant/Cross-Appellee,
v.
KENNETH G.M. MATHER, Chapter 11
Trustee for the Bankruptcy Estate of
Honey Creek Entertainment, Inc.,
Appellee/Cross-Appellant.
Nos. 01-7052 & 01-7059
(D.C. No. 00-CV-229-S)
(Eastern District of Oklahoma)
ORDER AND JUDGMENT
href="#N_*_" name="txt*">(*)
Before KELLY,
name="9">PORFILIO, and ANDERSON,
Circuit Judges.
Lena Clancy appeals the district court's affirmance of the bankruptcy court's
conclusion Ms. Clancy owes a debt to Kenneth G. M. Mather, the Chapter 11 Trustee for
Honey Creek (Trustee), based on a promissory note she executed in favor of Honey
Creek Entertainment, Inc. Trustee cross appeals the district court's reversal of the
bankruptcy court's finding that the amount of the debt was evidenced by the sum
revealed by Honey Creek's income tax returns, rather than the amount of the loan
actually funded to Ms. Clancy. On Ms. Clancy's appeal, we conclude the question of
whether the district court's holding on the note was erroneous is not justiciable because
of subsequent circumstances. We believe, however, the district court correctly reversed
the bankruptcy court's finding on the amount of the debt.
The parties are well aware of the facts; therefore, we need not set them forth in
detail. Suffice that the controversy revolves around an instrument purporting to be a
promissory note evidencing a debt from Lena Clancy to the Debtor, Honey Creek. The
Trustee brought this action to enforce that debt. The bankruptcy court held the debt
instrument was a negotiable promissory note enforceable under Oklahoma law by the
Trustee. It further determined the debt was for $296,827, an amount set forth in the tax
returns filed by Honey Creek and not the $250,000 actually funded under the instrument.
The district court affirmed the bankruptcy court's ruling on the nature of the instrument
but held there was no credible record evidence to support the bankruptcy court's finding
of the amount of the debt. Therefore, it reversed and awarded the Trustee judgment for
$250,000, plus interest.(1) Both sides
appeal.
While the parties have presented substantial argument over the nature of the
instrument, both sides eventually agree that Ms. Clancy is indebted to Honey Creek, and
perforce, to the Chapter 11 estate. Ms. Clancy's principle argument on appeal is that
debt notwithstanding, the language of the instrument makes clear the obligation to repay
has not ripened. This contention is based upon the last sentence of the instrument which
reads: "If Honey Creek Entertainment Corp. is dissolved prior to payment in full of all
principal and accrued interest, this Note shall be immediately due and payable on demand
after such dissolution." She consequently argues because Honey Creek is enmeshed in a
Chapter 11 reorganization, it has not been dissolved, and, until dissolution, she has no
obligation to pay.
The curiously circuitous language of the instrument, which ultimately gives rise to
the holder's right to demand payment only after the occurrence of a condition precedent
which has yet to occur, calls into question whether the instrument is indeed negotiable as
both the bankruptcy and district courts have decided. Nonetheless, it has become clear to
us any pursuit of this issue is academic and will in no way affect the ultimate
collectability of Ms. Clancy's debt.
At oral argument, the Trustee informed us that other than Ms. Clancy's debt, the
assets of Honey Creek have been liquidated in full, and he awaits only the outcome of
this appeal to liquidate the estate (presumably under 11 USC 1112(b)). That
liquidation would thus ripen the debt, as admitted by Ms. Clancy, and eliminate her
arguments.(2) Moreover, the result would
make our resolution of the legal issue presented
by Ms. Clancy merely advisory and not dispositive. Because of the case and controversy
provisions of Article III, section 2 of the Constitution, it is not our judicial function to
render advisory decisions. Public Service Co. of Colorado v. U.S.E.P.A.,
225 F.3d
1144, 1148, n.4 (10th Cir. 2000).
On the Trustee's cross appeal, we must consider the district court's finding of
error in the bankruptcy court's determining of the debt. The bankruptcy court found the
amount to be $296,827, the sum noted as "other assets" in the schedule balance sheet
attached to certain of Honey Creek's federal income tax returns. Yet, the district court
did not believe the record supported the additional $46,827.
Despite Ron Armitage's statement the additional funds were probably
accumulated interest, the court found it "highly unlikely" that the sum of over $46,000 in
interest would accumulate in a year. The court noted, moreover, the total did not
increase from 1994 to 1997. If the $46,000 was interest, the court opined its
accumulation would have to change each year, but no change consistent with the
accumulation of interest is reflected by the tax returns. The district court concluded the
bankruptcy court's reliance on Mr. Armitage's testimony and the tax returns was clearly
erroneous. Our view of the record leads us to conclude the issue was properly resolved
by the district court.
The Trustee persists in his cross appeal to argue the bankruptcy court extensively
reviewed all of the documentation surrounding the Clancy obligation and concluded,
based on the returns for 1994 through 1997, that the amount of the debt was $296,827.
Each return, after all, was signed by Ms. Clancy under penalty of perjury. Trustee points
out Ms. Clancy never filed an amended return to correct the error.
Those points notwithstanding, we were advised by counsel at oral argument
Honey Creek kept its books by the accrual method. There was no explanation of why the
so-called "interest" was neither accrued nor reported as income during the same period.
Moreover, there was no testimony, other than that of Mr. Armitage, about the origin of
the additional $46,827. We agree with the district court's analysis of that testimony.
Moreover, it is not contested that Ms. Clancy received the benefit of only $250,000 from
the instrument she signed. On the basis of those accumulated facts, we believe the
bankruptcy court clearly erred in finding her debt was enhanced beyond that amount
based on a promissory note she executed in favor of Honey Creek.
The judgement of the district court is AFFIRMED IN PART AND
REMANDED WITH DIRECTIONS to forthwith return the case to the bankruptcy
court for further proceedings toward liquidation.
ENTERED FOR THE COURT
John C. Porfilio
Senior Circuit Judge
FOOTNOTES
Click footnote number to return to corresponding location in the text.
*.This order and judgment is not binding
precedent, except under the doctrines of
law of the case, res judicata, and collateral estoppel. This 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.
1.Ms. Clancy has not contested the award of
interest except to the extent such a
contest may be subsumed in her explicit challenges to the rulings of the district court.
2.Ms. Clancy has raised other legal
arguments which we have considered and
found unpersuasive. For example, the argument over how the obligation was to be
repaid is superceded by the fact that liquidation of Honey Creek, as admitted by Ms.
Clancy, makes the obligation payable without regard to the source of repayment. Her
argument that there are "two contracts" simply ignores the factual finding of the
bankruptcy court affirmed by the district court that the bankruptcy court found Ms.
Clancy's testimony "contradictory" and "[did] not believe [her] testimony with regard to
the note is credible."
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