In re Advanced Modular Power Systems, Inc.

• Decision Date: 16 September 2009
• Docket Number: Adversary No. 08-03177.,Bankruptcy No. 07-34646-H4-7.
• Citation: 413 B.R. 643
• Parties: In re ADVANCED MODULAR POWER SYSTEMS, INC., Debtor. William G. West, Trustee, Plaintiff, v. David Hsu, individually and as agent for Information and Computing Technology, Inc., and Information and Computing Technology, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Texas

Page 643

413 B.R. 643

In re ADVANCED MODULAR POWER SYSTEMS, INC., Debtor.

William G. West, Trustee, Plaintiff, v. David Hsu, individually and as agent for Information and Computing Technology, Inc., and Information and Computing Technology, Inc., Defendants.

Bankruptcy No. 07-34646-H4-7.

Adversary No. 08-03177.

United States Bankruptcy Court, S.D. Texas, Houston Division.

September 16, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Jason Barnes Keith, Waldron & Schneider LLP, Houston, TX, Marc H. Schneider, Waldron Schneider LLP, Houston, TX, for Plaintiff.

Jeffrey Wayne Glass, Attorney at Law, Houston, TX, for Defendants.

AMENDED MEMORANDUM OPINION ON THE TRUSTEE'S FIRST AMENDED ORIGINAL COMPLAINT FOR TURNOVER OF PROPERTY OF THE ESTATE, BREACH OF FIDUCIARY DUTY, USURPATION OF CORPORATE OPPORTUNITY, AND ALTER EGO¹

[Docket Nos. 34 & 43]²

JEFF BOHM, Bankruptcy Judge.

I. INTRODUCTION

In the suit at bar, the Chapter 7 Trustee, William G. West (West or the Plaintiff or the Trustee), brings this adversary proceeding against: (a) David Hsu (Hsu), individually and as an agent for Information and Computing Technology, Inc. (ICT); (b) ICT; and (c) A.M. Power Services, Inc. (the Defendants, collectively). The Trustee alleges eight separate causes of action; (1) Pursuant to 11 U.S.C. § 541 and § 542: Turnover of property of the estate; (2) Conversion of estate assets; (3) Pursuant to 11 U.S.C. § 549 and § 550: Post-petition transfers; (4) Breach of fiduciary duty; (5) Pursuant to 11 U.S.C. § 548: Fraudulent transfer under the Bankruptcy Code; (6) Pursuant to Tex. Bus. & Com. Code Ann. § 24.001, et seq: Fraudulent transfer under state law; (7) Pursuant to 11 U.S.C. § 510(c): Equitable subordination; and (8) Usurpation of business opportunities.

The Trustee requests that this Court order the Defendants to turn over all payments and other assets identified as belonging to the bankruptcy estate and order the Defendants to make a detailed accounting of, and provide access to, all books and records of Hsu's non-debtor entity known as American Mobile Power Services, Inc. (AMP Services).

After considering the arguments, pleadings of the parties, testimony adduced at trial, and the evidence admitted, the Court now makes its written findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014.³ To the extent that any finding of fact is construed as a conclusion of law, it is adopted as such. Moreover, to the extent that any conclusion of law is construed as a finding of fact, it is adopted as such. The Court reserves its right to make additional findings of fact and conclusions of law as it deems appropriate or as may be requested by any of the parties.

II. FINDINGS OF FACT

1. The debtor entity, Advanced Modular Power Systems, Inc. (the Debtor or AMPS), was a Texas corporation, formed on April 11, 1996, which manufactured and sold hydraulic generators in the OEM market in the fire industry.⁴

2. Hsu owns and controls ICT. [Tape Recording, 7/9/09 Trial at 10:52.] ICT owned 75% of AMPS, and Gary McCann (McCann) owned the remaining 25% interest. [Tape Recording, 7/9/09 Trial at 10:56.] Therefore, the Defendants had access, knowledge, and ability to influence the operations of the Debtor.

3. Gene Edward Inman (Inman), AMPS's Chief Financial Officer, together with McCann, managed the day-to-day operations of AMPS. [Tape Recording, 7/9/09 Trial at 3:56]; [Pl.'s Ex. 4]; [Tape Recording, 7/9/09 Trial at 10:58].

4. On February 19, 2002, Merrill Lynch Business Financial Services Inc. (Merrill Lynch), a creditor in the main bankruptcy case, provided a loan to AMPS of approximately $900,000.00. [Case No. 07-34646, Docket No. 1, Schedule D— Creditors Holding Secured Claims.]

5. By late 2006, AMPS's generator sales had substantially declined. [Tape Recording, 7/9/09 Trial at 11:01, 3:57.] This decline in sales caused or contributed to conflicts among the owners, directors, and managers of AMPS, including, but not limited to, disagreements between Hsu, on the one hand, and McCann and Inman, on the other. [Tape Recording, 7/9/09 Trial at 11:01.]

6. By the time AMPS filed its bankruptcy petition, AMPS's service business was the only viable division of AMPS because the decline in generator sales eliminated the sales aspect of AMPS's business. [Tape Recording, Trial 7/9/09 at 11:01, 3:58.]

7. In January 2007, Hsu, as an officer and director of AMPS and ICT, terminated Inman and McCann and began managing AMPS's operations himself. [Tape Recording, 7/9/09 Trial at 10:58, 3:56.]

8. On February 20, 2007, Hsu incorporated a new business by the name of: AMP Services.⁵ [Pl.'s Ex. 7.] The incorporation papers filed with the Texas Secretary of State list Junying Lu (Lu) as a Registered Agent/Officer. [Pl.'s Ex. 7.] On November 24, 2008, Lu resigned as a registered agent. [Pl.'s Ex. 8.] At some point, Hsu offered an ownership interest in AMP Services to Lu, but Lu did not accept any stock in AMP Services. [Tape Recording, 7/9/09 Trial at 11:06.] Therefore, Hsu is the sole shareholder of AMP Services. [Tape Recording, 7/9/09 Trial at 11:05.] The 2008 tax return for AMP Services falsely listed David Rose and Lu as the owners of AMP Services. [Tape Recording, 7/9/09 Trial at 11:08]; [Pl.'s Ex. 66, p. 3].

9. Shortly after the incorporation of AMP Services, the Defendants assumed and exercised control over the AMPS's service business and AMPS's related telephone number, name, acronym, customer information and customer lists, address, vendor information, and competitive advantages in the forms of goodwill and specialized knowledge (AMPS's Assets). [Tape Recording, 7/9/09 Trial at 11:41, 2:35.] The address set forth in the Certificate of Formation for AMP Services filed with the Texas Secretary of State is 13013 Jess Pirtle Blvd., Sugar Land, Texas 77478. [Pl.'s Ex. 7.] This is the same address as set forth in the Chapter 7 petition signed by Hsu and filed with this Court on July 10, 2007. [Pl.'s Ex. 1.]

10. When the Debtor filed its bankruptcy petition, its operations had essentially ceased. [Tape Recording, 7/10/09 Trial at 1:06.]

11. Once AMP Services was established and after AMPS filed its bankruptcy petition, AMP Services sent a letter to many of AMPS's customers referring to the reorganization of AMPS. [Pl.'s Ex. 2.] The Defendants contacted customers of AMPS to indicate that the formation of AMP Services would provide the same services previously available through AMPS. [Pl.'s Ex. 2.]

12. On July 10, 2007 (the Petition Date), Hsu, as a director and the President of AMPS, filed a voluntary Chapter 7 bankruptcy petition on AMPS's behalf. [Case No. 07-34646, Docket No. 1.]

13. On July 25, 2007, AMP Services issued an invoice to a customer of AMPS for generator services. [Pl.'s Ex. No. 3.]

14. After July 10, 2007, neither this Court nor the Trustee authorized any transfers of property out of the Debtor's bankruptcy estate.

15. On the Petition Date, the United States Trustee, pursuant to 11 U.S.C. § 701, appointed West as the interim Trustee for the case. On August 15, 2007, at the meeting of creditors, West became the permanent Trustee for the case under 11 U.S.C. § 702.

16. On the Petition Date, the Debtor had over $1,500,000.00 in debts, including a secured loan from Merrill Lynch with a balance owing of approximately $900,000.00. [Case No. 07-34646, Docket No. 1, Summary of Schedules]; [Tape Recording, 7/10/09 Trial at 1:09].

17. On the Petition Date, the Debtor had tangible assets with little or no value. [Tape Recording, 7/10/09 Trial at 1:09.]

18. From September 2007 to January 2008, AMP Services received checks totaling $30,717.91, which were made payable to AMPS for services rendered post-petition. [Pl.'s Ex. 14-22.] Invoice dates ranged from July 25, 2007 to December 21, 2007. [Pl.'s Ex. 14-22.] AMP Services fulfilled orders from customers of AMPS, and AMP Services also purchased equipment needed for the continued operation of AMP Services. [Pl.'s Ex. 25, 27-47.] These post-petition transactions began on July 25, 2007 and continued until January 2008. [Pl.'s Ex. 14-25, 27-47.] For example, on July 25, 2007, AMP Services issued an invoice to a customer of AMPS for generator services. [Pl.'s Ex, No. 3.]

19. In February of 2008, Hsu, individually, and as agent of ICT, hired a cleaning crew to remove AMPS's records that remained in the leased space once used for its business, and this cleaning crew thereafter disposed of twenty to thirty boxes of AMPS's documents that were in the building. [Tape Recording, 7/9/09 Trial at 9:14.]

20. On May 28, 2008, the Trustee, on behalf of the Debtor's estate, filed a "Complaint for Turnover of Property of the Estate, Breach of Fiduciary Duty, Usurpation of Corporate Opportunity, and Alter Ego" (the Complaint) initiating this adversary proceeding to recover certain property, or its equivalent value, belonging to the estate. [Docket No. 1.]

21. On May 29, 2008, this Court issued a Comprehensive Scheduling, Pretrial, and Trial Order. On October 14, 2008, this Court signed an Agreed Order on Joint Motion to Enter into a New Scheduling Order (the Scheduling Order) setting April 23, 2009 as the deadline for discovery. [Docket No. 14.]

22. On March 13, 2009, AMP Services filed Form 1120 U.S. Corporation Income Tax Return with the Internal Revenue Service for the fiscal year ending December 31, 2007. [Pl.'s Ex. No. 66, p. 7.] In this tax return, AMP Services reported gross profits of $134,056.00 and the following expense deductions: Salary & Wages, $32,803.00; Repairs & Maintenance, $338.00; Rent, $6,700.00; Taxes & Licenses, $9,232.00; and other miscellaneous expenses of $33,554.00. [Pl.'s Ex. No. 66, p. 7.] There were no...