Discussion of new developments in Asset Protection and related debtor-creditor issues, primarily from the viewpoint of planning for those who are concerned about unforeseen contingent liabilities, but also some news from the creditors' side as well. Hosted by Jay Adkisson and Chris Riser, authors of "Asset Protection: Concepts and Strategies" with supporting website at http://www.assetprotectionbook.com
In re A-Z Electronics, LLC, 350 B.R. 886 (Bkpr.D.Id 2006)
Another single-member LLC is disregarded in the bankruptcy context and the bankruptcy trustee allowed to take control over the entity's assets. United States Bankruptcy Court, D. Idaho.
In re A-Z ELECTRONICS, LLC, Debtor.
No. 05-05758-TLM, Feb. 23, 2006.
*887 David A. Kras, Boise, ID, for Debtor.
MEMORANDUM OF DECISION
TERRY L. MYERS, Chief Bankruptcy Judge.
BACKGROUND AND FACTS
The Office of the U.S. Trustee (“UST”) brought a motion to convert or dismiss the above chapter 11 case based on the unauthorized filing of Debtor’s chapter 11 petition. Doc. No. 24 (“Motion”). The UST alleges that sufficient “cause” exists under sec. 1112(b) FN1 to support such dismissal.
FN1. All citations herein are to the Bankruptcy Code, 11 U.S.Code sections 101-1330, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8, 119 Stat. 23 (2005) ( “BAPCPA”), since this case was filed after BAPCPA’s October 17, 2005, effective date.
The UST presented no testimonial or documentary evidence at the time of the *888 scheduled hearing on February 13, 2005. Instead, it relied on the pleadings of record in this case, and certain pleadings in the case of Ron and Lotte Ryan, Case No. 03-04278-TLM. The Court takes judicial notice of its files and records in those cases, Fed.R.Evid. 201, and treats the submissions of the debtors in their respective cases as admissions under Fed.R.Evid. 801. See In re Field, 05.1 I.B.C.R. 11 n. 2 (Bankr.D.Idaho 2005) (citing In re Webb, 03.1 I.B.C.R. 25, 26 (Bankr.D.Idaho 2003)).
Chapter 11 debtor in possession A-Z Electronics, LLC (“Debtor”) did not file any response to the Motion, but its counsel did appear at the time of hearing and voiced objection.FN2 Debtors did not present evidence at hearing.
FN2. As might be expected given the lack of a written response to the Motion, Debtor filed no briefing on the issues presented. Then, too, neither did the UST.
Though the record developed by counsel is scant, the Court’s review found the operative facts to be clear enough, and undisputed in material regards. The documents of record in the two bankruptcy cases show the following.
Ron Ryan, along with his wife, filed a joint petition for chapter 7 relief, commencing Case No. 03-04278-TLM, on November 21, 2003. In the initial schedule B filed in that case, Ron Ryan claimed to own 100% of A-Z Electronics, LLC, ascribing a value of “$0.00” thereto. See Case No. 03-04278-TLM, Doc. No. 6.
Following a conversion and brief foray into chapter 13, the Ryans’ case was converted back to chapter 7 on September 8, 2004. Their chapter 7 trustee, Lois Murphy, who was the chapter 7 trustee before the chapter 13 hiatus, filed a “no asset” report on August 25, 2005. The case, however, was not closed. The Ryans’ trustee thereafter “withdrew” her no asset report on October 13, 2005, and continued to administer that case.
On December 18, 2005, Debtor filed a voluntary chapter 11 petition commencing the instant case. The petition was signed by Ron Ryan as Debtor’s “managing member.” Ron Ryan also signed the list of the 20 largest unsecured creditors and the statement of financial affairs.FN3 The response to question 21(b) on the statement of financial affairs indicates that Ron Ryan owns 100% of Debtor. On December 27, 2005, Debtor filed a “statement of operations” stating it “is a single member Limited Liability Company organized under the laws of Idaho. [Debtor] was created on April 8, 2002 with Ron Ryan holding one hundred percent (100%) of the membership interests as member.” Doc. No. 21 at 4.
FN3. The Court has been unable to find a verification of schedules as required by the Rules and Official Forms, but assumes that it would be similarly executed if filed.
When the petition herein was filed, the Ryans’ chapter 7 case was open and pending, and it remains so. When the petition herein was filed, the Ryans’ trustee had not abandoned the Ryans’ interests in Debtor.FN4 The same thus remained sec. 541(a) property of the Ryans’ estate.FN5 *889 The Ryans did file a motion to abandon under sec. 554(b) and Fed. R. Bankr.P. 6007 on January 20, 2006. See Case No. 03-04278-TLM at Doc. No. 97. However, that motion was filed 11 days after the UST’s Motion in this case.FN6
FN4. Debtors do not argue that the trustee’s no asset report effected an abandonment of Debtors’ interest in the LLC. Any such argument would be futile given Schwaber v. Reed (In re Reed), 940 F.2d 1317, 1321 (9th Cir.1991), which held that the filing of a no asset report “in and of itself cannot result in abandonment unless the court closes the case.” See also In re Killingsworth, 04.3 I.B.C.R. 88, 89-90 (Bankr.D.Idaho 2004) (discussing sec. 554(c) abandonment of scheduled and unadministered assets “at the time of closing of a case”).
FN5. The Ryans’ trustee did not appear or take a position on the UST’s Motion to dismiss this chapter 11 case, though she did observe the hearing from the gallery.
FN6. The Ryans’ motion for abandonment is subject to a separate Memorandum of Decision of this Court entered today in Case No. 03-04278-TLM.
DISCUSSION AND DISPOSITION
As noted, neither party briefed the authorities or provided written legal analysis.FN7 The Court has undertaken an independent review and determines the UST’s Motion must be granted and the case dismissed.FN8
FN7. Each cited one reported case during oral argument. The Court reviewed both cases. They are unhelpful.
FN8. This Decision constitutes the Court’s factual findings and legal conclusions as required under Fed. R. Bankr.P. 9014 and 7052.
The filing of a bankruptcy petition and initiation of a bankruptcy case is governed by the Code. “A voluntary case under a chapter of [Title 11, U.S.Code] is commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter.” See sec. 301. An “entity” includes a “person” as well as others, and a “person” includes an individual, partnership, and corporation. sections 101(15), 101(41). With restrictions not implicated in the present case, a person that may be a debtor under chapter 7 may also be a debtor under chapter 11. See sec. 109(d).
The Code does not establish other prerequisites for filing applicable to this case. Case law and treatise analysis, however, note one:
When the debtor is a corporation, partnership, or limited liability company, questions may arise as to who within the debtor possesses the requisite authority to verify and file a voluntary petition in the debtor’s name. Questions may also arise concerning the process pursuant to which such authority may be exercised.
2 Collier on Bankruptcy ¶ 301.04[7] at 301-11 (Alan N. Resnick & Henry J. Sommer, eds. rev. 15th ed.2005).
State law, not bankruptcy law, is used to determine whether the party signing the entity petition had the authority to do so.FN9 The Court finds an analogous area, that of partnership cases, instructive.
FN9. See 2 Collier ¶ 301.04[7][a] at 301-11 (partnership), ¶ 301.04 [7][b] at 301-12 (corporations), ¶ 301.04[7][c] at 301-13 (limited liability companies).
Prior to a revision in 2002, Federal Rule of Bankruptcy Procedure 1004(a) provided that a voluntary petition could be filed on behalf of a partnership by one or more of the general partners if all the general partners consented. The 2002 amendments, however, eliminated subdivision (a) of the Rule (leaving that Rule to address only questions of involuntary partnership petitions). The Advisory Committee Note to this 2002 revision recognizes that the question of who has the authority to file on behalf of the partnership is a matter controlled by substantive nonbankruptcy law. The Note specifically refers to precedent involving corporate filings, which also applies “applicable nonbankruptcy law” to determine whether authority exists for the commencement of the case.
Collier agrees that the approach taken to partnerships and corporations applies as well to limited liability companies.
Similar to partnerships and corporations, the requirements for filing a limited liability company (“LLC”) bankruptcy will be contained in state law and the governing LLC agreement.
Id. at ¶ 301.04[7][c] at 301-13 (emphasis added).
*890 Limited liability companies are legal entities, created by and under state law, blending attributes of corporations and partnerships. See In re Real Homes, LLC, Case No. 05-02051-TLM, Doc. No. 87 at 8 (Bankr.D.Idaho Nov. 25, 2005) (Memorandum of Decision) (discussing In re Avalon Hotel Partners, LLC, 302 B.R. 377, 380 (Bankr.D.Or.2003)); see also In re Calhoun, 312 B.R. 380, 383 (Bankr.N.D.Iowa 2004).
In Idaho, limited liability companies are governed by Idaho Code sec. 53-601, et seq. Among other things, the Idaho statutes place management and decisional authority in the hands of the member(s) unless an operating agreement vests it in a manager or managers. See Idaho Code sec. 53-621.
The parties did not provide Debtor’s operating agreement to the Court. However since Ron Ryan has testified that he owns 100% of Debtor and since he signed under penalty of perjury all the critical and required documents in this case as its “managing member,” the Court concludes nothing in an operating agreement (if one exists) likely varies the statute’s member-controlled approach.FN10
FN10. The only conceivable variance would be assignment of authority to a non-member manager. If that were the case, Ryan clearly could not properly act for Debtor, including filing the instant petition, and the UST’s Motion would still be well taken.
Under Idaho law, a debtor’s membership interest in a limited liability company is personal property. Idaho Code sec. 53-635. It therefore becomes property of the estate upon the filing of debtor’s petition. See sec. 541(a)(1). Accord Calhoun, 312 B.R. at 384 (applying Iowa law).FN11
FN11. A number of Idaho cases hold that a debtor’s interest in a separate legal entity becomes property of the estate, even if the other entity’s assets do not. See, e.g., In re Hale, 04.3 I.B.C.R. 128, 129 (Bankr.D.Idaho 2004) (addressing partner’s interest in limited partnership); Hopkins v. Brossard (In re Neuroscience Ctr., P.C.), 04.1 I.B.C.R. 45, 47 (Bankr.D.Idaho 2004) (addressing interests in subchapter S corporation); In re Brown, 00.3 I.B.C.R. 123, 123-24 (Bankr.D.Idaho 2000) (addressing interests in a subchapter S corporation); In re Fisher, 94 I.B.C.R. 130, 131 (Bankr.D.Idaho 1994) (addressing limited partnership interests).
What becomes property of the estate when a member of an LLC files bankruptcy depends on the facts. In In re Garrison-Ashburn, L.C., 253 B.R. 700 (Bankr.E.D.Va.2000), the court considered the impact of the bankruptcy filing of a 50% member in an LLC. Id. at 704-08. It observed that such a member-debtor’s “economic rights” (the membership interest and its value) fall squarely within sec. 541(a)(1), but so, too, do his “non-economic rights” (such as the ability to participate in management) because sec. 541(a)(1) is so broadly-and intentionally-drafted. Id. at 707-08.
However, In re Albright, 291 B.R. 538 (Bankr.D.Colo.2003), illustrates the difference between a single-member LLC and a multi-member LLC. It found that where “there are no other members in the LLC, ... the Debtor’s bankruptcy filing effectively assigned her entire membership interest in the LLC to the bankruptcy estate, and the Trustee obtained all her rights, including the right to control the management of the LLC.” 291 B.R. at 540.FN12 The right to control (and not just *891 “participate” in) management is significant. “Because the Trustee became the sole member of [the] LLC upon the Debtor’s bankruptcy filing, the Trustee now controls, directly or indirectly, all governance of that entity, including decisions regarding liquidation of the entity’s assets.” 291 B.R. at 541.
FN12. Conversely: “Where a single member files bankruptcy while the other members of a multi-member LLC do not, ... the bankruptcy estate is only entitled to receive the share of profits or other compensation by way of income and the return of contributions to which that member would otherwise be entitled.” 291 B.R. at 540 n. 7. Of course, depending on applicable state law and the operating agreement, the estate may (via the trustee, see sec. 323(a)) may also be entitled to take part in management.
On the date the petition herein was filed, all the Ryans’ interests in Debtor were property of the bankruptcy estate in Case No. 03-04278-TLM.FN13 As such, they were subject to the sole and exclusive authority of the Ryans’ trustee, and that trustee was the only one entitled to manage Debtor and decide, inter alia, whether the LLC would or would not file bankruptcy. FN14 She did not make or authorize the chapter 11 filing, she was not consulted or informed of the filing, and her consent to the filing has not been established.FN15
FN13. That Ron Ryan’s member interests were property of the estate is clear. There was no affirmative proof concerning any interests of debtor Lotte Ryan in Debtor, though the Court assumes some community property interest at a minimum. This is enough. See sec. 541(a)(2).
FN14. In addition to the case law, there are several applicable Code provisions at play. See sec. 323(a) (trustee is the representative of the estate); sec. 363(b) (trustee’s ability to “use, sell, or lease” property of the estate); sec. 704 (trustee’s duties). See also sec. 521(3) and (4) (debtor’s obligation to cooperate with the trustee, and to surrender all property of the estate, and all books and records concerning such property, to the trustee).
FN15. Debtor argues that the Ryans’ trustee should be allowed an opportunity to “ratify” the filing. The argument is not persuasive. Even assuming the defective petition can be remedied through “ratification,” this trustee has had over a month to analyze the matter, and has shown no desire to ratify Ron Ryan’s unilateral and unauthorized acts.
The Court thus concludes Debtor’s bankruptcy petition was not properly authorized or executed under applicable nonbankruptcy law.
In Real Homes, this Court stated that “[i]t is generally accepted that a bankruptcy case filed on behalf of an entity by one without authority under state law to so act for that entity is improper and must be dismissed.” Id. at 7. It further noted this Court’s prior decisions are consistent. Id. at 8 (citing In re Quarter Moon Livestock Co., 116 B.R. 775, 90 I.B.C.R. 246 (Bankr.D.Idaho 1990); In re Council Golf & Country Club, Inc., 82 I.B.C.R. 207 (Bankr.D.Idaho 1982)).FN16
FN16. While the Court appreciates (and has often noted) that sec. 1112(b) motions raise a secondary issue of whether dismissal or conversion to chapter 7 best serves the interests of creditors and the estate, and acknowledges that the Motion here suggests conversion, the Court will dismiss the case. First, no evidence or helpful argument was presented on the question of which remedy was appropriate under the best interest language of sec. 1112(b). Second, and more importantly, if the filing was not authorized in the first place and the case was improperly commenced, dismissal seems not just warranted but required.
CONCLUSION
The UST’s Motion and the pleadings of record present a prima facie case. Ron Ryan lacked the authority and ability to file Debtor’s instant chapter 11 case in December, 2005. Debtor presented no cogent defense or argument to the contrary.
The UST’s Motion will be granted, and this case will be dismissed. The Court will enter an order so providing.
This is a good discussion of alter ego in the single member LLC context.
United States District Court,
D. Minnesota.
COGNEX CORPORATION, Plaintiff,
v.
VCODE HOLDINGS, INC., VData LLC, Acacia Research Corporation d/b/a Acacia Technologies Group, TechSearch LLC, and Veritec Inc., Defendants.
Civ. No. 06-1040 (JNE/JJG), Oct. 24, 2006.
James T. Nikolai, Peter G. Nikolai, Nikolai & Mersereau, Minneapolis, MN, John L. Capone, Kevin Gannon, Michael E. Attaya, Thomas C. O’konski, Cesari & McKenna, LLP, Boston, MA, for Plaintiff. Edward E. Casto, Jr., Jonathan T. Suder, Friedman, Suder & Cooke, Fort Worth, TX, Lora Esch Mitchell, Fredrikson & Byron, PA, Minneapolis, MN, for Defendants.
ORDER
JOAN N. ERICKSEN, District Judge.
*1 In a Report and Recommendation dated September 13, 2006, the Honorable Jeanne J. Graham, United States Magistrate Judge, recommended that Defendants’ motion to dismiss be granted in part and denied in part, that defendant TechSearch LLC be dismissed from this action, and that claims related to the ‘ 078 patent be dismissed without prejudice. Defendants objected to the Report and Recommendation, and Plaintiff responded. The Court has conducted a de novo review of the record. See D. Minn. LR 72.2(b). Based on that review, the Court adopts the Report and Recommendation. Therefore, IT IS ORDERED THAT:
1. Defendants’ motion to dismiss [Docket No. 9] is GRANTED IN PART and DENIED IN PART in accordance with the terms of the Report and Recommendation.
2. Pursuant to the representations of the parties, defendant Techsearch LLC is DISMISSED from this action.
3. All claims related to the ‘078 patent are DISMISSED WITHOUT PREJUDICE.
4. No later than seven (7) days after this Order, the parties shall schedule a Rule 16(a) initial pretrial conference by contacting Mary Lenner, Judicial Assistant for Magistrate Judge Jeanne J. Graham, at (651) 848-1890.
5. Until an initial pretrial conference is held, the parties shall make a good faith effort to carry out reasonable preliminary discovery.
6. Cognex’s application for costs and attorney fees is DENIED.
JEANNE J. GRAHAM, Magistrate Judge.
REPORT AND RECOMMENDATION
This matter came before the undersigned for a hearing on May 26, 2006 on defendants’ motion to dismiss (Doc. No. 9). Thomas C. O’Konski, Esq., and Peter G. Nikolai, Esq., appeared on behalf of plaintiff Cognex Corporation (Cognex). Jonathan T. Suder, Esq., and S. Jamal Faleel, Esq., appeared on behalf the defendants. The defendants are moving to dismiss for lack of personal and subject matter jurisdiction. The matter is assigned to this Court for a report and recommendation in accordance with 28 U.S.C. § 636 and Local Rule 72.1(c).
I. BACKGROUND
This action arises out of a patent dispute between plaintiff Cognex Corporation (Cognex) and five defendants. The defendants allegedly own or control the ‘524 patent, which teaches a device for two-dimensional bar codes. Like ordinary bar codes, these are used for tracking merchandise. Cognex makes devices that read and interpret these codes; it has several clients that have purchased these devices.
Some of Cognex’s clients were contacted by Acacia Technologies Group, which consists of subsidiaries of defendant Acacia Research Corporation (Acacia Research). The subsidiaries include defendants VData LLC (VData) and VCode Holdings, Inc. (VCode). By letters in January 2006, Acacia Technologies Group contacted Cognex’s clients, requesting that they purchase licenses for the patent. ( See Decl. of K. Gannon, Aug. 17, 2006, Exh. 1 (Depo. of R. Berman, Aug. 9, 2006 at 33); Aff. of L. Mitchell, Apr. 3, 2006, Exhs. 2, 3 (Letters of T. DeRaimo, Jan. 4, 2006, Jan. 9, 2006).)
*2 Clients who refused were sued by VCode and VData for patent infringement. ( See, e.g., Aff. of J. Capone, May 5, 2006, Exhs. P, Q (Compls.).) In contracts with its clients, Cognex has agreed to indemnify some of its clients for patent liability arising out of the use of its products. At least one of these clients, in response to litigation by VCode and VData, has demanded indemnification. ( See Aff. of J. Testa, May 4, 2006 at 3-4; Aff. of J. Capone, May 5, 2006, Exh. B (Letter of M. LeHocky, Mar. 10, 2006).) Cognex claims this litigation has affected its ability to solicit and retain customers.
Because of this concern, Cognex brings this action for declaratory judgment and seeks a declaration on the validity of the patent. The defendants here move to dismiss. All of the defendants challenge subject matter jurisdiction, and two of the defendants also challenge personal jurisdiction. The parties have since agreed that there is no basis for jurisdiction over defendant TechSearch, LLC, and so the following discussion is limited to the remaining four defendants.
II. DISCUSSION
A. Subject Matter Jurisdiction: Controversy and Declaratory Judgment
[[[Jurisdictional Discussion Omitted]]]
B. Disregarding Business Entity
*9 The previous analysis indicates that Cognex may only proceed with its action for declaratory judgment against VCode, VData, and Veritec. Anticipating this outcome, Cognex argues that VData is controlled by the remaining defendant, Acacia Research, and so it should remain a party to this action. To support this argument, Cognex alleges VData is an alter ego of Acacia Research.
Questions of business entity are controlled by law of the jurisdiction where organization is executed. See In re World Vision Entertainment, 275 B.R. 461, 462 (M.D.Fla.2002); Keller Sys., Inc. v. Transp. Int’l Pool, Inc., 172 F.Supp.2d 992, 999-1000 (N.D.Ill.2001); see also Restatement (Second) Conflicts of Law § 307 (1971). VData is an Illinois limited liability company, and so the law of that state is controlling here.
Like most states, Illinois law will impute the actions of a subsidiary to a parent where the subsidiary is an alter ego of the parent. The parent must exercise such control over the subsidiary that the two entities are indistinguishable. The actions of the subsidiary will then be imputed to the parent where necessary to prevent fraud or injustice. In re Rehabilitation of Centaur Ins. Co., 632 N.E.2d 1015, 1017-18 (Ill.1994).
To determine whether a subsidiary is an alter ego, the parties advance a multiple-factor test first adopted by the Tenth Circuit in Taylor v. Standard Gas & Elec. Co. 96 F.2d 693, 704-05 (10th Cir .1938) (quoting Frederick J. Powell, Parent and Subsidiary Corporations §§ 5, 6 (1931)). That test examines several factors, including but not limited to whether the subsidiary (1) is adequately capitalized; (2) issues stock; (3) observes corporate formalities; (4) pays dividends; (5) lacks functioning officers or directors; (6) maintains corporate records; (7) commingles funds with its parent; (8) diverts assets from its parent to evade creditors; (9) fails to maintain an arm’s-length relationship with related entities; or (10) is a facade for the interests of dominant stakeholders. See CM Corp. v. Oberer Devel. Co., 631 F.2d 536, 538-39 (7th Cir.1980); United States v. Advance Machine Co., 547 F.Supp. 1085, 1093 (D.Minn.1982).
This test is infrequently employed by Illinois courts, and there is little indication that its use is currently favored. Compare Fontana v. TLD Builders, Inc., 840 N.E.2d 767, 778-79 (Ill.Ct.App.2005) (considering individual factors), with Main Bank of Chicago v. Baker, 427 N.E.2d 94, 101-02 (Ill.1983) and Larson v.. CSX Transp., Inc., 835 N.E.2d 138, 145-46 (Ill.Ct.App.2005).
Moreover, this test is premised on the assumption that the subsidiary is a corporation that is subject to certain corporate formalities. At the time that the test was developed, the law of business organizations had yet to recognize statutory limited liability companies. See J. William Callison & Maureen A. Sullivan, Limited Liability Companies § 1:5 (2006). And unlike a corporation, an Illinois limited liability company does not issue stock, does not appoint officers, and is not required to issue annual reports. See generally 805 Ill. Comp. Stat. 180/10, /13, /30. Though the proposed multi-factor test is germane to the extent it examines control by a parent entity, the underlying focus is whether the parent exercises such control that the parent and subsidiary are indistinguishable.
*10 After jurisdictional discovery in this matter, the record shows the following. VData is wholly owned by Acacia Global Acquisitions Corporation (Acacia Acquisitions). It has no employees of its own. All of its affairs are handled through Acacia Acquisitions, its sole member. ( See Decl. of K. Gannon, Aug. 17, 2006, Exhs. 1 (Depo. of R. Berman, Aug. 9, 2006 at 13, 21), 8 (Settlement Agreements).) VData has substantial capital reserves, but it has yet to pay any dividends to either Acacia Research or Acacia Acquisitions. The revenues of VData are reported in consolidated tax returns by Acacia Research. ( See Decl. of L. Mitchell, Aug. 25, 2006, Exhs. 1 (Depo. of R. Berman, Aug. 9, 2006 at 30), 8 (Statement of July 10, 2006).)
Acacia Acquisitions is a holding corporation wholly owned by Acacia Research. It has no assets other than its stakes in various subsidiaries. And the officers of Acacia Acquisitions are nearly identical to those for Acacia Research.FN4 ( See Decl. of K. Gannon, Aug. 17, 2006, Exhs. 1 (Depo. of R. Berman, Aug. 9, 2006 at 13, 51), 6 (Action of Bd., Dec. 21, 2004); Decl. of L. Mitchell, Exh. 1 (Depo. of R. Berman, Aug. 9, 2006 at 69).)
FN4. At a motion hearing before this Court on September 11, 2006, the defendants represented that the officers of Acacia Research and those of Acacia Acquisitions are different persons with different roles. This representation, however, is not supported by the record. Paul Ryan is chief executive officer of both entities. ( Compare Aff. of J. Capone, May 5, 2006, Exh. I (Press Release of Acacia Research, Sept. 30, 2005), with Decl. of K. Gannon, Aug. 17, 2006, Exh. 6 (Action of Bd., Dec. 21, 2004).) Though Robert Berman is sometimes represented as the executive vice president of Acacia Acquisitions, he has frequently represented himself as its chief operations officer, which is also his title with Acacia Research. ( Compare Decl. of K. Gannon, Aug. 17, 2006, Exh. 1 (Depo. of R. Berman, Aug. 9, 2006 at 42), with id. Exhs. 6 (Action of Bd., Dec. 21, 2004), 8 (Settlement Agreements).) And Clayton Haynes is chief financial officer for both entities. ( Id., Exhs. 1 (Depo. of R. Berman, Aug. 9, 2006 at 40), 6 (Action of Bd., Dec. 21, 2004).)
The principal activity of VData is the enforcement of its patent rights. Only two identified persons are involved in its decisions about patent licensing and litigation. One is Robert Berman, general counsel and chief operations officer for both Acacia Research and Acacia Acquisitions. The other is Tisha DeRaimo, identified on the letterhead of Acacia Technologies Group as Vice President of Licensing, but who may evidently be employed by a separate entity, Acacia Employment Services Corporation. (Decl. of K. Gannon, August 17, 2006, Exh. 1 (Depo. of R. Berman, Aug. 9, 2006 at 33); Decl. of L. Mitchell, Exh. 1 (Depo. of R. Berman, Aug. 9, 2006 at 20, 23).)
Invitations to enter licensing negotiations are prepared and sent out by DeRaimo. ( See Aff. of L. Mitchell, Apr. 3, 2006, Exhs. 2, 3 (Letters of T. DeRaimo).) If negotiations lead to a license or some other settlement, the agreement is executed by Berman. The agreements indicate that Berman appears in his capacity as COO of Acacia Acquisitions, the “sole member” of VData. ( See Decl. of K. Gannon, Exh. 8 (Settlement Agreements).)
In two press releases issued by Acacia Research in the last year, it has announced that VData has settled patent litigation with other parties. One release quotes Paul Ryan, the chairman and chief executive officer of Acacia Research, as saying, “We will continue to increase our licensing and enforcement efforts with this patented technology[.]” (Aff. of J. Capone, May 5, 2006, Exhs. I (Press Release of Acacia Research, Sept. 30, 2005), J (Press Release of Acacia Research, Apr. 26, 2006).) When later asked what entity made this statement, Berman asserted it was VData rather than Acacia Research. (Decl. of K. Gannon, Aug. 17, 2006, Exh. 1 (Depo. of R. Berman, Aug. 9, 2006 at 87-88).)
*11 To determine whether VData is an alter ego of Acacia Research, it is necessary to examine both the relationship between VData and Acacia Acquisitions and that between Acacia Acquisitions and Acacia Research.
Because no natural persons are part of VData, all its operational decisions are necessarily made by Acacia Acquisitions. The officers of Acacia Acquisitions and Acacia Research are nearly identical and they perform identical duties. Through its press releases and consolidated tax returns, Acacia Research speaks on behalf of VData.
There is no reasonable way to tell when the officers of Acacia Research are acting in their capacity as officers of Acacia Acquisitions. Because they are identical, they cannot represent the independent interests of VData, Acacia Research, and Acacia Acquisitions. Put another way, it is impossible for the three entities to engage in arm’s-length dealings with one another. Under these circumstances, Acacia Research has such control over VData that the two are indistinguishable.
As a result, VData is an alter ego of Acacia Research, and the actions of VData may be imputed to Acacia Research. Cognex may proceed with its action for declaratory judgment against Acacia Research.
C. Personal Jurisdiction
[[[ Personal Jurisdiction Discussion Omitted ]]]
D. Case Management Concerns
[[[ Case Management Discussion Omitted ]]]
III. CONCLUSION
*13 Because Cognex has established an actual controversy with regard to the ‘524 patent, it is appropriate to exercise subject matter jurisdiction over its claims against VCode, VData, and Veritec. VData is an alter ego of Acacia Research, and therefore, the actions of VData also establish personal jurisdiction and subject matter jurisdiction over Acacia Research. Therefore, this Court concludes that the motion to dismiss should be handled accordingly.
IV. CONCLUSION
Being duly advised of all the files, records, and proceedings herein, IT IS HEREBY RECOMMENDED THAT:
1. The defendants’ motion to dismiss (Doc. No. 9) be GRANTED IN PART AND DENIED IN PART in accordance with the terms of this report and recommendation.
2. Pursuant to the representations of the parties, defendant TechSearch be dismissed from this action.
3. All claims related to the ‘078 patent be DISMISSED WITHOUT PREJUDICE.
4. No later than seven days after the order adopting this report and recommendation, the parties shall schedule a Rule 16(a) initial pretrial conference by contacting Mary Lenner, Judicial Assistant for Magistrate Judge Jeanne J. Graham, at (651) 848-1890.
5. Until an initial pretrial conference is held, the parties shall make a good faith effort to carry out reasonable preliminary discovery.
6. Cognex’s application for costs and attorney fees be DENIED.
Wilferd v. Wardle, 2007 WL 391583 (D.Utah, Feb. 1, 2007)
Under the "continuing concealment doctrine", a bankruptcy debtor who attempted to hide an asset was denied a discharge. That the client admitted that he had engaged in asset protection weighed heavily in the court's decision. One the lessons that Chris and I constantly preach is: Avoid Bankruptcy! Bad things happen to debtors there, since the primary purpose of bankruptcy is to gather assets for the benefit of creditors.
United States District Court, D. Utah, Central Division.
Erving and Nancy WILFERD, Appellees,
v.
Jeremy Jay WARDLE, Appellant.
No. 2:06-CV-01007, Feb. 1, 2007.
Gregory J. Adams, Jeremy C. Sink, McKay Burton & Thurman, Salt Lake City, UT, James T. Dunn, South Jordan, UT, for Appellant.
Jerome Romero, Jones Waldo Holbrook & McDonough (SLC), Salt Lake City, UT, for Appellees.
ORDER AFFIRMING BANKRUPTCY COURT DECISION
PAUL G. CASSELL, United States District Judge.
*1 Jeremy Jay Wardle has appealed the decision of a bankruptcy court denying him discharge in bankruptcy. The bankruptcy court determined that more than one year before Mr. Wardle filed for bankruptcy, he had concealed an asset. Specifically, he transferred the title of his house to his wife, in anticipation of an unfavorable judgment against him in a pending lawsuit. The bankruptcy court found that this concealment of Mr. Wardle's interest in the house continued to the time of the bankruptcy and that Mr. Wardle had the intent to hinder, defraud, or delay creditors by continuing this concealment. On these grounds, the court denied discharge. Factually, the court is unable to fully review the bankruptcy court's findings because the parties presented an incomplete record. But the limited record presented supports the bankruptcy court's factual determinations. Legally, the court affirms the bankruptcy court's application of the continuing concealment doctrine. The court finds oral argument to be unnecessary, as the record is sufficiently detailed and clear.
BACKGROUND
A number of years ago, Mr. Wardle bought two businesses from Erving and Nancy Wilferd. According to a promissory note dated August 31, 2000, Mr. Wardle owed the Wilferds $1,240,000, in connection with these purchases. Eventually, Mr. Wardle became delinquent in his payments to the Wilferds. On January 24, 2003, the Wilferds filed a complaint in state court against Mr. Wardle and his father, Hal Wardle. The Wilferds sought to recover amounts due and owing on the promissory note. Then, on February 3, 2003, the Wilferds filed a complaint against two business the Wardles were involved with-Mountain States Trailer & Equipment Sales, Inc., and Storage On Site, Inc.-attempting to recover collateral securing Mr. Wardle's obligation under the promissory note. Both actions were filed in Utah State courts, and the actions were ultimately consolidated.
While this state litigation was pending against him, Mr. Wardle transferred ownership of his residence to his wife, Hollie Wardle, via a quit claim deed. Mr. Wardle executed the quit claim deed on March 4, 2003, and recorded it with the county recorder's office on March 5, 2003. Around July 15, 2004, Ms. Wardle used this residence to secure a loan from Wells Fargo Bank in the amount of $118,200. Ms. Wardle then used the loan proceeds to purchase cabin property in Duchesne County. She purchased the property in association with Brett Peterson-each party paid half of the purchase price. Less than six months later, in December 2004, Ms. Wardle liquidated her interest in the property, receiving approximately $127,000. Also in 2004, Ms. Wardle and Mr. Peterson purchased property in Pleasant Grove, Utah. After the property had been developed, they sold it for a profit-Ms. Wardle realized a $32,000 profit from the sale. Ms. Wardle converted the proceeds from both the Duchesne County and Pleasant Grove properties into cash. Mr. and Ms. Wardle kept the cash in their basement, and each had equal control over it. The Wardles claim to have spent all of the cash proceeds on living expenses.
*2 On June 23, 2004, the day before the consolidated state court litigation was scheduled for trial, Mr. Wardle filed for bankruptcy, staying the trial. Judge Boulden dismissed Mr. Wardle's petition, with prejudice, on July 16, 2004. She dismissed the petition, in part, because Mr. Wardle failed to file his statement of financial affairs and to attend a creditors' meeting.
The Wilferds' state court actions progressed, and in April 2005, the state court ultimately entered judgment in favor of the Wilferds and against Mr. Wardle. Apparently, the court found Mr. Wardle had misappropriated over one-hundred thousand dollars and had defaulted on the promissory note.
On April 12, 2005, Mr. Wardle voluntarily filed for bankruptcy under Chapter 7. With this filing, Mr. Wardle submitted the necessary financial statements and schedules. On the bankruptcy schedules, Mr. Wardle indicated that he had an equitable interest in a personal residence with Ms. Wardle, but he never indicated he had once possessed an ownership interest in the residence which he later transferred to Ms. Wardle. The Wilferds filed an adversary proceeding against Mr. Wardle on July 8, 2005, seeking a denial of his bankruptcy discharge due, in large part, to Mr. Wardle's transfer of his primary residence. The Wilferds sought denial of discharge pursuant to 11 U.S.C. § 727(a)(2), (a)(4)(A), (a)(3), and (a)(5).
Judge William T. Thurman conducted a bench trial on this matter on September 20, 2006. On October 20, 2006, the bankruptcy court issued a judgment against Mr. Wardle and for the Wilferds on their claim to deny Mr. Wardle discharge pursuant to § 727(a)(2). The court dismissed the Wilferds' other causes of action against Mr. Wardle. Mr. Wardle filed a notice of appeal and elected that a United States District Court, rather than a bankruptcy panel, hear his appeal. As a side note, the court received an initial brief from Mr. Wardle, but received no reply brief-and the time for filing a reply has long expired. The Wilferds filed a notice of cross-appeal shortly after Mr. Wardle filed his notice of appeal.
STANDARD OF REVIEW
"In reviewing an order of the bankruptcy court, an appellate court reviews the factual determinations of the bankruptcy court under the clearly erroneous standard, and reviews the bankruptcy court's construction of [a statute] de novo." FN1 Accordingly, this court reviews the bankruptcy court's application of the continuing concealment doctrine in relation to 11 U.S.C. § 727 de novo, as this involves the construction and application of the bankruptcy code.FN2 However, the court reviews the bankruptcy court's factual inquiry into Mr. Wardle's intent under a "clearly erroneous" standard. FN3 Under a clearly erroneous standard, the court will only overturn the bankruptcy court's findings if the court has "a definite and firm conviction that a mistake has been committed." FN4
FN1. Taylor v. I.R.S., 69 F.3d 411, 415 (10th Cir.1995).
FN2. Rushton v. State Bank of S. Utah (In re GledhilI), 164 F.3d 1338, 1340 (10th Cir.1999).
FN3. See Hughes v. Lawson (In re Lawson), 122 F.3d 1237, 1240 (9th Cir.1997).
FN4. The Cadle Co v. Mac Stewart (In re Mac Stewart), 263 B.R. 608, 611 (10th Cir.) (citation and internal quotation omitted); see also Federal Deposit Ins. Corp. v. Hamilton, 122 F.3d 854, 860 (10th Cir.1997).
DISCUSSION
Mr. Wardle challenges the bankruptcy court's decision on three grounds. First, he claims the bankruptcy court erred by applying the continuing concealment doctrine in this case, and even if the court properly applied the doctrine, factually, Mr. Wardle's situation falls outside of doctrine's reach. Mr. Wardle then claims the bankruptcy court erred in its factual determination of Mr. Wardle's intent to hinder, delay, or defraud creditors. Finally, Mr. Wardle argues that, in light of these errors, the bankruptcy court erred by denying Mr. Wardle a discharge pursuant to 11 U.S.C. § 727.
*3 Section 727(a)(2) requires courts to discharge the debts of a debtor unless:
the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed-
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition; FN5
FN5. 11 U.S.C. § 727(a)(2).
An inquiry under § 727(a), therefore, consists of two components: a disposition of property, like concealment or transfer, and a subjective intent by the debtor to hinder, delay, or defraud a creditor. "Proof of fraudulent concealment, in order to bar discharge, need be shown only be a preponderance of the evidence." FN6
The court finds that the bankruptcy court properly applied the continuing concealment doctrine in this case. And although the lack of a complete record has made a complete factual review of the bankruptcy court's decision impossible, the record provided sufficiently supports the bankruptcy court's factual determinations.
1. Adoption of the Continuing Concealment Doctrine
Mr. Wardle objects to the bankruptcy court's use of the continuing concealment doctrine, arguing that it conflicts with the plain language of § 727. But this court finds the bankruptcy court's decision to be legally correct.
Section 727 provides for an exception to the granting of a discharge when a debtor has concealed property or allowed it to be concealed within one year before the debtor files for bankruptcy. Mr. Wardle argues "the language [of § 727] clearly references transactions that occur within one year of the debtor's bankruptcy petition" FN7 and no others. What Mr. Wardle misses is that property concealed before this one-year time frame fits within the plain language of § 727 if it is still being concealed within one year of the petition. Thus, the continuing concealment doctrine applies under § 727 "as long as the debtor allowed the property to remain concealed into the critical year," even if the concealment itself occurred before the one-year period.FN8 This doctrine "merely recognizes that a failure to reveal property previously concealed can ... properly be considered culpable conduct during the year before bankruptcy." FN9 Although the Tenth Circuit has not addressed the continuing concealment doctrine under § 727, it is a well-settled approach adopted by many circuit courts.FN10 Other bankruptcy courts within the Tenth Circuit have utilized this approach as well.FN11 Therefore, this court finds that the bankruptcy court's decision to apply the continuing concealment doctrine to § 727 was legally correct.
FN7. Appellant App. 15.
FN8. Rosen v. Bezner, 996 F.2d 1527, 1531 (3d Cir.1993).
FN9. Id. at 1532.
FN10. See, e.g., Keeney v. Smith (In re Keeney), 227 F.3d 679 (6th Cir.2000); Hughes v. Lawson (In re Lawson), 122 F.3d 1237 (9th Cir.1997); Rozen v. Bezner, 996 F.2d 1527 (3d Cir.1993); Thibodeaux v. Olivier (In re Olivier), 819 F.2d 550 (5th Cir.1987); Bank of Miami v. Espino (In re Espino), 806 F.2d 1001 (11th Cir.1986); First Federated Life Ins. Co. v. Martin (In re Martin), 698 F.2d 883 (7th Cir.1983).
FN11. See, e.g., Teilhaber Mfg. Corp. v. Hodge (In re Hodge), 92 B.R. 919 (Bankr.D.Kan.1988).
2. Factual Determinations
In addition to arguing the bankruptcy court erroneously adopted the continuing concealment doctrine, Mr. Wardle argues the doctrine does not apply to the facts of this case and that the bankruptcy court erred in its determination of Mr. Wardle's intent to hinder, delay, or defraud creditors. But Mr. Wardle's factual challenges fail at the outset, as he has presented an incomplete record on appeal. Mr. Wardle presented the court with some depositions and documentary evidence, but only a small portion of the trial record-the bankruptcy court's rulings. This leaves the court will little basis for comprehensively reviewing-let alone overturning-the bankruptcy court's decision.
*4 Without the trial transcript, the court cannot know the content of the witnesses' testimony, or whether any such testimony conflicted with prior testimony (i.e., whether it was supported by or contradicted by deposition testimony). This type of incomplete record "raises an effective barrier to informed, substantive appellate review." FN12 "When a trial transcript is not designated a part of the record on appeal, an appellate court cannot review the [lower] court's factual findings and must accept them as correct." FN13 In short, without the trial transcript, it is impossible for the court to find the bankruptcy court's decision to be clearly erroneous because the evidence presented at trial may undermine the evidence presented in the record to this court.
FN12. McGinnis v. Gustafson, 978 F.2d 1199, 1201 (10th Cir.1992).
FN13. Trujillo v. Grand Junction Reg'l Ctr., 928 F.2d 973, 976 (10th Cir.1991) (citations omitted).
However, if the court decided the case based on the limited record presented on appeal, it would affirm the bankruptcy court's factual determinations, on the following grounds.
(A) Continuing Concealment
Mr. Wardle argues his factual situation falls outside the reach of the continuing concealment doctrine. The facts presented to this court, however, support the bankruptcy court's determination.
"Concealing property for purposes of section 727(a)(2)(A) can be accomplished by a transfer of title coupled with the retention of the benefits of ownership," FN14 among other ways. This same retention of a beneficial interest in the property is evidence of continuing concealment.FN15 In Thibodeaux v. Olivier,FN16 for example, the Fifth Circuit affirmed the decisions of a district court and a bankruptcy court as to the applicability of the continuing concealment doctrine. One debtor in Olivier had been involved in a car accident, leading to the amputation of the accident victim's leg. FN17 Just two days after the accident, the debtors transferred the title of their home to one of their mothers.FN18 The mother paid $15,000 in cash for the home, but the debtors returned this full amount to her a few days after the sale.FN19 Even after the transfer, the debtors continued to live in the house, maintain it, and pay the mortgage on it.FN20 The debtors paid no rent in exchange for the privilege of living there.FN21 About one month after the accident, the other party to the accident sued the debtors. Ultimately, he obtained a $103,544 judgment against one of the debtors.FN22 About six years later, the debtors filed for bankruptcy under Chapter 7.
FN14. Olivier, 819 F.3d at 553.
FN15. Hodge, 92 B.R. at 922.
FN16. 819 F.2d 550 (5th Cir.1987).
FN17. Id. at 551.
FN18. Id.
FN19. Id.
FN20. Id.
FN21. Id.
FN22. Id.
The Fifth Circuit found there to be "ample evidence supporting the conclusion that the transfer of the house was motivated by the realization of appellants and [the mother] that a personal injury suit based on the accident and an adverse judgment were likely." FN23 The other party to the accident, said the court, became a creditor at the time the claim arose-the time of the accident.FN24 The court "decline[d] to hold that purposefully concealing property in anticipation of a known and imminent creditor's lawsuit should somehow qualitatively be different from concealing property after the judgment on that claim becomes final." FN25
FN23. Id. at 552.
FN24. Id. at 553.
FN25. Id.
*5 Similar to the parties in Olivier, Mr. Wardle transferred ownership of his home to his wife when he knew a lawsuit was pending against him. Just one month after the Wilferds sued Mr. Wardle in state court, Mr. Wardle signed the quit claim deed. The bankruptcy court was justified in viewing this transfer as a concealment in anticipation of a known creditor's lawsuit. Mr. Wardle's own deposition reveals this purpose somewhat:
Q. You had indicated that you assigned your title in the home to [your wife.]
A. Yes.
Q. What consideration did you get for that?
A. What do you mean by consideration?
Q. Did you get any money from her?
A. A $10 transaction.
Q. All right. And so why did you do that?
A. Just asset protection.
Q. You wanted to protect the home from the Wilferds?
A. From the Wilferds, from anybody.FN26
FN26. Appellant App. 250.
Although Mr. Wardle transferred his home more than two years prior to filing bankruptcy the second time, the transfer occurred barely more than thirteen months before he initially filed for bankruptcy. Just as in Olivier, after the transfer, Mr. Wardle retained the benefits and burdens of ownership. He continued to live in and maintain the residence. Ms. Wardle had not earned an income since 1998, so Mr. Wardle continued to pay the mortgage with his income. Indeed, nothing appeared to have changed except for the titled owner. The bankruptcy court correctly found, therefore, that although Mr. Wardle represented that he had transferred away his real interest in the property, he retained a secret interest-revealed by his retention of the benefits of ownership and control.
Mr. Wardle argues that because he recorded his property transfer, the continuing concealment doctrine does not apply. This misstates the point. Even if the court assumed the recording gave creditors some kind of constructive notice of transfer, it did not give creditors notice of Mr. Wardle's continuing beneficial interest in the property. Mr. Wardle's claim that the recording prevented a concealment would only be valid if he had somehow provided notice of his continuing interest in the property-as well as notice of the transfer-to his creditors. This did not happen. If anything, public recording of the quit claim deed may have lead creditors to think Mr. Wardle had disclaimed any and all interest in the property, not that he retained beneficial interest. Of course, as with all of its factual review, the court's review of this point is limited because Mr. Wardle failed to provide a trial transcript revealing the context surrounding the transfer.
Mr. Wardle also claims that his bankruptcy disclosure indicating he transferred the property and continued to maintain an equitable interest in it proves he did not conceal the property. Again, the trial transcript regarding this issue was not presented to this court. But no evidence before the court indicates that Mr. Wardle disclosed the transfer of the property when he filed bankruptcy. He disclosed an equitable interest in the residence but never wholly clarified what interest he held. Based on this information alone, a creditor or trustee would have had no basis for knowing Mr. Wardle had transferred his equity to his wife-or what benefits of ownership, if any, he retained. Any disclosure by Mr. Wardle was insufficient because he failed to disclose the transfer and the nature and extent of his beneficial interest in and use of the property. For instance, Mr. Wardle failed to disclose the other benefits he had received from the property since its transfer. Ms. Wardle used the home's equity to obtain a loan, buy a cabin, then sell it for a profit. Mr. Wardle failed to disclose that he had an equitable interest in the cabin or in the $127,000 proceeds from it. Yet these assets sprang directly from the house. In sum, it was not clearly erroneous for the bankruptcy court to find that Mr. Wardle's limited reference to equity in the home on his bankruptcy schedule failed to cure the continued concealment of the asset.
(B) Intent to Defraud
*6 Mr. Wardle also contends that the bankruptcy court erred in its determination that he had an actual intent to defraud, delay, or hinder his creditors. Based on the limited record before it, the court finds the bankruptcy court's determination on this point to be well-supported.
To deny a discharge under § 727, a court must find the debtor had an actual intent to defraud creditors.FN27 "Since debtors seldom testify that they have had an intent to defraud creditors, a finding of actual intent must be based on circumstantial evidence or on inferences drawn from a course of conduct." FN28 Specific indicia of fraud include the concealment of pre-bankruptcy conversions, gratuitous property transfers, continued use of the transferred property, transfer of the property to family members, the debtor's use of credit to buy exempt property, property conversion after a large judgment against the debtor, "sharp dealing" by the debtor before bankruptcy, and conversions leaving the debtor insolvent.FN29 In particular, the " 'retention of the use of transferred property very strongly indicates a fraudulent motive underlying the transfer.' " FN30
FN27. Marine Midland Bus. Loan, Inc. v. Carey ( In re Carey), 938 F.2d 1073, 1077 (10th Cir.1991).
FN28. Hodge, 92 B.R. at 922.
FN29. Carey, 938 F.2d at 1077 & n. 4.
FN30. In re Olivier, 819 F.2d at 553 (quoting EFA Acceptance Corp. v. Cadarette (In re Cadarette), 601 F.2d 648, 651 (2d Cir.1979)).
Many of these fraud indicators are present in Mr. Wardle's conduct. First, Mr. Wardle transferred title to his wife-a family member. He made this transfer in exchange for $10-a nominal amount that was never even paid. Although Mr. Wardle made the transfer before any judgment had been entered against him in the state court case, he made it after the case had been filed against him. And Mr. Wardle admitted in his deposition testimony that he transferred the home to protect it from the Wilferds or anyone. From this statement alone, it is reasonable to believe that Mr. Wardle was fully aware that his interest in the home might have been subject to seizure by the Wilferds or other creditors if he lost the suit against him, and that he transferred the home to avoid such a result.
Also critical to a finding of intent to hinder, delay, or defraud creditors under § 727 is a finding that Mr. Wardle intended to continue to conceal his property transfer into the year before he filed bankruptcy. As discussed before, the evidence presented to the court supports this finding. There is no evidence Mr. Wardle revealed the ful nature or extent of his interest in the residence at any time. Mr. Wardle even participated in literally hiding a related physical asset-the proceeds from the sale of property that had been purchased using a home equity loan. Rather than deposit the funds into a bank, the Wardles decided to keep the proceeds from the property sale in cash. Ms. Wardle testified that the Wardles kept this money (over $100,000 cash) in the basement of their home in order to keep people from garnishing the money. Both Mr. and Ms. Wardle testified to Mr. Wardle's access to and use of this cash. This evidence of literal hiding of assets supports a finding that Mr. Wardle had a general intent to defraud creditors. Considering the circumstances surrounding the gratuitous transfer of the house to his wife, it was not clear error for the bankruptcy court to determine the same sort of intent was present specifically with regard to the house. Indeed, in light of Ms. Wardle's testimony, it is difficult to imagine how Mr. Wardle can validly claim his intent was not to continue the concealment.
*7 Mr. Wardle argues the recording of the transfer in the county clerk's office proves he had no intent to defraud, delay, or hinder his creditors by the transfer. But even if this constituted constructive notice of the transfer, it did not constitute notice of Mr. Wardle's continued beneficial interest in the house. If Mr. Wardle had not intended to defraud his creditors, he could have fully disclosed the transfer and his retained interest on his bankruptcy schedule. And even if the recording of the property weighed in favor of a finding of no intent, the bankruptcy court did not clearly err by finding other overriding, contrary factors demonstrated an intent by Mr. Wardle to "hinder, delay, or defraud" his creditors weighed heavier. In short, circumstances are sufficient to find that Mr. Wardle's transfer of the house and concealment of his interest in it was meant to hinder, delay, or defraud creditors.
3. The Wilferds' Cross-Appeal
The Wilferds filed a cross-appeal in this matter, but failed to comply with filing rules. For a cross-appeal to be proper, the cross-appellant must "file and serve a statement of the issues to be presented on the cross appeal and a designation of additional items to be included in the record" within ten days after service of the appellant's statement.FN31 The Wilferds filed no such statement in this case. In addition, the rules require an appellee to include any "issues and argument pertinent to the cross appeal, denominated as such" in the response to the appellant's brief FN32 Again, the Wilferds failed to comply with this requirement.
FN31. Fed. R. Bankr.P. 8006.
FN32. Fed. R. Bankr.P. 8009.
The court, therefore, denies the Wilferds' cross-appeal.
CONCLUSION
The court affirms the bankruptcy court's decision in whole. The bankruptcy's court's application of the continuing concealment doctrine was proper. And although the court is unable to comprehensively review the factual record, the portion of the record presented to this court does not reveal clear error by the bankruptcy court. The clerk's office is directed to enter judgment accordingly and to close the case.
More Tales About Asset Protection Scammer David Tedder
David Tedder was an attorney from San Diego who put together many very aggressive asset protection schemes, as well as help his clients commit offshore tax evasion. As of the time of this writing, he is currently incarcerated in Club Fed. Here is another in an increasingly long line of cases that detail the tails of David Hampton Tedder. Banyan Ltd. Partnership v. Baer, 2007 WL 405695 (Cal.App. 4 Dist. 2007)
California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.
Court of Appeal, Fourth District, Division 3, California.
BANYAN LIMITED PARTNERSHIP et al., Plaintiffs and Respondents,
v.
Dan W. BAER, Defendant and Appellant.
No. G036089.
(Super.Ct.No. 764271).
Feb. 7, 2007.
Appeal from an order of the Superior Court of Orange County, Kim Garlin Dunning, Judge. Affirmed.
Enterprise Counsel Group, David A. Robinson and Benjamin P. Pugh for Defendant and Appellant.
Dressler & LaViña, Thomas W. Dressler; Law Offices of Dennis Hartmann and Dennis Hartmann for Plaintiffs and Respondents.
OPINION
O'LEARY, J.
*1 This case involves rather murky business dealings of Dan W. Baer and David H. Tedder, who was an attorney. In the mid-1980s, the two formed a joint venture (the Joint Venture) in which they marketed "asset protection" and estate planning services to Tedder's high wealth clients. The Joint Venture's profits (as well as proceeds from various loans made to the Joint Venture by Baer's offshore corporation and from client accounts controlled by Tedder) were then used to acquire real estate for investment. In the mid-1990s, the partners' relationship soured, and litigation between them and former clients has been ongoing since 1996. The Joint Venture's assets, mainly the real estate, are currently being managed and controlled by Baer.
This appeal involves only one issue: whether the trial court abused its discretion by appointing a receiver pursuant to Code of Civil Procedure section 564 FN1 to manage the remaining assets of the Joint Venture while it winds down.FN2 The appellant, Baer, argues appointment of a receiver was inappropriate because his personal equity in the remaining real property assets was more than sufficient to satisfy any judgments against him for any of his alleged misdeeds in managing the assets. We find no abuse of discretion and affirm the order.
FN1. All further statutory references are to the Code of Civil Procedure, unless otherwise indicated.
FN2. An order appointing a receiver is appealable. (§ 904.1, subd. (a)(7).)
FACTS
Procedure
Although the litigation began in 1996, the only pleadings in the record are a sixth amended complaint and fourth amended cross-complaint filed in December 2005. The plaintiffs on the complaint are 10 limited partnerships and one corporation, all formed by Tedder for various clients.FN3 All essentially allege they made loans to the Joint Venture, and those loans have not been repaid. Three of the limited partnerships, Banyan Limited Partnership, Pear Tree Limited Partnership, and Orange Blossom Limited Partnership have common ownership (hereafter referred to collectively as the Grammer Partnerships), and in an earlier phase of this case were adjudicated as being owed over $1 million by the Joint Venture. The cross-complaint contains Tedder's claims against Baer, the corporation formed as part of the Joint Venture, and another corporation owned by Baer, for among other things dissolution of the Joint Venture and an accounting.
FN3. In an earlier opinion, we affirmed the order dismissing several other limited partnerships from this action because they lacked capacity to sue. ( Castlerock Limited Partnership et al. v. Dan Baer et al. (Dec. 12, 2001, G026308) [nonpub. opn.].)
In May 2005, Tedder and the Grammer Partnerships filed a motion to appoint a receiver to take control of the assets of the Joint Venture, which Baer opposed. The trial court granted the motion pursuant to section 564, subdivision (b)(9), concluding "appointment of a[r]eceiver is 'necessary to preserve the property or rights of' ... Tedder and the plaintiffs Grammer [P]artnerships."
In support of the motion to appoint a receiver, Tedder and the Grammer Partnerships presented evidence in the form of declarations explaining the ongoing dispute. In 1985, Tedder was managing partner of the Tedder Law Firm, which specialized in corporate law and taxation. Baer owned a corporation called Southern California Sunbelt Developers, Inc. ("SCSD"), which owned and operated wind turbine facilities. Tedder devised a complicated asset protection/estate plan for Baer that involved creation of several offshore Baer-owned trusts and a Cook Island corporation, American Enterprise Bank ("AEB"), which was wholly owned by Baer's trusts.
*2 In 1986, Tedder and Baer decided to "take the show on the road," so to speak. They orally agreed to "form a 50/50 joint venture (the 'Joint Venture') [,]" which through the Tedder Law Firm, would market legal services to very wealthy individuals for "offshore" asset protection and estate planning. Profits from the estate planning business would be invested in real estate. Tedder and Baer agreed Tedder would retain ownership of the law firm, and be responsible for overseeing the client legal services aspects of the Joint Venture. Baer became the law firm's administrator. Baer would oversee and manage the Joint Venture's real estate acquisitions.
A corporation, IBT International, Inc. ("IBT"), was formed to be the holding company for the Joint Venture's real estate investments. A third company, the Legal Forum, Inc., was formed to conduct asset protection seminars and publish related materials. Baer owned 99 percent of the IBT stock, and Tedder owned one percent. Tedder understood no stock was ever issued for the Legal Forum. (Baer alternately has claimed all the stock was issued to him and all the stock was issued to IBT.) Nonetheless, Tedder claimed he and Baer had agreed they would equally split profits and losses from all businesses and he had a 50 percent equitable interest in IBT and in the Legal Forum.
In 1996, Baer's and Tedder's relationship soured, creditor's claims began piling up, and the instant litigation commenced. The Joint Venture ceased doing business, and Baer has been in control of the Joint Venture's remaining assets: an undeveloped tract of land in Tehachapi and a condominium office park in Orange County.
The Ranch: The Grammer Partnerships' Loans
In 1987, Baer and Tedder agreed IBT would purchase a 7,000 acre cattle ranch (the Ranch) in Tehachapi for residential development. The purchase price was $2.2 million. A $440,000 down payment was required, and the seller agreed to carry back the balance of the purchase price ($1.76 million), secured by a first deed of trust on the Ranch and payable in three installments. Baer and Tedder agreed two of Baer's offshore entities, AEB and International Trade & Investment ("ITI"), would make loans to IBT, secured by second and third deeds of trust on the Ranch, for the down payment. (The ITI loan was later assigned to AEB.) The actual source of the money loaned by AEB was another Baer owned entity, Hamilton Cove Realty.
In 1989, AEB loaned IBT another $400,000 for development of the Ranch. The promissory notes called for full payment within five years and bore interest at a rate of 15 percent per annum. Baer and Tedder agreed that because of the high interest rate, the AEB loans were not intended to be long term debt and would be paid off as quickly as possible-e.g., in less than six months.
By 1990, IBT had run out of money. It was unable to pay the final installment on the seller-carried back note secured by the first deed of trust, and foreclosure proceedings had commenced. There was no money available for development of the Ranch.
*3 One of Tedder's common asset protection devices for his wealthy clients was formation of limited partnerships with clients, in which he was the controlling general partner. The client's money would be placed in a partnership account for investment, and Tedder had complete control over the client funds (thereby, theoretically, putting the client's assets beyond the reach of creditors). Baer and Tedder referred to these client accounts as "controlled accounts." Baer and Tedder agreed unsecured loans would be made to IBT from various controlled accounts.
Over the next three years, Tedder arranged for almost $4 million in unsecured loans to IBT from various controlled accounts, including those belonging to the Grammer Partnerships. Baer and Tedder agreed the loans to IBT from controlled accounts would be used to pay off the delinquent first trust deed, pay off the high interest AEB loans, and continue with development of the Ranch. Baer promised that once lots started to be sold, the proceeds would first go to paying off the loans from the controlled accounts. Apparently, the delinquent first was paid off, moving the AEB loans into first position as secured debt on the Ranch.
Tedder claimed IBT received additional Joint Venture money as well, which he and Baer had agreed was to be used for development of the Ranch, including almost $1.1 million in funds the Tedder Law Firm received from clients, $500,000 from condemnation of a part of the Ranch, and almost $1.75 million from the sale of other Joint Venture real estate. Tedder claims a total of almost $7 million was distributed to IBT from 1990 to 1994; more than enough to retire all the AEB debt on the Ranch and to fully develop it.
During the course of litigation, Tedder learned none of the almost $4 million loaned to IBT from the controlled accounts was used to pay down the high interest loans held by AEB. Instead, Baer transferred most of the loan proceeds to himself to pay off unsecured personal loans he claimed to have made to IBT at an annual interest rate of 10 percent. Baer had also done almost nothing to develop the Ranch.
During the litigation, Baer had several times taken the position that no payments of principal or interest had ever been made on the AEB loans, and the 15 percent annual interest rate on the AEB loans compounded annually. Tedder's accountant declared if Baer's position prevailed, by the time the motion for appointment of a receiver was filed, in the over 18 years since the loans were made, the AEB loan balance would have swelled to over $9 million. Baer testified at an earlier phase of the trial that the Ranch was worth between $5 and $7 million.
Additionally, accounting records indicated that during the winding down of the Joint Venture, without Tedder's consent, Baer caused IBT to pay his own corporation, SCSD, significant amounts of money for equipment rental fees related to the Ranch. He also purchased a house in Tehachapi on which IBT paid part of the mortgage and utilities.
The Guild Property
*4 In 1993, Baer and Tedder agreed the Joint Venture would buy a condominium office park in Orange County (the Guild) for $1 million. Tedder caused one of the controlled accounts (not belonging to the Grammer Partnerships, but to another Tedder Law Firm client, Charles J. Give
