Buchanan v. Henderson, CV-R-85-563-HDM.
| Decision Date | 12 October 1990 |
| Docket Number | No. CV-R-85-563-HDM.,CV-R-85-563-HDM. |
| Parties | Neil BUCHANAN, Clair Vogt, Bruno Menicucci, Anna Menicucci, and Menicucci Insurance Services, Inc., Appellants, v. Timothy J. HENDERSON, Trustee, Appellee. |
| Court | U.S. District Court — District of Nevada |
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Frank R. Petersen, Cal Hoover, Vivian Lynch, Hamilton & Lynch, Reno, Nev., for appellants.
Henderson & Nelson, Reno, Nev., for appellee.
This is an appeal of a judgment entered by the bankruptcy court against Bruno Menicucci and Anna Menicucci and Menicucci Insurance Services, Inc. (hereinafter referred to as "the Menicuccis") and Neil Buchanan (hereinafter "Buchanan") and Clair Vogt (hereinafter "Vogt"). 52 B.R. 743. Judgment was entered against Vogt and Buchanan for five million six hundred and forty-six thousand four hundred and sixty-eight dollars ($5,646,468.00) and against Menicucci jointly and severally with Vogt and Buchanan for two million nine hundred and ninety-six thousand seven hundred and ninety-nine dollars ($2,996,799.00) on the claim of breach of fiduciary duty. Judgment was entered in favor of Menicuccis on the alter ego and partnership theories. Judgment was entered against the Menicuccis for preferential transfer in the sum of ten thousand three hundred and ninety-eight dollars and seventy-four cents ($10,398.74) and against the corporate Menicuccis for preferential transfer in the sum of thirty thousand eight hundred and eighty dollars and five cents ($30,880.05). Judgment was further entered against Menicucci Insurance Services, Inc. subordinating its claim regarding the preferential transfers to the claims of other creditors.
Vogt and Buchanan met in 1978 and commenced a business relationship. Over a period of several years, Vogt would loan money to Buchanan to fund the operation of certain entities which consisted of approximately twenty-five (25) corporations in which Buchanan was the primary manager and Vogt became the sole stockholder. In most instances, stock was never issued for the corporations and the bankruptcy court determined that funds advanced by Vogt for such companies were loans, not capital investments, and, therefore, the companies were undercapitalized. Four of the five debtor companies were Vogt-Buchanan ventures in which the Menicuccis had no interest and were not officers, directors or shareholders. These companies were United Securities Systems, Inc. ("USS"), United Securities Systems Leasing, Inc. ("USSL"), United Emergency Services, Inc. ("UES"), and Leasco Financial Corporation ("LFC"). The record reflects that funds invested with USSL, directly or through Western World Funding, were used by some of these other companies, and while these facts may be relevant to the judgment against Vogt and Buchanan, they did not involve the Menicuccis.
USSL was the security company utilizing closed circuit television equipment and other electronic equipment. This equipment was acquired and owned by USSL. Prior to 1981, USSL obtained financing from short-term investor loans which were administered by City Investment and Trust Co. The relationship with City Investment and Trust Co. was terminated in 1982. Prior to terminating the relationship, Buchanan had met with Menicucci in order to secure insurance for USSL and USS. Menicucci is a former mayor of Reno and was a Reno city councilman for several years. He was also an insurance broker in Reno. During the course of processing and handling insurance claims for Buchanan, Menicucci and Buchanan discussed a dormant corporation, Western World Funding, Inc., ("WWF") which the Menicuccis had formed sometime earlier. Buchanan suggested to Menicucci the possibility of the Menicuccis participating with them through WWF and obtaining investor capital for USSL. Menicucci would remain as the head of WWF to attract new investors. No stock had ever been issued in WWF.
Prior to undertaking this venture, Menicucci investigated Buchanan and Vogt by talking with Buchanan's and Vogt's banker and attorney. After determining the net worth of Vogt and USSL, Menicucci agreed to permit WWF to be used as a conduit for investor financing for USSL. Menicuccis remained in the position of officers and directors of WWF. WWF was then used to obtain investor loans for USSL. Although there is some conflict in the record, the obligation to repay the loans and to pay interest thereon was USSL's and promissory notes representing the obligations ran directly from USSL to the investor lender.
Investor accounts, after they were established, were handled by USSL directly through employees retained by Buchanan. All communications concerning investors were handled by an employee of Buchanan's. Investors were solicited by printed advertisements offering high rates of returns. These advertisements featured the involvement of Menicucci as president of WWF. Investors would make loans directly to USSL or to USSL through WWF. When funds were invested with WWF, the investor was shown a rate card which showed the different interest rates, depending on the term of the investment. They would receive a receipt for the loan and a promissory note. The promissory note form was the same for all investments, whether made through WWF or directly to USSL, and provided that principal and interest would be paid by USSL. None of the documents showed any obligation for payment of principal and interest on the part of WWF. These notes were the only evidence of indebtedness as far as the investors were concerned.
The procedure for handling the investor loans was that at the end of each day, funds received by WWF would be deposited into WWF accounts and a check for ninety-five percent (95%) of that sum would be made payable to USSL, with five percent (5%) being retained by WWF to pay for overhead and expenses. Checks transferring the loan funds from WWF to USSL were signed by Menicucci and Vogt and deposited into USSL accounts every day. When Menicucci would attempt to secure information as to where loan funds were being transferred to USSL and for what purpose they were being invested and distributed, he was advised by Buchanan that they were being invested in short-term bank loans, leases and leasing blocks, but Buchanan refused to provide Menicucci with any additional information. During this period, Menicucci inspected warehouse facilities of USSL and determined that there were substantial quantities of equipment on the premises.
During the latter part of 1981 and early 1982, Menicucci and Buchanan began having conflicts when Menicucci objected to his lack of control, and he notified Buchanan and Vogt that he either would have to have more direct knowledge and authority or he would terminate the relationship. In late March, Menicucci again expressed his concerns and advised that he would be resigning in April if matters were not resolved. On April 30, 1982, Menicucci resigned. The record also reflects that the Menicuccis invested individually and received promissory notes and interest payments from USSL and WWF.
Vogt and Buchanan manipulated the funds coming into USSL by intercompany transfers which were documented by notations on the checks and deposit slips. They made payments to themselves and on their own behalf for their own use, which were again documented only by notations on the checks. None of these activities involved WWF or Menicucci. The Menicuccis received no compensation for services performed by Menicucci for WWF, nor was there any form of diversion of corporate funds to the Menicuccis personally. The accounts of WWF were properly maintained, and all obligations of WWF were paid and accounted for. No funds were transferred to any of the Menicuccis other than for insurance payments and repayments of interest and principal on actual investments made by the Menicuccis.
In this proceeding, the bankruptcy judge imposed liability on the Menicuccis individually on the theory of breach of fiduciary duty, finding that the Menicuccis failed to discover the wrongdoing of Vogt and Buchanan, after first concluding that the companies were insolvent. Liability for preferences was based on the theory of knowledge of insolvency and insider status. Equitable subordination was imposed on the theory of breach of fiduciary duty giving rise to the liability for investor loans. The Menicuccis' liability was calculated on the basis of unpaid investor loans.
Liability was imposed on Vogt and Buchanan for breach of fiduciary duty, fraudulent transfer, preferential transfers, and conversion. The bankruptcy court found a partnership relationship existed between Vogt and Buchanan and also applied the doctrine of alter ego in finding liability.
This court reviews the bankruptcy court's findings of fact using the clearly erroneous standard and its conclusions of law de novo. Probasco v. Eads (In re Probasco), 839 F.2d 1352, 1353-54 (9th Cir. 1988). For the reasons stated in this court's order of June 30, 1989, the court will review all non-core issues de novo. 28 U.S.C. § 157(c)(1)-(2) (1988). These non-core issues are the fiduciary duty, alter ego and partnership claims.
The appellants all assert that they did not consent to the reference of the non-core related proceedings to the bankruptcy judge under 28 U.S.C. § 157(c)(2), and, therefore, the court could only propose findings and conclusions pursuant to 28 U.S.C. § 157(c)(1). This court, in its order of June 30, 1989, dealt with the issue of consent and concluded that the non-core issues would be reviewed de novo. Therefore, the bankruptcy court had jurisdiction to adjudicate the claims in the manner in which they were adjudicated.
Appellants Menicuccis and Buchanan and Vogt contend the trustee did not have standing to maintain this action. The bankruptcy judge held that the...
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