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Filed: August 24, 1987.


APPEAL FROM THE BENTON CIRCUIT COURT The Honorable R. Perry Shipman, Judge, Cause No. C. 83-46.

Miller, P.j., Ratliff, C.j., Dissents With Opinion, Young, J., Concurs.

Author: Miller


Marte Mathas sued Homer Tolliver, president and owner of Acutus Industries, and Acutus Industries of Michigan (hereinafter collectively, Acutus) for breach of two oral contracts. In one of these contracts, Acutus agreed to reimburse Mathas for funds he expended to gain control of certain shares of stock in T & M Manufacturing; in the other contract, Acutus agreed to reimburse Mathas for funds he expended to keep T & M, a financially troubled company, operating. These contracts were made while T & M was under the jurisdiction of the bankruptcy court for the Northern District of Indiana. After trial by jury, the Benton Circuit Court awarded Mathas a judgment of $85,000. Acutus appealed, alleging, among other things, that the contracts between Mathas and Acutus violated the bankruptcy code and are void as against public policy. We agree, and reverse the judgment of the Benton Circuit Court.


In 1973, Marte Mathas and three other individuals formed a corporation known as T & M Fabricating, Inc., which provided welding services to the steel industry in the Calumet Region. At first T & M grew rapidly, reaching $1,300,000 in sales in 1978. During this period of rapid growth Mathas was the primary manager of daily operations, as well as owner of one-third of the outstanding shares of the corporation.

T & M began experiencing financial difficulties in 1979. These difficulties continued through 1980, primarily because of the decay of the steel industry in the northwest part of the state. On November 7, 1980, T & M filed a bankruptcy petition in the Bankruptcy Court for the Northern District of Indiana.

Mathas and the other shareholders, David Willis, Ed Auten, and George Bonnich, also began to look for parties interested in buying T & M. Acutus Industries of Pontiac, Michigan, expressed an interest and, in November of 1980, representatives of Acutus toured T & M. During this trip the parties began preliminary Discussions of a possible sale. These Discussions ended abruptly when Willis outlined his expectations for T & M and quoted a purchase price which the Acutus representatives considered wildly unrealistic. The Acutus representatives returned to Detroit.

Acutus remained interested in acquiring T & M, but felt it would be impossible to do so while Willis retained an ownership interest in T & M. An agent of Acutus informed Mathas that Acutus was still interested in the purchase if Mathas could somehow remove Willis from the transaction. Mathas ascertained that Willis would be willing to sell his interest in T & M for $85,000. After Mathas informed Tolliver that Willis could be bought out, Tolliver asked Mathas to see if he could get Willis to sell for less than $85,000. When Willis said he would accept $65,000, Tolliver instructed Mathas to buy the stock and told Mathas that Acutus would reimburse any funds Mathas expended to purchase the shares. In January of 1981, Tolliver and Mathas finalized the agreement. Mathas agreed to buy out Willis, and Tolliver agreed to reimburse Mathas by assuming Mathas's obligations under two notes.

At this time the financial situation of T & M deteriorated further. There were no funds remaining to pay the workers, and Mathas informed Tolliver that T & M would have to close down. Tolliver asked Mathas to use his own funds to keep T & M from closing down. Mathas was reluctant to do so because he had already put $7,600 of his own money toward keeping T & M a going concern. When Tolliver assured Mathas that he would repay Mathas for any funds put into the operation, including the $7,600 Mathas already advanced, Mathas agreed to continue to keep the business running. He put an additional $18,000 into the daily operation of the firm.

After Mathas acquired Willis's shares of T & M, T & M and Acutus were able to agree on a plan for the purchase of the corporate assets. They submitted this plan to the bankruptcy court on January 22, 1981. The plan was modified, resubmitted on March 10, and accepted by the court on July 27. It is undisputed that the court was not informed of the Mathas-Acutus agreements.

After the sale, Acutus began paying off Mathas's debts. Acutus also hired Mathas as a sales representative. In November, however, Acutus fired Mathas and stopped payment on his debts.


Acutus brings several issues for our review. We need not address all these issues, because a single issue is dispositive of this case. Acutus alleges the contract with Mathas is illegal and void as against public policy. We find we must agree.

Generally, a contract made in violation of a statute is void. Maddox v. Yocum (1941), 109 Ind. App. 416, 31 N.E.2d 652; 6 I.L.E. § 3. The determination of whether a contract violates the statute is a question of law for the court, not a question of fact for the jury. Ross Clinic v. Tabion (1981), Ind.App., 419 N.E.2d 219.

Acutus argues the contracts violated several sections of the bankruptcy code. We do find a violation of one of those sections and must therefore reverse.

The code provided,[Footnote 1] in part:

"The court shall confirm a plan only if all of the following requirements are met:

Any payment made or promised by the proponent, by the debtor, or by a person issuing securities or acquiring property under the plan, for services or for costs and expenses in, or in connection with the case, or in connection with the plan and incident to the case, has been disclosed to the court. . . ." 11 U.S.C. 1129(a)(4)(A). (emphasis added).

It is obvious the code required disclosure in order to protect creditors from collateral transactions which might impair their recovery from the debtor in possession. Ely v. Donoho (S.D.N.Y. 1942), 45 F.Supp. 27. The bankruptcy court is entrusted with the task of examining the available information to ensure that no assets of the debtor in possession are being diverted from the creditors to other parties, especially equity holders. Id. It was therefore imperative that all relevant information be reported in the disclosure documents. In re Wilson Realty Corp. (E.D. Mich. 1938) 30 F.Supp. 486.

Our research has not revealed any case which has considered the question of whether a failure to notify the bankruptcy court of a contract when required by ยง 1129(a)(4)(A) renders the contract unenforceable as illegal or against public policy. We have, however, found precedent in a similar type of case which leads us ...

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