RGW Construction, Inc. v. LucidoRGW Construction, Inc. v. Lucido
MEMORANDUM DECISION RE: CHAPTER 11 DISCHARGE
On Junе 6, 2023, June 8, 2023 and July 12, 2023, this court conducted a trial on plaintiff RGW Construction, Inc.’s (“RGW“) complaint to deny Chapter 11 debtor Mark Lucido (“Lucido“) a chapter 11 discharge under
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Charles Novack
U.S. Bankruptcy Judge
The RGW Judgment
Before he filed his Chapter 11 bankruptcy, Lucido was the 100% owner of Bay Area Drilling, Inc., an entity involved in the heavy construction drilling business (“BAD“). In September 2014, RGW and BAD executed two subcontracts for BAD to provide drilling and installation services for a California Department of Transportation project on Highway 880 in Oakland. In August 2017, RGW terminated the subcontracts for cause and on November 28, 2018, RGW sued BAD in Alameda County Superior Court.
On January 7, 2020, the Alameda County Superior Court entered a $1,781,538.79 judgment in favor of RGW (the “Judgment“), which RGW then sought to enforce. In response to RGW’s enforcement efforts, Lucido took steps to protect his real property interests by, among other things, formally documenting debts that he allegedly owed to family members relating to the construction, development and improvement of two parcels of real property. On March 9, 2020, Lucido transferred a 50% ownership in his Arnold, California residence (the “Arnold Property“) to his mother, Geraldine Lucido (“Geraldine“). On March 31, 2020, Lucido provided his brother, Frank Lucido, with a $162,000 deed of trust and MDL Associates, a corporation wholly owned by another brother, Mike Lucido, with a $336,000 deed of trust against Lucido’s commercial property located in Pittsburg, California (the “Pittsburg Property“)1. While much was made during trial regarding the consideration provided for these transfers, the evidence clearly suggested (as discussed in greater detail infra) that: a) Geraldine had provided part of the funds that were used to purchase the land and build the residence on the Arnold Property; and b) Lucido’s brothers – both of whom are in the construction trade – helped renovate the Pittsburg Property.
The BAD and Lucido Bankruptcies
On December 22, 2020, BAD filed a chapter 7 bankruptcy petition (Case No. 20-41936). Marlene Weinstein was appointed chapter 7 Trustee (the “BAD Trustee“).
On November 2, 2022, the BAD Trustee objected to RGW’s proof of claim, alleging that: a) the Alter Ego Claim belonged to the BAD estate and RGW lacked standing to assert it; and b) RGW’s claim was duplicative of the BAD Trustee’s claim (the “Objection“). After briefing and a hearing, the court sustained the Objection and disallowed all but the $3,450 attributable to the sanctions award. On January 9, 2023, RGW appealed the order sustaining the Objection and elected to have the appeal heard by the District Court. RGW did not seek a stay pending appeal. On September 7, 2023, the District Court reversed this court’s order sustaining the Objection, leaving RGW with its full $2,657,078.21 unsecured claim in this Chapter 11 (the ultimate resolution of which is still uncertain).
The Plan
On April 28, 2023, Lucido filed an amended Chapter 11 Small Business Subchapter V Plan (the “Plan“)3. The Plan provided, among other things, that Lucido would sell the Pittsburg Property and retain the Arnold Property and all of his personal property. Lucido proposed to fund the Plan with the sales proceeds of the Pittsburg property, his social security income, income derived from his consulting business (related to the drilling business) and his work as an employee out of Operating Engineers Local #3.
The Complaint
RGW filed the Complaint on November 15, 2021, in response to Lucido’s initial Chapter 11 plan. While some of the plan terms have changed over the various plan iterations, the funding methods have remained constant, and the Complaint is still relevant. RGW seeks to deny Lucido’s Chapter 11 discharge under
Since filing the Complaint, RGW appears to have abandoned some of its
I. Conclusions of Law
As stated above, Lucido filed a SubChapter V Chapter 11 bankruptcy. Regardless of whether a SubChapter V plan is confirmed consensually under
The confirmation of a plan does not discharge a debtor if –
(A) the plan provides for the liquidation of all or substantially all of the property of the estate;
(B) the debtor does not engage in business after consummation of the plan; and
(C) the debtor would be denied a discharge under section 727(a) of this title if the case were a case under chapter 7 of this title.
A. The Plan is a Liquidating Plan
RGW has demonstrated that the Plan provides for the liquidation of “all or substantially all of the property of the estate.”
B. Lucido Will Engage in Business After Consummation of the Plan
Chapter 11 was originally designed to address the financial woes of corporate debtors. Um v. Spokane Rock I, LLC, 904 F.3d 815, 819 (9th Cir. 2018) (citing Toibb v. Radloff, 501 U.S. 157, 162-63 (1991)). As a result, the application of the “engage in business” element of
RGW argues that the Ninth Circuit has interpreted the phrase “engage in business” to mean nothing more than the continuation of the debtor’s pre-petition business, and that when this standard is applied herein, the Plan falls short. Lucido operated a drilling business (BAD) before he filed this case, and RGW asserts that Lucido: 1) is rеquired to hold a contractor’s license to operate the business; 2) has since relinquished his license; and 3) cannot renew it without committing fraud. Ipso facto, Lucido cannot contend that he will be engaging in business post-consummation.
RGW misconstrues the Um court’s holding. In Um, the debtors co-founded several real estate management companies. They ultimately filed a Chapter 11 bankruptcy and their plan provided for the sale of their nonexempt individual assets as well as those of their jointly owned business entities. Um, 904 F.3d at 817. Creditor Spokane Rock filed an adversary proceeding seeking to deny debtors their Chapter 11 discharge under
[W]e need not determine today whether the statutory prohibition on discharge is triggered only when an individual debtor continues a prepetition business after consummation of a Chapter 11 plan. The Debtors in this case fail to satisfy the second prong of the statute because they did not engage in any business during the relevant period. They were simply employees in businesses owned or operated by others – and Price a part-time employee at thаt.
Id. at 820 (emphasis in original). Thus, there is no binding Ninth Circuit caselaw and the court must examine this issue anew.9
That does not end the inquiry, however, as the court must still address whether Lucido intends to engage in “business.” The Bankruptcy Code does not define this term, but Black’s Law Dictionary defines “business” very broadly, as “[a] commercial enterprise carried on for profit; a particular occupation or employment habitually engaged in for livelihood or gain.” Black’s Law Dictionary (11th ed. 2019). The Official Bankruptcy Forms limit this expansive definition somewhat by specifically identifying five categories that constitute a business for bankruptcy purposes, including: (1) a sole proprietor or self-employed in a trade, profession, or other activity, either full-time or part time; (2) a member of a limited liability company (LLC) or limited liability partnership (LLP); (3) a partner in a partnership; (4) an officer, director, or managing executive of a corporation; and (5) an owner of at least 5% of the voting or equity securities of a corporation.
Lucido testified that he deactivated his contractor’s license in 2019 and has generated income since then by working out of his union hall and providing “self-employed independent” consulting services to S.G. Banks. His consulting services involves all phases of cast wet and dry hole drilling, including inspecting potential drilling sites and advising contractоrs (to date, S.G. Banks) who are interested in bidding for the drilling subcontract. Given his experience with BAD, Lucido appears to be well suited for this work.
S.G. Banks issued Lucido W-2s for employment wages and 1099s for his consulting work in 2021 and 2022. These post-petition tax documents and his Chapter 11 monthly operating reports disclose that his consulting work generated the bulk of his (non-rental) post-petition income10, and the Plan proposes that Lucido will expand his consulting business, continue to work out of the union hall, and start to receive social security. There is no strong indication that his consulting business will slacken post-consummation, and the fact that this work will not be the sole source of funds does not prevent this court from determining that he will be “engaging in business.” See In re Flintkote Co., 486 B.R. 99, 132 (Bankr. D. Del. 2012) (there is no language in the statute qualifying what level of business activity is sufficient). Accordingly, the court finds that RGW has not met its burden of proof on this element, and judgment can be entеred in Lucido’s favor on this basis alone.
C. RGW’s §727 Claims Will Not Result in a Denial of Discharge
As noted previously, RGW appears to have abandoned previously plead legal bases, added new legal bases, and alleged new facts to support its argument that Lucido would be denied a discharge if this case were a chapter 7. At the completion of its case-in-chief, and consistent with its trial brief and post-trial brief, RGW’s counsel confirmed that the remaining bases for denial of discharge are
1. 11 U.S.C. §727(a)(2)(B)
The court shall grant debtor a discharge, unless –
. . . .
the debtor, with the intent to hinder, delay or defraud a creditor. . . has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed
. . . . property of the estate, after the date of the filing of the petition[.]
RGW argues generally that Lucido has continually concealed evidence concerning the operations and finances of M.F. Engineering. Specifically, RGW argues that while Lucido produced M.F. Engineering’s bank statements, he failed to produce copies of the checks referenced in those statements. RGW argues that Lucido refused to produce copies of these checks because he was using M.F. Engineering assets to pay his personal expenses. As a result, RGW argues that M.F. Engineering’s diminishing cash reserves equally decreased the value of Lucido’s equity interest in M.F. Engineering. This, RGW alleges, constitutes post-petition concealment of estate property.
RGW’s argument is undermined by its unwillingness to appreciate (despite the court’s reрeated admonitions) that M.F. Engineering’s assets are not property of Lucido’s estate. The only thing that is property of Lucido’s estate is Lucido’s equity interest in M.F. Engineering, the value of which is measured not only by its cash on hand, but also by the debts it owed (the latter of which RGW failed to explore at trial). Accordingly, arguments that Lucido was using M.F. Engineering cash for personal expenses, without sufficient evidence that it eroded Lucdio’s equity, are inadequate to prove that such conduct somehow constituted the concealment of estate property (particularly when the evidence suggested that MF Engineering was, at all relative times, insolvent).
RGW also has not established that Lucido acted with the requisite intent. Lucido produced M.F. Engineering’s bank statements (which listed the checks drawn against its account) as well as copies of M.F. Engineering’s general ledgers (which contained consistent, corresponding entries of the above checks and categorized those expenses paid by those checks). This is not the behavior of someone who has the intent to hinder, delay or defraud.
In addition, the evidence does not persuasively demonstrate that Lucido used M.F. Engineering funds for personal expenses. For example, RGW took issue with some of the insurance, alarm and gas/vehicle maintenance expenses that M.F. Engineering paid, contending that these payments personally benefitted Lucido. Lucido testified that the insurance and alarm expenses were for M.F. Engineering’s business premises located on the Pittsburg Property and the gas/maintenance expenses were for a truck that M.F. Engineering rents from Lucido11. Lucido also testified that while M.F. Engineering was in the process of closing, it was not closed yet and was still incurring business expenses. RGW produced no evidence to the contrary.
Assuming for the sake of argument that Lucido did use M.F. Engineering funds for
Accordingly, the court finds that RGW has not demonstrated by a preponderance of the evidence that Lucido transferred, removed, destroyed, mutilated, or concealed property of the estate with the intent to hinder, delay or defraud a creditor.
2. 11 U.S.C. §727(a)(3)
The court shall grant the debtor a discharge, unless –
. . . .
The debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case[.]
A creditor must demonstrate under
It is unclear what RGW’s current arguments are, or if it has abandoned this basis entirely. In the Complaint, RGW asserted that Lucido had previously testified that his financial records were on a hard drive that had been stolen when in, fact, he had the records in his possession but failed to produce them. Notwithstanding the argument, no evidence was presented during trial to substantiate this claim for relief.
RGW’s Trial Brief and Post-Trial Brief are equally unhelpful as both cite
3. 11 U.S.C. §727(a)(4)(A)
The court shall grant the debtor a discharge, unless –
. . . .
thе debtor knowingly and fraudulently, in or in connection with the case –
. . . made a false oath or account[.]
RGW alleges Lucido’s October 12, 2021, declaration in support of confirmation of a prior plan (the “Declaration“)13 contains numerous false statements about the underlying reasons for the transfer of 50% of the Arnold Property to his mother Geraldine and about the alleged debts underlying the issuance of deeds of trust against the Pittsburg Property to his two brothers, Frank and Mike (via MDL Associates).
It is undisputed that the Declaration was signed by Lucido under penalty of perjury, was filed in this Chapter 11 and related to material facts. Thus, the real inquiry is whether the statements were knowingly false and fraudulently made.
a. The Arnold Property
RGW asserts that the following statements in the Declaration are false: (1) Geraldine advanced 50% of the cost to construct the residence on the Arnold property, the amount of which totaled more than $450,000; (2) Geraldine agreed to get off title to allow for refinancing; and (3) in 2020, Geraldine demanded to be restored to title to protect her interests. RGW argues that Lucido’s failure to produce documentation showing that Geraldine paid for any of the costs of construction, combined with Geraldine’s pattern and practice of documenting debts Lucido owed to her, and his subsequent signing of three Personal Financial Statements which did not disclose Geraldine’s ownership interest, satisfies its burden of proof. While this is a close call, the court disagrees.
The court agrees that Lucido failed to produce explicit, documentary evidence to support the statements that Geraldine advanced 50% of the cost to construct the residence or that the amount advanced was more than $450,000. The circumstantial evidence, however, indicates that Geraldine probably provided substantial funding for the Arnold Property. The Arnold Property was purchased in 2002 and subsequently placed in the name of La Varaca Properties, LLC, an entity jointly owned by Lucido, Geraldine, Michael Lucido (and his spouse) and Lucido’s sister (and her spouse) with the goal of building a cabin on the premises. In 2005, before any extensive work had been done on the project,
RGW must demonstrate, by a preponderance of the evidence, that Geraldine did not advance 50% of the construction costs which totaled more than $450,000. Evidence regarding the actual cost of construction and Geraldine’s financial net worth and liquidity would have been good first steps towards meeting this burden of proof, but RGW did not introduce any such evidence. Instead, the evidence disclosed that: 1) Geraldine was involved with the Arnold Property from the inception and that she and Lucido were the only two owners after Lucido’s siblings withdrew from the project; 2) she regularly loaned funds to Lucido; and 3) Lucido was compelled to eventually refinance the Arnold Property after its completion to obtain funds for his business ventures. This evidence suggests that Lucido may have lacked the capital to complete the Arnold Property on his own and that his mother, who was a regular source of funds for him (and who owned a half interest in the Arnold Property), provided it instead14. Moreover, while Geraldine may have carefully documented her loans to Lucido, the funds that she contributed to the Arnold Property were not loans but an investment in real property in which she, at the time, had a 50% interest. There was no need for a document to establish an interest rate and a maturity date, and no testimony was solicited regarding the operations and/or underlying documents (including the operating agreement) of La Varaca Properties LLC.15 Accordingly, the court reasonably infers that Lucido’s business ventures prevented him from contributing all of the funds necessary to complete the project, and that he relied on his mother to help carry the load.16 To be clear, the court is not conclusively finding that Geraldine funded the Arnold Property to the tune of $450,000 or more, or that she paid for half of its construction; instead, it holds that
Lucido also did not perjure himself when he asserted that Geraldine agreed to get off title to allow him to refinance the Arnold Property. RGW argues that Lucido’s declaration was false because there was more than sufficient equity in Lucido’s 50% interest to secure the amount of business capital that he needed. RGW’s argument, however, does not address nor negate Geraldine and Lucido’s testimony on this issue. Lucido testified that he needed to borrow against the Arnold Property to obtain working capital for his business. Both Lucido and Geraldine testified that Geraldine agreed that La Varaca Properties, LLC should transfer the Arnold Property to Lucido because she did not want to be responsible for the debt in any form. RGW produced no evidence to dispute this testimony. Thus, the court finds that RGW did not sustain its burden to show, by a preponderance of the evidence, that this statement was false.
Similarly, RGW did not meet its burden of proof regarding the alleged falsehood of Lucido’s statement that Geraldine demanded to be restored to title in 2020 “to protect her interests.” Both Geraldine and Lucido testified that Geraldine made this demand and her reasons for requesting it. RGW did not offer any contrary evidence. Lucido transferred a 50% interest to Geraldine after the Judgment (this fee title interest was the functional equivalent of her prior interest in La Varaca Properties, LLC), and the transfer was, perhaps, a not unexpected knee jerk response to RGW’s efforts to enfоrce the Judgment (which ultimately included its Alter Ego Claim). Accordingly, RGW did not sustain its burden to show, by a preponderance of the evidence, that this statement was false, and RGW cannot prevail on this
b. The Pittsburg Property
RGW asserts that Lucido falsely stated that he gave his brothers, Frank and Mike (via MDL Associates) deeds of trust secured by the Pittsburg Property because he owed them money for construction and electrical work which they performed in 1996 and 1998. RGW argues that Lucido could not independently calculate the value of their work and did not produce any documents to support the amounts alleged. RGW further contends that it is “inconceivable” that the brothers would fail to document the debts for over twenty-five years, particularly given the family’s heated dispute in 2005 which led to Mike Lucido’s withdrawal from the Arnold Property development. RGW also argues that if Mike and Frank had provided the work as alleged, the Plan’s treatment of their deeds of trust (they purportedly agreed to cancel their liens and allow Lucido to use the sales proceeds to help fund the Plan) made little sense.17
Once again, the court agrees that Lucido failed to provide explicit documentation of
Mike and Frank’s testimony regarding the nature of their deal with Lucido was consistent. Mike testified that he provided a widе range of construction services on the Pittsburg Property in 1996 and 1998, including building a new office for R&L Door Company (a tenant on the premises), making tenant improvements for Orkin Pest Control, and applying for a permit to construct a storage and maintenance facility and to install a modular office building. He testified that he calculated the value of his work by examining the plans/drawings and that he verbally quoted Lucido an amount - $163,000, which they agreed was a fair price. He further stated that Lucido and he agreed that they would settle the debt upon sale of the Pittsburg Property, Mike’s retirement, or at some other mutually agreed time. Mike testified that this timetable was advanced due to the BAD litigation. When he generally became aware of the litigation, he informed Lucido that he needed some protection for his unpaid work, which resulted in the deed of trust. The $336,000 amount reflects the agreеd upon $163,000 value and 3% interest for 25 years.
Frank’s testimony mirrors that of his brother’s. Frank, an experienced electrician, provided extensive electrical work on the Pittsburg Property, including work on the Orkin Pest Control and R&L Door Company spaces, electrical work for a new office in the back warehouse, new yard site lighting and power, and new LED lighting in the main shop. Frank testified that the Pittsburg Property needed substantial work when Lucido purchased it, and that they agreed that Lucido would pay for this work when Lucido sold the Pittsburg Property, upon Frank’s retirement, or as otherwise agreed by the parties. Frank valued his work at $70,000 - $80,000. He testified that he met with Lucido in March of 2020 and they agreed that the value of the work was $78,000, plus 3% interest, for a total of $162,000.
Admittedly, the above evidence did not come bound in three punch binders with accountants in tow, and the court shares RGW’s concerns regarding the significant passage of time between completion of work and execution of deeds of trust. But the court finds the Lucido brothers’ testimony to be credible, and there is no evidence to the contrary. RGW’s counsel did not effectively cross-examine Frank or Mike regarding the work they did on the Pittsburg Property nor its value. Accordingly, RGW failed to prove, by a preponderance of the evidence, that the statements Lucido made in the Declaration regarding the debts owed to Frank and Mike were false.
4. 11 U.S.C. §727(a)(6)(A)
The court shall grant the debtor a discharge, unless –
. . . .
the debtor has refused, in the case –
. . . to obey any lawful order of the court, other than an order to respond to a material question or to testify.
Initially, the court notes that it has jurisdiction over the adversary proceeding, the underlying bankruptcy case and the parties. Thus, the Discovery Order is a lawful ordеr as contemplated by
RGW argues that the Discovery Order required Lucido to provide detailed information regarding all asset transfers made by M.F. Engineering to any person in the period between June 1, 2017, through the present, and that Lucido failed to comply with it when he failed to produce copies of checks from M.F. Engineering’s bank account(s). The Discovery Order itself, however, is not so specific. It provides, in relevant part,
Defendant shall serve further responses to the Requests for Production Nos. 1-38. . . and shаll produce all documents in his possession, custody and control that are responsive to those requests . . . no later than October 7, 2022. [and] Defendant shall serve further responses to Interrogatory Nos 1-6. . . no later than October 7, 2022.
Discovery Order, Plaintiff’s Exhibit 75. Thus, determination of Lucido’s compliance with the Discovery Order requires reference to, and review of, the Interrogatories and the Requests for Production.
Only one of the interrogatories refers to M.F. Engineering. Interrogatory No. 4 required Lucido to “Identify all transfers of Assets by M.F. Engineering to any Person from June 1, 2017 to the present.” Pl. Exh. 67. This Interrogatory only requests information and does not request documents. Lucido timely filed further responses to Interrogatory No. 4 on October 7, 2022. Pl. Exh. 79. Thus, with respect to the Interrogatories, the court finds that Lucido obeyed the Discovery Order.
Unfortunately, the court cannot determine whether Lucido complied with the Requests for Prоduction because they were never introduced into evidence at trial. Without that evidence, the court cannot find that Lucido refused to obey the Discovery Order at all, let alone that he refused to obey willfully or intentionally. As a result, RGW failed to sustain its burden to show by a preponderance of the evidence that Lucido refused to obey a lawful order of the court19.
As noted previously, these bases were asserted in the Complaint. However, no evidence or argument was presented at trial in their support, and they were not argued in RGW’s trial brief or post-trial brief. To the extent that these bases were not waived, the court finds that RGW has not sustained its burden to show by a preponderance of the evidence that Lucido would be denied a discharge in a chapter 7 under
For all of the above reasons, the court finds that RGW has failed to sustain its burden to prove, by a preponderance of the evidence, that Lucido would be denied a discharge under
II. Conclusion
RGW has not demonstrated, by a preponderance of the evidence, all three elements of
The court will conduct a post-trial status conference on September 29, 2023, at 11:00 a.m. to determine how the parties wish to proceed. The parties may appear in person or by Zoom.
***END OF MEMORANDUM DECISION***
Adversary No. 21-4031 CN
COURT SERVICE LIST
Recipients are ECF participants