Opinion
Case No. 93-57024-JRG Chapter 7; Adversary No. 95-5397
March 31, 2000
MEMORANDUM DECISION
I. INTRODUCTION
This is a case about a real estate development company, Portofino Development Company ("PDC"), that encountered financial difficulties forcing it to file for bankruptcy. PDC is owned and controlled by the Mariani family. The Bankruptcy Trustee instituted this adversary proceeding to recover for the bankruptcy estate money owed to PDC by other Mariani owned entities.
PDC is the debtor and one of the defendants in this adversary proceeding. Other defendants include David Mariani, as an individual, Mariani Group of Companies ("MGC"), a limited partnership, MGCLand, and other Mariani controlled entities and family members that were involved in the development of approximately 18 acres of land in Cupertino, California. The project, which came to be known as "Portofino," was envisioned to include 147 patio homes/town homes on 12 acres of the property and 195 condominiums on the remaining 6 acres of the property.
MGC owned the entire 8 acres subject to a $10,288,000 debt owed to Security Pacific National Bank ("SPNB") and wished to transfer the land to D.W. Mariani Development Corp. ("DWMD") for the purposes of development. The land had been in the Mariani family for decades and had a very low tax basis, raising concerns about the tax consequences of the sale. In response to these concerns, the Mariani family conceived a complex series of real estate transactions designed to avoid paying taxes. Under their plan, various interests in the land and its associated debts are bought, sold and distributed amongst the Mariani family members and entities until the tax basis of the land is increased from $300,000 to $30,000,000, apparently without any taxes being incurred. The deal did not proceed exactly as planned, however, and at the end of these transactions there is some confusion over who owns what interests in which land.
The original plan, reflected in the first set of deal documents, was for MGCLand to become the owner of 6 acres of land and to owe a $1,288,000 obligation to PDC for its share of the SPNB debt originally encumbering the property. MGCLand, however, never became the owner of the 6 acres and the deal had to be restructured. Later, a revised set of deal documents was drafted and executed to reflect MGC as the owner of those 6 acres and the obligor on the $1,288,000 to PDC. These documents come closest to matching the record title documents and the documents supporting the construction loan taken to develop the property. Nonetheless, MGCLand continued to carry the 6 acres and the debt on its financial statements and tax records. PDC paid for over $1 million worth of improvements to the 6 acres, but the paperwork is inconsistent as to whether MGC or MGCLand owed PDC for the cost of these improvements.
Unfortunately for PDC, sales of the Portofino houses were neither as brisk nor as profitable as expected, causing PDC to run into financial difficulties. When it became clear that the Portofino project was in jeopardy, PDC attempted to insulate MGCLand from having to repay the $1,288,000 note by amending the Agreement for Assumption of Indebtedness, the document evidencing the debt. The First Amendment to the Assumption of Indebtedness ("First Amendment") changed the nature of the debt from recourse to non-recourse and substituted in collateral without value, making the note worthless. The First Amendment also purported to incorporate into the Promissory Note the money MGCLand supposedly owed to PDC for improvement to the 6 acres of land. PDC's financial woes continued and in November of 1993 it filed a voluntary petition for bankruptcy.
The trustee brought the instant adversary proceeding to recover the money owed on the $1,288,000 note and PDC's expenditures for the improvements on the 6 acres. The trustee also asserted a claim that David Mariani ("Mariani") was the alter-ego of PDC and a claim for conversion of PG E refund checks for the Portofino project that were deposited into a bank account belonging to Warren Dried Fruit, another Mariani entity.
The trustee originally asserted the claims for breach of promissory note and money owing against MGC. MGC moved for summary judgment on the breach of promissory note claim, asserting that MGCLand, and not MGC, was the maker of the promissory note. This Court, at the time unaware of the existence of the executed promissory note naming MGC as the maker, granted summary judgment to MGC on that claim. The trustee then amended the complaint to allege the cause of action against MGCLand. The cause of action for money owed, however, was never challenged or amended and has remained against MGC. During the trial, the promissory note signed by MGC was introduced into evidence. The trustee moved to amend the complaint during trial, but that motion was denied. The trustee renewed her motion after trial, asking to amend the complaint to conform to the proof at trial. In an order dated September 20, 1999, this Court vacated the order granting summary judgment to MGC, granted the trustee's motion to amend the pleadings to conform to proof, and granted defendants' motion to reopen the trial to receive additional evidence specifically relevant to MGC's liability on the promissory note. Further evidence was then taken on November 30, 1999. For the reasons stated in this opinion, the Court finds for the trustee on her breach of promissory note, money owing and conversion causes of action and for defendant David Mariani on the alter-ego claim.
II. FACTUAL BACKGROUND
The Mariani family had owned an 18 acre parcel of property located in Cupertino, California since approximately 1915. In the late 1980's a decision was made to develop the property for residential housing. The evidence presents a confusing and conflicting picture of the role various Mariani entities played in the development. The difficulty stems in large part from the fact that the Marianis failed to maintain consistency between their deal documents, tax records, and financial statements. The Court therefore starts with a review of the various iterations and explanations of the Portofino development found in the original set of deal documents; the second, revised set of deal documents; the First Amendment to the Assumption of Indebtedness; the public record regarding title; the construction financing documents; and the tax records, financial statements and the value of the land. Finally, the Court will examine the factual background for the conversion of the PG E checks and the claim that David Mariani is the alter-ego of PDC.
The March 8, 1990 Deal Documents
In the beginning, MGC owned 18 acres of land encumbered by a $10,288,000 debt owed to SPNB. In late 1989, David Mariani decided that he wanted his development company, D.W. Mariani Development Corporation ("DWMD") to own and develop the land. Mariani commissioned an appraisal of the land which resulted in a valuation of $14.7 million for 12 of the 18 acres. Because the land had been in Mariani hands for so long, the land had a very low tax basis ($300,000) and a simple sale would have incurred a large tax liability on "phantom income."
MGC is a limited partnership. The General Partners are Marialisa Delmare (Mariani's sister), MF Co. (owned by Mariani and trusts for his daughters), John Mariani (Mariani's brother), Linda Mariani Duhamel (Mariani's sister), Mary Frances Mariani (Mariani's mother), and Paul Mariani III (Mariani's brother). The Limited Partners are Paul Mariani Jr. Trust (trust for Mariani's father), Mary Frances Mariani Trust, and Griffin Investments (composed of MFCo, Arch Real Estate — owned by Arlene Mariani — Mariani's wife; and Tracy Mariani Trust — Mariani's daughter).
D.W. Mariani Development Corporation was sometimes known as Mariani Development Corporation ("MDC") and, in 1991, changed its name to Portofino Development Corporation ("PDC").
"Phantom income" refers to the capital gain from the difference between the tax basis and the sale price. A regular sale of the property would have required the Marianis to pay capital gains' taxes on the entire $10 million increase in land value even though $10 million of the sale proceeds would have to go to repaying the SPNB loan.
In order to avoid paying taxes, the Marianis devised a complex series of sales, distributions and contributions. All of the documents effecting this transaction purport to be effective as of January 1, 1990, but none of the documents existed until March 8, 1990. The first step in the plan was to transfer the land to one of MGC's partners, the Paul Mariani Jr. Trust ("PMT"). The transfer was intended to liquidate PMT's interest in MGC and to make PMT solvent. In an Agreement of Distribution of Partnership Capital, MGC returned PMT's entire $9 million interest in MGC in the form of a fifty percent (50%) interest in 12 of the 18 acres. The Agreement of Distribution of Capital states that the parties concurrently entered into a Real Estate Purchase Agreement whereby MGC sold the remaining fifty percent (50%) interest in the 12 acres to PMT for $9 million, subject to the obligation to pay MGC fifty percent (50%) of the gross proceeds over $45 million. The Agreement of Distribution of Capital was printed on March 8, 1990, but there is no Real Estate Purchase Agreement printed on that date. The only Real Estate Purchase Agreement was printed later, in April of 1991.
A letter from Mariani's tax counsel, John Hopkins, outlines the objectives of the deal, including moving 12 acres over to MFCo with a new basis of $20 million, minimizing taxes on this transaction, and obtaining a purchase price of $20 million in order to allow the PMT to meet the substantial obligations it owed.
The documents were drafted by the law firm of Hopkins Carley. Hopkins Carley uses a computer system that inserts a footer indicating the document number and the date the document was printed. The earliest print date for the deal documents is March 8, 1990.
There are no deeds transferring the property and it continues to be a single 18 acre parcel. The first deed, transferring an undivided 12/18 interest in the property to DWMD, is recorded March 1, 1990.
The next step in the plan was another Real Estate Purchase Agreement. In this Agreement PMT sold the 12 acres to Mariani Financial Company ("MFCo"), another MGC partner, for $20 million. The $20 million was a pure swapping of debt. PMT was relieved of $11 million of debt it owed to MFCo and the $9 million of the Security Pacific debt that was assigned to the 12 acres. At the end of this stage, PMT walked away almost solvent after an instantaneous $2 million paper profit.
No explanation is given for the allocation of $9 million of the SPNB debt to the 12 acres and $1,288,000 to the 6 acres. The Court is forced to assume that the $9 million figure is derived from the value of PMT's share in MGC. Thus, PMT received all of its capital back from MGC, valued at $9 million. The land was valued at $18 million, so PMT had to purchase $9 million worth of land. PMT did not pay MGC $9 million, but instead assumed $9 million of the $10,288,000 debt owed to SPNB.
This profit is explained in various ways. Defense expert John Gleason ("Gleason") explains the extra $2 million in various ways. The first explanation is that it was a standard extra profit for the party who located the property, but this property was not located by PMT — it had been in Mariani hands all along. Gleason's next explanation was "in my experience, reasonable business people often go for less than they could get because they just find it repugnant to be too grasping" and that "you very often don't squeeze the last nickel out of the deal."(emphasis added) Gleason's last, and most credible explanation, was that Mariani was willing to pay a few million extra to maintain family harmony. Mariani simply testified that it was necessary to make the PMT solvent.
The next step in the plan was an Assumption of Indebtedness that provided for MFCo to take the 12 acres subject to the entire SPNB debt in exchange for a promissory note from MGCLand for the $1,288,000 of SPNB debt allocated to the 6 acres. Thus, for administrative convenience, the entire SPNB debt follows the 12 acres and is accompanied by a promissory note for the part assigned to the 6 acres. The next step was an Agreement for Distribution of Partnership Capital in which MFCo distributed the 12 acres (subject to the $10,288,000 Security Pacific debt and the obligation to pay MGC fifty percent (50%) of proceeds over $45 million) and a $1,288,000 note from MGCLand. The Promissory Note provides for interest at ten percent (10%) and contains an express limitation on modification. Mariani then contributed the 12 acres and the note to DWMD. The final step in the plan was another Agreement for Distribution of Partnership Capital in which MGC distributed the remaining 6 acres to its partners other than PMT and they, in turn, contributed the 6 acres to a new entity entitled MGCLand.
This series of transactions has several inconsistent results which make the transactions suspect. First, the land is valued at $18 million when it is distributed to PMT even though Cushman and Wakefield, a real estate firm, had just estimated the value of the land at $14.7 million in an appraisal used to obtain construction financing. Further, the $14.7 million is based on an assumption that the land was free and clear of any encumbrances, although this land was encumbered by the $10,288,000 debt to SPNB. Thus, not only is the land over-valued, the encumbering debt is disregarded. And, the land is not finished appreciating; when PMT sells the land to MFCo, it instantaneously increases in value to $20 million. Additionally, DWMD and MGCLand value the land inconsistently. DWMD places the 12 acres on its books at $20 million, but MGCLand places its 6 acres on the books at only $1.5 million, a fraction of the $10 million value that would have matched the DWMD valuation. Further, there are inconsistencies in the valuation of the right to participate in proceeds over $45 million. Mariani testified that PDC and the family were each to earn $7 million from the deal. Although Mariani's calculations are mathematically correct, the testimony and report of defense expert John Gleason ("Gleason") contradicts Mariani's testimony. Gleason wrote in his report that "cash participation was a remote event" and testified that, although he had spoken with Mariani about the profit sharing, he understood that profit sharing was a remote possibility and that a $7 million profit for the family was never mentioned.
Mariani testified that costs for the project were estimated at $26 million and proceeds at $68 million. Costs were expected to be forty percent (40%) of proceeds, leaving sixty percent (60%) of the proceeds as profit. They then calculated that profits would equal $26 million when proceeds reached $45 million (.6X = $26 million). Subtracting $45 million from the total expected proceeds of $68 million leaves $23 million in proceeds to be split. Again assuming sixty percent (60%) profit, that yields $14 million ($23 million X .6 = $14 million) in profit to be split between PDC and MGC or MGCLand.
In addition to the questionable valuations, the documents contain multiple inconsistencies and reasons to doubt their validity. First, the original documents drafted to execute this real estate transaction purport to be effective as of January 1, 1990. None of the documents, however, were signed until at least March 8, 1990. Second, the first set of deal documents is incomplete. There are no 1990 versions of the Real Estate Purchase Agreement (MGC to PMT) and a Receipt, acknowledging the contribution of the 12 acres to DWMD. These documents only exist as produced on April 11, 1991. Third, the text of Agreement for Distribution of Partnership Capital (MGC to PMT) and the Real Estate Purchase Agreement (PMT to MFCo) appears on pages printed on March 8, 1990, while the signatures appear on pages printed on April 11, 1991. Thus, the signature pages were taken from the second set of deal documents and attached to the March, 1990 documents in an attempt to convince the Court that the first set of documents was effective. Fourth, the Real Estate Purchase Agreement (PMT to MFCo), contains a page 5 without a Hopkins Carley footer. Defendants' explanation that they modified the document in-house is not persuasive because the provisions on this page 5 match exactly the provisions in its counterpart in the 1991 documents. Instead, the Court finds that defendants created a new page 5 as part of their attempt to match the 1991 signature page to the 1990 document.
This also creates doubt as to the validity of the Agreement of Distribution of Partnership Capital (to PMT) because it refers to a concurrent Real Estate Purchase Agreement in which PMT buys the other fifty percent (50%) interest in the 12 acres, but the only such document that was produced was not printed until April of 1991.
Further, the first set of documents is suspect because it is inconsistent with the record title of the land. For example, the Agreement for Recording of Deeds states that a deed would be recorded as if the 6 acres had been transferred directly from MGC to MGCLand, but no such deed was ever recorded. Similarly, the Agreement for Distribution of Partnership Capital speaks of 12 acres subdivided from 18 acres, but no such subdivision existed at the time. Finally, the validity of the first set of documents is cast into doubt by the existence of a completed, executed, and revised second set of deal documents.
The April 11, 1991 Deal Documents
A full set of deal documents was produced by Hopkins Carley on April 11, 1991, and all the documents are executed on pages dated in 1991. There is some disagreement as to the intent and purpose of these documents. Mariani originally insisted that the first set of documents was the only set ever created. When confronted with the second set, Mariani's second story was that the deal did not develop exactly as planned and the documents were modified to conform to the transaction as it actually occurred. Mariani, however, changed his testimony and gave a third explanation that the documents were a mistake, were only signed by people not knowledgeable about the deal, and were inoperative. Mariani's third story, however, is contradicted by his own signature on many of the documents.
All of the documents are executed on pages dated April 11, 1991 except for the new Promissory Note which is printed and executed on pages dated March 4, 1991. The Court draws no adverse inference from the fact that the law firm made final modifications to this document earlier than the others.
He explained the 1991 signature pages as necessary because his family "is traveling a lot" or maybe "someone might have forgotten to send the documents out to be signed."
It is interesting to note that none of the family members who supposedly signed the documents in error testified at trial. When additional evidence was taken on November 30, 1999, the only new witness to testify was Jennifer Cunneen, an attorney with the firm of Hopkins Carley. While Cunneen had drafted some documents, she had never met with or talked to any of the people who signed documents.
Mariani signed the Agreement of Distribution of Partnership Capital (from MFCo to Mariani), the Receipt, the Agreement of Assumption of Indebtedness and the Agreement for Recording of Deeds.
The most important distinction between the first series and the second series of transaction documents is the recognition that MGC retained ownership of the 6 acres of land and is the obligor on the $1,288,000 note. The first step is again the Agreement for Distribution of Partnership Capital (MGC to PMT) giving PMT a fifty percent (50%) interest in 12 acres, valued at $9 million. This time, however, a Real Estate Purchase Agreement in which MGC sells PMT the other fifty percent (50%) interest in the 12 acres at a purchase price of $9 million is actually created and executed. As before, another Real Estate Purchase Agreement was entered into in which PMT sells 12 acres to MFCo for $20 million. The next step was an Agreement of Distribution of Partnership Capital, in which MFCO distributed a $1.288 million promissory note and the 12 acres, subject to paying MGC fifty percent (50%) of the proceeds over $45 million and the $10,288,000 SPNB debt to Mariani. This note is again explained in the Agreement for Assumption of Indebtedness as a matter of administrative convenience and again contains a provision preventing modification, except by a writing signed by both maker and holder. The Promissory Note states "This Note may only be changed amended or modified in writing signed by both Maker and Holder." In this set of documents, however, the owner of the 6 acres and the maker of the note is MGC, not MGCLand. Additionally, the promissory note provides for an interest rate of prime plus one percent (1%) instead of the ten percent (10%) provided for in the original note.
The next step is for Mariani to contribute the land and the note to DWMD and this time it is recorded in a Receipt acknowledging the contribution. The last step in the plan is again the Agreement for Recording of Deeds. Importantly, this version contains no mention of MGCLand. In addition, this document provides for a 12/18 share going to an entity called Mariani Development Corporation ("MDC") with a 6/18 share retained by MGC. The Agreement then calls for a direct deed of a 6/18 interest by MGC and a 12/18 interest by MDC of 6 acres to MGC and the 12 acres to MDC.
In this Agreement, Mariani Development Corporation is used as a shorthand for DWMD.
The April 1991 documents represent a complete set of fully executed documents. There are no filler pages and all the text pages bear the same footer date as the signature pages. The second set of documents, however, do carry their own indicia of unreliability. First, all of the documents are backdated; they purport to be effective as of January 1, 1990, but are executed on pages printed in April of 1991. And, the backdating creates anomalies in the documents, such as the Real Estate Purchase Agreement printed in 1991, which has the PMT assuming a portion of the debt owed to SPNB when the debt was paid off over a year earlier. These anomalies are consistent, however, with documents revised to reflect changes in the transaction. Second, these documents do not match MGCLand's tax and financial records which carry the land as an asset and the note as a liability. The April, 1991 documents are, however, bolstered by their consistency with the public record regarding title.
DWMD and MGC obtained a construction loan from Home Federal Bank and Savings Loan Association ("Home Fed"). According to the final escrow statement, the SPNB loan was paid off in full on March 1, 1990 out of the original disbursement from the construction loan.
None of MGC's tax or financial records were admitted into evidence, so it is impossible to determine which deal documents, if any, match those records.
The First Amendment to the Assumption of Indebtedness
The first and second set of deal documents each contain a Promissory Note and an Agreement for the Assumption of Indebtedness. These documents evidence an agreement that PDC would pay off the entire Security Pacific debt in exchange for a promissory note for $1,288,000 (representing the portion of the debt attributed to the land PDC does not own). In the first set of documents the Promissory Note is written by MGCLand and in the second set of documents the Promissory Note is written by MGC. In both cases, however, the Promissory Note is secured by the 6 acres and the owner of the note (PDC) is entitled to seek payment on the note from the maker. Defendants claim that PDC and MGCLand entered into a First Amendment to the Assumption of Indebtedness which effectively altered MGCLand's obligations under the note.
The First Amendment purports to alter the note in three ways: 1) to change the note from recourse to non-recourse; 2) to change the collateral from the 6 acres to the right to fifty percent (50%) of the proceeds from the development in excess of $45 million; and 3) to incorporate all monies advanced by PDC for the improvement of MGCLand into the note. These changes are significant because they benefit MGCLand at the expense of PDC. The change from recourse to non-recourse renders the note valueless because there is no way to collect on the note other than by seizing the collateral. Thus, instead of having recourse to the assets of the MGCLand general partners, PDC is limited to the collateral supporting the note. At the same time, the collateral is changed from the 6 acres of land to the right to share in proceeds — a worthless right never expected to generate any money. Thus, the note is rendered valueless because the only asset guaranteeing its payment has no value. Further, the incorporation of the money spent on land improvements into the now worthless note was simply an attempt to allow MGCLand not to repay more debt owed to PDC for the cost of the land improvements. The First Amendment is unreliable because it is shrouded in mystery as to how it was drafted and when it was executed. First, of all of the versions of all of the documents relating to this transaction, only this one is not drafted by the Law Firm of Hopkins Carley. The only evidence as to why Hopkins Carley did not draft this extremely convenient document was speculation that perhaps PDC was trying to save money by having John Delmare ("Delmare"), PDC's Project Manager, or an in-house attorney draft this two page document. Second, there is no evidence as to when the document was executed. The document states that is made as of February 1, 1990, but all parties agree that this date is impossible because it is signed by PDC, a name not acquired until January of 1991. Further, no witness can remember when the document was executed. Defendants speculate that it must have been in 1991, but cannot point to any evidence to support their hypothesis. The only evidence as to when the document was effective comes in the form of an increase in the note receivable from MGCLand to reflect the cost of improvements on the 6 acres in the 1992 financial statements. The note is carried on PDC's Balance Sheets with a balance of $1,288,000 in 1990 and in 1991, but the 1992 Balance Sheet indicates an increased balance of $2,403,820.69. The increase of $1,115,820.69 exactly matches the allocation of construction costs to the 6 acres in PDC's ledger accounts. As the First Amendment purports to incorporate the construction costs into the promissory note, the increase in the value of the note by the amount of the construction costs is conduct consistent with the First Amendment.
Delmare is Mariani's brother-in-law by way of his marriage to Mariani's sister, Marialisa.
According to the Amendment to Articles of Incorporation, DWMD did not change its name to PDC until January 15, 1991.
Both Mariani and John Delmare testified that they did not know when the Amendment was executed. In response to questions about when the First Amendment was signed, Mariani testified that he was "not sure when it was actually executed" and John Delmare testified "I don't recall."
The PDC ledger accounts indicate that MGC, as opposed to MGCLand, owes the $1,115,820.69. This is, of course, inconsistent with defendants' claim that MGCLand owned the 6 acres.
It appears clear that the First Amendment was created well after the project had run into trouble. See Section F infra.
D. The Public Record Regarding Title
Record title to the 18 acre Cupertino property has been held by only a few entities in recent years. On August 4, 1980, a grant deed was recorded whereby Mathilda Sousa and Winifred Thiltgen granted to Mariani Group of Companies (MGC) the 18 acres of real property in Cupertino. Subsequently, on March 1, 1990, MGC granted an undivided 12/18 interest in the property to DWMD. Approximately nine months later, on December 13, 1990, a map was recorded subdividing the 18 acre property into 100 individual lots. Then, on April 17, 1991, MGC, as to an undivided 6/18ths interest, and PDC, as to an undivided 12/18ths interest, granted to MGC lot 99, representing the 6 acres of land. Also on that date, the same grantors granted to PDC the lots 1-98 and lot 100, representing the 12 acres.
This is not the beginning of the Mariani family ownership of the land as Mathilda Souza is Mary Frances Mariani's sister, and therefore David Marianis's aunt. This was not a sale, involved no consideration and was considered an exempt transfer.
A deed of trust, granting Home Federal Bank and Savings and Loan Association a security interest in the entire 18 acres, was also executed on March 1, 1990 as part of the closing of escrow for the Home Fed loan.
The second set of documents were printed April 11, 1991, just six days before the April 17, 1991 grant deeds were recorded. The proximity in time strongly suggests that the deal documents were modified in anticipation of recording the grant deeds.
Thus, according to record title, MGC is the owner of 6 acres of the property and PDC is the owner of the other 12 acres of the property. Record title never changed after April 1991 and these two entities continued to hold title to the property after the project failed and was ultimately foreclosed upon. Thus, MGCLand never appears as the record title holder of any interest in any part of the Cupertino land.
Construction Financing from Home Federal Bank
The construction loan documents are generally, but not completely, consistent with the record title and second set of deal documents. Home Federal Bank and Savings and Loan Association ("Home Fed") provided the financing for the development of the Cupertino land in the form of a $38 million loan to MGC and DWMD. There were several documents executed to document the loan. On February 1, 1990, MGC and DWMD signed a promissory note payable to Home Fed which was to be secured by a deed of trust and a security agreement. The deed of trust was recorded March 1, 1990 and granted to Home Fed the 18 acre Cupertino property to secure the promissory note dated February 1, 1990.
A Loan Agreement dated February 1, 1990 was also prepared, whereby Home Fed acknowledged that a final subdivision map would be recorded after loan recordation and agreed that title to a portion of the property would be transferred in fee from MGC to DWMD. Home Fed advised Mariani that it would not enter into the loan transaction unless certain obligations of the borrower were guaranteed. Consequently, Mariani entered into a Guaranty Agreement dated February 1, 1990 whereby he agreed, among other things, to complete the project in accord with the Construction Loan Agreement, that the obligations of the guarantor were independent of the borrower's obligations, and that Home Fed may proceed in a separate action against him individually to enforce the provisions of the Guaranty Agreement if the borrower failed to timely complete construction of the project.
In connection with the closing of the Home Fed loan, DWMD and MGC, as borrowers, were obligated to pay off the $10,288,000 Security Pacific National Bank loan which was then secured by the 18 acre Cupertino property. In a final escrow statement prepared by Continental Land Title Company, the close of escrow was set for March 1, 1990, whereby the lender would deposit $12,419,230.77 with $10,376,069.56 going towards paying off the Security Pacific National Bank loan ($10,288,000 in principal and $88,019.56 in interest and a $50 reconveyance fee).
Finally, on May 22, 1992, over two years later, a First Loan Modification Agreement was prepared, extending the loan's original maturity date of March 1, 1992 to March 1, 1995. The loan was converted to an acquisition and development loan without further advances. Thus, the borrowers and the guarantor agreed to complete construction of 15 units without demand for further advances and would finance the construction themselves. The parties further agreed that "Portofino Development Corporation" shall be substituted for "D.W. Mariani Development Corp."
Thus, the loan documents never mention MGCLand; instead, they indicate an arrangement in which MGC and PDC were the borrowers of the money and the developers of the land. The Loan Agreement specifically allows MGC to transfer a portion of the land to DWMD, the other borrower, but contains no provision for MGCLand to become the owner of any portion or interest in the land. This is consistent with the record title and the second set of deal documents and inconsistent with the tax records, financial statements, and first set of deal documents. Importantly, the First Loan Modification presented the parties with an opportunity to make any necessary corrections to the loan documentation, such as the substitution of PDC for DWMD. The documents were not, however, amended to include MGCLand as an owner, borrower, or developer.
The Loan Agreement provides that "title to a portion of the property" will be transferred in fee to DWMD after loan recordation. This is almost consistent with the record title. On March 1, 1990, MGC transferred a 12/18 undivided interest in the land to DWMD as part of the scheme to increase the tax basis and circumvent the paying of taxes. On April 17, 1991, the grant deeds were recorded which cleaned up this situation and transferred full ownership of the 12 acres to DWMD and full ownership of the 6 acres to MGC.
Tax Records and Financial Documents
In conformity to the original deal documents, but in contravention of the second deal documents and the public record of title, the tax records and financial statements in evidence suggest that MGCLand is the owner of the 6 acres and the obligor on the $1,288,000 note. MGCLand's tax returns for 1990, 1991, 1992, 1993 and 1994 all list the land as an asset worth $1,556,802 and the note payable to PDC as a liability of $1,288,000. No MGCLand financial statements are in evidence for 1990 or 1991. In 1992, however, MGCLand's Balance Sheet lists the land as a $3,815,927.11 asset and the PDC note as a $1,288,000 liability. No 1993 Balance Sheet was supplied and the Balance Sheet for 1994 carries neither the land nor the note.
In addition to being incomplete, MGCLand's tax records and financial statements contain internal and external inconsistencies. First, in 1992 the tax records list the land as being valued at $1.5 million but the 1992 Balance sheet carries the land at a value of $3.8 million. Thus, while a gain in the value of the land is reflected on MGCLand's balance sheet, no gain is accounted for on MGCLand's tax return. Second, MGCLand's 1994 tax records and balance sheet are inconsistent in that there is no mention of the land or the note on the balance sheet, yet both are still on the tax return. Third, MGCLand's Balance Sheet does not square with PDC's Balance Sheet in terms of the value of the note allegedly owed from MGCLand to PDC. In 1992, PDC increased the value of the note receivable from MGCLand from $1,288,000 to $2,403,820 while MGCLand left the value of its note payable to PDC at $1,288,000. Finally, the $1.5 million valuation of the 6 acres on MGCLand's books is significant. PDC carried the 20 acres on its balance sheet at the purchase price of $20 million. Thus, in order to be consistent, MGCLand should have carried its 6 acres at $10 million, but instead carried the land at a mere fraction of its alleged value.
Additionally, PDC's records indicate serious financial difficulties as early as 1991. Plaintiff's accounting expert, Michael Gabrielson ("Gabrielson") testified that PDC was not able to pay bills as they came due, had run out of money, and was in default on its loan. Additionally, the accounts payable detail prepared by PDC as of December 31, 1991 shows a significant number and dollar value of accounts past due. And, the schedule lists five other accounts payable of significant amounts that are more than 60 days past due. Further, the real estate market had taken a downturn and sales were not meeting projections. Delmare testified that the market had slowed down, prices had dropped, and that PDC was having trouble meeting or modifying Home Fed's loan requirements. Thus, the tax and financial records indicate that the Marianis were not consistent in their treatment of the Portofino project and that by 1991 PDC was in serious financial difficulty.
For example, PDC is more than nine months late on the $30,000 it owes Carducci Associates and on the $12,000 it owes Richardson, Nagy Martin. Similarly, PDC owes over $27,000 to Edwards McCaslin, and over $24,000 to McLarand, Vasques Partners, Inc. which is more than 90 days past due.
The Value of the Land
Many different valuations have been placed on the 12 acres of land at issue in this proceeding. Values range from plaintiff's lowest estimate of $8.7 million to defendants' highest estimate of $20 million. The Court will examine these valuations from highest to lowest. Starting at the very top, defendants assert that the purchase price of $20 million should be used as the value of the land. The $20 million valuation, however, is unsupported by any credible evidence. First, the transactions were not "arms' length." For example, Mariani himself testified that one of his objectives in the deal was to make the PMT solvent. Similarly, defense expert Gleason testified that the $2 million was tacked on to the sales price to maintain "family harmony." Additionally, all the other estimates prepared fall far short of the $20 million mark, including the estimate commissioned by defendants as an aid in obtaining construction financing.
The next highest estimate is the $14.7 million valuation from the Cushman Wakefield appraisal prepared by Kenneth Matlin ("Matlin"). This valuation is also suspect. First, the valuation is based, in part, on an assumption of increasing land values when the evidence shows that land values were not increasing. The report supporting the valuation states that "sales activity appears to have dropped off significantly in the third quarter of 1989" and charts in the report show both average and median prices falling. Second, the Cushman Wakefield appraisal was increased by the use of the land residual technique, which rested on erroneous estimates. For example, Matlin based his appraisal, in part, on the estimate that all the town homes would be sold by February of 1991, but the first town home was not sold until November or December of 1991. Third, the Cushman Wakefield appraisal was based on the assumption that the land was free and clear of all encumbrances, but this land was encumbered by the SPNB debt.
Matlin's only explanation of "statistics can be very deceiving." is unpersuasive because the statistics are part of his own report.
The sales comparables approach resulted in a valuation of $9.5 million, whereas the land residual technique resulted in a valuation of $18 million.
The next valuation in line is the $10,288,000 figure from plaintiff's expert appraiser, John Hollwedel ("Hollwedel"). The only two criticisms of the Hollwedel valuation are both easily dispelled. The first criticism is the failure to use the land residual technique. But, Hollwedel credibly testified that, because the land residual technique requires so many estimates, it should only be used when there are no sales or other data is missing. The second criticism is that plaintiff's counsel, Patrick Smith, wrote a letter to Hollwedel suggesting that he wanted a valuation equal to or less than the Security Pacific loan. While it is suggestive that the loan was $10,288,000 and the Hollwedel valuation was $10,290,000, Hollwedel credibly testified that he did not remember discussing a loan and came up with the value independently.
The Bankruptcy schedules prepared by defendants list the land as worth $13.5 million. But there is no support, or even explanation, in the record for this valuation.
The Court, after observing Hollwedel's tone of voice, body language, manner and appearance, finds no reason to doubt his credibility.
Finally, the lowest of the valuations is the $8.7 million from Gabrielson, plaintiff's expert. This valuation is in conflict with plaintiff's expert appraiser's valuation of $10,288,000. Additionally, Gabrielson's analysis rests upon an average sales price of $408,000 supported by his personal judgment and knowledge. However, Gabrielson is not an expert appraiser, so there is no expert opinion supporting the average sales price of $408,000. Thus, the Gabrielson analysis must be disregarded.
Gabrielson's explanation that Hollwedel was unaware of traffic and congestion problems was contradicted by Hollwedel's testimony and is unpersuasive.
The PG E Checks.
The trustee has asserted a claim for conversion for three PG E refund checks due to PDC. PG E addressed various correspondence relating to the Portofino project to various Mariani entities. The first recorded dealings with PG E for the Portofino project originate with Mariani Development Corp. ("MDC"). On September 21, 1989, a PG E representative sent a letter to MDC projecting costs associated with getting the utilities for Phase I of the project. MDC requested that PG E perform certain work for the Portofino project and made payments to PG E.
Letters were also sent to PG E in February 1991. One letter, from MDC, provided street addresses for the Portofino Project. Another letter, sent by Portofino Development Corporation, requested meters for the models at the Portofino property and stated that the meters should be billed to Portofino Development c/o Mariani Development in Los Altos.
There were several statements of the account for Mariani Development Corporation which describe refundable customer advances for construction deposits with PG E. All of the statements of account show the PG E refundable advances for construction deposits to be mailed to MDC at the Los Altos address. PG E billing statements, however, are addressed differently. One bill was addressed to Portofino Development Corporation at its Los Altos address for service at the Cupertino address. Another statement for that same period bills Portofino Development Corporation and Mariani Development Corporation in Los Altos for service for Portofino and Mariani Development Corporation at the Cupertino address. Finally, a third statement on that date bills Portofino c/o Mariani Development at the Los Altos address, for service at the Cupertino address for Portofino c/o Mariani Development Corporation.
In January of 1995, Robert Serventi ("Serventi"), CFO and Controller of Warren Dried Fruit ("WDF") another Mariani company, received a statement from PG E indicating that a refund was due to Mariani Development Corporation for construction deposits. Attached to this statement was a post-it note from Sheila Delarose, an administrative assistant, asking "Portofino: Do we notify them we are no longer owner or . . .?" Serventi added to that post-it "Discuss w/ no one — not John — not Liz. Keep quiet — this is how we get some $$ back on Portofino." Serventi testified that he was not trying to keep the refund money but that he just did not want the separating partners John Delmare and Liz Dodson to know about it because it would increase the complexity of the separation negotiations. According to Serventi, WDF and MFCo were considering suing Citation (the ultimate holder of the Home Federal note) to recover money owed to PDC and MGCLand. Serventi hoped that any money recovered for Portofino would return to WDF and MFCo as PDC creditors. Further, Serventi was worried that if John Delmare and Liz Dodson knew about this potential recovery, they would claim a share in any money recovered by MFCo. Thus, to believe Serventi, the Court would have to accept that Serventi was worried about potential claims against money which might be recovered by PDC which would then possibly accrue to MFCO. Not only is this tenuous and unlikely scenario completely illogical, it is also belied by John Delmare's testimony at trial that he understood that any PG E refund would belong to the estate and would never have made a claim to such funds.
In June of 1996, Serventi received three checks from PG E: one in the amount of $81,513.60 dated June 10, 1996, a second dated June 14, 1996 in the amount of $57,846.49, and a third also dated June 14, 1996 in the amount of $46,376.38. Serventi deposited one check into the account of Warren Dried Fruit on June 12, 1996 and deposited the other two to that same account on June 17, 1996, each with the notation "suspense, find source."
No action was taken to discover the true owner of the funds, however, until a letter was sent by plaintiff's attorney, Scott Goodsell, to defendants' attorney, Robert Yorio ("Yorio"), on July 11, 1996 alerting Yorio to the deposit of these checks and to possible willful and intentional withholding of information concerning the refunds. On July 12, defendants' counsel responded, stating that they were "looking into" the matter. Yet, on the very same day, Warren Dried Fruit cut a check to its counsel for the $186,007.34. The money was returned to the estate when defense counsel wrote out a check to the trustee for the $186,007.34 on July 18, 1996. Thus, the dealings with PG E illustrate rampant confusion as to what entity or entities (among MDC, PDC, Mariani Development and/or WDF) PG E was dealing with on the Portofino project and a Serventi plan to keep the refund money.
PDC's Compliance with Corporate Formalities
Plaintiff has alleged that Mariani and PDC are so interrelated and interconnected that he should be held personally responsible for PDC's debts. There is some evidence that Mariani and PDC are not wholly separate. It is uncontested that Mariani used the same business location and attorneys for PDC and various Mariani owned entities. In fact, at least six Mariani entities operated out of 4 Main Street in Los Altos. Mariani was the sole shareholder, officer and director of PDC, and as such, dominated PDC at all times. It is also uncontested, however, that Mariani took no draws, distributions, advances or loans from PDC. In addition, there is no evidence in the record to suggest that Mariani used PDC as a means of avoiding personal liability or for any personal gain.
Mariani testified that DWMD, MGC, MFCo., Griffin Investments, Arch Development, Warren Dried Food and possibly other entities all operated out of the offices at 4 Main Street.
Mariani did, however, use PDC to benefit related Mariani owned entities by failing to maintain arms-length transactions. For example, one of the objectives in the purchase of the 12 acres of Cupertino land from the PMT was to make the PMT solvent. Towards that end, PDC paid the PMT $2 million more for the 12 acres than PMT paid for the property. Similarly, MGC received approximately $1.6 million in March of 1990, ostensibly to pay park fees for PDC, but did not pay the fees until August of 1990. Thus, MGC received an interest-free loan from PDC while PDC was paying Home Federal interest on the money. Yet, PDC received money from DWM Enterprises, ostensibly for payroll, and was charged interest on this money. PDC then passed this money along to MFCo, but did not charge MFCo interest. Thus, PDC was paying interest on money solely for the privilege of passing the money to MFCo interest free. In sum, while there is some evidence that Mariani was the alter-ego of PDC (and many questionable transactions with Mariani controlled entities), many of the factors indicating alter-ego status were not proven.
III. ISSUES PRESENTED
There are four issues before the Court. The first issue is what are the terms of the $1,288,000 promissory note. In order to address this first issue, the Court first must determine who is the obligor on the note. The next questions involving the promissory note are whether it was effectively amended to become non-recourse; whether the amendment was signed by the obligor; and whether it is supported by valid consideration.
The second issue is whether the trustee can recover the $1,115,820.69 for improvements to the 6 acres. This issue will turn on whether the First Amendment, incorporating money owing for land improvements into the promissory note, is valid.
The third issue before the Court is whether Mariani is the alter-ego of PDC. In order to address this issue the Court must first determine whether the trustee has standing to bring an alter-ego claim. If the Court determines that the trustee does have standing to bring this claim, the Court must then determine whether there was a unity of interest between Mariani and PDC and whether an inequitable result would follow unless Mariani is held responsible for the acts of PDC.
The fourth issue before the Court is whether WDF, through its agent Serventi, converted the PG E checks. This issue will turn on whether Serventi intended to exercise dominion and control over the money inconsistent with PDC's ownership of the money. If the Court determines that Serventi did intend to keep the money from PDC, the Court will have to determine what actual and punitive damages are appropriate.
IV. DISCUSSION Breach of Promissory Note
It is uncontested that no payments were ever made on the promissory note and thus it has clearly been breached. There are, however, numerous questions as to who is the maker of the note and therefore responsible for the breach. In order to determine liability for this cause of action, the Court must first determine who is the obligor on the note and then determine the effectiveness of the First Amendment. For the reasons that follow, the Court determines that MGC is the true obligor on the note and that the First Amendment is invalid because it is not signed by the obligor and because it is not supported by valid consideration.
Obligor on the Promissory Note
The first question the Court must answer is who is the obligor on the promissory note. The original promissory note states that it is made by MGCLand whereas the 1991 promissory note states that it is made by MGC. The Court finds that MGC is the true obligor on the note. As described in the factual background section, the original deal documents are rife with inconsistencies and cannot be credited as an effective set of documents. The original deal documents are incomplete, unsigned, and inconsistent with the record title of the land. The second set of deal documents, in comparison, is complete, is timely executed, and matches the record title of the land. The Court further finds that Mariani's testimony that the second set of deal documents was ineffective is simply not credible. Because the Court has found that MGC is the true obligor on the note, the next question is whether the Court should grant the trustee's motion to conform the pleadings to the evidence at trial by reinstating the breach of promissory note claim against defendant MGC.
After observing the appearance and demeanor of Mariani while he gave three separate stories about the second set of documents (they did not exist, they were created to match the documents to the deal, and they were a mistake and were ineffective), the Court finds that the second deal documents were intended to be effective.
First Amendment to the Assumption of Indebtedness
The Court now turns to the issue of whether the First Amendment to the Agreement for Assumption of Indebtedness has any force. If the first amendment is valid, the trustee will be unable to recover on this claim as a practical matter because the Amendment limits recourse to a worthless right to participate in non-existence profits from the Portofino project. Because the Amendment is not signed by the obligor of the note and is unsupported by consideration, the Court finds that the Amendment is without force.
As discussed above, the Court has found that MGC is the obligor on the promissory note. As the Promissory Note specifically limits modification to a "writing signed by both Maker and Holder," any modification of the Note would have to be signed by both MGC and PDC. As the obligor is MGC and the Amendment is signed only by MGCLand, the Amendment is clearly invalid. Cf. Cal. Civ. Code § 1698 (West 1985) (parties may agree to permit only modifications in writing); Marani v. Jackson, 183 Cal.App.3d 695 (preventing oral modification where contract requires written modification). Additionally, any modification of a written contract must be supported by a consideration in order to be binding. Fairlane Estates, Inc. v. Carrico Construction Co., 228 Cal.App.2d 65 (1964). "There must be some consideration flowing from the obligor, either a benefit to the obligee or a detriment to the obligor for which the obligee bargained, before a modification or novation can be found." Hunt v. Smyth, 25 Cal.App.3d 807, 819 (1972). Defendants assert that the consideration for the Amendment was the use of the 6 acres as part of the collateral for the Home Federal loan. Because the Court has found that the First Amendment was entered into after the Home Federal loan had been secured by all 18 acres, the use of the land as collateral could not and did not serve as valid consideration for any modification. The Court has reviewed the document and the testimony of the witnesses and finds that the First Amendment served only one purpose: to insulate Mariani's family from the need to repay its debts. The First Amendment was internally drafted at a time when Mariani knew that the Portofino project was in trouble. The only possible reason to draft this document at this time would be to prevent family members from having to pay their debts. As such, the Court finds that the First Amendment is unsupported by valid consideration and has no effect.
Amount Owed on Promissory Note
For the reasons discussed above, the Court has found that the promissory note executed by MGC in April of 1991 is the valid obligation. That note provides for $1,288,000 to be paid by MGC to MFCo. with interest one percent (1%) over the Prime Rate. It is uncontested that no payments have been made on the note. Because the First Amendment is ineffective, no expenditures for improvements to the 6 acres are included in the note. Thus, the entire amount of principal and interest is due on the note.
Defendants argue that there are offsets to the MGC note. They point out that the note provides that those affiliates listed on Exhibit B may assert offsets against the holder, MFCo. However, there are no affiliates listed on Exhibit B. It is blank. Mariani, who at one point asserted that the note was a mistake, would now like to create a list of affiliates and amounts for Exhibit B. The Court can give no credence to his desire to create history years after the event. There is simply no trustworthy evidence to support the existence of any offsets.
Money Owing
As discussed above, the First Amendment to the Agreement for the Assumption of Indebtedness was not effective. Thus, the money owing for expenditures to improve the 6 acres of land was not incorporated into the promissory note and is still a valid receivable. The amount of the expenditures is uncontested at $1,115,820.69. Defendants claim that the debt is owed by MGCLand and the claim is only asserted against MGC. However, the PDC ledger accounts allocating construction costs list MGC as the party responsible for the costs allocated to the 6 acres. Further, MGC, as the record owner of the land, is the logical responsible party.
Plaintiff has also asked for interest from the date this action was filed, August 9, 1996, to the present. Prejudgment interest on a debt arising out of state law is governed by state law. Otto v. Niles, 106 F.3d 1456 (9th Cir. 1997); In re Consolidated Pretrial Proceedings in Air West Securities Litigation, 436 F. Supp. 1281 (N.D.Cal. 1997) (Prejudgment interest on contractual claims governed by state law.) Under California law, prejudgment interest is available to a person "entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him upon a particular day, is entitled also to recover interest thereon from that day." Cal. Civ. Code § 3287(a) (West 1997). California law further provides that if no contractual rate is specified, the rate of interest for claims arising out of contracts entered into after 1986 is ten percent (10%). Cal. Civ. Code § 3289(b) (West 1997); Banks v. Port Warehouse Corp., 225 B.R. 738 (Bankr.C.D.Cal 1998); American President Lines v. Zolin, 38 Cal.App.4th 910 (1995). In this case, the amount owed is certain at $1,115,820.69 and no rate is specified. Thus, the Court finds that plaintiff is entitled to judgment on the Fifth Cause of Action for Money Owing in the amount of $1,115,820.69 together with interest at the rate of ten percent (10%) from August 9, 1996.
Alter-Ego
As a threshold issue, the Court must determine whether plaintiff has standing to bring an alter-ego claim. Section 541 of the Bankruptcy Code defines the property of a bankruptcy estate to include all the legal and equitable interests, including causes of action, of the debtor as of the commencement of the case. United States v. Whiting Pools, Inc. 462 U.S. 198, 205 n. 9 (1983). Once the bankruptcy petition is filed, all property rights of the debtor become the property of the estate. Just and efficient administration of the estate requires the trustee to pursue claims which are assets of the estate. Pepper v. Litton, 308 U.S. 295, 307-308. Whether a claim for alter-ego relief is the property of the estate or of an individual creditor depends upon whether state law allows a debtor to pierce its own corporate veil. CBS Inc. v. Folkes, 211 B.R. 378, 385 (9th Cir. B.A.P. 1997).
Under California law, a debtor may pierce its own corporate veil if it is alleging an injury to the corporation. Once harm to the corporation is alleged, the claims belong to the debtor and are transferred to the trustee after filing. California law recognizes two types of alter-ego claims: general claims benefiting all creditors and claims alleging a specific harm to an individual creditor. If the claim is a general one, it does not belong to any individual creditor and can only be brought by the bankruptcy trustee. CBS, Inc., 121 B.R. at 385. "[T]he estate is the proper party to assert an alter-ego claim, and creditors are bound by the outcome of the estate's action, `if the claim is a general one, with no particularized injury arising from it, and if the claim could have been brought by any creditor of the debtor.'" In re Davey Roofing 167 B.R. 604, 608 (C.D. Cal 1994) (quoting Kalb, Voorhis Co. 8 F.3d 130, 132 (2d Cir. 1993)).
To determine whether the alter-ego claim is one personalized to particular creditors or generally benefiting the estate, the court must look to the alter-ego claim and the relief sought. CBS Inc. v. Folkes, 211 B.R. 378, 387 (9th Cir. B.A.P. 1997). In CBS, as here, the alter-ego claim alleged that: 1) the principal was the sole shareholder, officer and director; 2) corporate formalities, such as maintaining minutes of shareholder or board meetings were not maintained; and 3) the principal used the corporation's bank accounts for personal and family expenditures. The Bankruptcy Appellate Panel found that such allegations assert a general claim because they affect all creditors and allege no particularized injury to any creditor. Similarly, the alter-ego claim against Mariani alleges he controlled PDC, disregarded corporate formalities, and used the corporation to benefit himself and his family — all claims that would benefit all creditors. In short, a finding that Mariani is the alter-ego of PDC and therefore personally liable for its debts would benefit the estate as a whole, not one particular creditor. Therefore, the trustee is the only appropriate party to assert the claim.
The Court, however, finds there is insufficient evidence to prove that Mariani is the alter-ego of PDC. Under California law, "the two requirements for applying the alter-ego doctrine are that (1) there is such a unity of interest and ownership between the corporation and the individual or organization controlling it that their separate personalities no longer exist, and (2) failure to disregard the corporate entity would sanction a fraud or promote injustice." Communist Party of the U.S. v. 522 Valencia, Inc., 35 Cal.App.4th 980, 993 (1995). Courts must consider a number of factors, not relying exclusively on any one or two. The relevant considerations include, but are not limited to: 1) the commingling of funds and other assets; 2) the unauthorized diversion of corporate funds to other than corporate purposes; 3) the treatment by an individual of corporate assets as his own; 4) the failure to maintain adequate corporate minutes or records; 5) the ownership of all the stock by a single individual or family; 6) the use of a single address for the individual and the corporation; 7) the inadequacy of the corporation's capitalization; 8) the use of the corporation as a mere conduit for an individual's business; 9) the disregard of formalities and the failure to maintain arm's-length transactions with the corporation; and 10) the attempts to segregate liabilities to the corporation. Mid-Century Ins. Co. v. Gardner 9 Cal.App.4th 1205, 1213 (citing Associated Vendors, Inc. v. Oakland Meat Co. 210 Cal.App.2d 825, 838-40 (1962)).
The trustee has alleged all of the above factors as evidence that Mariani is the alter-ego of PDC. Most of these claims, however are not supported by the evidence admitted at trial. Starting at the beginning, there is some evidence that assets were commingled and diverted. PDC loaned money to other Mariani entities without charging interest even though it was paying interest on the money. Also, PDC paid other Mariani entities interest on money it borrowed from them, even when it was passing on that money to other Mariani entities interest free. Thus, there was diversion of corporate assets. Further, it is uncontested that Mariani was the sole shareholder, officer and director of PDC. It is also uncontested that Mariani did use the same business location and attorneys for PDC and various Mariani owned entities. Finally, Mariani failed to maintain arms-length transactions with affiliated entities. The series of transactions resulting in DWMD paying $20 million for the 12 acres proves that affiliated entities benefited from Mariani's control over PDC. For example, Mariani's willingness to pay the PMT $2 million over what the PMT paid in order to help make the trust solvent shows a clear benefit to a related entity.
However, plaintiff has proven none of the other indicia of alter-ego status. Additionally, plaintiff has pointed to no credible evidence that Mariani treated PDC assets as his own, used PDC as a business for his own devices, used PDC to procure anything for his own benefit, diverted assets to himself, or attempted to avoid any personal liability. Finally, there is no evidence that Mariani transferred liabilities of affiliated entities to PDC. Thus, although there are many questionable transactions in the dealings between PDC and other Mariani owned entities, plaintiff has failed to prove that Mariani is the alter-ego of PDC and cannot prevail on this claim.
Conversion
Plaintiff has asserted a claim for conversion for PG E refund checks due to PDC but deposited in a WDF account. In order to state a claim for conversion, the trustee must show: 1) ownership or right to possession of the property; 2) defendants' conversion by a wrongful act or disposition of property rights; and 3) damages. Stan Lee Trading, Inc. v. Holtz, 649 F. Supp. 577 (C.D.Cal. 1986); Burlesci v. Petersen 68 Cal.App.4th 1062 (1998). In this case, PDC's right to the refund checks is undisputed. Defendants allege that they did not act in a manner inconsistent with PDC's ownership of the money. Serventi's words on the post-it note, however, speak for themselves. "Tell no-one" and "this is how we get some $$ back on Portofino" are clear statements and do not require explanation. The explanation given by Serventi is convoluted and illogical and cannot overcome the clear intent of his words. The Court finds that Serventi purposefully kept the PG E refund money a secret and intended to keep the money if nobody found out about it.
The Court notes that Serventi's credibility suffers from his willingness to say whatever Mariani tells him to say. Serventi admitted at trial that he submitted a declaration under penalty of perjury swearing that he had personal knowledge that the $1,288,000 promissory note had been changed to a non-recourse note when he had no such personal knowledge. Serventi further admitted that he was merely relying on what Mariani and John Delmare told him about the note. The Court further notes that Serventi's appearance and manner as a witness does not bolster his credibility.
Finally, plaintiff admits that the money was returned, but is claiming damages of $17,825.67 in the form of interest at the legal rate of ten percent (10%) from the conversion of the Chapter 7 case (August 9, 1995) to the date of delivery of the converted funds (July 19, 1996). The checks, however, were not received until June of 1996. The check for $81,513.60 is dated June 10, 1996 and the checks for $7,846.49 and $46,376.38 are dated June 14, 1996. Thus, defendants were only in possession of the funds for approximately one month. The availability of pre-judgment interest for conversion claims is governed by state law. In re Halmar Distributors, Inc., 232 B.R. 18 (Bankr.D.Mass. 1999);Otto v. Niles, 106 F.3d 1456 (9th Cir. 1997) (Prejudgment interest on debt arising out of state law governed by state law). As discussed above, under California law, prejudgment interest is available when damages are certain. Cal. Civ. Code § 3287(a) (West 1997). The rate of interest for tort damages is set forth in the California Constitution at seven percent (7%). Cal. Const., Art. XV, § 1 (West 1996). The amount converted was certain, as was the date of conversion. Thus, the Court finds that defendants are liable for damages in the amount of $1,085.04, representing interest on the $186,007.34 for one month at the legal rate of seven percent (7%).
Plaintiff also asserted a right to punitive damages. Under California law, exemplary or punitive damages are available "where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice." Cal. Civ. Code § 3294(a); Paulson v. State Farm Mut. Auto. Ins. Co., 867 F. Supp. 911 (C.D.Cal. 1994). The statute defines malice, oppression and fraud as follows:
"Malice" means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.
"Oppression" means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights.
"Fraud" means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury. Cal. Civ. Code § 3294(a) (West 1997).
Conduct that is merely negligent or reckless will not suffice.Krusi v. Bear, Stearns Co. 144 Cal.App.3d 664 (1983). The clear and convincing burden of proof has been defined as "requiring that the evidence be "`so clear as to leave no substantial doubt'; `sufficiently strong to command the unhesitating assent of every reasonable mind.'" Mock v. Michigan Millers Mut. Ins. Co., 4 Cal.App.4th 306, 332 (1992) (quotingSheehan v. Sullivan 126 Cal. 189 (1899)).
While Serventi's words on the post-it clearly demonstrate a willingness to keep the money and an attempt to keep the money a secret, they are not sufficient to meet the exacting burden of clearly and convincingly proving malice, oppression or fraud. First, the post-it note was written in January of 1995 and the refund checks did not arrive until June of 1996. Thus, the post-it note is not clear and convincing evidence of malice, oppression or fraud 18 months later. Second, Serventi deposited the checks in a suspense account with a notation to "find source" which raises some question as to his intent to keep the money. Finally, Serventi did return the money promptly when requested to do so. Taken in sum, the evidence shows that Serventi was happy to keep the money for WDF (or whatever Mariani owned entity could best use the funds), but he was not willing to lie, hide the money or otherwise actively deny PDC the money. Thus, the Court finds that Serventi intended to deprive PDC of the money, but there is not clear and convincing evidence of malice, oppression or fraud. Accordingly, plaintiff is entitled to prevail on her claim for conversion, but her claim for punitive damages is hereby denied.
If the refund checks had been received closer in time to the post-it note, the note would be evidence of fraud — the intentional concealment of a material fact (the existence of the refund checks) with the intention to deprive PDC of property (the refund money).
Plaintiff has also requested attorneys' fees for the recovery of the converted funds. Plaintiff has not, however, asserted any basis for such a request. The Court expresses no opinion as to plaintiff's ability to succeed on a proper motion for an order approving the payment of fees.
V. CONCLUSION
Based on the foregoing, the Court concludes that MGC owes PDC:
$1,288,000 for the breach of the promissory note plus interest at one percent (1%) over the Prime Rate, in an exact amount to be calculated and submitted to the Court by plaintiff;
$1,115,820.69 for money owing for the costs of improvements to land owned by MGC plus interest at ten percent (10%) through the date of judgment; and
$1,085.04, for interest on the converted PG E refund checks, calculated at the legal rate of seven percent (7%) on $186,007.34 for a period of one month.
Plaintiff shall lodge and serve a proposed form of judgment with the Court not later than April 12, 2000. It need not contain the findings of fact and conclusions of law the Court has made through this Memorandum Decision. The proposed form of judgment shall include interest. Interest on items 1) and 2) above shall be calculated by plaintiff and interest on item 3) as set forth by the Court. Interest calculated by plaintiff shall be calculated to April 20, 2000. Concurrently with lodging the proposed form of judgment, plaintiff shall file and serve a pleading setting forth the method of calculation of interest on items 1) and 2) above, together with the calculations.
This Memorandum Decision constitutes the Court's findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52 of the Federal Rules of Civil Procedure.