In re Nelson, Bap No. CC-09-1016 PaRMo (B.A.P. 9th Cir. 8/27/2009)
| Decision Date | 27 August 2009 |
| Docket Number | Adv. No. SV-07-01014-MT.,Bap No. CC-09-1016 PaRMo.,Bk. No. SV-06-11455-MT. |
| Parties | In re: MARK NELSON and KIMBERLY NELSON, Debtors. MARK NELSON and KIMBERLY NELSON, Appellants, v. UNION BANK OF CALIFORNIA, Appellee. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Appeal from the United States Bankruptcy Court for the Central District of California; Hon. Maureen T. Tighe, United States Bankruptcy Judge, Presiding.
Before: PAPPAS, RIEGLE2 and MONTALI, Bankruptcy Judges.
Chapter 73 debtors Mark Nelson ("Nelson") and Kimberly Nelson ("Mrs. Nelson" and, collectively, "Nelsons") appeal the judgment of the bankruptcy court determining that the debt they owe to Union Bank of California ("UBOC") is excepted from discharge under § 523(a)(4). We AFFIRM.
Nelsons are the sole shareholders, officers and directors of Imperial Chair Components, Inc. ("Imperial"). Imperial, a California corporation, engaged in importing and distributing engineered furniture components. Nelson alleges that, at its height, Imperial serviced 80 percent of the United States arm chair market, equivalent to 40,000 chairs a week in production.
On June 24, 2004, Imperial executed a Trade Finance Agreement and Trade Promissory Note in favor of UBOC (the "Agreement"). Under the Agreement, UBOC agreed to extend a Trade Finance Credit Facility to Imperial in the principal amount of $2 million (the "Loan"). At the time of executing the Loan, Imperial used approximately $1.85 million to pay off its prior lender, Bank of the West.
The Agreement provided that UBOC would advance sums to Imperial to purchase inventory from overseas vendors. The advances would be paid directly to vendors upon confirmation of clearance from U.S. customs. Within 120 days of each advance, Imperial was required to repay the advanced funds to UBOC from the receipt of accounts receivable from the sale of the inventory for which the advance was made. Imperial agreed to repay the entire principal amount plus interest upon the maturity of the Loan. UBOC was Imperial's only term creditor, and the amounts owed to UBOC accounted for essentially all of Imperial's debts.
Imperial executed a Security Agreement on June 24, 2004, to secure the Loan with all of Imperial's personal property. The same day Nelsons executed unconditional guarantees of Imperial's obligations under the Loan. Nelsons also executed Subordination Agreements, agreeing that any debt owed by Imperial to Nelsons would be subordinated to, and be paid after, the debt owed by Imperial to UBOC under the terms of the Loan.
From June 24, 2004, through November 28, 2005, Nelsons allege that they infused $1,269,818.35 of their personal funds into Imperial, and that they paid $396,127.19 of Imperial's business expenses from their personal accounts, for a total contribution of $1,665,945.54. There are no loan or other agreements in the record supporting these contributions, and Nelson admitted in his response to interrogatories that he had no such documents.
Beginning in September 2004, UBOC issued several trade advances totaling approximately $250,000 to an Asian vendor on behalf of Imperial for its purchase of certain chair pads (the "New Inventory"). The New Inventory was needed by Imperial to fulfill an order for chairs from one of its customer, Steelcase, Inc., a major office products supplier. The advances were set to mature starting on January 27, 2005.
On January 18, 2005, Nelson contacted Mark Brutto ("Brutto"), the loan officer responsible for Imperial's accounts at UBOC. Nelson informed Brutto that Steelcase had reported there were latent defects in the New Inventory in that the chair pads secreted an offensive odor, and that Steelcase would not pay for the New Inventory. Given this development, Nelson told Brutto Imperial would be forced to take a writeoff of approximately $ 180,000. In addition to discussing the New Inventory problem at this meeting, Nelson and Brutto also spoke about Imperial's insufficient cash flow to pay the advances. Nelson proposed reducing the Loan from $2 million to $1.8 million, and sought an additional term loan from UBOC of $350,000 for two years to pay off the New Inventory advances and for other projects.
UBOC rejected Imperial's request for the additional term loan, but extended the time to repay the advances on the New Inventory to February 20, 2005. And, on or about February 5, 2005, UBOC downgraded its risk grade on the Loan and reassigned the Imperial account to Salvador Lopez ("Lopez") of UBOC's special assets division ("SAD").
Imperial failed to repay the advances on the New Inventory on the maturity date of February 20, 2005, or at any time thereafter. Consequently, as of that date, Imperial was in default on the Loan, and, under the terms of the loan agreement, the full amount of the loan, $1,994,928, plus interest and costs, was due and payable in full.
As of April 20, 2005, Nelsons had not been able to refinance their property and infuse cash into Imperial because the loan-to-value ratio on their property was too high and Nelsons had poor credit scores. Nelsons requested that UBOC forebear from exercising their remedies under the Loan agreement until May 31, 2005, to allow Nelsons additional time to infuse cash into Imperial. UBOC continued to forebear by allowing Imperial to use its limited cash flow to pay down some old advances and permitting additional advances on the credit line, provided that the total indebtedness did not exceed the $2 million line.
As of May 31, 2005, Imperial and Nelsons had been unable to pay the advances or pay down the loan. On June 6, 2005, UBOC charged off the majority of the Loan, based on Imperial's "weak cash flow, insufficient collateral coverage and losses from the write-downs of defective inventory resulting in serious liquidity issues."
During this time, Nelson was in negotiation with various asset-based lenders. Lopez testified that he spoke with Richard Gilbert of BFI Business Finance, an asset-based lender that was considering a possible line of credit of $1 million for Imperial. Gilbert sent Lopez a copy of an unsigned proposal addressed to Imperial on December 8, 2005. The negotiations between BFI and Imperial were unsuccessful.
On January 23, 2006, and for the next several months, Lopez and Nelson discussed Nelsons' continuing efforts to pay down the Loan and their joint efforts at a workout agreement. However, on April 28, 2006, Lopez informed Nelson that there had been too many delays. Nelson allegedly told Lopez that he would "do his best" to close with an asset-based lender by May 31, 2006, but Imperial did not pay down the Loan by the May 31, 2006 deadline.
On June 22, 2006, UBOC filed a complaint in Los Angeles County Superior Court, Union Bank of Cal. v. Imperial Chair Components, Inc., et al., Case no. LC075032 (the "State Court Action"). The complaint alleged causes of action for breach of contract against Imperial and breach of the guarantees against Nelsons.
On August 29, 2006, Nelsons filed a petition for relief under chapter 7 of the Bankruptcy Code. On their Schedule F, Nelsons list a contingent, disputed, unsecured nonpriority claim of $ 1,999,974.94 to UBOC.
On January 22, 2007, UBOC commenced an adversary proceeding against Nelsons seeking to determine that its claim should be excepted from dischargeable under § 523(a)(4). The complaint alleges that on or about February 20, 2005, Imperial's debt obligation to UBOC became due and payable; that as of that date, and thereafter, Imperial was insolvent; that Nelsons, as the sole directors and officers of Imperial during the period of insolvency, had a fiduciary duty to Imperial's creditors; and that Nelsons had violated that duty by making significant payments to themselves to the detriment of Imperial's creditors. Nelsons answered on March 15, 2007, generally denying the allegations.
On October 18, 2007, Nelsons moved for summary judgment. Nelsons argued they owed no fiduciary duty to UBOC, there was no express trust between UBOC and Nelsons, and there was no evidence that Nelsons misappropriated any of Imperial's assets. UBOC replied on November 14, 2007, asserting that California's Trust Fund Doctrine imposed an express trust on Imperial's assets and a fiduciary duty on Nelsons, that the withdrawals of money by Nelsons from Imperial were defalcations, and that there remained material issues to be determined by the trier of fact. After taking the issues under submission at a hearing on December 5, 2007, the bankruptcy court issued a memorandum of decision on the summary judgment motion on April 18, 2008. In the decision, the court denied the motion, concluding that genuine issues of material fact existed as to the elements of UBOC's claim.
The bankruptcy court then conducted a five-day trial from June 2 through June 11, 2008. Nelsons, Lopez, and Brutto testified. On January 5, 2009, the court entered its judgment in favor of UBOC and against Nelsons, determining that the debt owed by Nelsons to UBOC was nondischargeable under § 523(a)(4). The following day, the court entered findings of fact and conclusions of law in support of the judgment. Among those findings and conclusions are the following:
— Nelson "just hoped to keep UBOC at bay while he provided insufficient financial statements, did not allow an audit, and kept failing to find financing from elsewhere."
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— Nelsons "committed defalcation under 11 U.S.C. § 523(a)(4) when they...
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