603 B.R. 455
Bankr. N.D. Cal.2019Background
- Debtor Pacific Thomas Corporation (PTC) operated a self-storage facility; Pacific Trading Ventures (PTV) managed the property under a 2003 Management Agreement (amended 2011) and collected rents, paid expenses, and took fees.
- After the Ninth Circuit vacated an earlier judgment and remanded, the bankruptcy court held a bifurcated trial to determine (a) whether various lease agreements were void under California law and (b) the appropriate turnover/judgment amount, taking into account PTV’s management-fee and reimbursement rights.
- Trustee asserted PTV received $697,786.35 (Aug 6, 2012–Dec 10, 2013) and paid or diverted funds not benefitting Debtor; Trustee sought turnover of $376,552.10 in disputed expenditures, relying largely on PTV Quickbooks and limited backup documentation.
- PTV maintained many payments were legitimate Debtor operating expenses or reimbursable under the Management Agreement; PTV’s president Worsley and officer Whitney testified but the court found varying credibility and frequently lacked documentary support.
- The court audited disputed payments by category (e.g., outside labor, accounting, legal, rent, draws to Whitney/Worsley) and allowed some amounts as legitimate Debtor expenses while disallowing others as PTV obligations, personal reimbursements, unauthorized professional fees, or prepetition claims paid postpetition.
- Court found Trustee proved a net claim of $224,608 against PTV for funds not properly benefitting the estate, and permitted PTV to offset an allowed management fee of $109,225 against the judgment.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (PTV) | Held |
|---|---|---|---|
| Applicable burden of proof | Trustee used preponderance standard; Maggio inapplicable | PTV urged clear-and-convincing (pre‑Code precedent) | Court applied preponderance of the evidence (Grogan/Jacobson trend) |
| Whether rents/receipts collected by PTV are estate property and subject to turnover | Rents collected were Debtor’s receipts; PTV paid amounts that did not benefit Debtor and must turn them over | PTV contended expenditures were legitimate Debtor operating expenses or reimbursable under the Management Agreement | Court found Trustee met burden for many items, establishing $224,608 in improper payments subject to judgment |
| Legitimacy of specific expenditure categories (e.g., outside cash labor, professional fees, draws, rent) | Many categories lacked backup or were personal/affiliate expenses; some payments to professionals and prepetition debts paid postpetition unauthorized | PTV/Whitney/Worsley testified many items directly benefited Debtor (marketing, payroll, supervision, truck rental operations) | Court assessed categories line-by-line, allowed some amounts (e.g., portions of labor, draws for on-site managers) and disallowed others (unauthorized professional fees, affiliate or headquarters rent, personal reimbursements) |
| Effect of PTV’s contractual management-fee/reimbursement rights on remedy | Trustee sought full turnover of improper payments | PTV argued allowed management fee and reimbursements should offset any judgment | Court allowed PTV to offset the judgment by its allowed management fee of $109,225 (permitted setoff) |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (preponderance standard applies in bankruptcy nondischargeability and informs evidentiary standards)
- In re Jacobson, 676 F.3d 1193 (9th Cir. 2012) (applied preponderance standard to trustee turnover claims)
- Maggio v. Zeitz (In re Luma Camera Service, Inc.), 333 U.S. 56 (pre-Code case cited by PTV to argue for higher evidentiary standard)
- United States v. 4.0 Acres of Land, 175 F.3d 1133 (9th Cir. 1999) (witness credibility and admissibility of oral testimony)
- Kalvar Corp. v. Xidex Corp., 384 F. Supp. 1126 (N.D. Cal. 1973) (evidentiary principles regarding testimony, affirmed on appeal 556 F.2d 966)