Friesen et al v. Seacost Capital Partners II, L.P.

Filing 18

MEMORANDUM AND ORDER. The bankruptcy court's February 18, 2011, Order granting Defendant's Motion for Summary Judgment (Doc. 4-4) is hereby AFFIRMED. Signed by District Judge Eric F. Melgren on 3/13/2012. (alm)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

IN RE:
QuVIS, INC.,
Debtor,
_____________________________________

DOUGLAS A. FRIESEN, M.D.; MARILYN
R. FRIESEN GREENBUSH, Ph.D.;
DOUGLAS C. CUSICK; JFM LIMITED
PARTNERSHIP I; and UNSECURED
CREDITORS’ COMMITTEE,

Case No. 11-1072-EFM

Plaintiffs,

vs.

SEACOAST CAPITAL PARTNERS II, L.P.,
Defendant.

MEMORANDUM AND ORDER
Plaintiffs appeal from the bankruptcy court’s decision to grant Defendant summary judgment
on Plaintiffs’ adversary action requesting equitable subordination of Defendant’s secured interest
in the debtor’s assets. The Bankruptcy Code gives courts the discretion to equitably subordinate
creditors’ claims if the creditor engaged in inequitable conduct that injured other creditors and if

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subordination is not inconsistent with other provisions of the Bankruptcy Code. Plaintiffs claim that
Defendant—whose Managing Director sat on the debtor’s board of directors—committed
misconduct when it filed its own UCC-1 financing statement after the debtor’s financing statement
lapsed, thereby giving Defendant’s security interest priority over the Plaintiffs’ unsecured interest.
Because there is no genuine issue of material fact as to whether Defendant engaged in inequitable
conduct, the Court affirms the bankruptcy court’s decision to grant Defendant summary judgment.
I. Factual and Procedural Background1
The debtor, QuVIS Inc., was a Topeka technology company offering digital motion imaging
technology. Plaintiffs are unsecured creditors of the debtor who purchased promissory notes from
QuVIS prior to 2005. Defendant Seacoast Capital Partners II, L.P., is a licensed Small Business
Investment Company (“SBIC”) as defined in the Small Business Investment Act of 1958.2 On June
1, 2005, after conducting due diligence, Seacoast purchased a promissory note after loaning QuVIS
the sum of $3,160,066.40 (the “June 2005 Note”). The note was issued in accordance with a
security agreement QuVIS entered with all Noteholders—including Plaintiffs— that was dated June
30, 2003 (“2003 Note Agreement” or “Note Agreement”).3
QuVIS also executed a Joinder Agreement that outlined the terms of the sale of Seacoast’s
June 2005 Note.4 The Joinder Agreement named Seacoast as a Lender subject to the provisions of
the 2003 Note Agreement. It also permitted Seacoast to place a representative on QuVIS’s board
1

In accordance with summary judgment procedures, the Court has set forth the uncontroverted facts, and they
are related in the light most favorable to the non-moving party.
2

Pub. L. No. 85-699, 72 Stat. 689 (1958).

3

The 2003 Note Agreement was entitled “First Amended and Restated Convertible Loan and Security
Agreement” and had a maturity date of June 30, 2006. See Doc. 3-4.
4

Doc. 3-2, p. 5.

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of directors and to designate a person to observe all board meetings.5 The QuVIS board of directors
approved the Joinder Agreement after “full discussion and careful[] consider[ation].”6 Neither
Seacoast nor its Managing Director, Eben Moulton—who later sat on QuVIS’s board of
directors—were involved in the negotiation of the 2003 Note Agreement or 2005 Joinder
Agreement. Both Seacoast and Moulton understood that the Note Agreement set forth collateral
sharing terms such that no lien was subordinate to any other interest held by QuVIS’s Lenders.7 The
parties agree that Seacoast would not have accepted the promissory notes if Seacoast’s interest was
subordinate to existing lienholders.8
On May 3, 2006, Eben Moulton was elected to serve on QuVIS’s board as an outside
director. Moulton previously served as an outside director on the boards of many small business
companies to which Seacoast provided venture capital, as well as boards of public companies.
Moulton’s service on QuVIS’s board of directors is consistent with Moulton’s understanding that
the Small Business Investment Act encourages SBICs to support the management of the small
business ventures in which the SBIC invests.

5

See id. at 14 (“The Company will (a) permit New Lender to designate one (1) person to attend all meetings
of the Company’s board of directors . . . , (d) permit New Lender, so long as New Lender holds a Note or owns any
stock, warrants or other equity interest in the Company, to designate one (1) Person to serve as a member of the
Company’s board of directors . . . .”).
6

Id. at 1.

7

See Doc. 3-4. Section 10.02(a)(iv) states that in the event of default, “[a]ll amounts received by the Lenders
upon the exercise of its remedies hereunder shall be applied by Lenders, pro rata based on the outstanding principal
amount of Notes issued under this Agreement.” Id. at 18.
8

The bankruptcy court noted that Seacoast signed a Subordination Agreement with two majority-interest
Noteholders, Owen Leonard and Vernon Nelson. See Doc. 4-2, pp. 44–49. Leonard and Nelson agreed to subordinate
their interests in QuVIS “to induce [Seacoast] to enter into the Loan Agreement and any other agreements related
thereto.” Id. at 44. Although this Subordination Agreement does indicate that Seacoast never intended to enter an
agreement that placed its security interest below other lenders’, the Subordination Agreement also contradicts Seacoast’s
claim that it believed all lenders would receive a pro rata share of QuVIS’s assets in the event of default.

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The parties’ agreement also stated that QuVIS was responsible for perfecting Seacoast’s
interest in the promissory notes.9 The parties agree that QuVIS generally filed UCC filing
statements on behalf of the Lenders. QuVIS filed the original financing statement with the Kansas
Secretary of State on March 14, 2002, and filed UCC-2 Financing Statement Amendments to
subsequently add the names of new secured parties. Plaintiffs’s security interests were all secured
under QuVIS’s 2002 financing statement. But unbeknownst to the parties, QuVIS never filed a
UCC-2 amendment naming Seacoast as a secured party under the original 2002 financing statement.
In fact, after Seacoast loaned QuVIS an additional $719,933.60 on November 2, 2005, QuVIS again
neglected to file a UCC-2 amendment. As a result, Seacoast’s security interests were never
perfected.10
On March 14, 2007, the UCC-1 financing statement that QuVIS filed in 2002 lapsed by
operation of state law.11 On that same day, by coincidence, Seacoast loaned QuVIS an additional
$350,000 and received another promissory note. Neither Seacoast nor QuVIS filed any UCC
financing statements for this loan. Moulton believed that the March 2007 note was perfected, but
did not verify the status of the lien. If Moulton had known that QuVIS’s 2002 UCC-1 financing
statement had lapsed, Moulton would have acted to ensure the proper legal documentation was filed
to secure Seacoast’s lien.

9

See Doc. 3-4, p. 8 (“In order to perfect such security interest, Borrower shall: make such filings and take such
other actions as may be required under the Uniform Commercial Code of the State of Kansas or other jurisdiction.”).
10

See Doc. 7-8, p. 22, n.67.

11
See Kan. Stat. Ann. § 84-9-515 (2010) (“[A] filed financing statement is effective for a period of five years
after the date of filing.”).

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According to the 2003 Note Agreement, as well as Moulton’s understanding, when QuVIS’s
loans matured on June 30, 2007, each Lender would have the option of either (1) exchanging the
note for QuVIS stock pursuant to a detailed formula, or (2) receiving cash payment on the note. In
the spring of 2007, Moulton and the other QuVIS board members searched for a new funding source
to retire the obligations of Lenders who might elect cash payment. Moulton believed the investment
banking firm Pacific Crest Securities was a potential source of funding. In April 2007, Moulton and
other QuVIS board members met with Pacific Crest and negotiated an engagement letter. When the
QuVIS board members realized that they could not close the deal with Pacific Crest before the June
30, 2007, maturity date of the Notes, the board decided to request that the Lenders extend the
maturity date. On May 31, 2007, board member Owen Leonard circulated a draft letter for the
board’s consideration. The letter requested that the Lenders extend the June 30, 2007, maturity date
to September 30, 2007. After receiving feedback from the other directors, including Moulton,
QuVIS sent the letter to the Lenders on June 7, 2007. The letter did not mention that the 2002
financing statement had lapsed, and the board’s minutes from 2007 do not reference the lapse.
After receiving the letter from the QuVIS board of directors, Seacoast asked its outside
counsel to review the letter and offer advice. Seacoast’s attorneys obtained a UCC search report,
which did not show any financing statement or amendment securing Seacoast’s loans, nor did the
report list QuVIS’s lapsed 2002 financing statement. On June 14, 2007, Seacoast filed a UCC-1
financing statement to perfect its security interest in QuVIS.12 Two other Lenders, Greg Kite and
The Christine Baugher Trust, filed UCC-1 financing statements on June 7, 2007. Directors Leonard

12
The Note Agreement permitted Lenders “to perform every act which such Lender considers necessary to
protect and preserve the Collateral and Lenders’ interest therein.” Doc. 3-4, p. 18.

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and Nelson did not file UCC-1 statements until January 2009, and Plaintiffs filed financing
statements in 2008.
Plaintiffs brought an involuntary Chapter 11 bankruptcy suit against QuVIS on March 20,
2009. 13 QuVIS consented to an order for relief that was entered on May 18, 2009. In its Disclosure
Statement and Plan, QuVIS proposed to treat all Lenders under the 2003 Note Agreement equally
as secured creditors with equal priority such that all Lenders would receive a pro rata share of
QuVIS’s assets. Seacoast filed a document in support of QuVIS’s proposal, arguing that all of the
original Lenders’ liens could be perfected upon the filing of a UCC-1 financing statement by any
one of the Lenders. In its order determining the secured status of QuVIS’s noteholders (“Secured
Status Order”),14 the bankruptcy court denied QuVIS’s request to classify all of the Lenders as
equals. The bankruptcy court found that “the Loan Agreement did not abrogate the first to file rule
under the circumstances here and that payments to the Noteholders who filed new UCC-1s should
be made in the order in which each Noteholder filed a financing statement.”15 Applying the first-tofile rule, the bankruptcy court found that Seacoast’s interest was subordinate to liens held by J. Greg
Kite and the M. Christine Baugher Revocable Living Trust, but superior to Plaintiffs’ secured
claims. Kite claimed $133,933 of QuVIS’s assets, the Trust claimed $133,363, and Seacoast
claimed $5.3 million. Because QuVIS’s assets amount to only $1.3 million, none of the Plaintiffs
have security for their claims.

13

The bankruptcy court converted QuVIS’s Chapter 11 bankruptcy to a Chapter 7 bankruptcy on May 12, 2011.
Order Granting Motion to Convert Case to Chapter 7, In re QuVIS, Inc., No. 09-10706 (Bankr. D. Kan. May 12, 2011),
ECF No. 515.
14

Doc. 7-8 (entitled “Order on Debtor’s Motion to Determine the Secured Status of the Noteholders”).

15

Id. at 22.

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In response to the bankruptcy court’s ruling, Plaintiffs filed an adversary suit against
Seacoast, arguing that Seacoast’s lien should be equitably subordinated to an unsecured claim under
section 510(c) of the Bankruptcy Code.16 Plaintiffs alleged that Seacoast, through Moulton’s
position on QuVIS’s board of directors, had actual or constructive knowledge of the lapse of
QuVIS’s 2002 financing statement, and that Seacoast had a fiduciary duty to notify the other
Noteholders of the lapse. Plaintiffs argued that Seacoast acted unfairly when it filed its own UCC-1
financing statement, and that Seacoast’s actions were a result of its alleged insider status. Seacoast
moved for summary judgment on Plaintffs’ claims. The bankruptcy court granted the motion for
summary judgment, holding that Seacoast was not an insider and did not engage in gross misconduct
by filing its UCC-1. Plaintiffs subsequently filed this appeal. Plaintiffs’ claim for equitable
subordination presents no genuine issue of material fact. Because Seacoast is not an insider of
QuVIS’s and its conduct in filing a UCC-1 financing statement does not rise to the level of gross
misconduct, the Court affirms the bankruptcy court’s decision to grant Seacoast summary judgment.
II. Analysis
A.

Plaintiffs’ Appeal is Not Moot.
First, the Court must determine whether it has jurisdiction over this appeal.17 Seacoast

argues that the appeal is moot because QuVIS’s assets were purchased at a foreclosure sale on
March 7, 2011. After the bankruptcy court issued its Secured Status Order, Seacoast requested that
the court lift the automatic stay on QuVIS’s assets and permit Seacoast to seek a state foreclosure

16

11 U.S.C. § 510(c).

17

See Golfland Entm’t Ctrs, Inc. v. Peak Inv., Inc. (In re BCD Corp.), 119 F.3d 852, 856 (10th Cir. 1997) (“We
address the issue of mootness as a threshold question because in the absence of a live case or controversy, we have no
subject-matter jurisdiction over an appeal.”).

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sale of the collateral. The bankruptcy court found that Seacoast was entitled to have the stay lifted
because QuVIS had no equity remaining in the property and the parties could not agree on a
reorganization plan.18 But the court also set several conditions on the foreclosure sale, including a
requirement that the sale could not close until “the Court has decided the equitable subordination
adversary proceeding” if the prevailing party was a credit-bidder.19 After the bankruptcy court
approved Seacoast’s bidding instructions for the sale, Seacoast conducted a public auction of the
collateral on December 28, 2010, and was the winning bidder.20 The court granted Seacoast’s
motion for summary judgment on the equitable subordination claim on February 18, 2011. Plaintiffs
did not move for a stay pending appeal, and on March 7, 2011, Seacoast closed the bankruptcy sale.
After making a cash payment to both of its senior creditors, Seacoast assigned its rights in the
collateral to the company QuVIS Technologies, Inc. Because it sold the collateral to a third party,
Seacoast argues that Plaintiffs have no remedy in law or equity.
Under Article III of the Constitution, federal-court jurisdiction is limited to justiciable cases
and controversies.21 A justiciable case or controversy is one that presents the court with a question
“in an adversary context and in a form historically viewed as capable of resolution through the
judicial process” and does not “intrude into areas committed to the other branches of government.”22

18

Section 362(d)(2) of the Bankruptcy Code permits the court to terminate or modify the automatic stay if (1)
the debtor has no equity in the property, and (2) the property is not necessary to an effective reorganization.
19

Doc. 7-11, p. 9.

20

Section 363(k) of the Bankruptcy Code allows a secured creditor to use up to the full amount of the debt
owed to bid at a bankruptcy sale on the collateral securing the debt owed to that secured creditor.
21

U.S. Const. Art. III, § 2 (defining the power of the federal courts to include nine enumerated categories of
“cases” and “controversies”).
22

Flast v. Cohen, 392 U.S. 83, 95 (1968).

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“The core of Article III’s limitation on federal judicial power is that federal courts cannot issue
advisory opinions.”23 To enforce this restriction on federal-court jurisdiction, the Supreme Court
relies on both Article III and certain prudential requirements announced in case law.24 Prudential
considerations are especially prevalent in the context of bankruptcy proceedings where questions
as to the court’s remedial power raise the issue of mootness.25
Mootness is one aspect of the court’s inquiry into justiciability. As the Supreme Court has
explained, the mootness doctrine requires that, “throughout the litigation, the plaintiff must have
suffered, or be threatened with, and actual injury traceable to the defendant and likely to be
redressed by a favorable judicial decision.”26 In other words, a case becomes moot when the
litigants no longer have standing to sue because “it becomes ‘impossible for the court to grant any
effectual relief whatever to a prevailing party.’ ”27 Even if relief can be granted in a bankruptcy

23

Erwin Chemerinsky, Federal Jurisdiction §2.2 (5th ed. 2007); see also Flast, 392 U.S. at 96 (“[I]t is quite
clear that the oldest and most consistent thread in the federal law of justiciability is that the federal courts will not give
advisory opinions.” (Citation omitted) (internal quotation marks omitted)).
24

See, e.g., Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, 17–18 (2004) (discussing the limitations on
third-party standing and domestic relations); Warth v. Seldin, 422 U.S. 490, 499 (1975) (prohibiting standing “when the
asserted harm is a generalized grievance shared in a substantially equal measure by all or a large class of citizens”); Ass’n
of Data Processing Serv. Orgs., Inc. v. Camp, 397 U.S. 150, 153 (1970) (holding that a “case” or “controversy” exists
only when “the interest sought to be protected by the complainant is arguably within the zone of interests to be protected
or regulated by the statute or constitutional guarantee in question”); Flast, 392 U.S. at 105–06 (placing limitations on
taxpayer standing).
25

See, e.g., 13B Charles Alan Wright, Arthur R. Miller, & Edward H. Cooper, Federal Practice and Procedure
§ 3533.2.3 (3d ed. 1998) (discussing equitable mootness in bankruptcy); see also In re Manges, 29 F.3d 1034, 1038–39
(5th Cir. 1994) (“Many courts . . . have employed the concept of ‘mootness’ to address equitable concerns unique to
bankruptcy proceedings.”).
26

Spencer v. Kemna, 523 U.S. 1, 7 (1998) (citation omitted) (internal quotation marks omitted).

27
Boullioun Aircraft Holding Co., Inc. v. Smith Mgmt. (In re Western Pacific Airlines, Inc.), 181 F.3d 1191,
1194–95 (10th Cir. 1999) (quoting Church of Scientology v. United State, 506 U.S. 9, 12 (1992) (citation omitted)).

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proceeding, federal courts may invoke their equitable discretion to find that a case is moot if the
relief requested would be inequitable.28, 29
Application of the equitable mootness doctrine in the Tenth Circuit requires consideration
of the following six questions to determine whether a decision on the merits would be unfair or
impracticable: (1) whether the appellant moved for a stay pending appeal, (2) whether the
reorganization plan has been substantially consummated, (3) whether the rights of innocent third
parties will be adversely affected by reversal, (4) whether the public policy need for reliance on
bankruptcy decisions will be undermined by hearing the appeal, (5) the impact of reversal on the
successful reorganization of the debtor, and (6) whether the appeal appears to be meritorious or
equitably compelling.30 The party asserting lack of jurisdiction based on mootness bears the burden
of proof under both the constitutional and equitable mootness doctrines.31
In this case, Seacoast has not met its burden of proving mootness under Article III or in
equity. Plaintiffs’ appeal is justiciable under the constitution because they allege that Seacoast

28

See Search Market Direct, Inc. v. Jubber (In re Paige), 584 F.3d 1327, 1337 (10th Cir. 2009) (expressly
adopting the theory of equitable mootness after noting that “[e]very other circuit to consider the issue has found that
‘equitable,’ ‘prudential,’ or ‘pragmatic’ considerations can render an appeal of a bankruptcy court decision moot even
when the appeal is not constitutionally moot”); see also C.O.P. Coal Dev. Co. v. C.W. Mining Co. (In re C.W. Mining
Co.), 641 F.3d 1235, 1239–40 (10th Cir. 2011) (“Because the trustee has not affirmatively foreclosed the possibility that
COP might be entitled to alternative relief that would not affect the validity of the sale, the trustee has not established
that this appeal is moot. The trustee is left with the equitable mootness doctrine.”).
29

Seacoast did not explicitly request the Court to apply the equitable mootness doctrine, but one of the cases
Seacoast cites does discuss the doctrine. See Sullivan Cent. Plaza, I, Ltd. v. BancBoston Real Estate Capital Corp. (In
re Sullivan Cent. Plaza, I, Ltd.), 914 F.2d 731, 736 (5th Cir. 1990). And although the Tenth Circuit has not yet applied
the doctrine in the Chapter 7 setting, it has been discussed. See In re C.W. Mining Co., 641 F.3d at 1239–40. Out of
an abundance of caution, the Court will briefly address the issue.
30

In re Paige, 584 F.3d at 1339. Although the Tenth Circuit in Paige applied these factors to an appeal of a
confirmed reorganization plan, the doctrine of equitable mootness extends to circumstances involving sale of the
collateral. See Wright et al., supra, at §3533.2.3. Therefore, the Paige factors may serve as guideposts for the Court
in this case.
31

Id. at 1339–40.

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caused Plaintiffs a cognizable injury for which several possible forms of relief exist, despite the
foreclosure sale to QuVIS Technologies, Inc (“QTI”). First, Plaintiffs argue that records indicate
the assets are still in Seacoast’s possession or control, permitting the bankruptcy court to undo the
sale on remand. Second, Plaintiffs note that if QTI is a successor of the debtor in this case—which
appears likely given information Plaintiffs uncovered—the bankruptcy court has jurisdiction over
the successor company and the assets of QTI remain a part of the bankruptcy estate.32 Moreover,
the only Tenth Circuit decision that Seacoast cites as support for its proposition that the present
appeal is moot is factually distinguishable.33 And more recently, in a more analogous case, the
Tenth Circuit found that an appeal following the sale of bankruptcy collateral to a good faith
purchaser was not moot because “there was a possibility of recovery, to which the appellant might
be entitled, from proceeds of a sale of property in a bankruptcy case.”34 Similarly, Plaintiffs have
presented this Court with a legally cognizable claim for which the bankruptcy court could grant
relief. Therefore, a justiciable Article III case or controversy exists between the parties.35
32

Because Plaintiffs did not provide any citations for their arguments on this point, the Court assumes Plaintiffs
refer to the rule of successor liability. Generally, a party who purchases assets at a section 363 bankruptcy sale does not
inherit the seller’s debts. See 2 William L. Norton, Jr., Norton Bankruptcy Law & Practice § 44:25 (3d ed. 2012). But
a purchaser may be subject to the bankruptcy court’s jurisdiction in certain circumstances, such as when the purchaser
is a successor of the debtor. See Chicago Truck Drivers, Helpers & Warehouse Workers Union Pension Fund v.
Tasemkin, Inc., 59 F.3d 48, 49 (7th Cir. 1995) (explaining that the theory of successor liability in federal common law
allows the bankruptcy court to retain jurisdiction of the sold assets if there is “substantial continuity in the operation of
the business before and after the sale”).
33

In that case, the Tenth Circuit upheld a district court decision that an appeal from the bankruptcy court by
the New Mexico Environment Department was moot because there was no live controversy. New Mexico Env’t Dep’t
v. Foulston (In re L.F. Jennings Oil Co.), 4 F.3d 887, 891 (10th Cir. 1993). The property in question was abandoned
with the permission of the bankruptcy court after NMED declared that the property was not contaminated. Id. at 889.
Given these facts, the Tenth Circuit concluded that NMED’s claims that the trustee had not complied with state
environmental laws was moot because there was no controversy between adversarial parties. Id.
34

In re BCD Corp., 119 F.3d at 856.

35

Plaintiffs devoted significant attention to a third argument that the federal mootness doctrine does not apply
when state law offers an attainable remedy. Plaintiffs’ argument correctly notes that Kansas state law permits creation
of constructive trusts as an equitable remedy to unjust enrichment. See Draper v. Bank of America, 205 P.3d 698, 706

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Furthermore, Seacoast has not shown that a finding of equitable mootness is appropriate
here. Equitable mootness is an exception to the federal courts’ constitutional obligation to exercise
jurisdiction over justiciable cases. For that reason, courts apply the doctrine only when it is
necessary to “protect parties’ settled expectations and the ability of a debtor to emerge from
bankruptcy.”36 There are no compelling reasons to apply equitable mootness in this case. Although
Plaintiffs did not file a motion to stay the foreclosure sale pending appeal, Plaintiffs did attempt to
prevent the sale by opposing Seacoast’s motion requesting that the bankruptcy court lift the
automatic stay. Also, parties to the bankruptcy proceedings are not relying on any confirmed
reorganization plan because QuVIS’s assets have been liquidated. The purchaser of the those assets
is not an bona fide third-party purchaser requiring the Court’s protection, but instead appears to be
a company related to QuVIS. And aside from Seacoast, QuVIS’s creditors would not be adversely
affected if the bankruptcy court undid or offered other equitable relief from the foreclosure sale
because the unsecured creditors were not parties to the sale.37 Moreover, application of the equitable

(Kan. 2009) (stating that a constructive trust is an appropriate remedy when a third-party holds title to property that must
be conveyed to another party to avoid unjust enrichment). But the Court declines to adopt Plaintiffs’ premise that courts
may disregard Article III standing requirements in favor of state law remedies. Plaintiffs cite cases from other
jurisdictions as support, but each of these cases involves state foreclosure sales wherein state law provided for
redemption periods. See In re Sullivan Cent. Plaza, I, Ltd., 914 F.2d at 735; Onouli-Kona Land Co. v. Estate of Richards
(In re Onouli-Kona Land Co.), 846 F.2d 1170, 1173 (9th Cir. 1988); West End Assoc., L.P. v. Sea Green Equities, 166
B.R. 572, 576–77 (D. N.J. 1994). In fact, the Tenth Circuit Bankruptcy Appellate Panel explicitly rejected the rationale
in these cases, noting that jurisdiction based on redemption rights shifts power from the courts to the debtor and would
either force the courts to decide the appeal within the redemption period or improperly allow courts to expand the
debtor’s redemption period. Egbert Dev. LLC v. Cmty. First Nat’l Bank (In re Egbert Dev., LLC), 219 B.R. 903, 906–07
(B.A.P. 10th Cir. 1998). Therefore, the Court’s jurisdiction over this appeal is based in no part upon the availability of
relief for Plaintiffs in state court.
36

Curreys of Nebraska, Inc. v. United Producers, Inc. (In re United Producers, Inc.), 526 F.3d 942, 946 (6th

Cir. 2008).
37

Seacoast did purchase the assets from the two creditors with superior priority—J. Greg Kite and the M.
Christine Baugher Revocable Living Trust—prior to assigning its rights to QTI. See Second Amended Proposed Bid
Procedures, In re QuVIS, Inc., No. 09-10706 (Bankr. D. Kan. Nov. 19, 2010), ECF No. 443-1. Because Plaintiffs do
not dispute that these two creditors had priority over Plaintiffs’ unsecured interests, the Court presumes any equitable
remedy fashioned by the bankruptcy court would protect the priority creditors’ interests in the sale.

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mootness doctrine lies firmly within the Court’s discretion. Rather than drawing inferences about
the bankruptcy proceeding as a whole from the record in this adversary proceeding, the Court
declines to exercise its equitable powers to moot the appeal because “the better and more appropriate
course is to resolve this appeal on the merits.”38
B.

Standard of Review
Having decided that the Court may hear Plaintiffs’ appeal, the Court must determine what

standard of review governs the appeal. Seacoast argues that the Court should review the bankruptcy
court’s decision for abuse of discretion because Plaintiffs appeal from denial of their equitable
subordination claim. Seacoast cites case law from other circuits holding that equitable subordination
claims are reviewed for abuse of discretion because they are claims in equity.39 But the Tenth
Circuit has not adopted this rationale. Instead, the Tenth Circuit abides by the established principle
that a district court “review[s] the bankruptcy court’s legal determinations de novo and its factual
findings under the clearly erroneous standard.”40 When a case involves mixed questions of fact and
law, courts “conduct a de novo review if the question primarily involves the consideration of legal
principles and apply the clearly erroneous standard if the question is primarily a factual inquiry.”41
Applying these canons, the Tenth Circuit Bankruptcy Appellate Panel reviewed de novo an equitable
38

In re C.W. Mining Co., 641 F.3d at 1240.

39

In re Valley-Vulcan Mold Co., 237 B.R. 322, 326 (B.A.P. 6th Cir. 1999); Paulman v. Gateway Venture
Partners III, L.P. (In re Filtercorp, Inc.), 163 F.3d 570, 583 (9th Cir. 1998); see also Christian Life Ctr. Litig. Def.
Comm. v. Silva (In re Christian Life Ctr.), 821 F.2d 1370, 1376 (9th Cir. 1987) (“As the [bankruptcy] court exercises
broad equitable power to subordinate claims, we review for an abuse of discretion.” (Citation omitted)).
40

Conoco Inc. v. Styler (In re Peterson Distrib. Inc.), 82 F.3d 956, 959 (10th Cir. 1996); see also, e.g., CarterWaters Okla., Inc. V. Bank One Trust Co., N.A. (In re Eufaula Indus. Auth.), 266 B.R. 483, 477–78, 490–91 (B.A.P. 10th
Cir. 2001) (applying a de novo standard of review to the issue of whether the bankruptcy court used the proper legal
standard when considering a claim for equitable subordination).
41
In re Eufaula, 266 B.R. at 488 (quoting Uselton v. Commercial Lovelace Motor Freight, Inc., 940 F.2d 564,
572 (10th Cir. 1991)).

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subordination claim that raised arguments similar to those at bar.42 Also, this Court recently
reviewed de novo a bankruptcy court’s grant of summary judgment in a case that included a request
for equitable subordination.43 Because Plaintiffs’ appeal involves only the legal question of whether
Seacoast was entitled to summary judgment in Plaintiffs’ suit for equitable subordination, the Court
reviews the case de novo.44
C.

Standard of Review on Summary Judgment
Summary judgment is appropriate if the moving party demonstrates that there is no genuine

issue as to any material fact, and the movant is entitled to judgment as a matter of law.45 A fact is
“material” when it is essential to the claim, and issues of fact are “genuine” if the proffered evidence
permits a reasonable jury to decide the issue in either party’s favor.46 The movant bears the initial
burden of proof, and must show the lack of evidence on an essential element of the claim.47 The
nonmovant must then bring forth specific facts showing a genuine issue for trial.48 These facts must
be clearly identified through affidavits, deposition transcripts, or incorporated exhibits—conclusory

42

See id.

43

Speth v. Whitham Farms Feedyard, L.P. (In re Sunbelt Grain WKS, LLC), 427 B.R. 896, 902 (D. Kan. 2010).

44

Review for abuse of discretion is a more deferential standard than de novo review. Because this Court, like
the bankruptcy court, finds that Seacoast is entitled to summary judgment, the result in this case would be the same under
either standard.
45

Fed. R. Civ. P. 56(c).

46

Haynes v. Level 3 Communications, LLC, 456 F.3d 1215, 1219 (10th Cir. 2006).

47

Thom v. Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir. 2003) (citing Celotex Corp. v. Catrett, 477
U.S. 317, 322–23 (1986)).
48

Garrison v. Gambro, Inc., 428 F.3d 933, 935 (10th Cir. 2005).

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allegations alone cannot survive a motion for summary judgment.49 The court views all evidence
and reasonable inferences in the light most favorable to the party opposing summary judgment.50
D.

Plaintiffs’ Claim for Equitable Subordination Contains No Genuine Issues of Material
Fact and Defendant is Entitled to Judgement as a Matter of Law.
Turning to the merits of this appeal, Plaintiffs argue that the bankruptcy court erred when

it granted Seacoast’s motion for summary judgment on Plaintiffs’ equitable subordination claim.
Section 510 of the Bankruptcy Code permits subordination of claims in specific circumstances.
Relevant to this appeal, the Code states that courts may, “under the principles of equitable
subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part
of another allowed claim.”51 Equitable subordination is a remedy intended to “ensure fairness in the
bankruptcy process as a whole,” rather than securing fairness between particular creditors.52 To
prove that a fair bankruptcy proceeding requires equitable subordination of a claimant’s security
interest, plaintiffs must show the following: (1) the claimant engaged in inequitable conduct; (2) the
conduct injured creditors or conferred an unfair advantage on the claimant; and (3) subordination
of the claim is not inconsistent with the Bankruptcy Code.53 The Tenth Circuit places particular
emphasis on the first prong, noting that “[t]he critical inquiry is whether there has been inequitable

49

Mitchell v. City of Moore, Okla., 218 F.3d 1190, 1197 (10th Cir. 2000)(citing Adler v. Wal-Mart Stores, Inc.,
144 F.3d 664, 670 (10th Cir. 1998)).
50

LifeWise Master Funding v. Telebank, 374 F.3d 917, 927 (10th Cir. 2004).

51

11 U.S.C. § 510(c)(1).

52

Norton, supra, at § 53:3.

53

Sloan v. Zions First National Bank (In re Castletons, Inc.), 990 F.2d 551, 559 (10th Cir. 1993).

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conduct on the part of the party whose debt is sought to be subordinated.”54 Generally, inequitable
conduct sufficient to justify subordination falls within one of three categories: (1) fraud, illegality,
and breach of fiduciary duty; (2) undercapitalization; or (3) control or use of the debtor as an alter
ego for the benefit of the claimant.55
The required burden and sufficiency of proof is not uniform across all claims for equitable
subordination. Rather, the relationship between the claimant and debtor dictates the burden of proof.
If the claimant is an insider or fiduciary, the party requesting subordination need only show that the
claimant engaged in “unfair conduct.”56 But if the claimant is not an insider, the plaintiff must meet
a significantly higher burden by showing that the claimant’s wrongful conduct was “gross and
egregious, tantamount to fraud, misrepresentation, overreaching or spoliation, or involving moral
turpitude.”57
In the context of bankruptcy, a creditor can be either a statutory or a nonstatutory insider.
The Bankruptcy Code specifically defines an “insider” as a “(i) director of the debtor; (ii) officer of
the debtor; (iii) person in control of the debtor; (iv) partnership in which the debtor is a general
partner; (v) general partner of the debtor; or (vi) relative of a general partner, director, officer, or
person in control of the debtor.”58 But the Tenth Circuit has held that this list of definitions is not

54

Id. (emphasis added) (citations omitted) (internal quotations omitted), accord Sender v. Bronze Group, Ltd.
(In re Hedged-Invs. Assocs., Inc.), 380 F.3d 1292, 1300 (B.A.P. 10th Cir. 2004).
55

In re Hedged Invs. Assocs., Inc., 380 F. 3d at 1301 (citing Fabricators, Inc. v. Technical Fabricators, Inc.
(In re Fabricators), 926 F.2d 1458, 1467 (5th Cir.1991)).
56

In re Eufaula, 266 B.R. at 489.

57

Id. (citations omitted) (internal quotations omitted).

58

11. U.S.C. § 101(31)(B) (defining the meaning of “insider” when the debtor is a corporation).

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exhaustive; relationships not defined in the Code may be sufficiently close to consider a party an
insider of the debtor, thereby creating a class of nonstatutory insiders.59
In this appeal, Plaintiffs argue that the bankruptcy court erred when it held that Seacoast was
neither a statutory nor nonstatutory insider of QuVIS. Instead, Plaintiffs argue: (1) Seacoast was a
statutory insider by virtue of Moulton’s position as its proxy on QuVIS’s board of directors; (2)
alternatively, Seacoast was a nonstatutory insider because Seacoast, through Moulton, had a
sufficiently close relationship to QuVIS and engaged in dealings at less than arm’s length; and (3)
as an insider, Seacoast’s conduct in filing the UCC-1 statement was unfair to the other creditors.60
The Court disagrees.
1.

Seacoast is Not a Statutory Insider of the Debtor.

Plaintiffs first argue that Seacoast is a statutory insider of QuVIS under section 101(31) of
the Bankruptcy Code. The 2005 Joinder Agreement between QuVIS and Seacoast gave Seacoast
the power to “designate one (1) Person to serve as a member of [QuVIS’s] board of directors.”61
Noting that directors of a corporate debtor are insiders,62 Plaintiffs contend that Seacoast appointed
itself as a director of QuVIS and that Moulton served as Seacoast’s proxy on the board. As support
for their claim, Plaintiffs point to board meeting minutes and deposition testimony identifying

59

See Rupp v. United Security Bank (In re Kunz), 489 F.3d 1072, 1079 (10th Cir. 2007) (noting that courts “are
in agreement that there are two distinct types of insiders”—first, “those entities specifically mentioned in the statute”
and second, “those not listed in the statutory definition, but who have a sufficiently close relationship with the debtor”).
60

The Court notes that Plaintiffs do not make an alternative argument that, even if Seacoast was not an insider,
its conduct was sufficiently egregious to meet the higher standard that applies to non-insiders. Therefore, a finding that
Seacoast was an insider is essential to Plaintiffs’ appeal.
61

Doc. 3-2, p. 10.

62

11. U.S.C. § 101(31)(B)(i).

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Moulton as a “representative of Seacoast Capital Partners, II, LLP,” as well as Moulton’s use of a
Seacoast e-mail address and letterhead.63
Seacoast denies that it appointed Moulton to serve as its representative on the board and
instead argues that Moulton was elected to QuVIS’s board as an outside director in an individual
capacity. Seacoast notes that Plaintiffs’ own Complaint identifies Moulton, not Seacoast, as “a
member of the Board of Directors of Debtor.”64 And Plaintiffs admitted without comment
Seacoast’s statement in its Motion for Summary Judgment that “Moulton was elected to serve as an
outside director to the board of QuVIS.”65 In fact, the minutes from the meeting electing Moulton
to the board show that Moulton—not Seacoast—was nominated to the board by another creditor,
MTV Capital Limited Partnership, and was elected pursuant to QuVIS’s bylaws rather than the
Joinder Agreement.66 Furthermore, Seacoast notes that the board meeting at which Moulton was
labeled Seacoast’s representative occurred before Moulton’s 2006 election to the board.67 In light
of this specific evidence offered by Seacoast, Plaintiffs are left with nothing more than
unsubstantiated speculation about Moulton’s behavior on the board and Seacoast’s motivations in
lending QuVIS capital.

These conclusory allegations are insufficient to survive summary

63

Doc. 13, p. 11–12 (emphasis added).

64

Doc. 2-4, ¶ 17.

65

Doc. 2-11, p. 5 (Seacoast’s Motion for Summary Judgment); Doc. 4-2, p. 3 (Plaintiffs’ Memorandum in
Opposition to Defendant Seacoast’s Motion for Summary Judgment).
66

Doc. 3-5, p. 7

67
Another provision of section 4.25 of the Joinder Agreement permitted Seacoast to designate a person to
attend QuVIS board meetings as an observer. Doc. 3-2, p. 10.

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judgment,68 and the Court thus declines to find that Moulton served as Seacoast’s proxy on QuVIS’s
board of directors.
The Court also rejects Plaintiffs’ argument that Seacoast was a “de facto director” of QuVIS
by virtue of Moulton’s position as a director of both corporations. Plaintiffs are correct that Moulton
was a “director of the debtor,” and thus an insider as defined in the Bankruptcy Code. But
Moulton’s status as a statutory insider does not extend to Seacoast because the idea that a
corporation can be a “de facto director” under 11 U.S.C. § 101(31) has no basis in statute or case
law.
First, section 101(31) clearly lists the relationships that create a statutory insider. When
construing statutes, courts interpret words and phrases in accordance with their plain and ordinary
meaning of words and phrases.69 In the phrase “statutory insider,” the word “statutory” means
“enacted, regulated, or authorized by statute.”70 Therefore, although the Tenth Circuit recognizes
some nonstatutory insiders, a statutory insider is one clearly defined within the Bankruptcy Code.
Here, the Bankruptcy Code states that a “director of the [corporate] debtor” is an insider. According
to the Tenth Circuit, “[w]hen the term ‘director’ is used in reference to a corporation, as it is used
in the statutory definition of ‘insider,’ the term plainly means a person who is a member of the
governing board of the corporation and participates in corporate governance.”71 In light of the

68

Kojima v. Grandote Int’l Ltd. Liability Co. (In re Grandote Country Club Co., Ltd.), 252 F.3d 1146, 1149
(10th Cir. 2001) (“The purpose of a summary judgment motion, unlike that of a motion to dismiss, is to determine
whether there is evidence to support a party's factual claims. Unsupported conclusory allegations thus do not create a
genuine issue of fact.”).
69

See Toomer v. City Cab, 443 F.3d 1191, 1194 (10th Cir. 2006) (citations omitted).

70

The American Heritage Dictionary of the English Language 1707–08 (5th ed. 2011).

71

In re Kunz, 489 F.3d at 1077–78.

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Court’s earlier finding that Seacoast was not a member of QuVIS’s board of directors, Seacoast was
not a “director of the debtor” under 11 U.S.C. § 101(31)(B)(i). And because section 101(31)(B)
does not include “de facto director,” Seacoast is not a statutory insider of QuVIS under the
Bankruptcy Code.
The Tenth Circuit has declined to adopt Plaintiffs’ “de facto director” theory in In re U.S.
Medical.72 In that case, a bankruptcy trustee sought to avoid transfers of interest to the creditor
corporation pursuant the 11 U.S.C. § 547(b)(4)(B). The trustee claimed the creditor was an insider
because the creditor’s CEO sat on the debtor’s board of directors.73 The Tenth Circuit rejected the
trustee’s claim that the CEO’s position on the board made the creditor a “de facto director” based
in part on the facts of that case, as well as a concern that “a closeness-alone test would create a ‘de
facto director,’ per se rule.”74 In other words, because “de facto director” is not an enumerated type
of statutory insider, and because nonstatutory insiders must have both a close relationship and
inequitable bargaining power,75 adopting the “de facto director” theory would constitute a new, third
category of insiders. Following the Tenth Circuit, this Court declines make such a secession from
case law and congressional intent.
Furthermore, the case the Tenth Circuit relied upon in U.S. Medical did not present “de facto
director” as a substantive theory at all.76 Instead, the court in In re Papercraft Corp. used the phrase

72

See Anstine v. Carl Zeiss Meditec AG (In re U.S. Medical, Inc.), 531 F.3d 1272, 1282 (10th Cir. 2008).

73

Id. at 1274.

74

Id. at 1282.

75

See infra Part D.2 (discussing the requirements for nonstatutory insiders).

76

See Comm. of Creditors Holding Unsecured Claims v. Citicorp Venture Capital, Ltd. (In re Papercraft
Corp.) 187 B.R. 486 (Bankr. W.D. Pa. 1995), rev’d 211 B.R. 813 (W.D. Pa. 1997), aff’d sub nom. Citicorp Venture
Capital, Ltd. v. Comm. of Creditors Holding Unsecured Claims, 160F.3d 982 (3d Cir. 1998).

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as a descriptive term that explained the degree of control a creditor had over its debtor.77 The court
noted that Pennsylvania law prohibited a corporation from serving as a corporate director, and held
that the representative in that case was an alter ego for the creditor corporation.78 In fact, the
representative explicitly testified that he served on the debtor’s board on behalf of the creditor and
acted with the single creditor’s best interests in mind, rather than the best interests of all creditors.79
Unlike Pennsylvania law, the Bankruptcy Code recognizes that a “person” may include an
individual, partnership, or corporation,80 and Seacoast had a clear opportunity to appoint itself to
QuVIS’s board pursuant to the Joinder Agreement. There is no evidence beyond abject speculation
that Moulton acted as Seacoast’s alter ego on the board. Therefore, as in U.S. Medical, the “de facto
director” language and any attendant legal consequences under the Bankruptcy Code are
inapplicable here.
2.

Seacoast is Not a Nonstatutory Insider of the Debtor.

A closer question for the Court is whether Seacoast is a nonstatutory insider of QuVIS. A
nonstatutory insider is one who has a sufficiently close relationship with the debtor that the insider’s
conduct should be subject to closer scrutiny.81 A relationship subject to nonstatutory-insider status

77
187 B.R. at 494 n.6 (“In this case CVC had Muqaddam, its officer and one of Debtor's directors, as its
instrumentality. Muqaddam acted for CVC’s benefit and on its behalf. Through Muqaddam CVC achieved its insider
status. Through Muqaddam CVC was a de facto director and therefore was in a position to exercise some control.”).
When distinguishing the facts in U.S. Medical from those in Papercraft, the Tenth Circuit did acknowledge that “the ‘de
facto director’ language seems particularly tailored to a situation where the director takes steps to enrich the creditor.”
In re U.S. Medical, Inc., 531 F.3d at 1282 (emphasis added). That statement is a far cry from recognizing a new theory
of recovery and reflects the fact that the court in Papercraft used “de facto director” as descriptive language rather than
a legally operative status.
78

Id. at 495.

79

Id.

80

11 U.S.C. § 101(41).

81

See In re Kunz, 489 F.3d at 1079.

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is one that “compels the conclusion that the . . . entity has a relationship with the debtor, close
enough to gain an advantage attributable simply to affinity rather than to the course of dealings
between the parties.”82 In other words, courts consider (1) the degree of control the insider holds
over the debtor, and (2) “whether there is anything other than closeness to suggest that any
transactions were not conducted at arm’s length.”83 Upon review of the uncontroverted facts, the
Court finds that Seacoast was not a nonstatutory insider.
a)

Degree of Control over Debtor

First, as the bankruptcy court noted, Seacoast did not exercise control over QuVIS as defined
in the Small Business Investment Act.84 Seacoast never served on QuVIS’s board of directors, and
even assuming that Moulton was Seacoast’s representative on the board, that body had at least four
other directors with no connection to Seacoast. Moreover, Plaintiffs’ contention that Seacoast
controlled QuVIS by virtue of Seacoast’s “unique and cozy relationship with QuVIS and its key
stakeholders” is supported only by conclusory allegations insufficient to survive a motion for
summary judgment.85 Plaintiff apparently believes Seacoast enjoyed preferential treatment from
QuVIS because Moulton had a “long-standing relationship” with one of QuVIS’s investors, Owen
Leonard. Plaintiffs opine that because (1) Seacoast and Moulton had a business relationship, (2)
QuVIS and Leonard had a business relationship, and (3) Moulton and Leonard had a pre-existing

82

Id. (citations omitted) (internal quotation omitted).

83

See In re U.S. Medical, Inc., 531 F.3d at 1277; see also Black’s Law Dictionary 866 (9th ed. 2009) (defining
an “insider” in the context of bankruptcy as “[a]n entity or person who is so closely related to a debtor that any deal
between them will not be considered an arm’s-length transaction and will be subject to close scrutiny”).
84

See 13 C.F.R. § 107.865 (requiring a majority representation on the board of directors for an investor
company to exercise control over a small business).
85

See In re Grandote Country Club Co., Ltd., 252 F.3d at 1149.

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social relationship, Seacoast had an advantaged relationship with QuVIS that permitted Seacoast “to
obtain, in essence super powers to the detriment of the outside creditors.”86 Aside from these
specious allegations, Plaintiffs fail to allege the existence of, let alone produce, any evidence
showing that the aforementioned relationships were improper. Other than Moulton’s position as a
director of both QuVIS and Seacoast and his friendship with Leonard, Plaintiffs offer no evidence
that Seacoast enjoyed preferential treatment from QuVIS. Therefore, Seacoast did not have a degree
of control over QuVIS indicative of an insider relationship.
b)

Transactions at Less than Arm’s Length

Second, no evidence suggests that Seacoast engaged in transactions with QuVIS at less than
arm’s length. An arm’s-length transaction is “[a] transaction between two parties, however closely
related they may be, conducted as if the parties were strangers, so that no conflict of interest
arises.”87 In other words, parties deal at arm’s length when they have roughly equal bargaining
power and each act in their own best interest.88 In a case often cited by the Tenth Circuit, a creditor
diverted assets to a successor corporation using inside information about the debtor obtained when
the creditor was the sole owner of the debtor corporation.89 The court found that the creditor’s abuse
of his former position precluded arm’s length dealings and the court consequently held that the
creditor was a nonstatutory insider.90 A nonstatutory insider relationship also existed in a case where

86

Doc. 13, p. 15 (emphasis added).

87

Black’s Law Dictionary 1635 (9th ed. 2009).

88

See In re U.S. Medical, Inc., 531 F.3d at 1277 n.4.

89

In re Krehl, 86 F.3d 737, 743 (7th Cir. 1996), accord In re Kunz, 489 F.3d at 1078–80.

90

In re Krehl, 86 F.3d at 743.

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the debtor was a “captive purchaser of unneeded and sometimes unidentified goods” to inflate the
creditor’s assets.91
In both of the aforementioned cases, the insiders exploited relationships with debtors to act
in a manner otherwise unauthorized by contract or law. The Tenth Circuit case of In re U.S.
Medical, Inc. provides a helpful contrast. In U.S. Medical, the CEO of the creditor corporation
served on the board of directors of the debtor corporation.92 The Tenth Circuit recognized that the
creditor had access to inside information via the CEO, but held that the creditor corporation was not
an insider because there was no evidence that the corporation acted in a way that suggested it had
an advantage over the other creditors.93
Seacoast’s dealings with QuVIS are more like those described in U.S. Medical than the cases
in which courts found an insider relationship. Seacoast acted only in accordance with the
agreements it negotiated with QuVIS. The 2005 Joinder Agreement permitting Seacoast to appoint
a representative to QuVIS’s board was obviously negotiated before Moulton could possibly access
inside information as a director. And all creditors, including Plaintiffs, signed an identical 2003
Note Agreement with QuVIS that permitted the creditors to file a financing statement in the event
QuVIS failed to do so. Even assuming that Seacoast had inside information from Moulton about
the lapsed UCC-1, the other creditors were privy to that same information through examination of
QuVIS’s records. And most importantly, it was the due diligence performed by Seacoast’s outside
counsel that disclosed that Seacoast’s notes were unsecured. It does not appear that Moulton played

91

Schubert v. Lucent Technologies Inc. (In re Winstar Communications, Inc.), 554 F.3d 382, 397 (3d Cir.

92

In re U.S. Medical, Inc., 531 F.3d at 1274.

93

Id. at 1281.

2009).

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any significant role in this discovery or in the corrective actions. Seacoast’s decision to file its own
UCC-1 statement is thus more indicative of a sophisticated and prudent investor than a predatory
creditor.
For the foregoing reasons, Seacoast’s actions do not suggest it had an advantage over the
other creditors, nor that Seacoast’s dealings with QuVIS were at less than arm’s length. Because
Plaintiffs cannot show that Seacoast had any measurable degree of control over QuVIS or engaged
in less-than-arm’s-length transactions with QuVIS, as a matter of law, Seacoast was not a
nonstatutory insider of QuVIS.
3.

Seacoast Did Not Engage in Gross and Egregious Misconduct when it Filed its
Own UCC-1 Financing Statement.

Because Seacoast was not an insider to QuVIS, to prevail Plaintiffs must prove that Seacoast
committed gross and egregious misconduct when it filed its own UCC-1 financing statement. The
record in this case could not possibly support such a finding. Although the parties disagree over
several factual allegations, the only material fact in dispute is whether Seacoast filed its UCC-1
financing statement on June 14, 2007, after receiving inside information from Moulton about the
lapse of QuVIS’s 2002 financing statement. Plaintiffs cite the following facts as evidence that
Seacoast learned of the lapse from Moulton: (1) Moulton consulted Leonard about QuVIS matters
and Leonard knew of the lapse sometime between June 1 and August 30, 2007; (2) QuVIS board
meeting minutes do not reflect any discussion of the lapse, but the board did not record minutes for
every meeting, so the board (including Moulton) may have known that the UCC-1 lapsed; and (3)
Seacoast filed a UCC-1 financing statement rather than a UCC-2 amendment. From these “facts,”
the Court is meant to infer that Moulton knew about the lapse, he told Seacoast about it, and that
information was the reason Seacoast filed its own UCC-1.
-25-

These allegations are so fanciful and speculative that they do not qualify as facts or
inferences which the Court, for summary judgment purposes, must presume to be true. The record
before the Court does not contradict the conclusion that Seacoast learned of the lapse of QuVIS’s
2002 financing statement when its outside counsel performed due diligence in connection with
QuVIS’s request to extend the maturity date of the creditors’ notes, and not based on any
information relayed by Moulton. Nevertheless, even if the Court were to assume that Seacoast
learned of the lapse via inside information from Moulton, Seacoast would still be entitled to
judgment as a matter of law because (1) the 2003 Note Agreement signed by all creditors permitted
each creditor to file its own financing statement, and (2) Seacoast owed no fiduciary duty to the
other creditors.
First, it is axiomatic that corporations that “have negotiated contracts are entitled to enforce
them to the letter, even to the great discomfort of their trading partners, without being mulcted for
lack of ‘good faith.’ ”94 For that reason, courts considering the remedy of equitable subordination
must “distinguish between the unilateral remedies that a creditor may properly enforce pursuant to
its agreements with the debtor and other inequitable conduct.”95 Here, the parties’ Note Agreement
explicitly provided: “Borrower authorizes each Lender to perform every act which such Lender
considers necessary to protect and preserve the Collateral and Lenders’ interest therein . . . .”96 As
later became apparent, had Seacoast not perfected its interest in QuVIS’s assets, it would not be
entitled to relief in bankruptcy. Accordingly, Seacoast took “appropriate, justifiable actions to

94

Kham & Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1357 (7th Cir. 1990).

95

In re Castletons, Inc., 990 F.2d at 559 (quoting Smith v. Assocs. Commercial Corp. (In re Clark Pipe &
Supply Co.), 893 F.2d 693, 701 (5th Cir. 1990)).
96

Doc. 3-4, p. 8.

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protect its security interest.”97 The mere act of filing the UCC-1, therefore, was not inequitable
conduct.
Second, Seacoast’s failure to notify the other creditors of the lapse of QuVIS’s UCC-1—no
matter how the lapse came to Seacoast’s attention—was not misconduct. When a corporation
becomes insolvent, its directors and officers owe a fiduciary duty not only to the shareholders, but
also to the corporation’s creditors.98 Non-insider creditors, however, do not owe any reciprocal
fiduciary duty to each other.99 Absent such duty, plaintiffs must prove the heightened standard of
egregious conduct by the creditor.100 Applying these principles to the present case, Moulton may
owe Plaintiffs a fiduciary duty as a member of QuVIS’s board of directors, but Seacoast was neither
an insider nor a “de facto director” of QuVIS. Seacoast had no legal obligation to sacrifice its own
priority standing by refraining from filing a UCC-1, nor was Seacoast required to inform the other
creditors of the lapse or file paperwork on their behalf.101
Furthermore, Seacoast’s conduct here is worlds apart from the misconduct of the creditors
in the cases Plaintiffs cited. In Papercraft Corp., the creditor corporation was permitted to place a
representative on the board of the debtor’s parent company.102 After the debtor filed for bankruptcy,
the major creditors agreed upon a restructuring plan. When the debtor filed the bankruptcy
97

In re Castletons, Inc., 990 F.2d at 559.

98

See Delgado Oil Co., Inc. v. Torres, 785 F.2d 857, 860 (10th Cir. 1986).

99

In re Castletons, Inc., 990 F.2d at 559 (finding that a creditor in an equitable subordination case had “no
fiduciary obligation to its debtor or to the other creditors of the debtor”).
100

Id.

101

The Note Agreement specifically states that “[n]o Lender shall have any liability whatsoever to the
Borrower, any other Lender or any third party” for any action taken pursuant to the Note Agreement. Doc. 3-4, p. 9.
102
See Citicorp Venture Capital, Ltd. v. Committee of Creditors Holding Unsecured Claims, 160 F.3d 982, 984
(3rd Cir. 1998) (providing a summary of the proceedings in the bankruptcy and district courts).

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paperwork, it failed to include a necessary disclosure statement. During the time debtor’s
bankruptcy filing was defective, the creditor became a “vulture investor,” surreptitiously purchasing
more than 40% of the debtor’s outstanding notes and achieving a sufficient interest in the debtor
company to block the proposed reorganization. The creditor then proposed its own reorganization
strategy that placed the creditor at a distinct advantage over the other creditors.103
In Estes v. N & D Properties Inc., the creditor was also a shareholder in the debtor
corporation and was personally obligated on most of the debtor’s loans from a bank.104 During this
time, the debtor mismanaged the corporation’s assets, and although the creditor had numerous
opportunities to discover these problems, the creditor was not aware of the debtor’s precarious
financial position until the bank called its loans. The creditor paid back the loans and was assigned
the bank’s interest in the debtor’s assets shortly before the debtor declared bankruptcy.105 The
Eleventh Circuit agreed with the bankruptcy court’s decision to equitably subordinate the creditor’s
security interest claims. The court found that the creditor was both an insider and a controlling
shareholder, and thus owed a fiduciary duty to the debtor’s other creditors. Placing the burden on
the creditor to show the fairness of her actions, the court found that the creditor’s conduct
“indicate[d] that she was acting solely for her own benefit, to minimize her risk of loss without any
consideration for other creditors.”106 The court held: “Such pursuit of personal gain at the expense

103

Id. at 984–86.

104

799 F.3d 726, 728–29 (11th Cir. 1986).

105

Id. at 729–30.

106

Id. at 732.

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of other creditors has been recognized as a breach of fiduciary duty justifying equitable
subordination.”107
The present case is distinguishable from Papercraft and N & D Properties. First, the
creditors in those two cases were insiders of their respective debtors, and therefore, the courts
analyzed their conduct under the “unfairness” standard. This Court has held that Seacoast was not
an insider of QuVIS, so Plaintiffs must prove that Seacoast engaged in “more egregious conduct
such as gross misconduct tantamount to fraud, misrepresentation, overreaching or spoliation.”108
Second, unlike the creditor in Papercraft, there is no evidence that Seacoast intended to jump the
line of creditors in priority interests. And contrary to the court’s finding in N & D Properties, Inc.,
the record contradicts Plaintiffs contention that Seacoast gave no consideration to QuVIS’s other
creditors. In fact, in an unsuccessful argument to the bankruptcy court, Seacoast expressed its
support for QuVIS’s reorganization plan that called for all creditors to recover a pro rata share of
QuVIS’s assets.109 In the same document, Seacoast argued that “Article 9 of the UCC does not
require that each Noteholder be listed as a secured party on the UCC-1; rather it is sufficient that so
long as even one Noteholder filed a UCC-1, such filing provides constructive notice of the terms of
the Note Agreement, and the pledges contained therein.”110 Seacoast’s representations to the
bankruptcy court indicate that it did not intend to disrupt QuVIS’s attempt in the Note Agreement

107

Id.

108

In re Hedged-Investments Assoc., Inc., 380 F.3d at 1301–02.

109

Document in Support of Disclosure Statement, In re QuVIS, Inc., No. 09-10706 (Bankr. D. Kan. Jan. 12,
2010), ECF No. 200.
110

Id. at ¶ 10.

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to grant all creditors equal priority when Seacoast filed its UCC-1. Plaintiffs cannot identify any
concrete evidence to the contrary.
In conclusion, upon de novo review of Seacoast’s motion for summary judgment on
Plaintiffs’ claims for equitable subordination, the Court finds that Plaintiffs have failed to present
specific facts showing a genuine issue for trial. Because Seacoast is not an insider of QuVIS’s and
Seacoast did not engage in inequitable conduct when it filed its own UCC-1 financing statement,
Seacoast is entitled to judgment as a matter of law.111
IT IS ACCORDINGLY ORDERED this 13th day of March, 2012 that the bankruptcy
court’s February 18, 2011, Order granting Defendant’s Motion for Summary Judgment (Doc. 4-4)
is hereby AFFIRMED.
IT IS SO ORDERED.

ERIC F. MELGREN
UNITED STATES DISTRICT JUDGE

111

Because the Court finds that Seacoast did not engage in inequitable conduct, it need not examine the second
and third requirements for equitable subordination—the creation of an unfair advantage for the claimant and consistency
with the Bankruptcy Code. See In re Hedged-Investments Assocs., Inc., 380 F.3d at 1303 (“[A] finding of inequitable
conduct is a necessary prerequisite to ordering equitable subordination.”).

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