In re Aoki
| Decision Date | 04 April 2005 |
| Docket Number | Bankruptcy No. 03-41386-JBR.,BAP No. MW 04-029.,Adversary No. 03-4164. |
| Citation | 323 B.R. 803 |
| Court | U.S. Bankruptcy Appellate Panel, First Circuit |
| Parties | Henry AOKI and Kay Aoki, Debtors. Henry Aoki and Kay Aoki, Appellants, v. Atto Corporation, Appellee. |
Brian J. McAuliffe, Hampstead & Associates, L.C., on brief for Appellants.
Sabin Willett, Aaron M. Wais, Bingham McCutchen LLP, Boston, MA, on brief for Appellee.
Before VOTOLATO, DEASY and KORNREICH, United States Bankruptcy Appellate Panel Judges.
This matter is on appeal from an order of the bankruptcy court (1) denying a discharge to the debtors pursuant to 11 U.S.C. § 727(a)(5), and (2) finding the debt owed to Atto Corporation to be nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). On appeal, the debtors challenge: (1) the bankruptcy court's decision to pierce the corporate veil of Byroma Engineering, Inc., to hold the debtors personally liable for the corporation's debts; (2) the bankruptcy court's determination that the debt owed to Atto Corporation was nondischargeable in the individual debtors' bankruptcy case pursuant to 11 U.S.C. § 523(a)(2)(A); and (3) the bankruptcy court's denial of discharge to the individual debtors pursuant to 11 U.S.C. § 727(a)(5). For the reasons stated below, we AFFIRM the decisions of the bankruptcy court.
The appellants, Henry and Kay Aoki (collectively, the "Aokis"), are Chapter 7 debtors and residents of Massachusetts. Mr. Aoki has two daughters, Kazuko Kuboyama and Noriko Takayama, who live in Japan. Mr. Aoki has invented a technology used to extract into liquid form the "aroma essence" of organic materials ("Extract"). This process is known as the "Byroma Extraction Device."1 The Aokis claim that the Extract has beneficial medicinal effects.
The appellee, Atto Corporation, is a Japanese corporation headquartered in Tokyo, Japan, which manufactures and markets bio-technologies in Japan. Mr. Shigemitsu Yamada is the founder and president of Atto Corporation.
Over the years, the Aokis have incorporated seven different corporations in Massachusetts, including Byroma Engineering, Inc. ("Byroma"). The Aokis are the sole shareholders, officers and directors of each corporation, with the exception of Byroma Soft, Ltd., the shares of which are entirely owned by Mr. Aoki's daughter, Kazuko Kuboyama. Atto Corporation claims that the Aokis used these corporate vehicles to carry out a common fraudulent scheme as follows: (1) the Aokis made claims to Japanese investors as to the medicinal value and popularity of the Extract and the readiness of the Extraction Device for marketing and sale; (2) investments were then made in reliance upon the Aokis' representations; and (3) the Aokis then quickly moved the invested money to personal and family accounts. Thereafter, when the victim of the fraud developed concerns and litigation ensued, the Aokis used a new corporation to target their next victim.
Atto Corporation identifies two other Japanese companies who were allegedly victims of the Aokis' fraudulent scheme. First, in 1997, the Aokis, through Big Beans, Inc., entered into an agreement with a Japanese corporation, Koujikan, whereby Koujikan agreed to pay approximately 30 million yen (approximately $271,000) for a license to sell the Extract in Japan. Shortly thereafter, a contract dispute ensued and Koujikan sued Big Beans, Inc. in Japan and was awarded a default judgment. After the Koujikan litigation began, the Aokis ceased conducting business through Big Beans, Inc. and incorporated Bio Aroma Corporation.
Next, in 1998, the Aokis, through Bio Aroma Corporation, entered into another licensing agreement for the Extract with another Japanese company, Nihon Kensui, pursuant to which Nihon Kensui paid a deposit of 120-140 million yen for the license and bottles of Extract. Nihon Kensui subsequently initiated a lawsuit against Bio Aroma Corporation and the Aokis in the United States District Court for the District of Massachusetts alleging fraud, and a default judgment was entered against Bio Aroma Corporation and the Aokis. After the Nihon Kensui litigation began, the Aokis ceased conducting business through Bio Aroma Corporation and incorporated Byroma Engineering, Inc. ("Byroma") on August 17, 1999.2
On April 28, 2000, the Aokis, on behalf of Byroma, entered into a Non-Exclusive Agency Agreement with Wada Invention Information Center, Inc. of Japan for the solicitation and negotiation of contracts with potential licensees for the manufacture and sale of the Byroma Extraction System. Mr. Teruo Wada, a Japanese citizen residing in Tokyo, was the president of Wada Invention Information Center, Inc. of Japan.
In or about February 2000, Mr. Wada met with Mr. Yamada, founder and president of Atto Corporation, about the Extraction Device and Extract. Thereafter, Mr. Yamada traveled with Mr. Wada to meet with the Aokis in Massachusetts. Between April 27, 2000 and May 1, 2000, Mr. Yamada met with the Aokis and Mr. Wada at Byroma's offices and the Aokis' home in Acton, Massachusetts to discuss a possible licensing venture for the Extraction Device.
During negotiations, Mr. Aoki represented that the Extraction Device was a fully functioning product with a ready market, and Byroma could and would deliver functioning Extraction Devices and blueprints for building more Extraction Devices so that Atto Corporation could manufacture and sell the Extraction Device in Japan.3 Mr. Yamada testified that although he had some concerns about the venture, "Mr. Aoki demonstrated the wonderful personality of the traditional Japanese spirituality... it's a Samurai spirit." Impressed by Mr. Aoki's "value of Samurai spirit," the main characteristic of which is "to keep one's promise," Mr. Yamada agreed to enter a licensing venture with Byroma.
On April 29, 2000, Byroma and Atto Corporation entered into a Licensing Agreement granting Atto Corporation the non-exclusive right to manufacture and sell medium-sized Byroma Extraction Devices in Japan.4 Pursuant to the Licensing Agreement, Atto Corporation was to begin business in Japan by initially importing four Extraction Devices to be built and delivered by Byroma. Mr. Aoki represented to Mr. Yamada that the first two units would be completed by the end of August 2000. In the interim, the Licensing Agreement required Byroma to complete the blueprints and design detail for the "Japanese models." Mr. Yamada claims that Mr. Aoki also told him that he would supply 3,000 marketing brochures for marketing of the Extraction Device in Japan, and that he would send an engineer to Japan to teach Atto Corporation how to build the Extraction Devices.
Pursuant to the Licensing Agreement, Atto Corporation made three payments totaling approximately $1,294,000 (100 million yen) to Byroma in May 2000. Atto Corporation claims that these funds were immediately diverted to the Aokis' other companies, for their personal use and to Mr. Aoki's daughters. The Aokis claim that Atto Corporation's payment to Byroma was a non-refundable deposit under the terms of the Licensing Agreement, and that Byroma was entitled to use the funds in any manner it saw fit. Moreover, the Aokis claim that the monies were used for legitimate purposes, including payment of Byroma's expenses, professional fees, intercorporate loans and pursuit of other business ventures. By the end of June 2000, more than $800,000 of these funds had been transferred out of Byroma's accounts.
The parties disagree as to what happened next. Atto Corporation claims that Byroma breached the Licensing Agreement first, by failing to perform its obligations under the Licensing Agreement. According to Atto Corporation, despite Atto's $1.2 million investment, Byroma did not commence construction of any of the Extraction Devices, nor did it place any orders with its subcontractor, Product Insight, for the construction of any Extraction Devices. Moreover, Byroma did not create any blueprints for the Japanese model of the Extraction Device, did not send Atto Corporation any brochures for marketing the Extraction Device in Japan, or send studies regarding the alleged human trials of the Extract's efficiency, as required under the Licensing Agreement. Mr. Yamada testified that he contacted Mr. Aoki numerous times to inquire about the status of the Extraction Devices, but the Aokis became "unreachable."
The Aokis claim, however, that they did place orders with Product Insight for the construction of the four Extraction Devices purchased by Atto Corporation,5 and that by August 2000, two units were completed and ready for shipment to Japan. However, around that time, they discovered that Atto Corporation was attempting to disassemble and reverse engineer the Extraction Device in direct violation of Byroma's patent rights and, therefore, they refused to ship any units to Japan. The Aokis claim that Atto Corporation's actions constituted a breach of the Licensing Agreement.
By letter dated September 12, 2000, the Aokis' attorney, Michael Katin, advised Atto Corporation that Byroma was invoking its right to terminate the May 9, 2000 order for Extraction Devices due to Atto's alleged violation of Byroma's copyright. The letter also asserted that the Aokis were unwilling to provide Atto Corporation with the Extraction Device because they were afraid Atto Corporation would "reverse engineer it." Thereafter, Atto Corporation and Attorney Katin engaged in a flurry of correspondence. Unable to resolve the matter, Atto Corporation refused to pay the first installment of the remaining contract fees due on September 29, 2000, and Byroma promptly terminated all remaining agreements with Atto Corporation.
On April 12, 2001, Atto Corporation filed suit against the...
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