Golden et al v. Mentor Capital et al

Filing 124

MEMORANDUM DECISION AND ORDER Granting 70 Plaintiffs' Motion for Partial Summary Judgment on Count I of their Second Amended Complaint. Signed by Judge Jill N. Parrish on 9/22/17. (dla)

IN THE UNITED STATES DISTRICT COURT
IN AND FOR THE DISTRICT OF UTAH

GENA GOLDEN, an individual, and SUSAN
GOLDEN, an individual,
Plaintiffs,
v.
MENTOR CAPITAL, INC., a Delaware
corporation, LABERTEW & ASSOCIATES,
a Utah limited liability company, and
MICHAEL L. LABERTEW, an individual,

MEMORANDUM DECISION AND
ORDER GRANTING PLAINTIFFS’
MOTION FOR PARTIAL SUMMARY
JUDGMENT

Defendants.
Case No. 2:15-cv-00176-JNP-BCW
MENTOR CAPITAL, INC., a Delaware
corporation,

Judge Jill N. Parrish

Third-Party Plaintiff,
v.
RICHARD GOLDEN, an individual, and
SCOTT VAN RIXEL, an individual,
Third-Party Defendants.

Before the court is Plaintiffs’ Motion for Partial Summary Judgment (Dkt. No. 70) (the
“Motion”). The court held oral argument on the Motion on January 31, 2017. Plaintiffs Gena and
Susan Golden (the “Goldens”) seek summary judgment on Count I of the Second Amended
Complaint against Defendant Mentor Capital, Inc. (“Mentor”) for violation of the Securities Act
of 1933. Specifically, the Goldens argue that Mentor was not authorized to issue the shares it

sold to them in March 2014 because it failed to comply with the Bankruptcy Court’s Order
Confirming Mentor’s Plan of Reorganization and, consequently, those shares were invalidly
issued and not exempt from the Securities Act’s registration requirement. Mentor opposes the
motion, arguing that genuine disputes of material fact preclude summary judgment.
I.

Undisputed Facts
1. Mentor 1 filed for bankruptcy in the United States Bankruptcy Court for the Northern
District of California (the “Bankruptcy Court”) in August 1998.
2. Mentor filed its Third Amended Plan for Reorganization (the “Plan”) on September 30,
1999, and a supplement to that Plan on December 2, 1999.
3. On January 11, 2000, the Bankruptcy Court confirmed the Plan (“Order Confirming
Plan”) and incorporated it into the bankruptcy court’s order.
4. The Plan allowed Mentor to issue several classes of warrants to its creditors. The
warrants were exercisable for shares of Mentor’s common stock at various prices,
depending on the class of warrant held.
5. Section 6.4(a) of the Plan provides that “[t]o the extent provided in § 1145 of the
[Bankruptcy] Code, the New Equity Securities [defined in the Plan to include the
warrants] . . . and all securities issued in exchange therefor or on conversion thereof, shall
be exempt from the registration requirements of the Securities Act of 1933, as
amended . . . .”
6. Section 1.1 of the Plan defines the “Effective Date” of the Plan as “the date on which
[Mentor] files the amendment to its articles of incorporation required by §6.7 hereof.”

1

Mentor was formed as a California corporation in July 1994 as Main Street Athletic Clubs, Inc. It later changed its
name to Main Street AC, Inc. The caption for the bankruptcy proceedings named Main Street AC, Inc., dba Mentor
Capital as the debtor. Main Street AC, Inc. later changed its name to Mentor Capital, Inc. On September 2, 2015,
Mentor Capital, Inc., a California corporation, merged into Mentor Capital Inc., a Delaware corporation. (Dkt. No.
77, Ex. A).

2

7. Section 6.7 of the Plan provides:
6.7
Amendment of Articles of Incorporation: Not later than 120
days after Confirmation [May 10, 2000], [Mentor] shall file
amendments to its articles of incorporation which provide for:
(a)
Authorization of sufficient shares of its common
stock to permit issuance of the New Common Stock, the shares
issuable on exercise of all Warrants to be issued under this Plan,
and such additional common stock as [Mentor] considers
appropriate to have available for future transactions; and
(b)
Prohibit the issuance of nonvoting equity securities.
8. Section 6.8 of the Plan provides:
6.8
Validity of Corporate Actions: Pursuant to § 1400 of the
California Corporations Code, Confirmation shall constitute due
authorization required for the full validity, enforceability, and
effectiveness of all transactions provided for in this Plan,
notwithstanding any provisions of the California General
Corporation Law which would otherwise require approval of such
transactions by the Debtor’s board of directors, shareholders, or
otherwise. Confirmation shall constitute authorization for Debtor’s
Responsible Individual designated under B.L.R. 4002-1 to take all
actions and execute, deliver and file all certificates, notices, and
other documents as he deems necessary or appropriate to
consummate the transactions provided for in this Plan, including
certificates of amendment of the Debtor’s Articles of
Incorporation.
9. There is no evidence that amended articles of incorporation were filed within the
prescribed 120-day period. The office of the California Secretary of State has no record
of such an amendment, there is no mention of an amendment in any document, and no
testimony that such amendment was filed.
10. On March 21, 2008, Mentor filed a Certificate of Amendment of Articles of Incorporation
of Mentor Capital, Inc. (the “2008 Amendment”). The 2008 Amendment states that “[t]he
total number of authorized common shares is unchanged at 400,000,000.”

3

11. The only other amendment on file with the California Secretary of State is an amendment
filed December 10, 2007. The filing record indicates that this amendment changed the
name of the company from Main Street AC, Inc.
12. Mr. Scott Van Rixel was the recipient of warrants that were issued to Mentor’s creditors
as contemplated under the Plan.
13. In late February 2014, Mr. Richard Golden was looking for an investment opportunity for
his wife, Plaintiff Gena Golden, and his daughter, Plaintiff Susan Golden.
14. Mr. Van Rixel informed Mr. Golden of a potential investment opportunity to purchase
Mentor stock.
15. Mr. Van Rixel showed Mr. Golden a letter that Chester Billingsley, CEO of Mentor, had
written to Mr. Van Rixel representing that the shares in Mentor were unrestricted and
freely tradeable.
16. Mr. Van Rixel offered to front the purchase price for the Goldens’ purchase of the Mentor
shares and indicated that Mr. Golden could then pay him back.
17. The Goldens and Mr. Van Rixel sought to confirm with Mentor that the shares were
unrestricted. Mr. Billingsley responded via e-mail that “The [shares] are unrestricted and
fall under the exemption from registration afforded under Section 1145 [of the
Bankruptcy Code].”
18. Mr. Golden decided to commit funds on behalf of Gena and Susan to purchase the
Mentor shares.
19. Mr. Golden paid Mr. Van Rixel $146,250.00 for 75,000 shares of Mentor stock through
the issuance of two checks, both dated March 20, 2014.

4

20. Mr. Van Rixel e-mailed Mr. Billingsley, “I wanted to know if I was able to put the shares
I committed to in different peoples [sic] names as I would like to use them as thank you’s
[sic] for peoples [sic] efforts in helping us make the decision to move forward with you.”
Mr. Van Rixel was informed that he could put the shares in other people’s names.
21. On March 21, 2014, Mentor received a check for $204,750.00, dated February 28, 2014,
from Mr. Van Rixel. The check, which was drawn on the account of the Scott J. Van Rixel
Family Trust, was for the purchase of 105,000 shares of Mentor common stock at a price
of $1.95 per share.
22. On March 23, 2014, Mr. Van Rixel requested that Mentor issue 25,000 shares in the name
of “Gena Golden” and 50,000 shares in the name of “Susan K. Golden, Rev Trust, u/a/d
11 May 1999.”
23. Four days after receiving the check from Mr. Van Rixel, Mentor sent confirmation letters
addressed to Susan and Gena Golden. 2 The letters stated: “Attached please find a
confirming copy of your February 28, 2014 check #8030 for $204,750.00. Part of this
remittance to complete the exercise of your MNTR warrants, which have now been
converted to [50,000 in the case of Susan and 25,000 in the case of Gena] shares.”
24. Mentor later issued 50,000 shares of stock to Susan and 25,000 shares of stock to Gena
Golden, as requested by Mr. Van Rixel.
II.

Legal Standard
Under Federal Rule of Civil Procedure 56(a), “[t]he court shall grant summary judgment

if the movant shows that there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” In applying this standard, the court must “construe the
2

At the request of Mr. Van Rixel, the confirmation letters were sent to his address in Florida and not directly to the
Goldens.

5

evidence and the reasonable inferences drawn therefrom in the light most favorable to the
nonmovant.” Sally Beauty Co. v. Beautyco, Inc., 304 F.3d 964, 972 (10th Cir. 2002); see also
Water Pik, Inc. v. Med-Sys., Inc., 726 F.3d 1136, 1143 (10th Cir. 2013) (“The nonmoving party
is entitled to all reasonable inferences from the record . . . .”). However, the nonmoving party “is
entitled to only those inferences that are ‘reasonable.’” Hornady Mfg. Co. v. Doubletap, Inc., 746
F.3d 995, 1004 (10th Cir. 2014).
A dispute of fact is genuine when “a reasonable jury could find in favor of the
nonmoving party on the issue.” Macon v. United Parcel Serv., Inc., 743 F.3d 708, 712 (10th Cir.
2014). And only genuine disputes of material fact can preclude the entry of summary judgment.
Birch v. Polaris Indus., Inc., 812 F.3d 1238, 1251 (10th Cir. 2015) (“Only disputes over facts
that might affect the outcome of the suit under the governing law will properly preclude the entry
of summary judgment.”). The nonmoving party has the burden of “present[ing] affirmative
evidence in order to defeat a properly supported motion for summary judgment.” Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 257 (1986). “[A] party opposing a motion for summary
judgment may not rest on mere allegations or denials to demonstrate there is a genuine issue of
material fact for trial . . . .” Sammons v. Allenbrand, 817 F. Supp. 94, 95 (D. Kan. 1993) (citing
Liberty Lobby, 477 U.S. at 256). Rather, “[a] party asserting that a fact . . . is genuinely disputed
must support the assertion by citing to particular parts of materials in the record.” Fed. R. Civ. P.
56(c)(1); see also DUCivR 56-1.
Where there is “no genuine issue as to any material fact,” the court need only apply the
relevant substantive law to the undisputed facts 3 in order to determine if Defendants are entitled
to judgement as a matter of law. See Fed. R. Civ. P. 56(a); BancOklahoma Mortg. Corp. v.
3

The court notes that it may consider materials in the record not directly referenced by the parties in their briefing in
order to decide this Motion. Fed. R. Civ. P. 56(c)(3) (“The court need consider only the cited materials, but it may
consider other materials in the record.”).

6

Capital Title Co., 194 F.3d 1089, 1097 (10th Cir. 1999) (indicating that, under Rule 56, district
courts must determine “whether any genuine issue of material fact [is] in dispute, and, if not,
whether the moving party [is] entitled to judgment as a matter of law”).
III.

Analysis
The Goldens seek partial summary judgment on Count I of their Second Amended

Complaint, Violation of Securities Act of 1933. Count I alleges that Mentor violated Section 12
of the Securities Act of 1933 (the Securities Act), 15 U.S.C. § 77l, when it sold unregistered
securities to the Goldens and misrepresented to them that those securities were exempt from
registration.
Section 12 of the Securities Act provides:
Any person who—
(1) offers or sells a security in violation of section 77e [Section 5] of this
title or
(2) offers or sells a security . . . by the use of any means or instruments of
transportation or communication in interstate commerce or of the
mails by means of a prospectus or oral communication, which includes
an untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements . . . not misleading . . .
shall be liable . . . to the person purchasing such security from him, who may sue
either at law or in equity in any court of competent jurisdiction, to recover the
consideration paid for such security with interest thereon, less the amount of any
income received thereon, upon the tender of such security, or for damages if he no
longer owns the security.
§ 77l(a). By its terms, proving a violation of subsection 1 of Section 12 requires a plaintiff to
prove a violation of Section 5 of the Securities Act.
Section 5 of the Securities Act prohibits the sale of a security “unless a registration
statement is in effect.” § 77e. But Section 5’s prohibition on the sale of unregistered securities
does not apply to exempt transactions. See, e.g., § 77d (listing exempt transactions); Allison v.

7

Ticor Title Ins. Co., 907 F.2d 645, 648 (7th Cir. 1990) (“[E]ach sale [of securities] must be
registered or exempt.”). One such exemption is found in the Bankruptcy Code (the “Bankruptcy
Exception”), which provides that Section 5 of the Securities Act of 1933 does not apply to:
(1) the offer or sale under a plan of a security of the debtor, of an affiliate
participating in a joint plan with the debtor, or of a successor to the debtor
under the plan-(A) in exchange for a claim against, an interest in, or a claim for an
administrative expense in the case concerning, the debtor or such
affiliate; or
(B) principally in such exchange and partly for cash or property;
(2) the offer of a security through any warrant, option, right to subscribe,
or conversion privilege that was sold in the manner specified in paragraph
(1) of this subsection, or the sale of a security upon the exercise of such a
warrant, option, right, or privilege;
11 U.S.C. § 1145.
To establish a Section 5 violation, a plaintiff must point to evidence that: (1) “no
registration statement was in effect as to the securities”; (2) the defendant “sold or offered to sell
the securities”; and (3) “the sale or offer was made through interstate commerce.” Berckeley Inv.
Grp., Ltd. v. Colkitt, 455 F.3d 195, 212 (3d Cir. 2006). “Once a plaintiff makes out a prima facie
case that the securities offered or sold were not registered, the defendant bears the burden of
demonstrating its entitlement to an exemption.” Busch v. Carpenter, 827 F.2d 653, 656 (10th Cir.
1987); Quinn & Co. v. SEC, 452 F.2d 943, 945–46 (10th Cir. 1971). “The exemption relied upon
must be strictly construed against the person claiming its benefit, as public policy strongly
supports registration.” Id. at 946 (footnotes omitted).
A.

Standing

At the outset, Mentor opposes the Goldens’ Motion for Summary Judgment by arguing
that a genuine dispute of fact exists regarding their standing to bring their Section 12 claim.
Mentor argues that the Section 12 claim is predicated on the sale of stock from Mentor to the
Goldens, inasmuch as Section 12 provides for liability only “to the person purchasing [a]
8

security from [it].” Mentor maintains that there is no credible evidence as to who bought stock
from whom. But the Goldens maintain that there is no dispute about the facts surrounding their
acquisition of the securities from Mentor and that they have standing to bring their Section 12
claim as the purchasers of the securities in question.
The court concludes that there is no genuine dispute of material fact relating to standing.
While the parties dispute the legal ramifications of the undisputed facts, the court need only
apply the relevant substantive law to those facts to determine if the Goldens have standing as
purchasers. See Fed. R. Civ. P. 56(a); BancOklahoma Mortg. Corp. v. Capital Title Co., 194 F.3d
1089, 1097 (10th Cir. 1999) (indicating that, under Rule 56, district courts must determine
“whether any genuine issue of material fact [is] in dispute, and, if not, whether the moving party
[is] entitled to judgment as a matter of law”).
Section 12 of the Securities Act gives purchasers a private right of action to sue for
violation of the Act. See Pinter v. Dahl, 486 U.S. 622, 643–44 (1988); Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723, 731–32 (1975); Melissa K. Stull, Annotation, Persons
Entitled to Relief Under Civil Liability Provisions of § 12 of Securities Act of 1933 (15 U.S.C.A.
§ 77l), 113 A.L.R. Fed. 575 (2017). But the Securities Act does not define “purchase” or
“purchaser.” Pinter, 486 U.S. at 645. The Supreme Court has clarified that “[a]t the very least . . .
the language of § 12(1) contemplates a buyer-seller relationship not unlike traditional contractual
privity.” Id. at 642. “Thus, it is settled that § 12(1) imposes liability on the owner who passed
title, or other interest in the security, to the buyer for value.” Id. But it is not clear who qualifies
as a purchaser in a situation where the person to whom title is passed is not the person who paid
for the security.

9

At least one court has encountered a factual scenario similar to the one presented here. In
Lewis v. Walston & Co., Inc., the plaintiff, McDonald, purchased stock with money that was
supplied to him by his relatives. 487 F.2d 617, 622 (5th Cir. 1973), abrogated on other grounds,
Pinter, 486 U.S. at 649. McDonald intended to distribute the shares to those relatives once the
stock went public. Nevertheless, McDonald purchased the stock in his own name and the seller
sent McDonald an “investment letter” confirming his purchase. The Fifth Circuit held that
McDonald was a “purchaser” with standing to bring his Section 12 suit. It explained:
[I]t seems to us that the record compels the conclusion that McDonald was
recognized as the “purchaser” of this stock. To be sure, the record does indicate
that the money for the purchases was supplied by his relatives and that McDonald
intended, on the stock's going public, to distribute shares to his relatives
proportionate to the amounts they had paid. But the key fact is that the stock
purchased with the relatives' money was purchased in McDonald's name and as
far as the parties were concerned, he was, for all intents and purposes, the owner
of the stock. McDonald . . . was never issued certificates on the Allied Automation
stock he bought; the only document evidencing his ownership was the letter of
investment intent, and that letter showed McDonald as the sole purchaser of the
entire block of shares.
Id. at 622 (emphasis added).
Here, it is undisputed that the Goldens were the recipients and owners of the securities in
question. Although Mr. Van Rixel sent a check to Mentor to pay for the shares, he informed
Mentor that he wanted some of the shares that he was paying for to be issued in other people’s
names as “thank you’s [sic].” And it is undisputed that Mr. Golden agreed to reimburse Mr. Van
Rixel for the shares that would go to the Goldens. In accordance with that understanding, Mr.
Golden later wrote two checks reimbursing Mr. Van Rixel for the cost of the Goldens’ shares.
The court concludes that the shares at issue were purchased by the Goldens. The Goldens
paid for the securities. And, as was the case in Lewis, the confirmation letters were addressed to
the Goldens and the shares were eventually issued in their names. Indeed, Mentor later

10

acknowledged in an e-mail 4 from its CEO, Chet Billingsley, that Mentor “issued separate
warrant certificates” for the Goldens and that “[f]or administrative convenience Scott [Van
Rixel] issued a single check to pay for all shares and then he received checks from the Goldens
to reimburse him at cost a few days later.” And Mentor acknowledged that it “treated [the sale]
as an original purchase [by the Goldens], not a resale, right from the onset.” As far as anyone
involved in the transaction was concerned, the Goldens were the owners of the shares and were
therefore the purchasers. Even though Mr. Van Rixel sent one check to Mentor, the Goldens later
reimbursed him for their portion of the purchase price. Accordingly, the Goldens are
“purchasers” and have standing to bring their Section 12 claim against Mentor.
B.

The securities sold to the Goldens are not exempt under 11 U.S.C. § 1145

Mentor does not dispute that the Goldens have made a prima facie case of a violation of
Section 5 of the Securities Act. The undisputed evidence shows that “no registration statement
was in effect as to the [Mentor] securities,” Mentor “sold . . . the securities” to the Goldens, as
discussed above, and “the sale . . . was made through interstate commerce.” See Berckeley Inv.
Grp., 455 F.3d at 212. The burden therefore shifts to Mentor to establish that the Bankruptcy
Exemption 5 applies in this case. To determine whether the Bankruptcy Exception applies, the
court must determine whether the securities were sold under a plan of reorganization.

4

Mentor filed an Objection [Dkt. No. 80] to the court’s consideration of this and other evidence attached to the
Goldens’ Reply Memorandum in Support of the Motion for Partial Summary Judgment. Mentor cites DUCivR 561(d), which provides that “[i]n the reply, a moving party may only cite additional evidence not previously cited in
the opening memorandum to rebut a claim that a material fact is in dispute. Otherwise, no additional evidence may
be cited in the reply memorandum, and if cited, the court will disregard it.” However, the evidence attached to the
Goldens’ reply addresses Mentor’s arguments regarding the Goldens’ standing under Section 12. Mentor also makes
a passing argument regarding authentication. But Mentor conceded at oral argument that it did not dispute the
authenticity of the documents, and particularly the e-mail upon which the court now relies. Therefore, Mentor’s
Objection [Dkt. No. 80] is OVERRULED.

5

Mentor has posited that other exemptions may apply to the transaction with the Goldens. But Mentor never raised
another exemption, or even the possibility of another exemption, in any pleading or motion.

11

1)

Jurisdiction

Mentor first argues that all issues related to interpretation of the Plan, or any
controversies arising therefrom, should be decided by the Bankruptcy Court for the Northern
District of California. Mentor relies on Article XI of the Plan, which provides that “the
Bankruptcy Court shall retain jurisdiction to enforce the provisions, purposes, and intent of this
Plan including, without limitation . . . [r]esolution of controversies and disputes regarding
interpretation of this Plan.”
“The confirmation of a Chapter 11 plan does not automatically terminate the jurisdiction
of the bankruptcy court.” In re Tri-L Corp., 65 B.R. 774, 778 (Bankr. D. Utah 1986) (citing In re
A.J. Mackay Co., 50 B.R. 756, 759 (Bankr. D. Utah 1985)). “This jurisdiction is necessary to
settle disputes concerning the administration of the plan as they arise . . . .” A.J. Mackay Co., 50
B.R. at 759. A bankruptcy court is allowed to “expressly retain jurisdiction over the plan, during
its consummation, under a provision of the plan itself or the order of confirmation.” Tri-L Corp.,
65 B.R. at 778. However, the continuing jurisdiction of a bankruptcy court in not interminable
and “[a] reservation of jurisdiction beyond what is necessary to effectuate the plan of
reorganization is beyond the power of the bankruptcy court.” Id.
Although Mentor argues that the Bankruptcy Court has retained jurisdiction to interpret
the Plan, it does not argue that the Bankruptcy Court’s jurisdiction is exclusive or that this court
lacks jurisdiction to interpret the Plan in the case before it. Further, Mentor has not moved the
court to stay this matter so that a declaratory ruling can be obtained from the Bankruptcy Court
and, to this court’s knowledge, no such proceeding has been commenced before the Bankruptcy
Court. Accordingly, the court will interpret the Plan to resolve the issue now before it.

12

2)

Because Mentor failed to comply with the terms of the Plan, it never
became effective

The Goldens argue that Mentor is not entitled to the Bankruptcy Exemption found in
Section 1145 of the Bankruptcy Code because the Plan never became effective. The Goldens
reason that the Plan became effective only upon the filing of amended articles of incorporation,
which Mentor failed to file within the requisite period. This failure is the fulcrum of the Goldens’
Section 12 claim inasmuch as Section 1145 of the Bankruptcy Code exempts only securities sold
“under a plan.” Absent an effective plan, the securities Mentor sold were unregistered and not
subject to an exemption from registration. Mentor responds that the Plan became effective on the
date it was confirmed and that a material dispute of fact exists on the issue of whether it
complied with the terms of the Plan. The court will consider Mentor’s arguments in turn.
i.

By its terms, the Plan was to become effective on the Effective
Date, not on the date of confirmation

The Plan states that the “Effective Date” is the date on which Mentor files an amendment
to its articles of incorporation, as required by Section 6.7 of the Plan. 6 Because Mentor did not
file amended articles of incorporation with the California Secretary of State within the 120-day
window prescribed by Section 6.7, the Goldens argue that the Plan never became effective.
Mentor responds that the Plan became effective on January 11, 2000, the date that the
Bankruptcy Court issued its Order Confirming Plan, and that the term “Effective Date” refers
only to certain actions to be taken under the Plan, not to the Plan’s overall validity and
effectiveness.
6

Mentor objects to paragraphs 8, 9, and 10 of the Declaration of Peter Benvenutti, the Goldens’ expert witness, on
the grounds that the statements therein are conclusory and form the basis of an improper opinion beyond the scope
of Federal Rule of Evidence 702. After reviewing Mr. Benvenutti’s declaration, the court concludes that Mentor’s
objection to Mr. Benvenutti’s opinion regarding the effectiveness of the Plan in paragraphs 8 and 9 is well-taken.
However, paragraph 10 simply summarizes the results of Mr. Benvenutti’s search of Mentor’s corporate records on
file with the Secretary of State of the State of California. Accordingly, the court SUSTAINS the objection with
regard to paragraphs 8 and 9, but OVERRULES it with regard to paragraph 10.

13

While the Bankruptcy Code does not define the term “effective date,” one commenter has
stated that “it is almost universally understood that the effective date of a plan is the ‘date on
which the provisions of a plan of reorganization become effective and binding on the parties.’”
Harold S. Novikoff, Post Confirmation Issues: Ascertaining the Effective Date; PostConfirmation Jurisdiction; Serial Filing; Post Confirmation Litigation Vehicles 1 (2007)
(available at www.lexisnexis.com/documents/pdf/20080411104921_large.doc) (quoting Kenneth
K. Klee, Adjusting Chapter 11: Fine Tuning the Plan Process, 69 Am. Bankr. L.J. 551, 560-61
(1995)). And the Bankruptcy Code provides that the effect of confirmation of a plan is to bind
the debtor and each creditor to the terms of the plan. 11 U.S.C. § 1327(a). While this would seem
to indicate that the confirmation date is the date on which a plan becomes effective, that is not
the case. In the same article, which Mentor cites, the author explains that most plans provide for
a specific effective date that will typically be some date “following confirmation of the plan on
which [the plan] becomes binding and distributions commence.” Novikoff, supra at 2; see also
In re Potomac Iron Works, Inc., 217 B.R. 170, 172 (Bankr. D. Md. 1997) (“Generally, the
‘effective date’ is understood as the date upon which distributions commence.”).
Thus, although the confirmation date may act as the effective date in a plan that does not
otherwise specify an effective date, the date that a plan is confirmed is not also necessarily its
effective date. See Benjamin Weintraub & Michael J. Crames, Defining Consummation, Effective
Date of Plan of Reorganization and Retention of Postconfirmation Jurisdiction: Suggested
Amendments to the Bankruptcy Code and Bankruptcy Rules, 64 Am. Bankr. L.J. 245, 277 (1990)
(“Effective Date is the date upon which a confirmed plan becomes operative and distribution of
property and cash is commenced.” (emphasis added)). Further support for this conclusion is
found in the Bankruptcy Code itself, which refers to the “effective date” of a plan when

14

discussing the requirements for confirming a plan, which is an indication that an effective date
and confirmation date are not necessarily the same. 11 U.S.C. § 1129 (requiring a court to
confirm a plan only if certain requirements are met, including nine requirements that reference
“the effective date of the plan”).
Here, Mentor’s Plan specified an Effective Date that is different from the date of
confirmation. And it is clear that the Plan becomes operational on the Effective Date. For
example, it is the Effective Date on which the amount of claims was to be determined, 7 on which
interest began to accrue on certain claims, 8 and on which other ministerial and administrative
actions for distributions were to be undertaken. 9 And most notably, in Section 6.7, the Plan
explicitly requires that Mentor file its amended articles of incorporation no later than 120 days
after confirmation.
In spite of these and other provisions in the Plan, Mentor maintains that Section 6.8 of the
Plan rendered the Plan effective upon confirmation. But this position is simply inconsistent with
the terms of the Plan. Section 6.8 of the Plan does not provide that the Plan becomes effective
upon confirmation. Rather, Section 6.8 authorizes Mentor to implement the actions required
under the Plan without obtaining approval of its board of directors, shareholders, or otherwise.
Section 6.8 specifically states that it was included in the Plan pursuant to § 1400 of the California
Corporations Code which grants “full power and authority to put into effect and carry out any

7

E.g., Section 3.1 of the Plan provides that holders of claims shall receive cash “in the amount of such claims on the
Effective Date.”

8

E.g., Sections 3.3(a) and 5.3 of the Plan provides that if a claim “has not been allowed on the Effective Date, the
holder shall receive such payment within thirty days after the Debtor receives notice that such claim is an Allowed
Claim, together with interest thereon from the Effective Date at the rate of eight percent (8%) per annum.”

9

E.g., Section 3.2 requires the holder of a claim to “notify the Debtor in writing of its partial or complete election
[to receive warrants or common stock in exchange for its claim] prior to the earlier of (a) ninety days after the
Effective Date or (b) the holder’s receipt of [c]ash on account of such portion of their claim;” Section 6.3 requires
Mentor to issue certain restricted shares “[n]ot later than sixty days after the Effective Date;” and Section 6.4(c)
restricts transfer of New Common Stock issued under the Plan “for eighteen months following the Effective Date.”

15

plan of reorganization and the orders of the [bankruptcy] court or judge . . . [and to] do any act
provided in the plan . . . without further action by its board or shareholders.” Thus, under Section
6.8 of the Plan and § 1400 of the California Corporations Code, Mentor was authorized by the
California legislature to take actions, such as the filing of an amendment to its articles of
incorporation, that were required by the Plan without first obtaining board or shareholder
approval. But nowhere does Section 6.8 provide that the Plan as a whole will become effective
upon confirmation.
Mentor also argues that Section 6.4(a)—the section exempting from registration the
warrants or other securities issued under the Plan—is not conditioned upon the filing of an
amendment to Mentor’s articles of incorporation. In essence, Mentor maintains that once the
securities were issued, they were exempt under Section 1145 of the Bankruptcy Code regardless
of whether Mentor had filed amended articles of incorporation rendering the Plan effective.
Although Section 6.4(a) of the Plan does not state that it becomes effective only on the Effective
Date of the Plan as a whole, other provisions of the Plan that provide for the issuance of
securities under the plan are tied to the Effective Date. 10
Mentor also argues that the Order Confirming Plan supports its position that the Plan was
effective on the date of confirmation. The Order Confirming Plan required Mentor to submit a
post-confirmation status report to the Bankruptcy Court “not later than one month after 90 days
after entry of this order” detailing Mentor’s progress in implementing the Plan. Mentor was
required to report on progress made during the 90-day period following confirmation, including
its progress in “whether the order confirming the Plan has become final . . . [and] whether

10

E.g., Section 5.3 provides that holders of priority claims (as defined by the Bankruptcy Code) could elect to
receive shares of stock plus sixteen warrants by notifying Mentor of their election within 90 days after the Effective
Date; and Section 6.3 requires Mentor to issue restricted shares and other securities no later than sixty days after the
Effective Date.

16

delivery of securities required to be distributed under the Plan have commenced or been
completed.” Mentor posits that there would have been no post-plan progress on which to report
had the court intended that the Plan would become effective only on the date on which Mentor
filed its amended articles of incorporation. The court is not persuaded by this argument inasmuch
as Mentor could have filed its amended articles of incorporation immediately after confirmation
of the Plan. And the Bankruptcy Court not only required a report on Mentor’s progress in
consummating the Plan during the first 90 days after confirmation, but also ordered “[f]urther
reports addressing [progress toward consummation of the Plan] every three months [after the
initial report] until entry of a final decree.” 11 Because the filing of the amended articles of
incorporation was required to occur within 120 days of confirmation, it was very possible that no
progress would have occurred in the first 90 days. In short, the fact that the Bankruptcy Court
required progress reports says nothing about when the Plan was to become effective.
ii.

There is no dispute that Mentor failed to file an amendment to its
articles of incorporation as required by Section 6.7 of the Plan

Mentor next argues that there are disputes of fact as to whether Mentor satisfied the
Plan’s requirement that it amend its articles of incorporation.
Section 6.7 required that Mentor amend its articles of incorporation to 1) authorize
sufficient shares of its common stock to permit issuance of the securities under the Plan, and 2)
to prohibit the issuance of nonvoting equity securities. When originally formed, Mentor
authorized 40 million shares of common stock. At some unknown point in time, the number of
Mentor’s authorized shares common stock was apparently increased to 400 million. Mentor’s
CEO, Mr. Billingsley, testified in his declaration that he remembers working with Mentor’s
11
Neither party has put forward any evidence on the substance of Mentor’s reports addressing its progress toward
consummation of the Plan. Moreover, Mentor does not claim that the Effective Date was modified or waived the
court.

17

attorneys after confirmation of the Plan to prepare amended articles in accordance with the Plan,
but acknowledged that he never received a confirmed copy of the amendment from the
California Secretary of State. Even though there is no amendment on file with the California
Secretary of State meeting the requirements of Section 6.7 and no evidence that such an
amendment was filed, Mentor asserts that an amendment authorizing additional shares had to
have been filed sometime before March 21, 2008, the date on which another amendment was
filed with the California Secretary of State stating that “[t]he total number of authorized common
shares is unchanged at 400,000,000.” (emphasis added).
Even assuming this to be the case, it does not create a genuine dispute of material fact.
Mr. Billingsley never testified that an amendment meeting the requirements of Section 6.7 was
filed. While the March 21, 2008 amendment may give rise to an inference that Mentor amended
its articles to increase the number of authorized shares at some point in time, there is no evidence
supporting Mentor’s contention that it filed the amendment within 120 days of the confirmation
of the Plan. And even assuming that Mentor filed an amendment increasing the number of
authorized shares from 40 million to 400 million at some point during the 120 days allowed in
the Plan, there is no evidence that Mentor filed within the 120-day period an amendment that
prohibited the issuance of nonvoting equity securities. 12 In short, the 2008 amendment filed with
the California Secretary of State eight years after confirmation of the Plan is not evidence that
Mentor increased the number of authorized shares within 120 days from confirmation of the Plan
or that it amended its articles to prohibit the issuance of nonvoting equity securities. Therefore,
there is no evidence that Mentor complied with the requirements necessary to render the Plan
effective.
12
The only mention of this second requirement is in Mr. Billingsley’s declaration where he states that Mentor has
never issued nonvoting equity securities. But this does not support the conclusion that Mentor’s articles were
amended to prohibit such an issuance, as was required under the Plan.

18

Mentor finally argues that the court should evaluate the totality of the circumstances to
determine whether Mentor has substantially complied with the terms of the Plan. Substantial
compliance is a contract law doctrine meant to “assist the court in determining whether conduct
should, in reality, be considered the equivalent of compliance under the contract.” Wolfe ex rel.
Joseph A. v. N.M. Dep’t of Human Servs., 69 F.3d 1081, 1086 (10th Cir. 1995) (quoting
Peckham v. Gem State Mut. of Utah, 964 F.2d 1043, 1052 (10th Cir. 1992); see also Connell v.
Higgins, 150 P. 769, 775 (Cal. 1915) (recognizing contract doctrine of substantial performance
and defining it as meaning “that there has been no willful departure from the terms of the
contract” and that a party will not forfeit his right to recover under the contract “by reason of
trivial defects or imperfections in” performance of the contract). But this contract doctrine does
not apply to the Plan.
Courts have likened confirmed Chapter 11 bankruptcy plans to contracts that specify the
rights and obligations of the debtor and its creditors. See In re Dial Bus. Forms, Inc., 341 F.3d
738, 743 (8th Cir. 2003) (“Once confirmed, a Chapter 11 plan acts like a contract that binds the
parties that participate in the plan.” (internal quotation marks omitted)); In re Victory Mkts., Inc.,
221 B.R. 298, 303 (2d Cir. B.A.P. 1998) (“[T]he Bankruptcy Code establishes the general rule
that ‘the provisions of a confirmed plan bind the debtor, any entity issuing securities under the
plan, any entity acquiring property under the plan, and any creditor, equity security holder, or
general partner in the debtor . . . .’ For this reason, a confirmed plan holds the status of a binding
contract as between the debtor and its creditors.”). However, because a confirmed Chapter 11
plan is also an order of the bankruptcy court, the analogy between Chapter 11 plans and contracts
can only extend so far. See In re Dial, 341 F.3d at 744.

19

Courts that liken confirmed Chapter 11 bankruptcy plans to contracts often do so only for
purposes of interpreting them. E.g., id. at 743 (explaining that the case turned on the proper
interpretation of the plan and likening it to a contract); In re Victory Mkts., 221 B.R. at 303 (“As
with any contract, the starting point for review of a plan is its plain language.”). Mentor has cited
no authority supporting its contention that the substantial compliance doctrine applies to
confirmed Chapter 11 plans, or any other court order for that matter. 13 The Plan was explicit in
requiring that Mentor “shall file amendments to its articles of incorporation” within 120 days
after confirmation and that the Plan would not become effective until it did so. The undisputed
facts show that Mentor failed to file the required amendments, and thus the Plan never went into
effect.
IV.

Conclusion
For the foregoing reasons, the court ORDERS that the Goldens’ Motion for Partial

Summary Judgment on Count I of their Second Amended Complaint (Dkt. No. 70) is
GRANTED.

DATED September 22, 2017.

_____________________________
Judge Jill N. Parrish
United States District Judge

13

Some courts have recognized substantial compliance as a defense to a charge of contempt. See, e.g., Bauchman v.
W. High Sch., 906 F. Supp. 1483, 1494 (D. Utah 1995) (citing an unpublished Tenth Circuit case and a Ninth Circuit
case). But “[w]hile some courts have recognized substantial compliance as a defense in a contempt proceeding, [the
Tenth Circuit] has not previously recognized the defense in a published opinion.” Phone Directories Co. v. Clark,
209 F. App’x 808, 815 (10th Cir. 2006). And courts that do recognize substantial compliance as a defense to
contempt require a “showing by clear and convincing evidence that ‘all reasonable steps' were taken in good faith to
ensure compliance with the court order and that there was substantial compliance.” Id. (citation omitted). Mentor has
not only failed to establish that it took all reasonable steps to comply with the Plan; it has failed to point to any
authority applying the substantial compliance doctrine to a court order outside of the contempt context.

20