Aceituno v. Vowell et al

Filing 78

FINDINGS of FACT and CONCLUSIONS of LAW signed by Judge John A. Mendez on 9/18/14. The Court ORDERS that judgment be entered against Mr. Todd Vowell and in favor of the bankruptcy estate in the amount of $2,376,879.00. The Court further ORDERS that declaratory judgment be entered against Fidelis declaring it liable for IDM's debt on Plaintiff's successor liability claim. Finally, the Court ORDERS that judgment be entered in favor of Raeanne Vowell and Jeffrey Garcia.(Mena-Sanchez, L)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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In re:

Case No.: 2:12-cv-03068 JAM-EFB

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INTELLIGENT DIRECT MARKETING,

Related No.: 2:09-cv-02898 JAMGGH

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Debtor,
[Bky Case 07-30685-A-7]

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THOMAS ACEITUNO, Chapter 7
Trustee,
Plaintiff,

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[Bky AP No. 09-2439]

v.
TODD VOWELL; RAEANNE VOWELL;
BEVERLY VOWELL; STEADFAST
MAILING SERVICES, INC.; SASHI
CORPORATION; JEFFREY K.
GARCIA; and FIDELIS
MARKETING, INC.,

FINDINGS OF FACT AND CONCLUSIONS
OF LAW AS TO PLAINTIFF’S CLAIMS
AGAINST TODD AND RAEANNE VOWELL,
JEFFREY GARCIA, AND FIDELIS
MARKETING INC.

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Defendants.
In this action, Plaintiff Thomas Aceituno’s, Chapter 7

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Trustee, (“Plaintiff” or “Trustee”) seeks to avoid and recover

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fraudulent transfers; to recover corporate distributions; to

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recover damages for breach of fiduciary duty; to recover

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preferential payments; to recover damages for conversion of

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assets and conspiracy; and a declaratory judgment for successor

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liability (Doc. #9 in the Bankruptcy Adversary Proceeding).

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Beginning on June 23, 2014, and through June 27, 2014, the

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Court held a bench trial and heard testimony from Todd Vowell,

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Lawerence Lemus, Jeff Garcia, Stuart Robken, and Raenne Vowell.

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Numerous exhibits were also submitted by the parties for the

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Court’s consideration.

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submitted a post-trial supplemental brief (Doc. #75) and all

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parties submitted proposed findings of fact and conclusions of

Following the bench trial, the Trustee

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law (Doc. ##73, 74, 76).

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upon review of the FAC, undisputed facts, testimony, exhibits,

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briefing, and all arguments made, the Court now enters its

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Findings of Fact and Conclusions of Law pursuant to Federal Rule

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of Civil Procedure 52(a).

For the reasons set forth below and

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I.

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1.

FINDINGS OF FACT

The remaining parties in this lawsuit are as follows:

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the Trustee for Intelligent Direct Marketing, Inc. (“IDM”),

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Defendants Todd Vowell (“Mr. Vowell”), Raeanne Vowell (“Ms.

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Vowell”), Jeff Garcia (“Mr. Garcia”), and Fidelis Marketing, Inc.

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(“Fidelis”).

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against her are dismissed.

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all claims against it are dismissed.

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Services, Inc. (“Steadfast”) is a suspended corporation not

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represented by counsel.

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Pretrial Conference Order, Doc. #44, ¶ 1.

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///

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///

Defendant Beverly Vowell is deceased and all claims
Defendant Sashi is a corporation and
Defendant Steadfast Mailing

Undisputed Facts (“UF”), Amended

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2.

Todd Vowell began operating as an automotive direct

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mailing service in approximately 1994 and incorporated IDM in

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1997 as an “S” corporation.

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herein was the sole shareholder, sole director, and CEO of IDM.

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Id. ¶ 2.

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3.

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incorporated.

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were the Vowells.

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4.

He is and at all times mentioned

On April 24, 2001, Mr. Vowell caused Sashi to be
The shareholders, officers, and directors of Sashi
Id. ¶ 3.

In or about 2001, Sashi purchased real property known

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as 6930 Destiny Drive, Rocklin, CA 95677 (“Destiny Drive”).

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Sashi leased Destiny Drive to IDM under a lease that expired in

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August 2005.

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5.

Id. ¶ 4.

On or about December 30, 2004, Sashi purchased 5750

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West Oaks Blvd., Rocklin, CA (“West Oaks” Property).

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commercial building with a total of 54,960 square feet.

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6.

This is a
Id. ¶ 5.

IDM transferred $1,779,039 directly to the escrow

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account to buy the West Oaks Property.

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1, 2, and 3; Settlement Statement Regarding West Oaks property,

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Ex. 41; Mr. Vowell’s Testimony.

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7.

Mr. Vowell loaned money to Sashi in 2005 to purchase

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the West Oaks Property.

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Property to IDM.

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8.

IDM’s Bank Statement, Ex.

Sashi leased a portion of the West Oaks

IDM paid Sashi rent in 2005.

UF ¶ 6.

In or about December 2004, IDM moved from Destiny Drive

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to the West Oaks Property.

IDM entered into a written lease with

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Sashi dated January 1, 2005, for 5 years for 27,200 square feet,

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or approximately 50% of the building.

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into had not been occupied previously.

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The space that IDM moved
Id. ¶ 7.

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2

9.

IDM paid for the improvements of the West Oaks

Property.

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10.

IDM’s 2004 Tax Return, Ex. 62.
IDM could not afford the West Oaks Property lease.

Mr.

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Garcia’s Testimony; Mr. Vowell Email Dated January 21, 2007, Ex.

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104.

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11.

At the end of 2004, IDM was depleted of all its cash.

IDM’s Bank Statement, Ex. 1, 2, and 3.
12.

In 2004, IDM had gross revenues of over $26 Million.

UF ¶ 8.
13.

When Sashi sold West Oaks in June 2005, it used the

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approximately $3 million in sale proceeds it received in part to

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pay $1,576,929 to Mr. Vowell and “loan” funds to IDM of $900,000.

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Id. ¶ 9.

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14.

On July 28, 2005, $2,650,000 was deposited into Mr.

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Vowell’s bank account from the sale of the West Oaks Property.

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Mr. Vowell’s Bank Statement, Ex. 89.

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15.

On July 20, 2004, IDM entered into a one-year lease of

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19,144 square feet of rentable space located within Building 347,

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“B” Bay 4937 43rd Ave., McClellan CA 95652 (“McClellan

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Property”).

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16.

UF ¶ 10.

In 2005, IDM had gross revenues over $21 Million.

Mr.

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Vowell received $633,620.50 in wages and compensation.

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Vowell received $45,200 in wages (not including contributions to

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401k plans).

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17.

Mrs.

Id. ¶ 11.

In 2005, IDM’s total assets at the end of the year

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were $3,329,020 and the total liabilities were $2,788,937.

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IDM’s 2005 Tax Return, Ex. 63.

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18.

In 2006, Mr. Vowell received wages of $242,000.00 from

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IDM (not including 401k contributions).

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did not receive any wages from IDM.

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19.

In 2006, Mrs. Vowell

Id. ¶ 12.

In 2006, the Vowells transferred $575,000 to IDM.

Vowells’ Checks to IDM, Ex. B1, B2, and B3.
20.

In 2007, Mr. Vowell received wages from IDM of

$21,250.00.
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Mrs. Vowell did not receive any wages. UF ¶ 13.

By late 2006 and 2007, IDM was operating at a loss.

Id. ¶ 14.
22.

On or about April 30, 2007, IDM ceased sale operations

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or performing its contracts, and vacated the West Oaks Property.

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Id. ¶ 15.

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On October 14, 2007, Mr. Vowell received a $454,299 tax

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refund as a result of IDM’s 2006 losses being carried back to

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offset IDM’s 2004 income. IDM’s 2006 tax return, Ex. 64;

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Application for a Tax Refund, Ex. 100.

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On February 22, 2011, Mr. Vowell received a $301,879

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tax refund as a result of IDM’s losses being carried back to

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offset IDM’s 2005 income.

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T-7-293; Changes to IDM’s 2005 Tax Return, Ex. 94.

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Mr. Vowell Bank Statement, Ex. 91, at

The $454,299 tax refund was used to pay IDM’s expenses.

Mr. Vowell’s Testimony.
26.

On May 1, 2007, Mr. Garcia started Fidelis, a direct

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mail marketing company.

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Testimony.

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Mr. Vowell’s testimony; Mr. Garcia’s

There were no differences between Fidelis and IDM

except for the debt.

Mr. Vowell’s testimony.

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Mr. Vowell paid almost all of Fidelis’ startup costs.

Mr. Vowell’s Testimony.

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29.

Starting on May 1, 2007, Fidelis began performing

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contracts with customers, including contracts with customers that

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were former IDM customers.

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30.

UF ¶ 16.

IDM granted Fidelis a right to possess IDM’s goodwill,

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income stream, and assets.

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2007, Ex. 32, at 2; Mr. Vowell Email dated March 26, 2007, Ex.

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110, at 1; Mr. Vowell Email Dated May 4, 2007, Ex. 108.

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The transfer of assets was to prevent creditors from

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collecting IDM’s debts.

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Ex. 32, at 2.

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32.

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33.

See Garcia Email Dated March 20, 2007,

Garcia Email, Ex. 110, at 2.

Mr. Vowell prepared letters to notify creditors but the

letters were never sent.

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Mr. Garcia Email dated March 20,

Mr. Vowell’s Testimony.

By mid-July 2007, Mr. Garcia/Fidelis and

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Vowells/Steadfast had reached an impasse and would not reach an

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agreement, or Fidelis/Garcia breached an agreement, regarding

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Fidelis’ exclusive use of Steadfast for printing, or Fidelis’

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payment to Mr. Vowell of a consulting fee, or lease payments.

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that point, Fidelis moved out of Steadfast’s Melody Lane

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facility.

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34.

At

UF ¶ 17.
Fidelis operated successfully in 2007 and was

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profitable.

Monthly deposits into Fidelis’ account in 2007 were

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as follows:

May $883,307.55; June $1,161,518.87; July $720,109;

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August: $945,059.11; September $847,218.74; October $848,142.83;

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November $754,835.35; December $608,986.81.

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Fidelis set aside $400,000 after payment of expenses.

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///
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From income in 2007,
Id. ¶ 18.

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35.

On July 26, 2007, Mr. Vowell, Steadfast, and IDM, filed

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a lawsuit against Mr. Garcia, Tony D. Tran, and Fidelis for

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misappropriation of trade secrets, conversion, breach of contract

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and other claims, (Placer County Superior Court Case No. S CV

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214314).

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Complaint against Plaintiffs, and on December 24, 2007, filed a

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First Amended Cross-Complaint, alleging intentional interference

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with contractual relations, conversion, alter ego, wage claims,

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and other claims.

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36.

On September 11, 2007, Defendants filed a Cross-

Id. ¶ 19.

On or about April 24, 2008, the United States

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Bankruptcy Court, Eastern District of California, made an oral

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ruling granting an order for relief in the state court action.

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On June 18, 2008, the United States Bankruptcy Court, Eastern

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District of California, issued its written Findings of Fact and

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Conclusions of Law.

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defendants removed the state court action to the bankruptcy court

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(Adv. Proc. No. 08-2456), which was later stayed pending the

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outcome of this proceeding.

On August 18, 2008, Fidelis and other

Id. ¶ 20.

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II.

OPINION

The Trustee brought this action against Defendants alleging

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the following causes of actions: (1) avoidance and recovery of

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fraudulent transfers, 11 U.S.C. §§ 548, 544; California Civil

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Code sections 3439.04, 3439.05, against Mr. Vowell; (2) recovery

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of corporate distributions, California Corporation Code section

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500, against Mr. Vowell; (3) breach of fiduciary duty against Mr.

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Vowell; (4) avoidance and recovery of fraudulent transfers

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against Mrs. Vowell; (5) avoidance and recovery of fraudulent
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transfers against Beverly Vowell; (6) avoidance and recovery of

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fraudulent transfers against Steadfast and Mr. Vowell;

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(7) avoidance and recovery of preferential payments against

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Steadfast and Mr. Vowell; (8) conversion and conspiracy to

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convert assets against Mr. Vowell, Mrs. Vowell, Steadfast,

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Fidelis, and Mr. Garcia; (9) avoidance and recovery of fraudulent

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transfers against Mr. Vowell, Mrs. Vowell, Steadfast, Fidelis,

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and Mr. Garcia; and (10) successor liability against Fidelis and

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Mr. Garcia.

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According to the First Amended Complaint (“FAC”), the first

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two causes of actions are based on the following transfers: (1)

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the $1.6 million transfer from IDM to Mr. Vowell (FAC ¶¶ 18, 36);

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(2) Mr. Vowell’s 2005 compensation (FAC ¶¶ 19,36); (3) Mr.

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Vowell’s 2006 compensation (“2006 compensation”)(FAC ¶¶ 19,36);

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(4) $350,000 promissory note from Mr. Vowell to IDM (“promissory

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note”)(FAC ¶¶ 20, 36);

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(5) $750,000 in advances made from IDM to officers

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(“advances”)(FAC ¶¶ 20, 36); (6) the compensation paid by IDM to

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Mrs. Vowell and Beverly Vowell during the period of 2005 through

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2008; (7) Mrs. Vowell’s American Express charges (FAC ¶¶ 23, 36);

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and (8) property of IDM retained by Mr. Vowell and not turned

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over to the Trustee.

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As mentioned above, all claims against Beverly Vowell and

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Sashi have been dismissed.

During the bench trial, the Court

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granted in part and denied in part the Vowell’s motion for

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judgment on partial findings.

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Procedure 52(c), the Court dismissed the claims based on the

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promissory note, advances, 2006 compensation, the fourth cause of

Pursuant to Federal Rule of Civil

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action, and the seventh cause of action as to any other amount

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not in evidence.

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fact and conclusions of law, he proposes that there was

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insufficient basis for recovery of the 2005 compensation.

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The Trustee’s Proposed Findings of Fact and Conclusions of Law

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(“Trustee’s Proposed F&C”), Doc. 74, ¶ 54.

Further, in the Trustee’s proposed findings of

See

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In the Trustee’s supplemental post-trial brief, he moves to

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amend the pleadings to conform them to the evidence and to raise

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unpleaded issues pursuant to Federal Rule of Civil Procedure

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15(b)(2) (“Rule 15(b)(2)”).

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(“Trustee’s Supp. PTB”), Doc. #75, at 1-2.

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Trustee wants to include claims based on the tax refunds Mr.

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Vowell received in 2007 and 2011.

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issue not raised by the pleadings is tried by the parties’

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express or implied consent, it must be treated in all respects as

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if raised in the pleadings.”

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case, the tax refunds were included in the Amended Pretrial

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Conference Order and were tried without objection during the

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bench trial.

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Vowell received substantial tax refunds as a result of the tax

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returns filed by IDM and he requests “for such other and further

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relief as the Court deems appropriate.”

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Relief ¶ 7.

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amend the pleadings because the allegations are in the FAC.

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Trustee’s Supp. Post-Trial Brief
In particular, the

Under Rule 15(b)(2), “When an

Fed. R. Civ. P. 15(b)(2).

In this

Moreover, in the FAC, the Trustee mentions that Mr.

FAC ¶ 25; FAC Prayer for

Accordingly, the Court need not grant the motion to

In addition, the Court holds that all the claims not

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discussed in either the Trustee’s proposed findings of fact and

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conclusions of law or the Trustee’s supplemental post-trial brief

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are abandoned.

Therefore, the remaining claims in this case are
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as follows: (1) avoidance and recovery of the $2,650,000 paid to

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Mr. Vowell on July 28, 2005, from the West Oaks Property as a

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fraudulent transfer under 11 U.S.C. §§ 548, 544 and California

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Civil Code sections 3439.04, 3439.05; (2) recovery of the

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$2,650,000 corporate distribution under California Corporation

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Code section 500; (3) breach of fiduciary duty based on the

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$2,650,000 transfer; (4) unjust enrichment of the $454,299 tax

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refund paid to Mr. Vowell on October 17, 2007, and the $301,879

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tax refund paid to Mr. Vowell on February 22, 2011; (5)

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conversion and conspiracy to convert assets against Mr. Vowell,

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Steadfast, Fidelis, and Mr. Garcia; (6) avoidance and recovery of

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fraudulent transfers against Mr. Vowell, Fidelis, and Mr. Garcia;

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and (7) successor liability against Fidelis and Mr. Garcia. 1

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A.

$2,650,000 Fraudulent Transfer

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The Trustee’s fraudulent transfer claims arise under federal

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bankruptcy law, 11 U.S.C. §§ 548, 544, as well as state law,

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California Civil Code sections 3439.04, 3439.05.

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of the Bankruptcy Code permits the Trustee to stand in the shoes

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of a creditor to assert any state law claims that a creditor may

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have.

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Section 544(b)

Under the Bankruptcy Code and California law, there are two

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types of fraudulent conveyances: actual and constructive.

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Compare 11 U.S.C. § 548(a)(1)(A); Cal. Civ. Code § 3439.04(a)(1)

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with 11 U.S.C. § 548(b); Cal. Civ. Code §§ 3439.04(a)(2),

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3439.05.

An actual fraudulent transfer is one made with “actual

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The Trustee has also moved for judgment against Steadfast and
Mr. Vowell (Doc. #77), which the Court addresses in a separate
order.
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intent to hinder, delay, or defraud a creditor.”

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548(a)(1)(A); Cal. Civ. Code § 3439.04(a)(1).

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fraudulent transfer does not require an intent to defraud.

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11 U.S.C. § 548(b); Cal. Civ. Code §§ 3439.04(a)(2), 3439.05.

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This claim involves a constructive fraudulent conveyance because

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no evidence of an intent to defraud was produced.

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1.

See 11 U.S.C. §

A constructive
See

The Bankruptcy Code

To prove a claim for constructive fraudulent conveyance
under 11 U.S.C. § 548(a)(1)(B), a plaintiff must show that

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(1) the transfer involved property of the debtor; (2) the

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transfer was made within two years of the filing of the

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bankruptcy petition; (3) the debtor did not receive reasonably

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equivalent value in exchange for the property transferred; and

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(4)(a) the debtor was insolvent at the time of the transfer or

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was made insolvent by the transfer or (b) the transfer was to an

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insider under an employment contract and not in the ordinary

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course of business.

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United Energy Corp., 944 F.2d 589, 594 (9th Cir. 1991) (stating

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elements of a claim for fraudulent transfer under § 548).

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11 U.S.C. § 548(a)(1)(B); see also In re

The $2,650,000 transfer occurred on July 28, 2005.

The

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involuntary bankruptcy petition was filed on December 10, 2007.

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Therefore, the Trustee’s claim to void and recover the $2,650,000

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fails under § 548 because it was not made within two years of the

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filing of the bankruptcy petition.

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2.

California Law

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Under California law, a transfer is constructively

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fraudulent if the debtor made the transfer without receiving

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reasonably equivalent value in exchange and the debtor did one of
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the following:
(1) was engaged or about to engage in a business or
transaction for which the debtor’s remaining assets
were unreasonably small in relation to the business or
transaction; or (2) intended to incur or believed (or
reasonably should have believed) that it would incur
debts beyond its ability to repay; or (3) was insolvent
at the time, or was rendered insolvent by the transfer
or obligation.

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United States v. Whitman, 2:12-CV-2316-MCE-EFB, 2013 WL 3968083,

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at *7 (E.D. Cal. July 31, 2013) report and recommendation

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adopted, 2:12-CV-2316-MCE-EFB, 2013 WL 4516009 (E.D. Cal. Aug.

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26, 2013).

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limitations under California law for constructive fraudulent

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conveyances is four years.

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Unlike the Bankruptcy Code, the statute of

Cal. Civ. Code § 3439.09(a).

Based on Schedule L, Balance Sheets, of IDM’s 2005 tax

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return, IDM’s total assets at the end of the year were $3,329,020

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and the total liabilities were $2,788,937.

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that in 2005, IDM was already experiencing financial stress.

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However, there is insufficient evidence to show that IDM was

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insolvent, its remaining assets were unreasonably small in

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relation to the 2.65 million dollar transfer, or the debtor

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intended to incur or believed (or reasonably should have

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believed) that it would incur debts beyond its ability to repay.

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Accordingly, the Court holds that the Trustee’s claim to void and

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recover the $2,650,000 as a fraudulent transfer under California

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law fails.

The Trustee argues

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B.

$2,650,000 Distribution

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The Trustee seeks to recover the $2,650,000 transfer as an

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improper distribution under California Corporation Code section

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500 (“Section 500”).

The Vowells argue that the $2,650,000
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transfer should not be treated as an IDM distribution because

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Sashi owned the property not IDM.

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Trustee argues Sashi should be treated as the alter ego of IDM.

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In his supplemental brief, the

As a threshold matter, the Court must determine whether the

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alter ego doctrine applies.

Alter ego applies when “(1) there is

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such a unity of interest and ownership between the corporation

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and the individual or organization controlling it that their

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separate personalities no longer exist, and (2) failure to

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disregard the corporate entity would sanction a fraud or promote

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injustice.”

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Cal.App.4th 980, 993 (1995).

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and ownership in this case because Sashi held the title to the

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West Oaks Property but IDM purchased it under Sashi’s name by

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directly transferring $1,779,039 into the escrow for the

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property, prepaying rent, and paying for tenant improvements.

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Second, failure to disregard the corporate entity would promote

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injustice because IDM was depleted of all cash to purchase and

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improve the West Oaks Property, which was sold and resulted in a

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$2,650,000 payment to the Vowells not IDM.

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the Court finds Sashi is the alter ego of IDM.

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Communist Party v. 522 Valencia, Inc., 35
First, there is a unity of interest

Based on these facts,

The Court must determine whether the distribution was

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proper.

A corporation is barred from making any distribution

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unless it meets the requirements of Section 500.

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§ 500.

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this case, prohibits a distribution unless (a) before the

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distribution, the corporation’s retained earnings exceed the

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distribution, or (b) the assets after the distribution are at

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least 125% of the liabilities and the current assets are at least

Cal. Corp. Code

The previous version of Section 500, which applies in

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equal to the current liabilities.

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amendment).

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Code section 166 as “the transfer of cash or property by a

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corporation to its shareholders without consideration, whether by

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way of dividend or otherwise . . . .”

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Id. (prior to the 2012

“Distribution” is defined in California Corporations

Cal. Corp. Code § 166.

On this issue, the Trustee’s expert testified that the

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distribution was improper because the transfer exceeded IDM’s

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retained earnings by $490,893 and IDM’s assets did not exceed

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125% of its liabilities.

The Court finds this part of the

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expert’s testimony credible and the Vowells provided no evidence

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to the contrary.

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show that they transferred a total of $575,000 to IDM in 2006.

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However, returning the money to IDM after the $2,650,000

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distribution does not make the distribution appropriate.

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At most, the Vowells submitted three checks to

Accordingly, the Court holds that the $2,650,000

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distribution was improper, but the Vowells are entitled to a

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$575,000 offset against the distribution for the money that was

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returned to IDM.

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Court will not credit this amount because it was approximately 3

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years after the distribution.

The Vowells also returned money in 2008 but the

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C.

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The Trustee claims that Mr. Vowell breached his fiduciary

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Breach of Fiduciary Duty

duty to IDM by causing IDM to make distributions to him.

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The elements of a claim for breach of fiduciary duty are

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“(1) the existence of a fiduciary relationship; (2) the breach of

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that relationship; and (3) damages proximately caused by the

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breach.”

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4017123 , at *41 (Bankr. C.D. Cal. Apr. 5, 2013) (citing Pierce

In re GSM Wireless, Inc., 2:12-BK-16456 RK, 2013 WL

14

1

v. Lyman, 1 Cal.App.4th 1093, 1101 (1991)).

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breach of fiduciary duty include damages for all harm proximately

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caused to the corporation, as well as rescission and

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restitution.”

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264 (1977) (citations omitted)).

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common law—generally, to act with honesty, loyalty, and good

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faith—predated the statute by decades.”

Lehman v. Superior

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Court, 145 Cal.App.4th 109, 121 (2006).

Similarly, under

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California Corporation Code section 309, a director shall perform

“Remedies for a

Id. (citing Hicks v. Clayton, 67 Cal.App.3d 251,
“A director’s fiduciary duty at

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his duties as a director “in good faith, in a manner such

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director believes to be in the best interest of the corporation

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and its shareholders and with such care, including reasonable

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injury, as an ordinarily prudent person in a like position would

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use under similar circumstances.”

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Cal. Corp. Code § 309.

A director is protected by the business judgment rule, which

16

provides that “a director shall be entitled to rely on

17

information, opinions, reports or statements [prepared by

18

specific parties including independent accountants] . . . so long

19

as . . . the director acts in good faith, after reasonable

20

inquiry when the need therefor is indicated by the circumstances

21

and without knowledge that would cause such reliance to be

22

unwarranted.”

23

the business judgment rule exists “in ‘circumstances which

24

inherently raise an inference of conflict of interest’ and the

25

rule ‘does not shield actions taken without reasonable inquiry,

26

with improper motives, or as a result of a conflict of

27

interest.’”

28

Cal.App.4th 1020, 1045 (2009)(citations omitted).

Cal. Corp. Code § 309.

However, an exception to

Berg & Berg Enterprises, LLC v. Boyle, 178

15

1

As the sole shareholder, sole director, and CEO of IDM, Mr.

2

Vowell owed a fiduciary duty to IDM.

Although Mr. Vowell

3

testified that he relied on the judgment of an accountant, the

4

business judgment rule does not protect him because there is a

5

conflict of interest in this case:

6

both IDM and Sashi and the distribution went to him.

7

Mr. Vowell breached his fiduciary duty by obligating IDM to

8

transfer the money to buy the property, to pay rent it could not

9

afford, and to pay for tenant improvements.

Mr. Vowell was a director of
Further,

This breach caused

10

damage to IDM because as Mr. Garcia testified, IDM could not

11

afford the lease, and when they moved into the West Oaks

12

Property, “that is when the wheels started to fall off.”

13

Vowell Email Dated January 21, 2007, Ex. 104.

14

Court finds that Mr. Vowell breached his fiduciary duty and IDM

15

is entitled to damages.

16

double recovery of the $2,650,000.

See Mr.

Accordingly, the

However, the Court will not permit

17

D.

Tax Refunds

18

The Trustee claims that the $454,299 and $301,879 tax

19

refunds should be returned to the bankruptcy estate on an unjust

20

enrichment theory.

21

refunds breached Mr. Vowell’s fiduciary duty and constitute

22

improper distributions.

23

Court will not address these two claims because neither was

24

sufficiently addressed in the Trustee’s proposed findings of fact

25

and conclusions of law or in his supplemental brief.

26

In addition, the Trustee claims that the tax

Trustee’s Proposed F&C ¶¶ 63, 64.

The

Tax refunds arising from pre-petition earnings or losses are

27

generally considered property of the bankruptcy estate under 11

28

U.S.C. § 541.

Segal v. Rochelle, 382 U.S. 375, 380-81 (1966)
16

1

(holding that a loss-carryback tax refund was property of the

2

chapter 7 estate); In re Salazar, 465 B.R. 875, 881 (B.A.P. 9th

3

Cir. 2012) (“Tax refunds are property of the bankruptcy estate

4

under § 541(a).”) (citing Segal v. Rochelle, 382 U.S. 375, 379

5

(1966); United States v. Sims (In re Feiler), 218 F.3d 948, 955–

6

56 (9th Cir. 2000)).

7

Tax refunds that belong to the bankruptcy estate may be

8

recovered based on an unjust enrichment theory.

In re Forman

9

Enterprises, Inc., 273 B.R. 408, 413 (Bankr. W.D. Pa. 2002) (“The

10

[net operating losses] might be viewed as providing a substantial

11

benefit for defendants which debtor conferred on them as a result

12

of their own course of conduct and which would be unconscionable

13

for them to retain.”) (emphasis in original).

14

receives a benefit in circumstances such that it would be

15

unwarranted to retain that benefit at the expense of another, the

16

defendant is said to be unjustly enriched.”

17

Inc., 2:12-BK-16456 RK, 2013 WL 4017123, at *45 (Bankr. C.D. Cal.

18

Apr. 5, 2013).

19

enrichment are: (1) the receipt of a benefit; and (2) the unjust

20

retention of the benefit at the expense of another.”

21

this case, Mr. Vowell used IDM’s 2006 net operating losses to

22

offset IDM’s 2004 income (a “loss carryback”), which resulted in

23

a $454,299 tax refund.

24

by a loss carryback to receive a $301,879.00 tax refund. 2

25

tax refunds were a result of pre-petition earnings and therefore,

“When a defendant

In re GSM Wireless,

“Under California law, the elements of unjust

Id.

In

Similarly, IDM’s 2005 income was offset
Both

26
27
28

2

It is unclear which year’s net operating losses were used, but
this information is unnecessary to determine whether the refund
belongs to the estate.
17

1
2

they belonged to the bankruptcy estate.
The Court must determine whether Mr. Vowell was unjustly

3

enriched by retaining the tax refunds.

4

benefit of a $454,299 tax refund based on IDM’s earnings and

5

losses.

6

expense of IDM.

7

was used to pay creditors and restart IDM.

8

was not unjustly enriched.

9

Mr. Vowell received the

However, Mr. Vowell did not retain the benefit at the
Based on Mr. Vowell’s testimony, this tax refund
Therefore, Mr. Vowell

Mr. Vowell also received the benefit of a $301,879.00 tax

10

refund based on IDM’s earnings and losses.

11

tax refund, there is no evidence that this refund was used to pay

12

IDM’s creditors or improve IDM.

13

even though IDM was going through bankruptcy proceedings when he

14

received the tax refund in 2011.

15

unjustly enriched at the expense of IDM.

16

Unlike the $454,299

The money went to Mr. Vowell

Mr. Vowell, as a result, was

Accordingly, the Court finds that Mr. Vowell must pay the

17

$301,879.00 tax refund to the bankruptcy estate, but is not

18

obligated to pay the $454,299 tax refund.

19

E.

Conversion and Conspiracy

20

The Trustee brought a conversion claim to recover the value

21

of IDM’s good will and income stream.

22

and Mr. Garcia are equally liable as co-conspirators for the

23

theft of the value of the assets on May 1, 2007.

24

He claims that Mr. Vowell

Under California law, “[c]onversion is the wrongful exercise

25

of dominion over the property of another.”

Ross v. U.S. Bank

26

Nat. Ass’n, 542 F. Supp. 2d 1014, 1023-24 (N.D. Cal. 2008)

27

(citation omitted).

28

show: (1) the plaintiff’s ownership or right to possession to the

“To establish conversion, a plaintiff must

18

1

property at the time of conversion; (2) the defendant’s

2

conversion by a wrongful act; and (3) damages.”

3

Id.

IDM owned its good will and income stream, but there was no

4

conversion by a wrongful act in this case.

Mr. Garcia testified

5

that the there was no transfer from IDM to Fidelis because the

6

customer list and contracts were worthless.

7

testimony is contradicted by the emails in which both Mr. Vowell

8

and Mr. Garcia state they do not want to lose IDM’s income

9

stream.

However, his

Mr. Garcia Email dated March 20, 2007, Ex. 32, at 2; Mr.

10

Vowell Email dated March 26, 2007, Ex. 110, at 1.

11

Vowell testified that IDM’s assets were used to set up Fidelis,

12

he encouraged Fidelis’ employees to call IDM’s customers, and in

13

one email, he said, “I called him and told him IDM is not dead

14

just reorganizing or something like that.”

15

Dated May 4, 2007, Ex. 108.

16

particular the employee confidentiality agreement.

17

Testimony; Lawrence Lemus Email, Ex. 27.

18

finds that Mr. Vowell and Mr. Garcia set up Fidelis to continue

19

IDM’s business by finishing IDM’s contracts and using its

20

customer list, and Fidelis was initially set up using IDM’s

21

assets.

22

to possess IDM’s good will, income stream, and assets until the

23

plan fell apart (i.e., IDM transferred to Fidelis its good will,

24

income stream, and assets).

25

voluntary.

26

required to establish a conversion claim.

27

Funding, Inc., 321 B.R. 287, 304 (Bankr. C.D. Cal. 2005) (“A

28

transfer that is voluntary is not wrongful because a voluntary

Moreover, Mr.

Mr. Vowell Email

Fidelis also used IDM’s documents in
Mr. Vowell’s

Therefore, the Court

As a result, on May 1, 2007, IDM granted Fidelis a right

The transfer, however, was

A voluntary transfer is not a wrongful act as

19

In re Lau Capital

1

transfer is consensual and thus, is not wrongful.”)

2

after the plan fell apart, there is no evidence of conversion

3

because Fidelis moved out and it purchased its own furniture,

4

computers, servers, software, and customer list.

5

In addition,

See Ex. 13b.

Accordingly, the Court finds that the Trustee’s conversion

6

claim fails thereby making it unnecessary for the Court to

7

address the Trustee’s conspiracy claim.

8

F.

Fraudulent Transfer

9

The Trustee also seeks to avoid and recover IDM’s good will

10

and income stream as a fraudulent transfer under federal

11

bankruptcy law and state law.

12

claim for the $2,650,000 transfer, the Trustee argues that both

13

types of fraudulent conveyances, actual and constructive, apply

14

in this instance.

15
16

1.

Unlike the fraudulent transfer

See Trustee’s Supp. PTB at 7.

Actual Fraudulent Conveyances

Pursuant to 11 U.S.C. § 548(a), the Trustee may avoid any

17

transfer that was made or incurred within 2 years if the transfer

18

was made with actual intent to hinder, delay, or defraud

19

creditors.

20

11 U.S.C. § 548(a).

The transfer of IDM’s good will and income stream to Fidelis

21

occurred in 2007, within two years of the filing of the

22

bankruptcy petition.

23

created with the understanding that it would benefit from IDM’s

24

connections and income stream while being distinguished from IDM

25

to prevent IDM’s creditors from going after it.

26

Dated March 20, 2007, Ex. 32, at 2 (“This would keep creditors

27

from saying its [sic] just IDM south”); Garcia Email, Ex. 110, at

28

2 (“U installed this thought that[]future biz cant be IDM or that

From the emails and testimony, Fidelis was

20

See Garcia Email

1

creditors could come after you” and “[h]ow do we insure that you

2

are protected from IDM’s creditors on this new venture?”).

3

Vowell testified that they intended to reach out to creditors and

4

they paid the creditors they could, but Mr. Vowell and Mr.

5

Garcia’s plan was never communicated to the creditors.

6

Mr.

Mr. Garcia argues that although there were discussions about

7

Mr. Vowell receiving a consulting fee and using IDM’s assets,

8

there was never an agreement and the Agreement for Consulting

9

Services was never finalized.

See Agreement for Consulting, Ex.

10

55.

11

emails and testimony show that Mr. Garcia and Mr. Vowell acted

12

pursuant to a plan to create a company that did not have IDM’s

13

debt.

14

the transfer.

15
16
17
18

However, while a formal agreement was never signed, the

The plan fell apart, but by that point, they had executed

Therefore, the Court finds that Mr. Vowell and Mr. Garcia
created Fidelis and transferred IDM’s assets to hinder creditors.
2.

Constructive Fraudulent Conveyance

As discussed above, to prove a claim for constructive

19

fraudulent conveyance under 11 U.S.C. § 548(a)(1)(B), a plaintiff

20

must show that (1) the transfer involved property of the debtor;

21

(2) the transfer was made within two years of the filing of the

22

bankruptcy petition; (3) the debtor did not receive reasonably

23

equivalent value in exchange for the property transferred; and

24

(4)(a) the debtor was insolvent at the time of the transfer or

25

was made insolvent by the transfer or (b) the transfer was to an

26

insider under an employment contract and not in the ordinary

27

course of business.

28

United Energy Corp., 944 F.2d 589, 594 (9th Cir. 1991) (stating

11 U.S.C. § 548(a)(1)(B); see also In re

21

1
2

elements of a claim for fraudulent transfer under § 548).
In this case, all the elements of a constructive fraudulent

3

conveyance are met:

4

IDM and the transfer occurred within two years of the filing of

5

the bankruptcy petition.

6

equivalent value because none of the expected compensation under

7

the agreement was paid to IDM.

8

from Fidelis but there is no evidence it was returned to IDM.

9

Finally, it is undisputed that in 2007, IDM was insolvent.

10

The good will and income stream belonged to

IDM did not receive a reasonable

Mr. Vowell received some money

Accordingly, the Court finds that the transfer to Fidelis

11

was an actual and a constructive fraudulent conveyance under the

12

Bankruptcy Code.

13

a constructive fraudulent conveyance under state law.

14

Capital Int’l Corp. v. Library Asset Acquisition Co., Ltd., 510

15

B.R. 248, 257 (C.D. Cal. 2014) (“The federal fraudulent transfer

16

provisions are ‘similar in form and substance’ to California’s

17

fraudulent conveyance statutes . . . .”) (citation omitted).

18
19

3.

As a result, the transfer is also an actual and
See Screen

Value of IDM

The Court must determine the value of IDM at the time of the

20

transfer.

21

trustee.

22

Mo. 1985).

23

The burden of proving the value of the goods is on the
Kidder Skis Int’l v. Williams, 60 B.R. 808, 811 (W.D.

In this case, the Trustee’s expert estimated that IDM’s

24

value at the time it was transferred to Fidelis on May 1, 2007,

25

was between $3,600,000 and $4,500,000, and Fidelis adjusted

26

profit for the first 8 months was $776,380.

27

numbers, the Trustee proposes that the Court split the difference

28

between the lowest valuation provided by the expert ($3,600,000)
22

Based on these

1

and Fidelis’ adjusted profit ($776,380) to set IDM’s value at

2

$2,188,190.

3

about IDM’s “customer list” and the expert failed to itemize the

4

intangible assets he considered in his valuation of IDM.

5

Additionally, Mr. Garcia testified that he received nothing from

6

IDM, IDM had abandoned its contracts thus rendering the contracts

7

worthless, and business generated by Fidelis was the sole result

8

of new business with dealers after May 1, 2007.

9

However, there was conflicting testimony at trial

The Court did not find Mr. Garcia’s testimony credible

10

because as mentioned above, several of his emails suggest that

11

IDM had a valuable income stream.

12

little to no weight to the expert’s testimony regarding IDM’s

13

value because there were several deficiencies in his appraisal

14

methodology.

15

(Bankr. N.D. Cal. 2008) (“The court may decline to accept an

16

expert’s opinion, in whole or in part, and may reject an expert’s

17

opinion based upon its conclusions regarding the expert’s

18

credibility. . . .

19

necessarily conclusive.”)

In addition, the Court gives

In re 3dfx Interactive, Inc., 389 B.R. 842, 868

Even uncontradicted expert testimony is not

20

As a result, the Trustee failed to meet his burden of

21

proving the value of the IDM’s goodwill and income stream.

22

though the Court finds there was a transfer and it is avoidable,

23

there is no valuation evidence on which the Court can reach the

24

conclusions urged by the Trustee.

25

award judgment for the value of IDM.

Accordingly, the Court cannot

26

G.

27

In the alternative, the Trustee argues that successor

28

Successor Liability

liability is an appropriate remedy based on the fraud-to23

Even

1
2

creditors theory.
Under successor liability, “a corporation purchasing the

3

principal assets of another corporation assumes the other’s

4

liabilities” only if “(1) there is an express or implied

5

agreement of assumption, (2) the transaction amounts to a

6

consolidation or merger of the two corporations, (3) the

7

purchasing corporation is a mere continuation of the seller, or

8

(4) the transfer of assets to the purchaser is for the fraudulent

9

purpose of escaping liability for the seller’s debts.”

Maloney

10

v. Am. Pharm. Co., 207 Cal. App. 3d 282, 287 (1988) (quoting Ray

11

v. Alad Corp., 19 Cal.3d 22, 28 (1977)).

12

liability often refers to purchases, liability may extend to

13

asset transfers as well. See Stoumbos v. Kilimnik, 988 F.2d 949,

14

961 (9th Cir. 1993) (stating that successor liability can extend

15

to “transfers other than straightforward purchases”)

16

(interpreting Washington law similar to California law).

17

“actual fraud or the rights of creditors are involved, . . . the

18

courts uniformly hold the new corporation liable for the debts of

19

the former corporation.”

20

1315, 1327 (2012)(emphasis in original), review denied (Jan. 23,

21

2013).

22

Although successor

When

Cleveland v. Johnson, 209 Cal.App.4th

In this case, the evidence shows that Fidelis was created

23

with the understanding that it would benefit from IDM’s

24

connections and income stream while being distinguished from IDM

25

to prevent IDM’s creditors from going after it.

26

transfer of IDM’s assets to Fidelis was for the fraudulent

27

purpose of escaping liability for IDM’s debt.

28

agreement fell through after a few weeks and Fidelis broke all
24

Therefore, the

However, the

1

ties to IDM.

2

continuing tie is sufficient to negate successor liability.

3

Because successor liability is an equitable principle, “it is

4

appropriate to examine successor liability issues on their own

5

unique facts and [c]onsiderations of fairness and equity apply.”

6

Cleveland, 209 Cal.App.4th at 1330 (internal quotations and

7

citations omitted).

8

inequitable to allow Fidelis to escape liability by severing its

9

ties with IDM after it received benefits from IDM and after many

None of the parties address whether the lack of a

Under these circumstances, it would be

10

creditors were defrauded.

11

successor liability by restructuring the form of the transfer and

12

severing all ties after a short period.

13

Otherwise, companies could avoid

Accordingly, the Court finds that Fidelis is IDM’s

14

successor.

The Trustee also seems to suggest that Mr. Garcia

15

should be held directly liable (see Trustee’s Proposed F&C

16

¶¶ 121-123), but he fails to address alter ego liability.

17
18
19
20

III.
1.

CONCLUSIONS OF LAW

The $2,650,000 transfer was not a fraudulent transfer

under the Bankruptcy Code or California law.

21

2.

IDM is the alter ego of Sashi.

22

3.

The $2,650,000 transfer was an improper distribution,

23
24
25
26
27
28

but the Vowells are entitled to a $575,000 offset.
4.

Mr. Vowell breached his fiduciary duty by transferring

the $2,650,000.
5.

Mr. Vowell was unjustly enriched by the $301,879.00 tax

refund, but not the $454,299 tax refund.
6.

Fidelis, Mr. Garcia, and Mr. Vowell did not convert
25

1
2

IDM’s assets because the transfer was voluntary.
7.

The transfer of IDM’s good will and income stream was

3

an actual and a constructive fraudulent transfer under the

4

Bankruptcy Code and California law; however, the Trustee failed

5

to meet his burden of proving the value of the IDM’s goodwill and

6

income stream.

7
8

8.

Fidelis is the successor of IDM because Fidelis was

created for the purpose of avoiding liability.

9
10

IV.

ORDER

11

For the reasons set forth above, the Court orders that

12

judgment be entered against Mr. Todd Vowell and in favor of the

13

bankruptcy estate in the amount of $2,376,879.00. The Court

14

further orders that declaratory judgment be entered against

15

Fidelis declaring it liable for IDM’s debt on Plaintiff’s

16

successor liability claim. Finally, the Court orders that

17

judgment be entered in favor of Raeanne Vowell and Jeffrey

18

Garcia.

19
20

IT IS SO ORDERED.
Dated: September 18, 2014

21
22
23
24
25
26
27
28
26