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Liberty Lobby Bankruptcy — Hearing transcript part 1 (6/6/2001)





Case No. 98-01046

Chapter 11

Washington, D.C.

Wednesday, June 6, 2001


DE# 309-1 - Miscellaneous Relief

Motion by Debtor Liberty Lobby, Inc., for Relief to Fully Implement the Debtor’s Plan




On behalf of the Debtor


On behalf of Legion for the Survival of Freedom, Inc.


THE CLERK: The next matter is the matter of Liberty Lobby, Inc., Bankruptcy Case 98-1046. The matter before the Court is debtor’s motion for relief to fully implement the debtor’s plan.

MR. CLARK: Good morning, Your Honor. Darrell Clark for creditor of the debtor, the Legion for the Survival of Freedom, or LSF, Incorporated.

MR. STANTON: Thomas Stanton, attorney for Liberty Lobby, the debtor, Your Honor.

THE COURT: All right. It is the debtor’s motion. I will hear from you, Mr. Stanton.

MR. STANTON: Your Honor, this plan was confirmed in 1999, in October. The debtor has made all of its plan payments up through the payment in June of this month, which was paid yesterday by wire, which amounts to $520,000, which all of these payments have been made in a timely manner. At one point, we paid some of those payments into the Court, but those payments were also made on a timely basis.

There was a lawsuit filed in the fall of last year against a fellow by the name of Kirk Lyons alleging a violation of the Lanham Act by his use of Liberty Lobby’s name in an effort to raise funds from Liberty Lobby’s subscribers.

THE COURT: Go ahead.

MR. STANTON: During the pendency of the case, before the plan was actually signed, but during the period after the settlement agreement was signed, but before the plan was actually confirmed, the solicitation went out for Mr. Lyons, and Mr. Mark Lane, who was the attorney in the case, is here and he will testify that he filed a suit only against Mr. Lyons, and after the suit was filed, he and his co-counsel called Mr. Lyons. Mr. Lyons said that he was the agent for LSF, and he was a secret agent from LSF because LSF didn't want anyone to know that they were a party to this suit, and he said that he was covered by the release that was part of the forbearance agreement.

Only at that point did Mr. Lane name LSF as a defendant in this action, and this case is in the District Court here in D.C. His original amended complaint was filed in October of 2000, and the answer filed by LSF was filed in December of 2000.

On December 15th, the LSF applied to the Court in California where the original judgment had been entered saying that the debtor had defaulted on the settlement agreement, never alleging the fact that we had a confirmed plan and the settlement agreement had been folded into the confirmed plan. The Court there said that they had continuing jurisdiction of the matter. They never relinquished jurisdiction of the matter, even though the plan had been confirmed by this Court. Again, if I could quite from pretty much Black Letter law from Collier's, A valid plan substitutes in much the same way as a common-law novation would, the obligation as stated in the plan, for all pre-confirmation claims and interests. The plan is a contract between the proponent and those bound by it. Should a confirmed plan later fail, creditors may sue only on the obligation as stated in the plan, unlike common-law compositions. The original preconfirmation obligations are not revived, and should the plan not consummate. In this case — and it goes on to say why it is important, then, for the plan claims to be carefully attended to because it is the claim that will govern.

Well, what happened here is the Court went in and said the settlement agreement — and set it aside and then allowed LSF to begin collection actions in California against Liberty Lobby and would they stop Liberty Lobby’s mail. They stopped the mail of Mr. Carto and Mr. Furr, and based on that action, we filed this motion here and we filed a companion adversary asking for an injunction that is also before the Court, though it has not been set. It was set the last time we were here basically for a status hearing today. So it is running sort of parallel with this motion.

Now, Liberty Lobby has a very, very important interest in t his plan staying in place because, if the Court’s action out there is sustained, the debt that was compromised under the plan in which Liberty Lobby has now paid $500,000 towards its resolution will just bounce back up to $4 million, and everything we worked on here will be lost.

And I might point out to the Court that California, unlike the District or any of the Court’s in the East Coast here, is one of those code States that we used to hear about in law school, and rescission there is set out in the California Code. California Code Section 1688 says rescission extinguishes a contract. Maybe I am jumping a little ahead. When a Court sets aside a contract, that is an old equity action. That is rescission.

And it’s funny. I went to law school here in Georgetown, and we had Judge — Professor Jaeger who used to edit Williston’s Contracts, and Williston’s Third Edition has — I don't know — 50 pages on rescission. I went to the law library looking at this California Code yesterday, and I pulled Williston’s Fourth Edition. It is no longer edited by Mr. — Professor Jaeger. He is dead. But there is nothing on rescission. It is like they eliminated rescission as part of Williston, though it is still in the restatement and I think it is still excellent law, and, certainly, in California, it is statutory law.

But, anyhow, rescission extinguishes a — that is what the Judge did. He rescinded the contract. Maybe I could hand our exhibits because Your Honor might not have them in front of him.

MR. CLARK: Your Honor, I haven't seen these exhibits before, nor have I been given them prior to the hearing today.

MR. STANTON: They are mostly attachments that were attached to this motion and the motion — and the injunction pleading. I don't think there is anything new except the pleadings from the District Court, which Mr. Lane filed, which were not part of these pleadings, but are a matter of record.

Could I hand this up Your Honor?

THE COURT: Do you have a copy for my law clerk as well?

MR. STANTON: Yes. Yes, Your Honor.

THE CLERK: Mr. Stanton, do you have a list, just a separate list?

MR. STANTON: A separate list in that? No.

THE CLERK: Just of the exhibits.

MR. STANTON: And the order from the California Court is the Exhibit No. 1, Your Honor, and this is the order that has set the matter aside.

As Your Honor will see, paragraph 1 of the order says, The Court has never relinquished jurisdiction over the parties, and, of course, with a confirmed plan, the Court is out of that case. The case has ended for all intents and purposes. Certainly, the Court doesn't have continuing jurisdiction once we have a confirmed plan.

And then the Court goes on to say, in view of the substantial breaches, whereas the forbearance agreement is hereby set aside, and plaintiff may proceed to collect the judgment.

I think what happened in California not only violated — is violative of the bankruptcy law, it is violative of California law. California law has an old hook that you didn't used to — most places who have rescission have eliminated it, but, under California law, you have to return all the benefit of the contract before you can rescind. In this case, they have got $500,000 from us. They got assignment of the Kiefer estate, which is somewhere between 6- and $1.5 million that was assigned. They can't have both. They can't have the rescission and the benefit.

And moreover, Your Honor — and I would ask Your Honor to flip all the way to the back of these documents, the last document here. I think it is the last one. No, it is the second to last there, 17. As recently as May 7th of this year in the District Court here in D.C., they are alleging that they are protected by the settlement agreement, and, therefore, the Lanham Act case has no validity because they have release under the Lanham — under all claims in the settlement agreement. So they are still using the settlement agreement in New Jersey, asserting the rights to the Kiefer estate, here in the District of Columbia asserting the rights to be protected under it, and --

THE COURT: What is the forbearance agreement? Is that part of the --

MR. STANTON: That is the settlement agreement, Your Honor, approved in July. This was a settlement agreement that was between the Legion and — it’s in here. Your Honor has looked at this document, I would think, 20 times in this case at one point.

THE COURT: All right. Exhibit 5, is it, or Exhibit 4?

MR. STANTON: Five. Yes, Your Honor.

MR. CLARK: Exhibit 4, Your Honor.

MR. STANTON: Four, Your Honor. It is 4, 5, and 6. All three of them refers, but the Legion — the Liberty Lobby one is for.

And we are asking the Court to let us go ahead and proceed under this plan.

THE COURT: Now, are they relying upon the forbearance agreement in the District Court?

MR. STANTON: Yes, Your Honor.

THE COURT: Or, are they relying upon the confirmed plan?

MR. STANTON: No. They are relying on the forbearance agreement. They seem to ignore the plan throughout their litigation. They are litigating around it. It is on page 6 of Exhibit 17, Your Honor.

THE COURT: All right.

MR. STANTON: No, that’s — I'm sorry.

THE COURT: Sixteen or 17?

MR. STANTON: I'm sorry. It is the reply of Defendants, Kirk Lyons. It is the reply brief. It should be 17, I think, Your Honor.

THE COURT: It is 18.

MR. STANTON: Eighteen. I'm sorry.

And California law, like most law everywhere, is pretty clear on the ability to rescind and to continue — well, first off, the statute says the contract is extinguished by its — a rescission, but then it goes on that you can't — you can't rescind the contract and then take advantage of its benefit.

Let me see if I can find it.

(Pause in proceedings.)

MR. STANTON: There is a U.S. District — a U.S. Court — Ninth Circuit Court of Appeals case in '98 from California. It is the case of Citicorp v. Smith, and it is at 155 F.3rd at 1097, and most of the case doesn't apply here, but I would call the Court’s attention to tabbed or marked Item 16 which I have here and I will hand up. It says: Under California law, a party to a contract has grounds to rescind the contract if the consent of the party seeking rescission was obtained through fraud — they are talking about a fraud case in that case — However, in order to escape from its obligation, the aggrieved party must rescind by prompt notice and offer to restore consideration received, if any. And it goes on to say if a party fails to do that, latches could occur, and they would lose that right.

There is a California court case, Your Honor, that basically refers to the same set of problems, if I could find the reference. This is referring to a settlement agreement in a PI case, but it says: A voluntary dismissal which typically follows a personal injury settlement is particularly unamenable to Section 473 relief. That is to amend the thing. But it says: Settlements are contracts. To set them aside, one must present contractual grounds for rescission. And the contractual grounds for rescission — I mean, what I am trying to get to, I guess, is that rescission requires that a party have a contractual ground and then must proceed under the California Code to rescind as the California Code requires. That case is Hewins v. Tatem (phonetic), and that is at 52 California — 60 California Reporter, Second Series, page 438.

But there is one more I wanted to bring to the Court’s attention. This is the case of Tippett v. Terich. It is at 44 California 2d at page 862, and the Court in its decision said: A contract is extinguished by rescission, in quotes, the Civil Code Section 1688. The consequence of rescission is not only the termination of further liability, but also the restoration of the parties to their former positions by requiring each to return whatever consideration was received. And it quotes several California cases. A rescission for illegality is a remedy which enables a party in the circumstances specified to procure restitutionary relief with respect to a contract which was never enforceable. But, again, they can't have the contract and then have the benefits of it and at the same time rescind it.

THE COURT: So what are they going to do? They have got a judgment for how much?

MR. STANTON: They have a judgment for — in excess of $4 million out there, Your Honor.

THE COURT: And they have collected $500,000 under the settlement. So they hand back the $500,000 with one hand, and they execute on it with the other hand. Is that what happens?

MR. STANTON: I am not sure if they could execute it. They would hand it back to the debtor who is now in bankruptcy. We would — I would think since this plan is dead, we would submit a new plan. Our new plan would include all the subscribers, Your Honor, who were unimpaired under the old plan, and we basically pass them through. There are $2 million. We have another class that would at least provide the opportunity to bring back before this Court the terms of the original settlement agreement, and I think it was — as Your Honor will recall, it is all the money that Liberty Lobby had. I mean, it was — it was not a comfortable agreement. We gave them effectively everything that wasn't nailed down, and that is what — we are just asking to have the confirmed plan go forward.

Mr. Carto is here, and he is here to testify today that they are in a position to raise the money and to borrow against the Kiefer estate money and to pay the full amount remaining on the plan within some reasonable period, 90 to 120 days, and be done with this thing. That is what we want the Court to do is just let us finish and be done with these guys and put our confirmed plan and fund it out completely. All the other creditors, everybody else in this case has been paid. Only the Legion. And I think that under the circumstances, Your Honor ought to give us the relief we have asked for and enjoin them either in this case or in the injunction matter for more of this kind of stuff where they are out there closing the --

Mr. Furr is absolutely without funds, except his retirement check. They hold his mail. They know that. They have taken his deposition. He is completely vetted in this case. They know that his only money is his retirement check, but they are down there holding his mail in Arkansas so that he doesn't get his retirement check. This is the kind of games they are playing in this case, Your Honor, and it goes on and on. You know, it is much more than a financial thing. It is a personal vendetta against these people.

They signed this agreement, the settlement agreement, and they signed the — they approved the plan. They voted in favor of the plan, and all we are asking is Your Honor hold them to it.

MR. CLARK: Good morning, Your Honor. Darrell Clark for LSF.

THE COURT: I thought you told me, the last time you were here, this matter was settling out.

MR. CLARK: It was. They went to mediation in California. An agreement was reached, and my understanding was that Liberty Lobby failed to comply with the agreement.

MR. STANTON: Your Honor, I would object to settlements being brought in, what of the efforts in settlement. Liberty Lobby actually agreed to pay them a substantial amount of more money, but they were unable to raise that much money, and that is why it never went forward. But it never was — the agreement was never signed. There was a number of --

THE COURT: Anyway, it didn't settle.

MR. CLARK: It did not settle.

MR. STANTON: It didn't.

MR. CLARK: But it took place in California through a mediator in California.

I think that this matter can be disposed of rather quickly. First of all, the motion seeks declaratory and injunction relief, which can't be brought by a motion. Therefore, the motion should be denied.

The wherefore clause of the motion simply says it seeks an order restraining the Legion from any further litigation or other acts attempting to abrogate its obligations under the settlement agreement. Well, that, to me, sounds like a declaratory or an injunctive type of relief which needs to be brought to an adversary proceeding.

Nevertheless, to argue the merits because the merits in the adversary proceeding which we are here today on the status are the same as in the motion. So, if the Court chooses to rule, perhaps its ruling on the merits, the ruling would be as to the adversary proceeding as well.

If you step back to 1998 when the case was filed, it was a contentious Chapter 11 case. It was filed in May 1998. My client has a judgment against the debtor. There are five judgment debtors, the Furrs, Mr. and Mrs. Carto, and the debtor. There was a settlement agreement. There were three settlement agreements: one for one married couple, one for the other married couple, and one for the debtor. There were three bankruptcies: one in Arkansas, one before Judge Hargrove in San Diego, and one here.

The individuals were not discharged of their obligations. We have a 523 judgment against both — all four of the individuals, both bankruptcy cases. The settlement agreement was comprehensive. The settlement agreement was noticed to all creditors under Bankruptcy Rule 9019 and was approved by this Court, and the agreement was attached to the disclosure statement. The terms were summarized in the disclosure statement, and the payment terms were assigned a class treatment in the plan.

The plan defined the settlement agreement as a specifically defined term. Following confirmation, as Mr. Stanton has said, Liberty Lobby filed suit before Judge Kennedy, and they also filed a suit after confirmation here concerning the settlement agreement and a motion to compel concerning the settlement agreement.

As the Court noted, it has ruled on the settlement agreement on a number of occasions. Exhibit 7, attached to Mr. Stanton’s list of exhibits, is this Court’s order making rulings about the settlement agreement. The Court has had the opportunity review it, to interpret its terms, and to hold it binding as to the parties.

The settlement agreement, as Your Honor will see, on page 7 of the settlement agreement, on all of the settlement agreements, says the following: San Diego County shall be the proper venue to enforce the provisions of this settlement agreement.

The Chapter 11 case was closed here in D.C. last fall, and Liberty Lobby brought suit upstairs against us before Judge Kennedy.

They also defaulted in the payment provisions by not paying us interest. That is also in the plan. The debtor’s amended plan of reorganization says t hat they will pay us $5,000 a month at 8 percent interest. Having filed suit against us and not paying us interested despite our demands and not having a case before Your Honor, this matter having been closed, we filed suit pursuant to the settlement agreement in San Diego County before the same judge that had decided the original judgment. All five defendants were a party to that lawsuit in California last fall. All five defendants had lawyers. All five defendants filed a pleading. The judge ruled not only that Liberty Lobby was in default. The judge’s order is Exhibit 1.

The Court has reviewed all documents submitted and having reviewed the files makes the following order. The Court has not relinquished jurisdiction over the parties. The defendants are in breach of the forbearance agreement by filing a new lawsuit, failing to pay interest, failing to pay the penalties as they came due.

A Court has already decided and interpreted what has happened in the settlement agreement. It has already made its decision. This Court, respectfully, doesn't have the jurisdiction to hear the arguments on the settlement agreement, the debtor having entered into a settlement agreement with the venue provision in San Diego County. Liberty Lobby didn't like that ruling, and so it came to this Court, reopened the bankruptcy case, and filed this motion. We need some type of relief here, Your Honor. It is causing confusion in the State court, but the relief here should be that this case is dismissed. The adversary proceeding and the motion is denied.

There are two forums, California where Liberty Lobby already has lawyers, is already arguing. In fact, it appealed that judge’s decision and obtained a brief stay, but when the stay expired, it did not like what was happening in California. So it runs over here and tries to get from this Court the relief that it couldn't get in California.

This Court should dismiss the adversary proceeding and deny the motion, or, alternatively, abstain from hearing the adversary proceeding under the permissive abstention provisions of 1334(c).

The California ruling, having been fully and fairly litigated with counsel, is ripe for either a finding of dismissal on res judicata or collateral estoppel grounds. This is a backhanded attempt to appeal what Judge Maino would not give them in San Diego.

It is obviously forum-shopping. There are five debtors. There is a venue provision for all five of the judgment debtors.

Bankruptcy Judge Hargrove is already in San Diego hearing two of the cases. If they wanted to have a decision on a confirmed plan, which is just essentially a contract between the debtor and its creditors, it could have opened a miscellaneous matter before Judge Hargrove, but they wouldn't do that because Judge Hargrove has already taken away — or already ruled that our debt is not dischargeable and knows Mr. Carto for the fraudulent acts that he had committed and already has been found to have committed by the State court. But if there is any bankruptcy questions, it could be addressed in San Diego.

As I said, Your Honor, it is essentially an interpretation of an agreement, a contract. The contract has a venue provision. If there is a need for Bankruptcy Court relief, they could go to the Bankruptcy Court in San Diego.

It meets the standard for dismissal for res judicata or collateral estoppel. The identical issue, is the debtor in default, has already been decided before a Court with jurisdiction, with lawyers for both parties. The issue, was the debtor in default, is necessary for the judge to have made that ruling. It was fully and fairly litigated.

Alternatively, the Court should consider abstaining if it feels like a decision needs to be made, this duplicative litigation, many forums, with an agreement that says San Diego controls. This is a one-creditor fight. There is no effect on any bankruptcy estate. San Diego is convenient to all parties, and Mr. Carto lives in California. Liberty Lobby has been a party to the California action for sometime. The San Diego judges are very familiar with the facts. This is just an attempt to get another judge to make a ruling that possibly would be in favor of Liberty Lobby.

It would simplify the case. For example, one issue in San Diego is can we sell Mr. Carto’s house to satisfy the debt as to the agreement between my client and Mr. Carto. This Court can't rule on that. This Court doesn't have jurisdiction over Mr. Carto, doesn't have jurisdiction over Mr. Carto’s case, but a ruling here may impact the extent to which we could sell Mr. Carto’s house, depending on how much we owe Liberty Lobby and the amounts that are remaining due.

If Liberty Lobby feels like it has an argument to make before Judge Kennedy upstairs, they can make that before Judge Kennedy. If my client is saying one thing and doing another or the settlement agreement has been abrogated in a court or rescinded in one court and argue in another, they can make those rulings before Judge Kennedy. They won't, though, because Judge Kennedy has already dismissed a prior lawsuit against my client, finding that Liberty Lobby has filed so many lawsuits against them over the years that the prior lawsuit was simply frivolous. They won't go back to him because they don't like the decisions they have received from him in the past. They won't go to California because they didn't like the State judge’s decision. They don't like Judge Hargrove’s decision. So now they are trying Judge Teel.

The motion should be denied. The adversary proceeding should be dismissed, or, alternatively, the Court should abstain.

MR. STANTON: Your Honor, there is — and I think Your Honor heard. We were back here before, and if Your Honor will remember the issue, we were back here because, after the plan was confirmed, LSF started a procedure that they were supposed to abandon in Switzerland of trying to get Mr. Carto indicted. Again, it was sub rosa. We didn't find out about it until much later when months and months after had been going on after the settlement agreement, after the confirmation issue, and Your Honor didn't rule that we weren't — at least my recollection is that Your Honor didn't rule that we were wrong in what we brought, but that Your Honor did not feel that he could act in that case.

This situation here is more of this kind of — the effort is to get the money, but not to give the benefit of the bargain to Liberty Lobby, and in respect to Mr. Carto was trying to get him thrown in jail after the settlement. With regard to this action, they are trying to get the money that Liberty Lobby has given them, the assignments we have given them, and yet not to give the benefit of finally being done with them.

It isn't a question of forum-shopping, Your Honor. It is a question of this is a confirmed bankruptcy plan in this Court, that the Court in California completely ignored. There is no reference in that order to a confirmed plan. It is an effort to reach down below the plan and say that they have authority over the settlement agreement without considering that the plan is confirmed. I think they could have brought the plan to the Court in California, but they didn't do that. They brought the settlement agreement, and in bringing the settlement agreement, they exceeded --

THE COURT: Didn't the plan continue the settlement agreement?

MR. STANTON: The plan made the settlement agreement part of the plan. It didn't --

THE COURT: So the settlement agreement survived.

MR. STANTON: Not to the extent that they can --

THE COURT: Well, in any event, the California Court has already ruled on the issue. Am I supposed to second-guess the California Court after it has already ruled?

MR. STANTON: Your Honor, if they had jurisdiction to rule on it, our feeling is they do not have jurisdiction because they can't reach into the plan without dealing with the plan and saying that this settlement is thrown out. This interest issue, for example, Your Honor, Your Honor previously ruled on that because they had stipulated that the interest in this case was to be collected at the end of the case, not during — there has been no request for any interest payments in the year and a half that we have been making payments. They went to the California Court and said they haven't paid interest. That is just not true. The agreement, you know --

THE COURT: Then you had your chance to defend in California, but it seems to me you are raising the same issue all over again here.

MR. STANTON: Your Honor, I don't think that a confirmed bankruptcy plan can just — that you can take it to any court anywhere. In a court — this was not a normal motion. This was a Court that said its collection action, which is what it was brought in, was still alive and kicking from before the plan. The plan extinguished all that.

THE COURT: It is the judgment. The judgment was still surviving.

MR. STANTON: The judgment — but the right to collect the judgment was not survived. They don't have a right to collect the judgment. They have a right to enforce the provisions of the bankruptcy plan, and they didn't do that.

THE COURT: But the issue is argued in California, and the California Court says that it never relinquished jurisdiction. It sounds like the issue has been decided. Why am I to hear it again? Why do I have to hear it again? I mean, you could have taken an appeal and shown the California Courts that this fellow, Maino, wandered off the reservation, he didn't stick to the law, but he has decided it, and I don't see how I can disregard a decision of a Court in California that is a final judgment.

MR. STANTON: The Court in California disregarded the decision of this Court confirming the plan, and that the plan payments had been made and that the debtor was doing what the debtor is supposed to do under it, and it ignored the fact that this case was pending in this Court and they had raised the issue and were — they can't have it both ways. They can't rescind and using the issue to defend.

THE COURT: It seems to me, you can say when they try to raise it as a defense, here is a judgment, it has been rescinded, they can't raise it as a defense. You are just saying they are being inconsistent, and maybe they are, but, today, they are saying the issue has been decided by Judge Maino’s judgment, Debtor’s Exhibit No. 1. I, frankly, don't see how I can disregard that decision. It seems to me, it is collateral estoppel.

MR. STANTON: Your Honor, might Mr. Lane speak to the Court for a second?

THE COURT: Certainly.

MR. LANE: Thank you, Your Honor.

THE CLERK: Would you state your full name for the record.

MR. LANE: Mark Lane.

Your Honor, Mr. Clark made a number of statements which are just untrue. The case is not pending before Judge Kennedy. Judge Kennedy never dismissed the case because Liberty Lobby brought a number of frivolous actions. Both of the statements are totally without any truth at all.

It is also untrue when Mr. Clark said that Judge Maino found Mr. Carto to be guilty of fraud. That is false. Judge Maino specifically said in his ruling — and I was there in court — he specifically said there is — he dismissed the fraud claim, stating that I believe that Mr. Carto did what he did because he honestly believed he had the right to do it, and there is no fraud. So Mr. Kessler has done the same thing his clients have done, have just gone far beyond the record to make misstatements.

THE COURT: Mr. Clark, you mean.

MR. LANE: I'm sorry?

THE COURT: You said Kessler. I think you meant Mr. Clark.

MR. LANE: I'm sorry?

THE COURT: You said Mr. Kessler has done --

MR. LANE: Mr. Clark, yes.

Now, the matter is before Judge Kessler. It is not that we are afraid to take it there. We have taken it there, and this is what is so relevant about the case before Judge Kessler. The Lanham Act violation, of which we complained, is very interesting because it was a letter signed by Kirk Lyons, no reference to the Legion for the Survival of Freedom, a letter signed by Mr. Lyons saying that in this case here, the bankruptcy case, something had to be done, and, therefore, money had to be sent to this group so they could get an impartial trustee. That is the language of the letter: Send money, we want to save Liberty Lobby by having an impartial trustee.

Now, that is in and of itself a fraud. How would that money — Mr. Clark said he didn't get the money. How would the money ever have an effect on having an impartial trustee?

But more than that, in preparing the complaint in that case, I conducted the furthest inquiry I could to determine of Kirk Lyons had any association with the Legion. I want to be sure of that because, if the Legion was involved, I wanted to know if that would violate the forbearance agreement and the plan approved of by this Court. We saw no evidence that Mr. Lyons had an association with the Legion.

We, therefore, filed the case here just against Mr. Lyons. Subsequent — and we charged fraud. We charged a violation of the Lanham Act, interfering with business contracts, et cetera. After that, Mr. Lyons and I and other co-counsel with me talked. Mr. Lyons said, Well, I was the secret agent of the Legion. That is my defense. And now we know that to be true. So we amended the complaint to bring in the Legion. That in no way violated the agreement because the agreement says — and this is important. The agreement was drafted by the Legion alone. We know it is Black Letter law that the party drafts the agreement is responsible for it, and all inferences are to be taken in support of the party who did not draft the agreement.

I was in Court here some weeks ago — or months ago when Mr. Carto — when the plan was being presented to the Court, the agreement, and Mr. Carto said to Mr. Clark in my presence, This statement about notifying Swiss authorities — that was the language — that is not specific. Could you change it to say it should be the magistrate and who should be notified rather than authorities?

Mr. Clark said, This is the agreement. It was drafted by my client. Take it or leave it. I have no authority to allow you to change a word.

They drafted the agreement, and they would not allow a word to be changed. In the agreement, it was not a general release. In the agreement, the Legion insisted that it say that what was released in terms of the future were those acts alleged in — made his claims in the subject lawsuits, making specific relationship to the lawsuits which were named in the complaint. There was on reference to this letter, to the interference with Liberty Lobby, to the fraudulent effort, and more than that — and to be sure of that, I met with four different lawyers who went over this with me to make sure that this was in no way violative of the agreement, not that it ever occurred to me that any judge would ever say, You violated the agreement; therefore, the agreement is dead. If we violated the agreement, that would be a defense against the lawsuit. It would not be a reason to kill the agreement. I knew that, but I was concerned not that the agreement would be held to be invalid, but that we would have a frivolous lawsuit unless we were sure.

We were sure. It was clear. They drew the agreement. It was very specific about claims in the subject lawsuits. These claims have never been made, ever, before this lawsuit before Judge Kessler was filed. So we filed that complaint.

The answer by the Legion states that this is the Legion’s defense, and Mr. Lyons' defense in their answer, Claims have been settled. They are relying now upon the agreement, the forbearance agreement.

Then, the defendants filed a motion to dismiss the complaint, and on page 1 of that mission, the Legion stated that the claims have been agreed to, have settled by agreement, and in their memorandum, they said the same thing. In our opposition, we raised this question, and in their reply as recently as May 7th before Judge Kessler. We are pressing this case forward. It is untrue that we are afraid of Judge Kennedy. It is not even before Judge Kennedy. And all of these pleadings indicate we are moving as rapidly as we can.

On the 7th of this year, the Legion in its reply states on page 6, Plaintiff has failed to establish that the release and forbearance agreement between the parties does not bar the instant lawsuit. So, as recently as May 7th, they are going to the United States District Court here and stating this agreement is valid. At the same time, they are coming before you and saying this agreement is not valid. It is the same building. It is the same District.

Now, what is interesting is because this is what is pending before Judge Kessler at the present time. This is what Judge Kessler may do. Judge Kessler may rule, may deny the motion to dismiss because the lawsuit in no way violate the agreement. That is one thing the Court can do. Judge Kessler may grant the motion ruling that this does violate, our lawsuit before Judge Kessler does violate the agreement, and, therefore, if she rules in that way, she is saying the agreement exists. So, no matter what Judge Kessler does because of the way the Legion has defended itself in that Court, Judge Kessler will rule that the agreement exists. Either it exists and that is why our lawsuit is barred or it doesn't apply, it doesn't bar this. It exists, but it does not bar our lawsuit because our lawsuit is not based upon one of the subject lawsuits.

I think at the very least, Your Honor, because what we have here is while Mr. Clark and his associates were allegedly negotiating in good faith with us, their clients were fraudulently concealing their role in seeking to destroy Liberty Lobby, and now they come before the Court and say because of the fraudulent concealment, which they admit now — they admit that Mr. Lyons was doing this secretly as their agent. That is their defense. They are saying to this Court that, Because of our fraudulent actions, you cannot bring an action there. You cannot be protected. It is not true, Your Honor, that only Judge Maino of the Superior Court of California can make this decision. Judge Kessler is going to make this decision, but in the interim, there will be no more Liberty Lobby. It will be destroyed.

So, at the very least, Your Honor, I would request that you stay this matter until Judge Kessler rules because Mr. Clark is wrong. We are not afraid of a ruling by the District Court. We are pressing for that ruling, and it seems to me that a ruling by Judge Kessler that the forbearance agreement and the plan approved of by this Court, which included that agreement, is valid, should have some impact on this Court, more so than what Judge Maino has done in the Superior Court in California.

MR. STANTON: Your Honor, one last thing. Your Honor mentioned that we had our rights in California and why didn't we defend them out there. What happened was that the Court did what it did in the original case. It insisted on an appeal bond at the full amount of the judgment, which is $4 million. Liberty Lobby doesn't have $4 million. So, not having a supersedeas bond, it loses its right to appeal, and if we hadn't filed this action in this Court, they would have walked in, taken over. We would be dead, justice effectively denied. We don't get a second right. We don't get a chance to explain it to the Court of Appeals out there. Like Mark says, we are dead in the interim. We are killed off. It is completely unfair, Your Honor.

MR. CLARK: I would like to clear up my misstatement. Judge Kessler actually is the judge hearing this case. Judge Kennedy was the judge who heard their RICO action against my client. That was dismissed on a motion for a more definite statement, and in that decision, Judge Kennedy listed the more than a dozen lawsuits that Liberty Lobby has brought against my client and dismissed the lawsuit, I believe, with prejudice.

There is a State court judgment against Mr. Carto. The underlying basis for the judgment, I believe, is for fraudulent conveyance. Whatever it was, it turned into a summary judgment under Section 523(a). I apologize to Mr. Carto for calling him — for saying that he had done anything fraudulently, if that is not exactly what the judgment says. It may say fraudulent conveyance.

Contrary to Mr. Stanton’s statement, the California Court dismissed the appeal for failure to file a brief, not for failure to post a bond. They, in fact, issued a stay for 30 days.

MR. STANTON: The stay was to post the bond, and they dismissed the stay long before this.

MR. CLARK: Oh, it was dismissed for failure to file a brief. I am sure if what Mr. Lane says has any merit, there are procedures in California to reconsider a decision by a judge, similar to Rule 60, and they can argue that out there. They can make their arguments before Judge Kessler, but to come here to ask the Court to decide something that has already been decided and in agreement with the venue provision in San Diego, it seems to seek a second bite at the apple when they have already had a full and fair opportunity to do that.

Thank you.

THE COURT: Why shouldn't they be able to invoke the doctrine of judicial estoppel, not collateral estoppel, but judicial estoppel? When you take inconsistent positions in different courts, it estops you from taking a position that is favorable to you in this Court, and you are taking the position in front of Judge Kessler that there is an intact forbearance agreement.

MR. CLARK: The primary position before Judge Kessler is that the State of Limitations has expired. That is the --

THE COURT: That may be the primary position, but there is also the position --

MR. CLARK: The dispositive.

THE COURT: — taken before Judge Kessler that the forbearance agreement is still in effect.

MR. CLARK: Your Honor, that motion in memorandum was filed February 13th, 2001.

MR. CLARK: The reply brief was filed May 7th of this year. It was just less than a month ago.

THE COURT: Exhibit 18 is what they are referring to.

MR. LANE: And, Your Honor, that is not their primary position about the Statute of Limitations. I don't think Mr. Clark is familiar with the importance involved in the case or the substance of it. It is true that reference is made to it, but in the answer and in the motion itself, the first point is the forbearance agreement, and in the memorandum, it deals with that. There are Statute of Limitations' questions raised about some of the caps, but the only defense as to all of the allegations is the forbearance agreement.

MR. CLARK: Your Honor --

MR. LANE: As it says, there is a Black Letter heading, which I have referred to in reply, which was not filed until February, which was filed last month, here.

THE COURT: Let Mr. Clark have a chance to reply.

MR. LANE: Yes. Sorry, Your Honor. Thank you.

MR. CLARK: I am looking at the memorandum, Exhibit 16, and the first argument is defendant’s claims that plaintiff’s intentional tort of defamation and tortuous interference with business affairs are barred by the Statute of Limitations.

THE COURT: But Exhibit 18 is the most recent position your client is taking. Yes, your client. And the first argument is plaintiff’s argument concedes failure to fall within the Statute of Limitations for liable and slander, and then you turn to page 6, and the argument is plaintiff has failed to establish that the release and forbearance agreement between the parties does not bar the instant lawsuit.

MR. CLARK: That is a reply brief, Your Honor, and I don't know exactly why it was filed. As Mr. Lane has pointed out, I have not been involved in that action. It is an argument that they can bring before Judge Kessler and ask her to invoke judicial estoppel or before the Court in California, I assume.

Please remember, Your Honor, there are four other defendants as to whom they are seeking relief, and even if the agreement was still in place with one, there are still two others, two other agreements, but I don't know why it shouldn't apply, except that I don't think this Court would be the proper court to estop my client. They can go before California. I mean, they have this agreement that has California venue provision in it, and they have a proceeding before Judge Kessler. They are free to make their arguments before her. They can certainly attach a transcript of this proceeding, but why this Court has any jurisdiction or need to hear an argument between a post-confirmation debtor and its remaining creditor on a case that has already been decided in California, and if we are taking inconsistent positions, then that is something that they can raise with the judges that we are taking inconsistent positions in front of, Judge Kessler and Judge Maino, but there may be a very good explanation for it, Your Honor. I don't know because I haven't been in contact with — it is Mr. Mercer who is handling the District Court litigation. But my understanding was that the Statute of Limitations was the primary argument.

THE COURT: All right. I am going to take a recess.

MR. STANTON: Your Honor, one thing when Your Honor goes back to this. The chronology of this, the issue — they had raised the issue before Judge Kessler in December, December 1, before they ever went to Judge Maino. So the inconsistent position, the original one that it was going to Judge Maino, they had already taken the position that the contract was — the forbearance agreement was in effect and protected them before Judge Kessler. The answer was filed December 1. The action before Judge Kessler was December 15 — before Judge Maino was December 15.

MR. CLARK: Judge Maino ruled on December 15th.

MR. LANE: May I speak for just one moment, Your Honor?

THE COURT: Yes, go ahead.

MR. LANE: Thank you, Your Honor.

When I went to law school, which was 55 years ago, they said for every grievance, there is redress. I have found over the years that is not always true, but I hope it will be true in this case.

They take inconsistent positions, the Legion does here, because they know what the next step will be. Unless this Court prevents them from violating the agreement, which was approved of by this Court, there will be no Liberty Lobby. Judge Kessler will never rule on this matter. They will take over Liberty Lobby, and they will dismiss the case against themselves. They cannot — our client cannot go forward in California because they have insisted upon a bond of $4 million, which they don't have. They will not be able to go forward before Judge Kessler.

What we did not bring — we did not raise this question. We just filed a lawsuit. They raised the question of the forbearance agreement. They chose that, this jurisdiction, but the final point will be if this Court does not act today, there will be no Liberty Lobby within a week, and the lawsuit before Judge Kessler will be dismissed, and there will be no redress for grievances. That is why it comes down to this Court.

Thank you.

MR. CLARK: The only thing we are here on today is a motion seeking injunctive relief, which probably is incorrect in its form, and the status conference in the adversary and the motion to dismiss that I filed.

If there is some argument to be made for judicial estoppel and this Court feels it has jurisdiction and it is the proper Court to make that decision, I will answer the complaint.

THE COURT: The Court will take a recess.

THE CLERK: Everyone rise. This Honorable Court stands in recess.


THE CLERK: This Honorable Court is again in session. Please be seated and come to order.

THE COURT: I apologize for the length of the recess.

Because I thought this matter was settling, I hadn't prepared for the hearing, and I must confess that I was not up to speed when the arguments began, but I think I understand the parties' arguments.

This is a hearing on a motion filed by the debtor on February 16, 2001, entitled Motion for Relief to Fully Implement the Debtor’s Plan in which the prayer for relief requests the Court to exercise the jurisdiction reserved only to this Court under the plan, resolve any issues regarding any purported defaults by any party under the agreement and plan, oversee a full and final funding and implementation of the plan, including the expedited payment of the funds necessary for the plan’s full implementation, and as set forth in detail in the companion adversary matter, restraining the Legion from any further litigation or other acts, attempting to abrogate its obligations under the settlement agreement to fully settle and discharge its indebtedness with the debtor under the plan, such that a final order can be entered determining if the debtor has fully performed all of its obligations under the plan and is entitled to its discharge.

To the extent that this motion seeks injunctive relief, it will be denied because it doesn't comply with Rule 7001. That is something that should be brought up in the adversary proceeding.

What this grows out of is action taken in the Superior Court of California for San Diego County in the matter of Legion for the Survival of Freedom, Inc. v. Willis Carto, and others including the debtor, in which the Superior Court enforced the settlement agreement in a mutual general release between the debtor and the Legion for the Survival of Freedom, which was incorporated into the plan of reorganization confirmed by this Court.

That agreement includes a venue provision providing that San Diego County shall be the proper venue to enforce the provisions of this settlement agreement, the provisions of the stipulation concerning the payment of funds, and the stipulation concerning the enforceability of this agreement.

Now, I don't have the order confirming the plan as an exhibit. It may be in this earlier file in the case. Just a moment.

MR. STANTON: I think it was the exhibit from the last time we were here, Your Honor, and not this time.

(Pause in proceedings.)

MR. STANTON: if Your Honor has the old file, it was entered October 26th of '99.

THE COURT: I was hoping it was attached to an earlier motion in the case. It is not with this file. No, it is not here, I don't think.

What my recollection is, is that the plan made the settlement part of the plan of reorganization, and the settlement clearly says that venue to enforce the forbearance agreement is lodged in the Superior Court in California for San Diego County, and this Court did retain jurisdiction over a number of matters, but it was not inclusive jurisdiction. It wasn't to the exclusion of the Superior Court in California. It seems to me that the Superior Court had concurrent jurisdiction to address the issue of a default under the forbearance agreement.

It is decided there was a breach under the forbearance agreement. The remedy it imposed was rescission. The debtor has rights of appeal. It says it can't afford to take the appeal, but the judgment of the Superior Court is a final judgment, and I have got to give it full faith and credit.

The debtor’s motion in this case is not an appropriate vehicle for seeking injunctive relief in any event, as I have previously explained.

The debtor’s motion, harkening back to its prayer for relief, seems to ask me to revise the payment schedule under the plan, but the plan was based upon a payment schedule in the forbearance agreement, and that forbearance agreement has not been set aside and the judgment that was already held by the Legion is being enforced.

Now, generally speaking, what happens is if you have a payment obligation under a plan, you are entitled to sue upon that payment obligation when the debtor defaults, get a judgment, and enforce the judgment, but this agreement had a provision that if the forbearance agreement remains in default, then the full balance of the original judgment, plus interest, is then due and owing at the option of plaintiff. That is paragraph 4 on the first page. So the agreement that the plan incorporated —

MR. STANTON: Your Honor, I am not sure that the plan actually incorporated the agreement, now that I think about it. I think we talked about doing that, and the decision was not to incorporate it. I don't think there is anything in the plan that full incorporates the agreement. I think it incorporates the payment provisions of the agreement, but it didn't incorporate the agreement saying the agreement is the plan.

THE COURT: The agreement was approved by the Bankruptcy Court —

MR. STANTON: Yes, it was, Your Honor.

THE COURT: — as part of the confirmation process is what I recall.

MR. STANTON: It was approved before the plan was submitted, Your Honor, but the plan did not contain a complete incorporation of the forbearance agreement.

THE COURT: But this is an issue that should have been raised in the Superior Court in California, and it wasn't raised. It seems to me that the judgment in the Court in California has to be given full faith and credit. It is res judicata as to whether the forbearance agreement is any longer in existence, and it is not. The judgment is fully collectable is what that California Court has said. I don't see how I can — under the full faith and credit clause, how I can second-guess that California Court.

The debtor had a defense available, perhaps, that the plan of confirmation didn't incorporate the forbearance agreement. It incorporated a payment schedule instead, and the remedy should have been limited to what remedy would be available for defaulting on the payment schedule under the plan. That defense could have been raised in the California Court. Apparently, it was not, but the judgment sets aside the forbearance agreement and says the judgment is collectable. This is a later judgment. The defense of the plan was a defense that should have been raised in the California Court, and perhaps its order violated the plan, but that is a defense that should have been raised and it wasn't raised. Even if it was raised, it has been adjudicated that it didn't preclude setting aside the forbearance agreement and letting the judgment be fully collected.

So I think it is too late for the debtor to come into this Court and have this Court attempt to modify the plan to somehow get around the California judgment. If the debtor wants to modify the plan, it would have to be on notice to — it is too late to modify the plan. The plan can't be modified after it has been substantially consummated, and not only has the plan been substantially consummated in the narrow technical defense of Section 1101 of the Bankruptcy Code, because there has been a transfer of all or substantially all of the property proposed by the plan to be transferred, assumption by the debtor, of the business of the debtor, and commencement of distribution under the plan. Not only that, the case was closed. That certainly is a signal that the plan had been substantially consummated because the Court doesn't close a case until there has been substantial consummation.

After there has been substantial consummation, the Court can't modify the plan. So I think that it is too late for the debtor to seek the remedy of modifying the plan in order to bring new payment obligations in place that would displace the judgment that the California Court has said is now effective.

So that leaves only the issue of judicial estoppel which arises from pleadings filed in a civil action pending in the United States District Court for the District of Columbia, Case No. 1-00CV02411, Liberty Lobby v. Legion for the Survival of Freedom, in which the Legion has taken the position that the forbearance agreement is in effect.

Page 6 of the reply filed in that case — it is the Debtor’s Exhibit 18 today. It has a certificate of service dated May 7th, 2001. Page 6 raises the argument that the lawsuit is barred by the forbearance agreement between the parties.

What the debtor argues is that this is a taking of inconsistent positions. I think it is the taking of inconsistent positions.

MR. CLARK: Your Honor, I don't know if the Court has had an opportunity to see pages 9 and 10 of that, but I do think that they advise the Court that the Superior Court of San Diego has determined that this lawsuit was barred by the agreement. So they do advise the judge of what has been happening in California, and it says on the top of page 10, That Court, the California Court, decided plaintiff’s breach of the agreement entitled Defendant’s to Institute Collection upon one of the judgments which had been subject to forbearance under the agreement. I don't know if it is necessarily —

THE COURT: Well, in any event, it seems to me that the issue of whether the Legion is taking inconsistent positions is something that can be brought up before Judge Kessler for her to decide whether there is, in fact, an inconsistency.

If the Superior Court’s judgment saying The forbearance agreement is hereby set aside, and plaintiff may proceed to collect on the judgment sets aside the entire forbearance agreement, then it seems to me that there is an inconsistent position being taken, but the remedy for that is, it seems to me, for the plaintiff Liberty Lobby to point out to the Superior Court that the forbearance agreement has been rendered a nullity and that the Legion can't have the best of both worlds.

So the motion in this case will be denied. The exhibits — I don't think there is any objection to the exhibits of the plaintiff. I will receive them into evidence and return the exhibits to counsel to retain custody of.

MR. CLARK: As for the adversary proceeding, Your Honor?

THE COURT: Now, as to the adversary proceeding --

THE CLERK: I haven't called that one. Should I call it?

THE COURT: — it needs to be called.

(Proceedings adjourned.)