Fuller v. Bae (In re Bae)
| Decision Date | 29 August 2022 |
| Docket Number | Case No. 19-40959 CN,Adversary No. 19-4032 CN |
| Citation | 645 B.R. 272 |
| Parties | IN RE: Raymond Won BAE, Debtor. Randall R. Fuller, Darius Oravec and Joo-Young Kim, Plaintiffs, v. Raymond Won Bae, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of California |
Natali Gulli, Law Offices of Charles Hastings, Stockton, CA, for Plaintiffs.
Stanley A. Zlotoff, Law Offices of Stanley A. Zlotoff, San Jose, CA, for Defendant.
On May 9, 10 and 11, 2022, this court conducted a trial in the above captioned adversary proceeding. All appearances were noted on the record. The following constitutes this court's findings of fact and conclusions of law under Federal Rule of Bankruptcy Procedure 7052.
In 2012 and 2013, plaintiffs Randall Fuller, Darius Oravec and Joo-Young Kim (collectively, "Plaintiffs") were enticed by defendant Raymond Won Bae to invest substantial funds in INB, Inc., a South Korean startup with a business plan to fabricate "ultra high tech" circuit boards in South Korea for the South Korean and American markets. The Plaintiffs – all of whom knew Bae personally and/or professionally before they invested – approached their investments from different perspectives. Oravec was strictly a passive investor in INB, and his investment was a pure profit play. Fuller and Kim, who have held various positions in the semi-conductor industry, became more involved in INB's operations after they invested, and they were eventually employed by INB or an INB affiliate in South Korea. Notwithstanding their different investment strategies, all three lost their investments when INB ceased operating in 2015. The question before this court is whether their losses were simply the unfortunate by-product of a well-intentioned but chaotically run start-up or the result of fraudulent representations by Bae, INB's CEO, founder, and largest shareholder.
The parties spent a substantial amount of trial time describing INB's operations, financing, and relationship with certain affiliates. While such information can be significant in investment fraud cases, the evidence presented here was incomplete at best. For example, this court is still unsure how INB was financed, and the parties’ efforts to describe the relationship between INB and several other Bae owned entities fell short. If nothing else, the trial demonstrated the precarious nature of investing in Silicon Valley-like start-ups. Regardless, Bae, who was an experienced Silicon Valley entrepreneur, formed INB in 2011 to manufacture specialty circuit boards, a niche field which he believed was underserved. Bae owned and operated RB Technology, a Fremont, California company that purchased circuit board components and did substantial business in South Korea. He believed that there was an undeveloped market for high end circuit boards, and he began discussing his concept with several persons in 2011, including some of the Plaintiffs. Plaintiffs do not dispute that Bae's concept was worthwhile, and they believed that he had the business experience and acumen to lead INB. Bae believed that he needed approximately eight million dollars to properly capitalize INB's initial operations. He began soliciting investments from friends and business associates in 2011 and ultimately developed and presented a business plan to potential investors, including Plaintiffs.1 While Bae drafted at least two business plans, the first, dated January 23, 2012, was the one Bae presented to Plaintiffs before they invested (the "January 2012 Plan"). The January 2012 Plan explained INB's business goals, listed financial and manufacturing milestones that it hoped to accomplish, provided economic projections describing the anticipated market for its product, named some of its management team, and stated the names of several parties who had purportedly invested substantial sums in INB.
At trial, Bae downplayed the significance of the January 2012 Plan and described it as a "work in progress." He correctly noted that over the next three years INB's business plans and timelines changed while it struggled to build its manufacturing plant, purchase the correct equipment, and train its employees before it terminated its operations in December 2015. While the January 2012 Plan presumably was Bae's best efforts to describe INB's prospects, its representations regarding INB's management team, existing investors, and current capitalization were not conjecture or prognostications. For example, the January 2012 Plan stated that INB's "current ownership" included Bae and Vijay Israni (an apparently well-known businessman with a good track record of investing in Silicon Valley startups) who each owned 40% of INB's shares and had "invested heavily in the company." The January 2012 Plan's Valuation and Investment Analysis stated that the company's "initial investment" was eight million dollars, allowing potential investors to surmise that Israni (and Bae) had invested substantial funds in the venture.
The January 2012 Plan's references to Israni as an investor, principal, and advisor were incorrect. While Bae testified that he discussed INB with Israni in 2011, Israni informed Bae in or around December 2011/January 2012 that he was not interested in investing in INB. Moreover, while the January 2012 Plan indicated that Bae had poured millions of dollars into INB, the only evidence regarding the scope of his investment was Bae's insistence that he had done so. Bae repeatedly testified that his investment included personal funds and monies contributed by RB Technology, Inc. Unfortunately, no party introduced any documentary evidence establishing exactly how much Bae invested, and, perhaps more significantly, exactly how much money INB had in the bank at any moment in time.
Bae's plans for INB never came to fruition. INB's employees struggled to operate the equipment needed to manufacture the circuit boards, and the equipment that INB purchased – whether new or from a defunct Israeli business – was initially inadequate for the task. These factors dramatically delayed the business's operations, and despite borrowing substantial funds from a South Korean bank, INB ceased operations in 2015. As more fully discussed below, Fuller, Oravec and Kim did not receive any return on their investments.
Oravec and Bae were business acquaintances and friends, and he respected Bae's business acumen and trusted him. Oravec was familiar with the circuit board industry, and he agreed with Bae that a niche circuit board manufacturer such as INB could be profitable. Bae began discussing INB with Oravec in 2011 and it appears that Oravec initially committed to investing $150,000.00 in INB before he reviewed the January 2012 Plan. In yet another of its misstatements, the January 2012 Plan represented that Oravec had already invested this amount well before INB received any funds from him. Oravec was nonplussed by this error during his direct and cross-examinations. While he initially informed Bae that he was interested in investing the requisite $150,000 (the January 2012 Plan indicated that INB was looking for investors who would invest that minimum amount), Oravec was only able to invest $85,000, which he provided to Bae in two tranches in the summer of 2012. Oravec first gave Bae a $40,000.00 check made payable to Bae or RB Technology, and he later, at Bae's instruction, deposited an additional $45,000.00 into a South Korean bank account that Oravec opened for this purpose. Oravec testified that he established this account in his name and that he did not know how or who withdrew these funds. Regardless, INB acknowledged that he had invested $85,000 with it. Oravec also traveled with Bae to South Korea before he invested to get a better sense of INB's potential.
Oravec testified that Bae informed him that Israni was investing in INB during their initial discussions, and that his review of the January 2012 Plan further disclosed that Israni was a 40% investor and an advisor to the company. Oravec stated that he knew that Israni had successfully invested in other start-ups. While Plaintiffs’ counsel guided Oravec through various sections of the January 2012 Plan to elicit his understanding of its terms, Oravec stated that he did not crunch any of its numbers before investing or focus on the January 2012 Plan's projections; instead, he was impressed by Israni's involvement and investment, trusted Bae, and believed that Bae's expertise and experience would turn INB into a profitable business.
Kim invested $300,000 in INB in January 2013 for a two percent equity interest in the company. Kim was a circuit design engineer by trade and had no experience in printed circuit board fabrication. Regardless, he was not strictly a passive investor in INB. Bae also owned/controlled Ara Technology, Inc., a South Korean based company that distributed circuit boards and certain raw materials which it purchased from RB Technology. Bae explained to Kim that he wanted to expand Ara Technology's business and use it (as disclosed in the January 2012 Plan) to market INB's product. Bae informed Kim that INB required his full attention and that he needed a CEO for Ara Technology. He offered the position to Kim, with one condition: that he invest $300,000 in INB. Kim accepted these terms and moved to South Korea to assume the CEO position.2 Kim made his investment on January 15, 2013 by depositing $300,000 into RB Technology's HSBC account.
Kim testified that Bae approached him regarding INB in late 2012 and that he reviewed the January 2012 Plan at that time; he invested in INB a few months later. Kim also visited INB's South Korean worksite and saw that work was progressing on its manufacturing plant. Kim had experience drafting business plans, and he understood that the January 2012 Plan's projections may have been overly optimistic. He testified, however, that he was more interested in how its financial projections...
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