Deloycheet, Inc. v. Beach (In re Beach)

• Citation: 570 B.R. 300
• Decision Date: 07 April 2017
• Docket Number: Adv. No. A15–90016–GS,Case No. A15–00210–GS
• Parties: IN RE: Corbett James BEACH, III, Debtor. Deloycheet, Inc., Plaintiff, v. Corbett James Beach, III, Defendant.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Alaska

570 B.R. 300

IN RE: Corbett James BEACH, III, Debtor.Deloycheet, Inc., Plaintiff,

v.Corbett James Beach, III, Defendant.

Case No. A15–00210–GS

Adv. No. A15–90016–GS

United States Bankruptcy Court, D. Alaska.

Signed April 7, 2017

Katherine E. Demarest, Dorsey & Whitney LLP, Anchorage, AK, for Plaintiff.

J. Mitchell Joyner, Anchorage, AK, for Defendant.

MEMORANDUM DECISION

GARY SPRAKER, United States Bankruptcy Judge

In this adversary proceeding, plaintiff Deloycheet, Inc. ("Deloycheet") seeks to establish and except from discharge a $400,000 debt that arose as a consequence of the actions taken by the defendant, and debtor, Corbett James Beach, III ("Beach"), on the grounds of fraud, under 11 U.S.C. § 523(a)(2)(A), and willful and malicious injury under § 523(a)(6).¹ Deloycheet also seeks an award of treble damages under the Alaska Unfair Trade Practices Act ("UTPA"), punitive damages, and an allocation of fault between Beach and another individual, Trudy Sobocienski, who is not a party to this action.

The court has considered the testimony and exhibits offered by the parties at trial. For the reasons stated herein, the court finds in favor of the plaintiff on its § 523(a)(2)(A) count and its claim for damages under the UTPA. Punitive damages will not be awarded. The court shall dismiss the plaintiff's § 523(a)(6) claim, with prejudice.

A. FACTS²

1. Organization of Plaintiff Deloycheet Inc.

Deloycheet is an Alaska Native Village Corporation located in Holy Cross, Alaska on the Yukon River.³ It was formed under the Alaska Native Claims Settlement Act of 1971, 43 U.S.C. § 1606 et. seq. ("ANCSA"), and conducts business through its two subsidiaries. The first is Holy Cross Oil, Inc. ("HCO"), who has traditionally sold fuel and materials to the Holy Cross community. The second subsidiary is Deloycheet Development Corporation, Inc. ("DDC"). DDC was formed in 2010 to help HCO utilize its status as an 8(a) contractor in the Small Business Administration's Business Development Program, which is designed to foster small business development in government contracting.

Deloycheet is governed by a nine-member board of directors, and its subsidiaries are each governed by smaller boards whose members are appointed by Deloycheet's board of directors.⁴ During the time period applicable to this proceeding, Eugene Paul ("Paul") was the president of Deloycheet's board of directors, and Chanda Aloysius ("Aloysius") was one of the board members. Aloysius testified that the Deloycheet board sets the direction of the company, but is not involved in daily business operations. The board relies heavily on corporate management to run the businesses on a day to day basis.

Deloycheet holds board meetings periodically throughout the year to review the corporation's financial information and budget, and to consider any items or transactions placed on the agenda by its staff. According to Aloysius, if management wanted Deloycheet to enter into a transaction, the item would be placed on the board of directors' agenda, and an informational packet would be sent to the board members to review before the meeting. Management would then present the proposal at the board meeting, and the board would vote on whether to approve it. Under Deloycheet's bylaws, corporate officers generally are not authorized to sign contracts or other instruments absent approval of the board; further, no loans may be contracted on the corporation's behalf absent prior approval of the board.⁵

Historically, Deloycheet was able to generate a small profit from HCO, but relied upon monies received yearly under Section 7(j) of ANCSA. According to Aloysius, the 7(j) funds are received annually in May. The amount received ranges between $300,000.00 and $750,000.00, but averages $500,000.00.

2. Defendant Beach is Hired by Deloycheet.⁶

Trudy Sobocienski served as Deloycheet's chief executive officer from August 2010 until May 2012.⁷ Her job duties were to manage Deloycheet's two subsidiaries and to develop new business operations to increase business revenues. To further these goals, in early 2011 DDC advertised for an executive vice president of business development. The written job qualifications for this position required "a senior business development executive who can identify potential deals and develop the tactics and teams to bring them to fruition."⁸ DDC sought someone with "10 years plus of demonstrated success in business development, marketing, and/or sales," and "[e]xperienced [in] marketing or selling products or services in a start-up or early stage environment."⁹

Defendant Beach was hired by DDC in mid–2011 to fill this position.¹⁰ His starting annual salary was $120,000.00, and he was eligible for annual performance incentive bonuses under certain circumstances.¹¹ Beach testified that his job was to build business for DDC. Yet, his hiring was somewhat at odds with the qualifications sought, as he lacked a college degree and had a sporadic history in business.¹² He had no prior experience working with Alaska Native corporations, nor did he have any knowledge of 8A contracting. However, Sobocienski, who was Beach's immediate supervisor, was knowledgeable in both areas, and was tasked with bringing Beach up to speed.

Beach's employment contract required him to "devote his full time, attention, and best efforts to the business and affairs" of DDC.¹³ It further prohibited him from engaging in "any other business activity, whether or not such business activity is pursued for gain, profit, or other pecuniary advantage."¹⁴ He was employed "at will." A termination clause in the agreement provided that if DDC terminated Beach without cause, he would be entitled to severance pay equal to six months' salary.¹⁵ However, he was not entitled to severance pay if he voluntarily terminated the contract, or if he was terminated for cause.

3. Deloycheet's Teaming Agreement with Sylvain Analytics.

At the time Beach was hired, Deloycheet had entered into a Teaming Agreement with Sylvain Analytics, Inc. ("SAI"), an 8(a)–certified veteran and minority-owned small business located in Reston, Virginia¹⁶ SAI offered analytics business services and data management to federal agencies under government contracts.¹⁷ Ray Sylvain ("Sylvain") was SAI's President and Chief Executive Officer.¹⁸

Sobocienski had met Sylvain at an 8(a) government contracting conference in early 2011.¹⁹ She signed the Teaming Agreement with SAI on behalf of Deloycheet on May 10, 2011. Under this agreement, the parties established a "team solely to seek opportunities and to provide deliverables" on professional service contracts they hoped to offer to certain governmental agencies, including the Department of Health and Human Services, the Department of Interior, and the Department of Justice.²⁰ Although the agreement contemplated that Deloycheet and SAI would work as a team, neither party was authorized to make commitments on behalf of the other without written consent. Further, neither party served as the other's agent, nor were the officers or employees of one party deemed employees of the other.²¹

The Teaming Agreement was entered in the hopes that it would help DDC obtain 8(a) government contracting opportunities. Beach understood the agreement as a notice, rather than a contract, whereby two companies "go steady" to see if they can develop business opportunities that would benefit both of them. He believed that SAI benefitted from the agreement because Alaska Native corporations receive certain priorities with the SBA that are not offered to other 8(a) corporations. SAI would reap the benefit of these priorities if it could work with DDC on 8(a) contracts. Conversely, Beach understood that the teaming agreement would give DDC access to SAI's business opportunities and government contracts, as well as its data management services.

In spite of the perceived benefits, no work was ever obtained or performed under the Teaming Agreement.²²

4. The HCO loan to SAI.

Shortly after Beach started with DDC, he and Sobocienski exchanged numerous emails with Sylvain regarding a potential loan from DDC to SAI. On October 5, 2011, Sobocienski forwarded Sylvain questions "from our Executive Management Team" about SAI's intended use of the borrowed funds, and whether it would be "possible/desirable for DDC to purchase a % of [SAI] as opposed to making a loan."²³ Sylvain was also asked to identify any risks that would cause delay or result in the uncollectability of SAI's projected receivables, and explain how such risks could be mitigated. Despite these concerns, the "gut response" by the Executive Management Team was that "this opportunity is a ‘no brainer’ based on the answers to the above questions."²⁴

Sylvain emailed a response to Sobocienski the same day. He explained that he was the sole initial investor in SAI, which was an "S" corporation that he controlled 100%. The purpose of the loan was to generate "working capital" to cover the cost of new staff.²⁵ He further assured Sobocienski that the only risk to SAI's revenue was the discontinuance of existing government contracts, but explained even that would not impact the company's finances for the duration of the short term loan being sought.²⁶ Sylvain also responded that it would be possible to structure the transaction so DDC could purchase an interest in SAI rather than as a loan.

Beach testified that he was impressed with SAI, and by what Sylvain and his team could do managing the massive amounts of data belonging to various governmental entities. When questioned as to the basis for this impression, he testified that he had checked with the SBA regarding SAI's viability, and believed that the company had good contracts, good receivables, and a realistic expectation of acquiring good contracts in the future. He also learned that Sylvain had graduated from Harvard Business School and was a former Marine. Beach further testified that he had gone to Sylvain's office and seen his operation in...