In re Lona

• Decision Date: 09 July 2008
• Docket Number: No. 03-53915 RLE.,03-53915 RLE.
• Citation: 393 B.R. 1
• Parties: In re Corrina Curiel LONA, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of California

Page 1

393 B.R. 1

In re Corrina Curiel LONA, Debtor.

No. 03-53915 RLE.

United States Bankruptcy Court, N.D. California, San Jose Division.

July 9, 2008.

COPYRIGHT MATERIAL OMITTED

David V. Duperrault, Silicon Valley Law Group, San Jose, CA, for Debtor.

Charles P. Maher, Luce, Forward, Hamilton and Scripps, San Francisco, CA, for Trustee.

MEMORANDUM DECISION AFTER TRIAL

ROGER L. EFREMSKY, Bankruptcy Judge.

Before the Court for decision is the objection of the debtor Corrina Curiel Lona ("Lona") to the unsecured claim of Jose Abreu, dba Intertel Communications ("Abreu"). Abreu's claim is based on his contention that Lona was an actual or ostensible partner with Timothy Turi ("Turi") in a business called Time Zone Distributing ("Time Zone"). The objection is based on Lona's contention that she was merely an employee of Time Zone and is not responsible for its debts.

The matter has been tried and submitted for decision. Abreu is represented by Stevan C. Adelman of Miller, Morton, Caillat & Nevis, LLP. Lona is represented by David V. Duperrault of the Silicon Valley Law Group. At trial on June 4, 5, 8 and 11, 2007, Abreu offered the testimony of the chapter 7 trustee John Richardson, Eugene Katz and himself. Lona offered the testimony of Timothy Turi, Alvaro Amador, Swan Nguyen, Romulus Bobesku, Mauricio Diaz and Marysol Solorio. Lona declined to testify in her case-in-chief, but testified on rebuttal.

The following constitutes the Court's findings of fact and conclusions of law, pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.

I. PROCEDURAL BACKGROUND

A. Lona Is Not Entitled to a Discharge

Lona filed this chapter 7 case on June 16, 2003. The United States Trustee sued Lona under Bankruptcy Code §§ 727(a)(2)(A), (a)(2)(B), and (a)(4)(A) and the Court has entered an order denying Lona's discharge.

B. Lona Has Standing to Object to Abreu's Claim

On the first day of trial, Abreu's counsel raised a question as to whether Lona had standing to object to Abreu's claim. Under the circumstances of this case, Lona has standing.

Bankruptcy Code § 502 provides that a "claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest ... objects." The term "party in interest" is not defined in the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure, but courts have held that standing in a bankruptcy context requires an "aggrieved person" who is directly and adversely affected pecuniarily by an order of the bankruptcy court. Fondiller v. Robertson (In re Fondiller), 707 F.2d 441, 442-43 (9th Cir.1983) (citations omitted); Licensing by Paolo, Inc. v. Sinatra (In re Gucci), 126 F.3d 380, 388 (2nd Cir.1997).

Generally, a chapter 7 debtor does not have standing to object to claims because the debtor has no interest in the distribution of assets of the estate and therefore, is not an "aggrieved person." There are two recognized exceptions to this general rule: a chapter 7 debtor will have standing where (1) disallowance of a claim will produce a surplus for the debtor; or (2) where a claim will not be discharged. In re Willard, 240 B.R. 664, 668 (Bankr. D.Conn.1999) (citing In re Toms, 229 B.R. 646, 650-51 (Bankr.E.D.Pa.1999)); see also, Menick v. Hoffman, 205 F.2d 365 (9th Cir.1953) (debtor was a "person aggrieved" with standing to challenge disallowance of tax claim where, if tax claim was not paid in bankruptcy, debtor would remain liable for such claim post-discharge).

The chapter 7 trustee testified that as of the trial date, the estate held $133,118 for payment of administrative expenses and unsecured claims, that unsecured claims exceeded $177,000 and that he had not objected to any of the pending claims. Tr. 146:6-147:18; 148:18-149:2. Given that Lona is not entitled to a discharge, if Abreu's claim is allowed, the pro rata share of the funds available to pay unsecured claims will be reduced and Lona will remain personally liable post-bankruptcy for any unpaid balance. As a result, Lona is an "aggrieved person" who is directly and adversely affected by an order of the bankruptcy court and has standing to object to Abreu's claim.

C. Late-filed Trial Briefs

Following the first day of trial, Kathryn Diemer, counsel for Lona's husband, Jonas Lona, offered three briefs to address certain issues regarding standing and the admissibility of evidence.¹ Tr. 225:7-19. The Court declined to accept the briefs for several reasons. Tr. 225:20-23. Nevertheless, the Court resolved each of the issues Ms. Diemer raised and allowed her to act as special counsel to Lona in order to assist Mr. Duperrault throughout trial.²

D. The Parties' Stipulations

For purposes of trial, the parties have stipulated: (1) Abreu is the moving party and has the burden of proof as to whether Lona was an actual or ostensible partner of Turi in Time Zone; and (2) the amount of Abreu's claim is $439,000.

II. FACTUAL BACKGROUND

A. 1994-1997: Turi and Lona Meet, Travel and Form Time Zone as a General Partnership

In 1994, Turi was working as a manager for a company that sold watches at trade shows. Tr. 470:25-471:19. That same year, Lona began to work for the company. Tr. 472:11-25. Turi and Lona worked together at this company until late 1996 or early 1997. Tr. 473:16-474:1. Subsequently, Turi and Lona traveled together to trade shows in Hong Kong, Argentina and the Philippines to explore starting a watch business together. Tr. 474:4-18; 608:20-609:16.

On March 21, 1997, in furtherance of the plan to start a watch business with Lona, Turi filed a Fictitious Business Name Statement ("FBS") to secure the name "Time Zone." Tr. 470:10-11; 474:6-20; 475:15-476:5. The FBS was signed only by Turi and identified the business as a general partnership with Turi and Lona as the general partners. Ex. 1; Tr. 607:13-608:2. Turi testified that Lona did not know he had put her name on the FBS, and had not authorized the use of her name. Tr. 475:8-17.

While it is unclear when the relationship started, how long it lasted, or whether it continued at the time of trial, during the time period relevant to this matter, Lona and Turi had a romantic relationship. Tr. 480:12-481:17.

B. Time Zone's Pre-Paid Phone Card Business

Time Zone began selling pre-paid phone cards in 1998. Tr. 456:16-23. Time Zone purchased phone cards from distributors such as Abreu and sold them to convenience stores which then resold them. Time Zone's profit was a percentage of the face-amount of each card. For example, Time Zone would buy a $10 phone card for 65% of its face value, or for $6.50. The convenience store that sold the phone card would keep 25% of the $10 purchase price. Time Zone's profit was the remaining 10% of the $10 purchase price. Tr. 458:14-459:19.

C. 1998-2001: Lona's Role at Time Zone

Turi testified that he hired Lona in late 1998 to assist him with opening accounts at the convenience stores. Tr. 461:23-462:7. In 1999, Time Zone also began selling phone cards to other phone card distributors. Tr. 483:23-484:2. Lona had authority to begin relationships with these distributors. Tr. 485:6-25. In 2001, Lona worked full time running the Time Zone office while Turi and various drivers distributed phone cards to the convenience stores. Tr. 480:1-11; 481:24-483:7; 484:10-22; 485:6-16; 713:3-5.

Turi testified that he viewed Lona as an independent contractor and he paid her $150 per day plus a commission of approximately half percent of whatever she sold to distributors who came to the office to pick up phone cards. Tr. 462:11-464:8; 488:1-7; 617:4-14; 618:6-25. Turi further testified that in 2001, he was paid approximately $36,000 from Time Zone while Lona was paid $78,000. Tr. 650:15-23; 652:24-653:9. Turi testified that the $78,000 that Lona received was salary plus commissions and was not from the profits of the business itself. Tr. 487:17-488:7; 617:10-11; 653:9-16. He also testified that he never gave her a W-2, a W-4, or a 1099 form and never filed payroll tax returns or withheld social security taxes. Tr. 617:14-619:6.

Lona testified that during the period relevant to this matter she ran the Time Zone office on a full-time basis and also did interior decorating and landscaping on a part-time basis. Tr. 709:18-21; 713:3-5; 729:12-17. Lona testified that her amended federal tax return for 2001 showed $400,000 in income for herself and her husband, that her husband's salary was approximately $45,000, and that Lona received $78,000 from Time Zone. Tr. 709:15-710:2. Lona testified that while she worked full-time at Time Zone, and her husband's "main" job was as a mechanic for Monterey Mushroom, they earned more than $277,000 from their side-jobs. Tr. 709:18-710:5; 711:9-19; 712;23-713:7; 729:12-21.

Lona's testimony regarding her income was confusing, contradictory and inconsistent. Tr. 709:15-740:25. No tax returns, W-2s, 1099s or similar documents were offered in evidence. In addition, Lona was convicted of felony tax evasion — apparently for years relevant to this matter. Tr. 708:20-709:1.

D. Abreu's Business with Time Zone

Between January and December 2001, Abreu sold approximately $5 million worth of phone cards to Time Zone (with an approximate retail value of $7 million). Tr. 24:12-14; Ex. S-1. Initially, Abreu accepted Time Zone checks for payment and normal payment terms were 2 weeks. Tr. 31:8-14; 33:18. In late January 2001, a Time Zone check for $57,000 was returned for insufficient funds and Abreu thereafter required Time Zone to pay with cash or third-party checks written to Time Zone by its convenience store customers. Tr. 31:14-32:3. Despite this change in terms, Time Zone continued to fall behind in its payments. Ex. S-1.

Abreu testified that he first met Lona in March 2001. Tr. 26:9-10; 253:23-255:16. Lona testified that this first meeting was in May 2001. Tr. 705:9-17. According to Abreu, at their very first meeting Lona told Abreu that she and Turi had previously...