In re Kakde

• Decision Date: 08 February 2008
• Docket Number: Bankruptcy No. 05-33193.,Adversary No. 05-3296.
• Citation: 382 B.R. 411
• Parties: In re Suhas S. KAKDE, Debtor. Buckeye Retirement Co., LLC, Ltd., Plaintiff. v. Suhas S. Kakde, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

382 B.R. 411

In re Suhas S. KAKDE, Debtor Buckeye Retirement Co., LLC, Ltd., Plaintiff. v. Suhas S. Kakde, Defendant.

Bankruptcy No. 05-33193.

Adversary No. 05-3296.

United States Bankruptcy Court, S.D. Ohio, Western. Division at Dayton.

February 8, 2008.

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James C. Carpenter, Vincent I. Holzhall, Carpenter Lane, LLC, Justin W. Ristau, Bricker & Eckler LLP, Columbus, OH, for Plaintiff.

John Paul Rieser, Patricia J Friesinger, Rieser & Associates LLC, Dayton, OH, for Defendant.

DECISION DETERMINING DEBT TO BE DISCHARGEABLE

LAWRENCE S. WALTER, Bankruptcy Judge.

The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and the standing General Order of Reference in this District. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).

This matter is before the court on the Complaint Objecting to Dischargeability of Debt and Seeking Denial of Debtor's Discharge filed by Plaintiff Buckeye Retirement Co., L.L.C., Ltd. ("Buckeye") [Adv. Doc. 1] and the Answer filed by Defendant Suhas S. Kakde ("Mr. Kakde") [Adv. Doc. 6]. Having abandoned its numerous counts pertaining to denial of discharge under 11 U.S.C. § 727(a), Buckeye proceeded on two nondischargeability counts pursuant to 11 U.S.C. § 523(a)(2)(B) and (4) seeking to deny discharge of the debt owdd by Mr. Kakde to Buckeye as assignee of Provident Bank ("Provident"). Buckeye essentially alleges that Mr. Kakde facilitated loan advances to his corporation, U.S. Aeroteam, Inc. ("USAT"), by intentionally or recklessly submitting to Provident certain false and misleading borrowing base certificates. Based on roughly the same facts, Burekeye alleges that Mr. Kakde breached his fiduciary duty to creditors of USAT.

Following a rancorous pretrial period characterized by an inordinate number of contested issues and discovery disputes, the matter finally proceeded to trial on June 27, 2007. The court has carefully considered and weighed the testimony of the witnesses, the exhibits admitted into evidence, and the post-trial briefs submitted by the parties. The following decision constitutes the court's findings of fact and conclusions of law in accordance with Fed., R. Bankr.P. 7052.

FINDINGS OF FACT

Mr. Kakde was the president, chief executive officer, and majority shareholder of USAT. On or about November 2, 2000, USAT and Provident entered into an asset-based secured revolving loan transaction. ("Loan") with a credit limit of the lesser of $2,500,000.00 or a variable borrowing base amount derived from a formula of 50% of eligible inventory and 85% of eligible accounts receivable ("Borrowing Base"). Provident's Loan was secured by USAT's inventory and receivables, a security interest having first priority by virtue of a subordination agreement with UPS Capital Business Credit fka First International Bank which otherwise held a first priority security interest in substantially all of USAT's assets. Mr. Kakde executed a guarantee of USAT's obligations under the Loan.¹

In accordance with the Loan requirements, USAT periodically presented financial statements and collateral reports to Provident. Detailed receivables reports known as Borrowing Base Certificates were generally prepared and faxed to Provident each day ("Borrowing Base Certificates")² These Borrowing Base Certificates were prepared by USAT's accounting staff and were usually signed by John Busch ("Mr. Busch"), the chief financial officer for USAT, or by his assistant. Mr. Kakde, as president and CEO, was generally cognizant of financial matters affecting USAT, but he left all of the details to Mr. Busch in whom he had complete confidence. However, on at least one occasion, Mr. Kakde did sign a Borrowing Base Certificate.³ Provident made periodic advances to USAT under the Loan, with maximum amounts adjusted in accordance with the Borrowing Base.

By early January of 2002, USAT was in default on its Loan with Provident and was consistently in default under various Loan covenants thereafter. In May of 2002, the Loan was transferred to the Special Assets Department of Provident, the department specializing in close monitoring of defaulted or troubled loans. USAT's pattern of profitability and cash flow during 2002 and 2003 was irregular and during that period Mr. Kakde made a concerted effort to accommodate Provident's concerns and to maintain the viability of the company. Among other things, he subordinated his capital contributions, liquidated and contributed his retirement account to USAT, induced a close friend to pledge $455,000 as additional collateral, acquiesced to management and workout consultants suggested by Provident, and worked diligently to find alternative financing to pay off Provident.⁴ Reciprocally, Provident did not accelerate the Loan and continued to fund the credit line, sometimes approving payment of specific checks despite an "out of formula"⁵ situation.

Originally, USAT had been exclusively a manufacturer for the aerospace industry, a business that had been negatively impacted by the terrorist incidents of September 11, 2001, but the company's ultimate demise was precipitated by its diversification into the automotive industry. USAT, had been induced by Delphi Automotive Systems, LLC' ("Delphi") to invest considerable resources, including funds contributed by Mr. Kakde, into a manufacturing relationship by which USAT would manufacture parts for Delphi's affiliates and ultimately for General Motors. Delphi eventually became USAT's primary customer, accounting for up to 60% of its business.⁶ Significant contract cancellations by Delphi precipitated a financial crisis for USAT.

Delphi's first major contract cancellation occurred in December of 2002 resulting in a $200,000.00 termination payment to USAT, a circumstance that wag promptly reported to Provident and accounted for in routine Borrowing Base Certificates. A more devastating cancellation, affecting a contract referred to as the Saginaw Steering Order ("Saginaw Cancellation"), occurred in June of 2003 and threatened to put USAT out of business altogether. The Saginaw Steering Order had been the cornerstone of what had been anticipated to be a venture producing several million dollars per year in revenue. This cancellation and its concomitant setoff issues were likewise promptly reported to Provident. Mr. Kakde and his staff realistically anticipated recovering more than $2,000,000.00 in termination damages from Delphi for the Saginaw Cancellation. When months of negotiations with Delphi produced no more than a final offer from Delphi of $750,000.00,⁷ and ongoing efforts to secure alternative financing were unfruitful, USAT had only one viable alternative. It filed for chapter 11 bankruptcy relief on December 24, 2003. On December 30, 2003, Provident obtained judgment against Mr. Kakde on his guaranty in the principal sum of $2,030,632:87 plus interest. Provident assigned its interest in the USAT Loan and the judgment against Mr. Kakde to Buckeye on December 16, 2004 and Mr. Kakde filed his personal bankruptcy on April 6, 2005.

Shortly after Delphi notified USAT of the Saginaw Cancellation in June of 2003, Mr. Kakde and USAT began consulting with Thomas Noland, an experienced chapter 11 bankruptcy attorney. Recognizing that, in the absence of a reasonable agreement with Delphi, the Saginaw Cancellation (together with related contract cancellations and setoffs) would likely make it impossible for USAT to survive, Mr. Kakde directed Mr. Noland to prepare all necessary paperwork by July 28, 2003 to enable the company to file for chapter 11 relief. In the context of this financial emergency and imminent bankruptcy filing, Mr. Noland and his staff met with USAT representatives, including Mr. Kakde and Mr. Busch, on July 31, 2003. At this meeting, among other things discussed, Mr. Noland recommended that USAT open a depositary account at a bank other than Provident, the existence of which was not to be disclosed to Provident. According to Mr. Noland, the separate account, although clearly a violation of the Loan covenants, was necessary to preserve USAT's ability to effectively file a chapter 11 case in the event Provident, upon being informed of USAT's bankruptcy plans, opted to freeze all of the company's accounts and, contest the company's use of cash collateral. In Mr. Noland's experience, Provident had a propensity for such uncooperative behavior which he described as "draconian." However, Mr. Noland did not advise USAT as to the source of the funds to be deposited in the new account and did not direct anyone to spend the funds or to falsify Borrowing Base Certificates as a means of keeping the account secret.

The new account was promptly opened at Bank One ("Bank One Account"), but its raison d'êetre, the imminent bankruptcy filing, was delayed for several months as Mr. Kakde negotiated with Delphi and continued to seek alternative financing. Funding of the Bank One Account, and shielding it from disclosure, was left to Mr. Busch. Funding was primarily accomplished by simply depositing receivables payments into the Bank One Account rather than forwarding them to the Provident lock box as required by the Loan documents. Nondisclosure was ensured by deliberately failing to report those receipts and instead continuing to show them as outstanding receivables on the Borrowing Base Certificates submitted to Provident. Also deposited into the Bank One Account were USAT's 2002 tax refund in the amount of $43,499.00 and a $200,000.00 payment from Borg Warner in settlement of litigation.

From August until mid-December of 2003, USAT used some funds from the Bank One Account to pay selected accounts payable. It was also Mr. Busch's practice to remit back to Provident from the Bank One Account sufficient funds to cover any reported (but actually collected) receivable that neared the 90-day outstanding date that...