In re: GO GLOBAL, INC. ( 2014 )

FILED
Jan. 13 2014
1
SUSAN M. SPRAUL, CLERK
2 U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. NV-12-1596-JuKiKu
)
6 GO GLOBAL, INC., et al., ) Bk. Nos. 10-14804-BAM
) 10-14456-BAM
7 Debtors. ) 11-27226-BAM
______________________________) (jointly administered)
8 HUGO R. PAULSON; AZURE SEAS, )
LLC; AZURE SEAS HOLDINGS, LLC;) Adv. No. 10-01334-BAM
9 THE LODGE, LLC; YOUGO, LLC; )
CHARLES ANTHONY ORCHARD, LLC, )
10 )
Appellants, )
11 )
v. ) M E M O R A N D U M*
12 )
GO GLOBAL, INC.; CARLOS A. )
13 HUERTA; CHRISTINE H. HUERTA; )
CHARLESTON FALLS, LLC, )
14 )
Appellees. )
15 ______________________________)
16 Argued and Submitted on November 22, 2013
at Pasadena, California
17
Filed - January 13, 2014
18
Appeal from the United States Bankruptcy Court
19 for the District of Nevada
20 Honorable Bruce A. Markell, Bankruptcy Judge, Presiding
_________________________
21
Appearances: John J. Egbert, Esq., of Jennings, Strouss &
22 Salmon, P.L.C., argued for appellants Hugo R.
Paulson, Azure Seas, LLC, Azure Seas Holdings,
23 LLC, Yougo, LLC, The Lodge, LLC, and Charles
Anthony Orchard, LLC; Mark G. Simons, Esq., of
24 Robison, Belaustegui, Sharp & Low, argued for
appellees Go Global, Inc., Carlos A. Huerta,
25 and Charleston Falls, LLC.
26
*
This disposition is not appropriate for publication.
27
Although it may be cited for whatever persuasive value it may
28 have (see Fed. R. App. P. 32.1), it has no precedential value.
See 9th Cir. BAP Rule 8013-1.
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1 Before: JURY, KIRSCHER, and KURTZ, Bankruptcy Judges.
2
3 Appellants, Hugo R. Paulson (Paulson), Azure Seas, LLC
4 (Azure), Azure Seas Holdings, LLC (Azure Holdings), The Lodge,
5 LLC (Lodge), YouGo, LLC (YouGo), and Charles Anthony Orchard,
6 LLC (CAO) (collectively, Appellants), appeal from the bankruptcy
7 court’s judgment in the amount of $5,579,656.711 in favor of
8 appellees, Go Global, Inc. (Go Global), Carlos A. Huerta
9 (Huerta), and Charleston Falls, LLC (Falls) (collectively,
10 Appellees). We AFFIRM.
11 I. FACTS2
12 Huerta, through his business entity, Go Global, was a real
13 estate developer. Huerta holds 100% interest in Go Global and
14 Go Global holds 79% interest in Falls. Appellees are
15 chapter 113 debtors in the underlying jointly administered
16 bankruptcy case.
17 Paulson holds 100% of the interests in Azure, Azure
18 Holdings, Lodge, YouGo, and CAO. Appellants each filed
19 voluntary chapter 11 petitions in the United States Bankruptcy
20 Court for the District of Arizona on November 16, 2012, after
21
22 1
Plus prejudgment interest on $2,604,478 calculated from
23 March 9, 2010.
24 2
The undisputed facts are mostly taken from the bankruptcy
court’s Memorandum Decision entered on November 2, 2012.
25
3
26 Unless otherwise indicated, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532,
27 “Rule” references are to the Federal Rules of Bankruptcy
Procedure, and “Civil Rule” references are to the Federal Rules
28 of Civil Procedure.
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1 the judgment was entered in this case.
2 A. Summary of the Dispute
3 Since 2002, Paulson, individually or through his various
4 business entities, invested with Huerta on real estate
5 development projects or worked with Huerta brokering real estate
6 developments or provided financing for third-parties with whom
7 Huerta was also associated. In 2009 the parties had a falling
8 out. Thereafter, Paulson took steps to disassociate himself
9 from Huerta on three of their existing projects which are
10 described below.
11 1. Mt. Charleston View, LLC
12 The main dispute among the parties centers on the
13 Mt. Charleston project that was located on Mt. Charleston, a
14 short drive from Las Vegas (Property). The Property consisted
15 of a restaurant/bar and banquet facility, two cell towers, some
16 cabins near the lodge, two custom homes and four custom lots.
17 In 2005 Huerta created an entity called Mt. Charleston
18 View, LLC (View) to own the project and named himself and a
19 third party, Barbara Orcutt (Orcutt), as managers.
20 In April 2006, View purchased the Property from C-Bar
21 Corporation (C-Bar), an Orcutt entity, for the amount of
22 approximately $2.9 million. At that time, Huerta held 80%
23 interest in View and Orcutt held the remaining 20%.
24 On May 31, 2006, Orcutt assigned her 20% interest in View
25 to Huerta for which Huerta purportedly paid $3 million.
26 Concurrently with the transfer of title, the escrow company
27 issued a $1 million check to Sierra Agency, LLC (Sierra).
28 Sierra was owned by Daniel DeArmas, then an employee of Huerta.
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1 The source of the funds to cover this check was the purchase
2 price for the Property, funded primarily by Huerta’s $3 million
3 investment. DeArmas negotiated the check to Go Global, which
4 issued invoices to Sierra to minimize or eliminate taxes on the
5 receipt. Go Global ultimately paid tax on this amount as
6 ordinary income.
7 Paulson eventually invested $5 million in the Property
8 through his investment vehicle Azure. Huerta then restructured
9 the membership interests so that Paulson held his interest in
10 View through Azure and Huerta held his interest in View through
11 Falls. Azure owned 65.6577% of the membership interests, based
12 on Paulson’s investment of $5,000,000, and Falls owned the
13 remaining 34.3423%, based upon an agreed investment of
14 $2,615,258.73.
15 In 2006, Paulson and Huerta through their respective
16 entities, Azure and Falls, executed an operating agreement for
17 View (View Operating Agreement). Through the View Operating
18 Agreement, the parties removed Orcutt as manager and named
19 Go Global (wholly owned by Huerta) and Paulson as managers. The
20 View Operating Agreement was not a model of clarity or
21 consistency. The bankruptcy court later found at trial that the
22 provisions relating to the authorization of the managers to act
23 on behalf of View were “hopelessly ambiguous.” Article X,
24 entitled “Management,” states that “each member shall have an
25 equal voice in the management of the Company.” Article X(B)
26 states that “[e]ach of the managers has authority to bind the
27 Company . . . and . . .[t]he Managers’ power(s) will not be
28 limited in any fashion whatsoever . . . .”
-4-
1 Orcutt’s exit from View presented an operational problem
2 because the Property sold liquor and sponsored gambling
3 activities, which needed special licensing. Orcutt had
4 qualified for this licensing. Initially, Orcutt stayed on to
5 manage the restaurant and gaming activities, but after about a
6 year, Huerta and Paulson decided to take back the restaurant and
7 gaming operations from Orcutt.
8 To operate the gaming and restaurant facilities at the
9 lodge, Huerta formed a separate company called Mountain Gaming,
10 LLC (Gaming) which was 100% owned and controlled by Huerta/Go
11 Global. Huerta agreed that Paulson would become a 50% member in
12 Gaming. Neither party invested any cash or other property,
13 other than the time and effort necessary to obtain the required
14 licensing.
15 On January 9, 2008, Huerta and Paulson executed an
16 operating agreement for Gaming, pursuant to which each
17 individual became manager of and 50% interest holder in the
18 company (Gaming Operating Agreement). Gaming acquired the
19 Property’s gaming licenses and took over its operations from
20 Orcutt in 2008. Gaming made significant profits which were used
21 to pay Gaming’s expenses, as well as some of View’s expenses.
22 In September 2008, after a month in which Gaming earned
23 some $84,000 in profits, Huerta caused Gaming to distribute
24 $15,000 in excess profits each to Paulson and Huerta. Around
25 this time, Paulson began to assert that his ownership in Gaming
26 mirrored his ownership in View and that, as a two-thirds owner,
27 he must consent to any major actions. Paulson also expressed
28 his view that Gaming was never intended to produce profits for
-5-
1 Huerta and Paulson, but was to be used as a source of funding
2 for View’s short and long term needs.
3 In 2008, Huerta’s and Go Global’s prior business plan no
4 longer worked due to the economy. Huerta began to have cash
5 flow problems.
6 In April or May 2008, Paulson loaned $950,000 for Huerta’s
7 benefit. The loan was actually made to Huerta’s father-in-law,
8 with the promissory note guaranteed by Huerta and Go Global.
9 The bankruptcy court found that there was no doubt the vast
10 majority of the proceeds went to Huerta’s and Go Global’s
11 benefit.
12 By early 2009, Paulson and Huerta had a falling out with
13 respect to the direction of the Mt. Charleston project. Paulson
14 wanted to turn the Property into a high-end resort while Huerta
15 wanted to sell the Property to raise much needed cash. Paulson
16 wanted Gaming’s profits transferred to View for View’s use and
17 Huerta wanted them distributed to him and to Paulson in equal
18 shares.
19 In February 2009, Paulson sought to buy out Huerta’s
20 investment in View for $2,615,258 plus a premium. When Huerta
21 asked to also be bought out of Gaming, Paulson balked and
22 refused to pay anything for Gaming. Paulson thought Gaming only
23 had value in light of View and that he controlled View by virtue
24 of his 66% interest in that entity.
25 Not surprisingly, Huerta rejected the offer even though he
26 was in significant financial straits. After this rejection,
27 Paulson sent an email to Huerta and DeArmas (who was in charge
28 of Gaming’s day-to-day operations at that time) forbidding any
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1 distribution of profits or revenues to Huerta until the
2 ownership issue was resolved. In turn, Huerta affirmatively
3 asserted his 50% interest in Gaming in an email dated April 21,
4 2009.
5 But by this time, Paulson began to take steps to dissociate
6 himself from Huerta for reasons extending beyond the dispute
7 over the Mt. Charleston project. Paulson did not inform Huerta
8 of his long term intent, instead assembling a team of
9 professionals with the intent of divesting Huerta from the
10 Property at the lowest cost possible. Paulson, through his
11 attorney, sent a letter to Huerta accusing him of criminal
12 misconduct and demanding $5,469,008 to settle all disputes.
13 When there was no response, Paulson sent an email to his team
14 elaborating on this criminal theme, asserting his opinion that
15 Huerta would walk away rather than fight the criminal charges.4
16 Huerta made several proposals to settle the disputes
17 between Paulson and himself, all of which were rejected.
18 The $950,000 loan from Paulson to Huerta’s father-in-law
19 came due in November 2009. Huerta did not pay it or cause it to
20 be paid. Paulson took Huerta’s default as a further insult and
21 ongoing justification for his efforts to disassociate himself
22 from Huerta.
23 In December 2009, Paulson formed YouGo to take over
24 operations from Gaming.
25 In January 2010, Paulson emailed his team of professionals
26 to indicate that the takeover should start as of February 15,
27
28 4
Huerta was never charged with any crime.
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1 2010. Paulson also began to develop theories to deduct
2 $1 million from any price paid to Huerta because of the April
3 2006 payment by Orcutt to, ultimately, Go Global. The
4 bankruptcy court found that “[m]otivating this was, in Paulson’s
5 own words, his desire not to put any money into Huerta’s ‘slimy
6 paw.’”
7 According to the bankruptcy court, Paulson took these steps
8 in secret and went so far as to categorize his efforts as a
9 “blitzkrieg;” an effort to surprise and defeat Huerta quickly
10 and without any chance for Huerta to defend himself.
11 On January 28, 2010, Paulson executed a formal lease
12 between Gaming and View. He signed in his capacity as a manager
13 of View and as a manager of Gaming. This document formalized
14 Gaming’s right to occupy the Property. It also stated that
15 Gaming’s rights would terminate upon “the creation of a right to
16 occupy the Property in YouGo, LLC, pursuant to that certain
17 Lease Agreement by and between Lessor, View, and YouGo, LLC, and
18 dated on or around the date hereof. . . .”
19 On February 12, 2010, Paulson formed Lodge with the purpose
20 of having it take over all of View’s assets, including the
21 Property.
22 On February 27, 2010, Paulson signed an Agreement and Plan
23 of Merger under which Lodge merged with View, with Lodge as the
24 surviving entity. Under the Agreement and Plan of Merger,
25 Falls’ interest in View would be converted into a right to
26 receive $10.
27 On March 5, 2010, Paulson filed the Articles of Merger with
28 the Nevada Secretary of State. The bankruptcy court found that
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1 Paulson did not inform or consult with Huerta about the merger.
2 On March 9, 2010, Paulson’s attorney sent a letter to
3 Huerta’s attorneys about the merger and tendered the $10 merger
4 consideration.5 In its findings, the bankruptcy court observed
5 that the merger was not particularly “clean.” Huerta remained
6 liable as a guarantor on View’s $1.9 million loan from Nevada
7 Bank and was not relieved of that liability until Paulson
8 effected a refinancing of that loan in July 2010. YouGo was not
9 appropriately licensed for the Property’s operations until
10 August 2010, and Paulson operated the Property through Gaming
11 until September 2010. Finally, the court found that upon taking
12 control of the Property, Paulson took $316,589.63 from View’s
13 and Gaming’s bank accounts for his own personal use.
14 On April 12, 2010, Paulson formed CAO so that he could
15 transfer to it the two custom houses and the four built-out lots
16 from the Lodge. The bankruptcy court found that Paulson did
17 this to place “roadblocks” in any effort by Huerta to seek
18
19 5
The letter indicated that Paulson determined, based on an
20 appraisal and other information, that the liabilities of View
exceeded the value of its assets and therefore the interests of
21 the members in View had a negative value. Despite the negative
value, the “Merger Consideration” for View was determined to be
22
ten dollars. The bankruptcy court’s findings tell a different
23 story. The bankruptcy court stated that Paulson and his
professionals determined that the value of View before the merger
24 was $782,000. Based on the 34/66 allocation of ownership
interest in View, that would have meant that Falls’ interest in
25 View before the merger was $258,050.00. Paulson determined
26 however that Falls’ interest in View had been diluted by the
$1 million kickback to Go Global during the purchase of View from
27 C-Bar. Thus, at the time of the merger, Paulson calculated that
Falls owed Azure money, and the ten dollar payment from Lodge to
28 Falls was intended as nominal consideration.
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1 redress for the squeeze-out merger.
2 2. McCarran Development, LLC
3 Paulson, Huerta and a third party, Michael Barnes (Barnes),
4 formed McCarran Development, LLC (MCD) with the intention of
5 having MCD acquire and develop 13 acres near Reno, Nevada. Each
6 party invested $10,000, with ownership to be 40% in Paulson and
7 his affiliate, 30% to Huerta and 30% to Barnes. The plan behind
8 MCD was that Paulson would contribute the 13 acres after which
9 the parties would work together to obtain entitlements to
10 develop and then sell to a developer. Despite these plans, the
11 parties never signed any agreement to convey the property to
12 MCD.
13 In an August 27, 2009 email, Paulson asked Barnes to take
14 over the business from MCD because another managing member,
15 Summer Rellamas, was leaving. In a May 31, 2011 deposition,
16 Barnes testified that he wanted to discuss his taking over as
17 the managing member with Huerta “so as not to blind side him.”
18 Two days later, after receiving another email from Paulson,
19 Barnes agreed to take over as the managing member but told
20 Paulson that he wanted to call Huerta. Barnes also asked
21 Paulson if there was an operating agreement. On Friday,
22 August 28, 2009, Paulson sent another email which told Barnes
23 that he did not have a copy of the operating agreement and “so
24 far as I’m concerned, creating an operating agreement or
25 articles may be important only in that it would provide a method
26 of dissolution. If [Huerta] was to create a problem in
27 accomplishing that, that’s up to him.” Finally, Barnes
28 testified that in late August 2009 he had figured out that he
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1 was coming in as the managing member of MCD for the sole purpose
2 of dissolving it.
3 On October 7, 2009, Barnes sent an email to Paulson and
4 Huerta regarding the dissolution of MCD. Barnes wrote: “Recent
5 discussions with all Members within McCarran Development, LLC
6 resulted in an unanimous decision to dissolve the entity.” The
7 email further stated that the company’s assets totaled
8 $14,503.94 and indicated that each member would receive its pro
9 rata share based on membership interest. However, the
10 bankruptcy court found that Huerta never agreed to dissolve MCD.
11 In its findings, the bankruptcy court noted that “Paulson
12 dissolved MCD soon after he sued Huerta in the [Waterstone]
13 Action.6 Paulson took these actions without informing Huerta,
14 and without Huerta’s consent.” Ultimately, the bankruptcy court
15 found Paulson’s dissolution of MCD was a fraudulent transfer
16 based on his breach of the fiduciary duty of loyalty to
17 Go Global and awarded Go Global judgment in the amount of
18 $10,000, which it offset against the judgment awarded in favor
19 of Paulson in the Waterstone Action.
20 3. Pecan Street Plaza, LLC
21 Before the problems at View, Paulson and Huerta had also
22 invested in a 15 acre parcel located in Pflugerville, Texas
23 known as Pecan Street Plaza, LLC (PSP). The investment was with
24 other people and Paulson desired to buy them out. In a
25 transaction in which PSP accomplished this, it also acquired an
26
27
6
The bankruptcy court refers to the Waterstone Action as
28 the “Prior Action.” This lawsuit is further described below.
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1 additional 22 acres in a transfer arranged by Huerta and
2 Go Global. As a result of the transfer, Go Global was given a
3 15.87% ownership interest in PSP. In order to reflect the
4 parties’ deal, however, Go Global simultaneously encumbered its
5 interest in favor of Paulson to secure a $700,000 “loan” made by
6 Paulson. However, no funds were ever transferred; the loan was
7 to ensure that any proceeds from sale or refinancing would go
8 first to Paulson or his interests, and then when those had
9 received a priority return, the remainder would be split in
10 accordance with the ownership interests of record.
11 The bankruptcy court determined that the transaction was
12 highly convoluted, and the parties’ efforts to explain it at
13 trial were unavailing. The court found that what was
14 uncontroverted, however, was that Paulson removed Huerta from
15 PSP’s management as part of the “blitzkrieg,” and subsequently
16 caused capital calls to be made at a time when Paulson knew that
17 neither Go Global nor Huerta had the resources to pay. The
18 court found that the intended result was that Go Global’s
19 interests would be diluted if Paulson paid Huerta’s and Go
20 Global’s share.
21 B. Paulson’s Allegations And Lawsuits Against Huerta
22 1. The Waterstone Action
23 As a reason to dissociate himself from Huerta, Paulson
24 alleged that Huerta failed to disclose relevant facts in another
25 real estate investment deal the parties developed through
26 HC Waterstone, LLC (HC Waterstone). Huerta and Paulson
27 contributed $6.5 million to HC Waterstone, which was an
28 investment vehicle designed to lend money to Waterstone Attached
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1 Homes, LLC. In connection with his contribution, Huerta
2 borrowed one million from an entity controlled by Paulson. The
3 plan was to turn around their investment in eighteen months.
4 However, the condominiums did not sell and the property went
5 into financial distress. Eventually, it was sold to a new
6 entity owned by John and Madonna Beal (Beal Transaction).
7 The distribution from the Beal Transaction was $3.9 million
8 with $2 million distributed with adjustments for the payoff of
9 the remainder of the one million loan owed to Paulson by Huerta.
10 The remaining $1.9 million was distributed to Go Global,
11 characterized as an undocumented short-term loan. Go Global did
12 not repay this short-term loan to Paulson.
13 On June 19, 2009, Paulson filed a lawsuit against Huerta
14 entitled Hugo R. Paulson, individually and as Trustee of the
15 Hugo R. Paulson SEP IRA v. Carlos Huerta and Go Global, Inc. in
16 the Second Judicial District Court, County of Washoe, Nevada,
17 alleging that Huerta had defrauded him of $4.5 million in
18 connection with this investment. This action was subsequently
19 removed to the bankruptcy court and is further described below.
20 2. Copper Canyon Development, LLC
21 Paulson also alleged that Huerta failed to disclose vital
22 information with respect to the Copper Canyon Development, LLC
23 (Copper Canyon), an entity owned and managed by Huerta and
24 Barnes, which was the first real estate deal on which Paulson
25 worked with Huerta starting in 2002. According to Paulson,
26 Huerta acted as his licensed real estate broker and assisted him
27 in the sale of 1,300 acres of real property near Sparks, Nevada,
28 to Copper Canyon for $23 million. Paulson paid Huerta a
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1 $2 million commission for the sale of the property. In 2009,
2 Paulson allegedly learned that Huerta sold the property for
3 $35.7 million and failed to disclose to Paulson the
4 $12.7 million profit that he and Barnes made on the re-sale of
5 Copper Canyon.
6 3. The Savino Lawsuit
7 When Huerta did not pay Paulson on the $950,000 loan that
8 benefitted Huerta and Go Global, Paulson sued Huerta and
9 Huerta’s father-in-law, Anthony Savino, in the Eighth Judicial
10 District Court, County of Clark, Nevada entitled Paulson et al.
11 v. Anthony Savino.
12 C. Bankruptcy Events
13 Largely due to the actions of Paulson, on March 18, 2010,
14 Huerta and his wife Christine filed a chapter 13 petition (Case
15 No. 10-14456).
16 Five days later, on March 23, 2010, Go Global filed its
17 voluntary chapter 11 petition (Case No. 10-14804).
18 On April 5, 2010, the bankruptcy court entered an order
19 granting the joint administration of Huerta’s and Go Global’s
20 bankruptcy cases.
21 On April 9, 2010, the bankruptcy court converted Huerta’s
22 case to chapter 11.
23 On October 31, 2011, Falls filed its voluntary chapter 11
24 petition (Case No. 11-27266).
25 On December 9, 2011, the bankruptcy court entered an order
26 granting the joint administration of Huerta’s, Go Global’s and
27 Falls’ bankruptcy cases.
28
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1 1. The Waterstone Action and Nondischarageability
Complaint
2
3 After Huerta and Go Global filed their petitions,
4 Paulson removed the Waterstone Action to the bankruptcy court
5 (Adv. No. 10-01207). Paulson alleged claims against Huerta for
6 fraud, conversion, declaratory judgment, breach of contract,
7 breach of fiduciary duty, and breach of the covenant of good
8 faith and fair dealing. In the Waterstone Action, Paulson
9 sought recovery from Huerta in connection with Paulson’s
10 investments in HC Waterstone.
11 Paulson contended that the debt due to him from Huerta in
12 the Waterstone Action should be excepted from discharge under
13 § 523(a)(2)(A), (4) and (6). Therefore, on July 19, 2010,
14 Paulson filed a separate action against Huerta and Christine
15 Huerta objecting to the dischargeability of the debt arising out
16 of the Waterstone Action (Adv. No. 10-01286).
17 On September 13, 2010, the bankruptcy court granted
18 Paulson’s motion to consolidate the two adversary proceedings
19 for trial.
20 On April 27, 2011, the two adversary proceedings were tried
21 together.
22 On August 31, 2011, the bankruptcy court issued its
23 Findings of Fact and Conclusion of Law (FFCL). In the
24 Waterstone Action, the court found that Go Global owed
25 $1,023,076.85 to Paulson for the undocumented short-term loan.
26 The court further found that Paulson’s contentions and testimony
27 that Huerta had defrauded him were “not credible” or
28 “believable.” The court concluded that Paulson failed to prove
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1 all his other claims against Huerta. In the nondischargeability
2 action, the bankruptcy court found that Paulson failed to prove
3 his claims against Huerta under § 523(a)(2), (4) or (6). The
4 court entered judgment in accordance with its ruling on
5 August 31, 2011.7
6 2. The Instant Adversary Proceeding
7 On September 3, 2010, Huerta and Go Global commenced this
8 adversary proceeding against Paulson, Azure and Azure Holdings
9 (Adv. No. 10-01334).
10 On August 29, 2011, Huerta and Go Global filed a first
11 amended complaint (FAC) adding Lodge, YouGo and CAO as
12 defendants. The initial and amended complaints sought monetary
13 recovery for transfers made involving View, PSP, and MCD under
14 theories that the transfers were either preferences under § 547
15 and or fraudulent transfers under § 548 and under state law.
16 The FAC also asserted state law claims under § 544.
17 On August 31, 2011, Appellants filed their answer and
18 counterclaim. In the counterclaim, Appellants sought
19 declaratory relief concerning the ownership of cabins
20 located on the Property purchased with funds allegedly belonging
21
22 7
Just prior to the bankruptcy court’s decision, Paulson
23 filed a complaint with the Nevada Department of Business and
Industry, Real Estate Division (“NRED” Complaint), alleging that
24 Huerta had defrauded him in 2005 regarding the Copper Canyon
project. The NRED Complaint also stated that Huerta had
25 embezzled money from him in the Waterstone investment even though
26 Paulson acknowledged that he was reporting Huerta’s actions after
the statute of limitations had expired. On January 3, 2012, the
27 Nevada Department of Business and Industry determined that there
was insufficient evidence to substantiate any violations alleged
28 and thus the investigation was completed.
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1 to View. Appellants alleged that Huerta and Go Global held the
2 deeds to certain cabins and claimed the cabins as assets on
3 their bankruptcy schedules, but in reality the cabins belonged
4 to View. Appellants also sought injunctive relief enjoining
5 Huerta and Go Global from including the cabins as assets in
6 their estates.
7 a. The Parties’ Motions for Summary Judgment
8 On September 7, 2011, Huerta and Go Global filed a
9 motion for summary judgment (MSJ). In the MSJ, Huerta and Go
10 Global sought partial summary judgment on the issue of liability
11 pursuant to the claims alleged in the FAC. Moreover, the MSJ
12 sought relief and recovery from Paulson based on nonbankruptcy
13 claims, including statutory and common law claims under Nevada
14 law, among them Paulson’s breach of fiduciary duties owed to
15 Appellees. The MSJ couched the state law claims as recovery
16 actions under § 544.
17 On December 14, 2011, the bankruptcy court denied this
18 motion.
19 On September 30, 2011, Appellants filed a motion for
20 partial summary judgment (MPSJ) seeking to dismiss the claims
21 for relief brought by Huerta and Go Global on the grounds that
22 they did not have standing to bring claims on behalf of Falls
23 and Gaming against Appellants.
24 On March 8, 2012, the bankruptcy court granted Appellants’
25 MPSJ finding that Huerta and Go Global lacked standing to bring
26 claims under §§ 544, 547, 548 and 550(a) against Appellants.
27 After several rounds of pleadings, Huerta and Go Global
28 corrected the standing issue by having Falls file its own
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1 bankruptcy petition, followed by the bankruptcy court’s approval
2 of Falls’ joinder as a plaintiff in the adversary proceeding.
3 b. Appellees’ District Court Action
4 Evidently concerned about the bankruptcy court’s
5 jurisdiction to enter a final judgment on the issues raised in
6 the adversary proceeding, Appellees filed a complaint in the
7 United States District Court in the District of Nevada on
8 January 12, 2012. In this complaint, Appellees alleged claims
9 for relief for breach of contract, contractual breach of the
10 implied covenant of good faith and fair dealing, tortious breach
11 of the implied covenant of good faith and fair dealing,
12 rescission, breach of fiduciary duties, conversion, preemptive
13 taking, bad faith filings, violation of View’s operating
14 agreement, fraudulent transfer, constructive fraud, and
15 constructive trust. As indicated below, this lawsuit was
16 eventually dismissed after the parties consented to entry of a
17 final judgment by the bankruptcy court.
18 c. The Parties’ Trial Statements
19 On February 12, 2012, Appellees filed their trial
20 statement in the bankruptcy court. In their statement,
21 Appellees argued that they could avoid the View/Lodge merger and
22 Gaming/YouGo merger under § 544(b)(1).8 Appellees also advanced
23 theories that they could recover against Paulson under
24 § 544(b)(1) on the grounds that he violated Nevada statutory law
25
8
26 Section 544(b)(1) provides in relevant part that “the
trustee may avoid any transfer of an interest of debtor in
27 property or any obligation incurred by the debtor that is
voidable under applicable law by a creditor holding an unsecured
28 claim . . . .”
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1 pertaining to limited liability companies and also breached his
2 fiduciary duties to Appellees. In support of their breach of
3 fiduciary duty argument, Appellees cited Nevada case law which
4 addressed fiduciary duties between business partners. Under
5 this case law, Appellees maintained that Paulson’s intentional
6 acts in divesting Appellees from their interests in View,
7 Gaming, MCD and PSP were a clear breach of Paulson’s fiduciary
8 duties. Appellees concluded their argument by stating that
9 Paulson was liable for all damages under their § 544(b)(1)
10 claims. At no time did Plaintiffs amend their FAC to add
11 stand-alone claims under Nevada statutory or common law.
12 On February 13, 2012, Appellants filed their trial
13 statement. They contended that no transfers occurred within the
14 meaning of §§ 544, 547, 548 and 550(a) and further argued that
15 View’s Operating Agreement gave Paulson authority to undertake
16 the merger. Finally, they asserted that Appellees’ claims
17 regarding MCD were precluded by the statute of frauds because
18 there was no agreement in writing which required Paulson to
19 transfer the 13 acres to MCD. Appellants did not address
20 Appellees’ arguments regarding Paulson’s breach of fiduciary
21 duties or other violations of Nevada law, but this is not
22 surprising since the parties trial statements were filed within
23 one day of each other.
24 d. Appellees’ Bench Brief on Damages
25 On March 9, 2012, Appellees submitted a bench brief on
26 consequential and punitive damages. The consequential damages
27 were awardable under the state law claims, not the bankruptcy
28 recovery claims. Appellees relied upon Nevada law for the
-19-
1 imposition of punitive damages, including Nev. Rev. Stat. (NRS)
2 40.005. In citing NRS 40.005(1), Appellees noted that the
3 statute imposed limitations on an award of punitive damages.
4 e. The Parties’ Consent to Entry of Final Judgment
5 On March 12, 2012, the bankruptcy court issued an
6 order regarding briefing on whether the parties had consented to
7 the entry of a final judgment in the proceedings by the
8 bankruptcy court. On the record at trial, the bankruptcy court
9 obtained the parties’ oral consent to the bankruptcy court’s
10 entry of a final judgment on the issues. Both parties had
11 evidently orally consented to the bankruptcy court’s entry of a
12 final judgment on all claims prior to this point in time because
13 Appellees dismissed the district court complaint on March 1,
14 2012.
15 f. The Trial
16 The bankruptcy court conducted a trial in the
17 adversary proceeding and heard testimony over six days, on
18 March 13, 14, 16, 23, 30, and on April 4, 2012.9 In addition to
19 the testimony, the bankruptcy court also indicated that it would
20 consider matters from the Waterstone Action, including the
21 credibility of the parties and witnesses.
22 g. The Parties’ Post-Trial Briefs
23 On April 30, 2012, Appellees submitted a post-trial
24 brief. In their brief, Appellees pointed out that Paulson had
25 admitted during trial that he understood he owed fiduciary
26 duties to Huerta as a co-member and manager of Gaming, to
27
28 9
The record contains partial transcripts for these dates.
-20-
1 Go Global as a co-member and majority manager of MCD and PSP and
2 to Falls as a co-member and managing member of View. They
3 further noted that Paulson testified that he believed as of
4 December 2009 that he still owed fiduciary responsibilities to
5 Huerta, but did not consider telling Huerta that he had created
6 and was implementing his “blitzkrieg” plan to divest Huerta of
7 all interests in View, Gaming, MCD and PSP.
8 Appellees’ brief also contained arguments pertaining to
9 Paulson’s violation of Nevada’s LLC statutes and his breach of
10 fiduciary duties. Finally, Appellees reiterated that the
11 evidence clearly supported an award of punitive damages against
12 Paulson due to his intentional, malicious and egregious conduct.
13 In so doing, Appellees referenced their previously filed Bench
14 Brief on damages and also cited Clark v. Lubritz, 944 P.2d 861,
15 867 (Nev. 1997) which held that “the breach of fiduciary duty
16 arising from the partnership agreement is a separate tort upon
17 which punitive damages may be based.”
18 On the same day, Appellants submitted their post-trial
19 brief, responding to the allegations relating to Paulson’s
20 violations of Nevada’s LLC statutes; specifically, NRS
21 86.326(4), 92A.150, and 225.084(1). They raised no objection to
22 the bankruptcy court’s jurisdiction to decide these claims.
23 They further argued that Appellees were not entitled to an award
24 of punitive damages based on NRS 225.084 for the alleged
25 wrongful filing of the merger documents with the Secretary of
26
27
28
-21-
1 State.10 Appellants did not specifically address Appellees’
2 arguments regarding Paulson’s alleged breach of fiduciary
3 duties.
4 h. The Bankruptcy Court’s Ruling
5 On May 3, 2012, the bankruptcy court heard closing
6 arguments and took the matter under submission.
7 On November 2, 2012, the bankruptcy court entered its
8 detailed FFCL. With respect to the View/Lodge merger, the court
9 denied Appellees’ preference claims under § 547 and fraudulent
10 transfer claims under §§ 544 and 548. The court also denied
11 Appellants’ counterclaims for declaratory and injunctive relief
12 with respect to the cabins.
13 In the FFCL, the bankruptcy court found that “Paulson did
14 not object” to the evidence presented in support of Appellees’
15 assertion that Paulson breached his fiduciary duty. The court
16 also observed that the parties had “extensively briefed” the
17 state law issues in their pretrial and post-trial memoranda and
18 thus there was “no prejudice” to Appellants in trying the
19 matters. As a result, the bankruptcy court deemed the FAC
20 amended under Civil Rule 15(b)(2)11 to include the state law
21
10
22 In their post-trial brief, Appellants incorrectly stated
that the “sole basis” for Appellees’ claim for punitive damages
23 and an award of attorney’s fees and costs was NRS 225.084.
Therefore, they did not mention NRS 40.005.
24
11
Civil Rule 15(b), incorporated by 7015, entitled
25 “Amendments During and After Trial” provides:
26
(1) Based on an Objection at Trial. If, at trial, a
27 party objects that evidence is not within the issues
raised in the pleadings, the court may permit the
28 (continued...)
-22-
1 claims for Paulson’s violation of Nevada’s LLC statutes and
2 breach of his fiduciary duties to Appellees. The bankruptcy
3 court also relied on Civil Rule 54(c) to grant Appellees relief
4 on the various state law claims.
5 On the breach of fiduciary duty claims, the bankruptcy
6 court found that Paulson’s takeover scheme violated his
7 fiduciary duty of loyalty to Falls and Huerta. The court
8 awarded Falls and Huerta compensatory damages of $2,604,478,
9 punitive damages in the same amount, attorneys’ fees in the
10 amount of $360,700.71,12 and prejudgment interest on part of the
11 damages.
12 The court also found Paulson’s dissolution of MCD was a
13 fraudulent transfer based on his breach of the fiduciary of duty
14 of loyalty to Go Global and awarded Go Global judgment in the
15
11
16 (...continued)
pleadings to be amended. The court should freely
17 permit an amendment when doing so will aid in
presenting the merits and the objecting party fails to
18
satisfy the court that the evidence would prejudice
19 that party’s action or defense on the merits. The
court may grant a continuance to enable the objecting
20 party to meet the evidence.
21 (2) For Issues Tried by Consent. When an issue not
22 raised by the pleadings is tried by the parties’
express or implied consent, it must be treated in all
23 respects as if raised in the pleadings. A party may
move--at any time, even after judgment--to amend the
24 pleadings to conform them to the evidence and to raise
an unpleaded issue. But failure to amend does not
25
affect the result of the trial of that issue.
26 12
The amount of the attorneys’ fees was based on three fee
27 applications filed by Huerta’s primary litigation firm, Robison,
Belaustegui, Sharp & Low. The bankruptcy court noted that these
28 fee applications were noticed and that Paulson did not object.
-23-
1 amount of $10,000, which it offset against the judgment entered
2 in favor of Paulson in the Waterstone Action.
3 On the same date, the bankruptcy court entered the
4 Judgment. Appellants filed a timely notice of appeal.
5 II. JURISDICTION
6 The bankruptcy court had jurisdiction over this proceeding
7 under 28 U.S.C. §§ 1334 and 157(b)(2)(A), (F), and (H) and
8 (c)(2). We have jurisdiction under 28 U.S.C. § 158.
9 III. ISSUES
10 A. Did the bankruptcy court err in amending the FAC
11 according to proof on the breach of fiduciary claim under Civil
12 Rules 15(b)(2) and 54(c)?
13 B. Did the bankruptcy court err in finding that Paulson
14 breached his fiduciary duties owing to Huerta and Falls through
15 the merger of View with Lodge when Paulson complied with
16 Nevada’s merger statute?
17 C. Did the bankruptcy court err in holding that Paulson
18 breached his fiduciary duties owing to Go Global through the
19 dissolution of MCD when Paulson complied with Nevada’s
20 dissolution statute?
21 D. Did the bankruptcy court err in failing to hold a
22 separate hearing to determine the amount of punitive damages
23 against Appellants as required by Nevada law?
24 E. Did the bankruptcy court err in failing to grant
25 relief to Appellants with respect to the cabins?
26 F. Did the bankruptcy court err in concluding that
27 Appellants did not admit into evidence, or designate under
28 Bankr. Local R. 7032, certain portions of the Daniel DeArmas
-24-
1 deposition testimony?
2 IV. STANDARDS OF REVIEW
3 We review for abuse of discretion the bankruptcy court’s
4 decision to amend the FAC to include Appellees’ state law claims
5 under Civil Rule 15(b)(2) and grant Appellees’ the relief to
6 which they were entitled on those state law claims under Civil
7 Rule 54(c). Carrol v. Funk, 222 F.2d 508, 511 (9th Cir. 1955)
8 (Civil Rule 15(b)(2)); Albemarle Paper Co. v. Moody, 422 U.S.
9 405, 424-25 (1975) (the standard of review for application of
10 Civil Rule 54(c) is “whether the [bankruptcy] court was clearly
11 erroneous in its factual findings and whether it abused its
12 traditional discretion to locate a just result in light of the
13 circumstances peculiar to the case.”).
14 The bankruptcy court abuses its discretion when it fails to
15 identify and apply “the correct legal rule to the relief
16 requested,” United States v. Hinkson, 585 F.3d 1247, 1263 (9th
17 Cir. 2009) (en banc), or if its application of the correct legal
18 standard was “(1) ‘illogical,’ (2) ‘implausible,’ or (3) without
19 ‘support in inferences that may be drawn from the facts in the
20 record,’” id. at 1262.
21 We review the bankruptcy court’s findings of fact for clear
22 error and its conclusions of law de novo. Pizza of Haw., Inc.
23 v. Shakey’s, Inc. (In re Pizza of Haw., Inc.), 761 F.2d 1374,
24 1377 (9th Cir. 1985). Waiver is a question of law reviewed
25 de novo. Schunck v. Santos (In re Santos), 112 B.R. 1001, 1004
26 (9th Cir. BAP 1990).
27
28
-25-
1 V. DISCUSSION
2 A. The Bankruptcy Court Did Not Abuse Its Discretion in
Amending the FAC Under Civil Rule 15(b)(2) Or Granting
3 Appellees’ Relief To Which They Were Entitled Under
Civil Rule 54(c)
4
5 It is undisputed that Appellees did not allege any stand-
6 alone Nevada state law claims in their FAC. Appellees first
7 asserted their nonbankruptcy claims alleging Paulson’s violation
8 of Nevada’s LLC statutes and breach of his fiduciary duties in
9 their MSJ which was denied, and then again in their trial
10 statement. These claims were also asserted in the district
11 court action which was dismissed after Appellants consented to
12 the bankruptcy court’s jurisdiction to decide these claims.
13 After trial, the bankruptcy court deemed the FAC amended under
14 Civil Rules 15(b)(2) and 54(c) to include the state law claims
15 for Paulson’s violation of Nevada’s LLC statutes and breach of
16 his fiduciary duties to Appellees, finding that Paulson did not
17 object to the evidence presented on those claims and suffered no
18 prejudice.
19 Appellants contend that the bankruptcy court erred when it
20 “created a cause of action for breach of fiduciary duty” on
21 behalf of Appellees and awarded them over $5.5 million in
22 consequential and punitive damages based on a claim that
23 Appellees never pled. Appellants maintain the issues were not
24 “extensively briefed” by either party and furthermore, they
25 never consented to a trial of a “stand-alone claim for breach of
26 fiduciary duty.” The record shows to the contrary.
27 We first observe that Appellants consented to the
28 bankruptcy court’s entry of a final judgment. See 28 U.S.C.
-26-
1 § 157(c)(2) (parties may consent to entry of final judgment by
2 bankruptcy judge in non-core case). Because Appellees’ breach
3 of fiduciary claim against Paulson could exist independent of
4 the bankruptcy, it was non-core. Accordingly, Appellants’
5 consent was needed only because of the state court claim.
6 Second, Appellants concede that Paulson’s breach of
7 fiduciary duties was placed at issue in Appellees’ trial brief,
8 albeit in the context of Appellees’ § 544(b)(1) claim.
9 Section 544(b)(1) incorporates applicable state law and a breach
10 of fiduciary duty claim could only be based on state law. As
11 stated above, it is not a claim which has a separate existence
12 in the bankruptcy code.13 In connection with their breach of
13 fiduciary duty argument in their trial statement, Appellees
14 cited case law to demonstrate that Nevada imposed fiduciary
15 duties between business partners. In addition, Appellees
16 alleged that Paulson’s intentional acts in divesting Appellees
17 from their interests in the various entities constituted a clear
18 breach of Paulson’s fiduciary duties under Nevada law.
19 At trial, Paulson testified that he was familiar with what
20 a fiduciary relationship was and also testified that as a
21
22 13
The bankruptcy court found that Appellees had a direct
23 cause of action against Paulson for breach of his fiduciary
duties because that claim belonged to the debtor LLCs themselves.
24 Therefore, technically § 544(b)(1) did not provide Appellees a
vehicle for pursuing their breach of fiduciary duty claims. See
25 In re Bliss Technologies, Inc., 307 B.R. 598, 608 (Bankr. E.D.
26 Mich. 2004) (holding that § 544(b)(1) does not apply to claims of
alleged breach of fiduciary duty). While Appellees may have
27 mislabeled their claim, nowhere do Appellants challenge the
bankruptcy court’s factual findings regarding Paulson’s breach of
28 fiduciary duty.
-27-
1 member, he understood he had fiduciary responsibilities to
2 co-members. Exhibits at trial included emails dated
3 November 17, 23, and December 22, 2009,14 in which Paulson
4 acknowledged that he was sending information about a proposed
5 offer to purchase the PCP property to “fulfill my fiduciary
6 responsibility to the members of Pecan Street Plaza, LLC, as the
7 Managing Member of PSP, LLC.”
8 At the May 3, 2012 hearing for closing arguments, the
9 bankruptcy court questioned Appellees’ counsel regarding
10 Paulson’s fiduciary duties and to which entity they were owed.
11 In their post-trial brief, Appellees again addressed Paulson’s
12 violations of his fiduciary duties and mentioned that such a
13 breach was a separate tort upon which punitive damages could be
14 based.
15 In light of Appellees’ numerous references to Paulson’s
16 breach of fiduciary duties in their MSJ and trial statement, we
17 conclude that Appellants had ample notice that the issue would
18 be tried and they voiced no objection. Paulson’s trial
19 testimony regarding his knowledge of fiduciary duties and the
20 bankruptcy court’s questions to Appellees’ counsel regarding
21 Paulson’s fiduciary duties demonstrate that the issue was indeed
22 tried without complaint. Further, since a claim for breach of
23 fiduciary duty can only be based on state law, it does not
24 matter that a “stand-alone claim” for breach of fiduciary duty
25 was not mentioned in the FAC.
26
14
27 In the email dated December 22, 2009, Paulson made a
capital call to pay taxes. Go Global’s share would have been
28 $21,424.50.
-28-
1 An amendment that seeks to conform the pleadings to proof
2 introduced at trial is proper under Rule 15(b) unless it results
3 in prejudice to one of the parties. See Mechmetals Corp. v.
4 Telex Computer Prods., Inc., 709 F.2d 1287, 1294 (9th Cir.
5 1983). Similar to Civil Rule 15(b), the main qualification for
6 granting relief under Civil Rule 54(c)15 is that the failure to
7 have demanded the appropriate relief must not have prejudiced
8 the defendant in the defense of the matter. See 10 Wright,
9 Miller & Kane, Fed. Prac. & Proc. Civ. § 2664 (3d ed. 2013);
10 Hopkins v. D.L. Evans Bank (In re Fox Bean Co.), 287 B.R. 270,
11 281 (Bankr. D. Idaho 2002). In this context, prejudice would
12 exist only if Appellants would have submitted additional
13 evidence at trial not otherwise relevant to the issues actually
14 raised. Id.; see also Rental Dev. Corp. v. Lavery, 304 F.2d
15 839, 842 (9th Cir. 1962) (prejudice has not been found to exist
16 when the additional evidence would also have been relevant to
17 the issues that were expressly raised).
18 Here, the bankruptcy court found no prejudice and we
19 discern none. Appellants fail to show on appeal that they
20 suffered any actual prejudice in the conduct of their litigation
21 nor do they point to any additional evidence they would have
22 submitted had Appellees asserted a stand-alone breach of
23 fiduciary duty claim. Accordingly, we conclude that the
24
15
Rule 54(c), incorporated by Rule 7054, provides, in
25 pertinent part:
26
Except as to a party against whom a judgment is entered
27 by default, every final judgment shall grant the relief
to which the party is entitled, even if the party has
28 not demanded such relief in the party’s pleadings.
-29-
1 bankruptcy court did not abuse its discretion by deeming the FAC
2 amended under Civil Rule 15(b) to include the breach of
3 fiduciary duty and other state law claims or by including those
4 state law claims in its final judgment under Civil Rule 54(c).
5 B. NRS 86.286(6) Did Not Preclude A Finding That Paulson Was
Liable for Breach of Fiduciary Duties As A Matter of Law
6
7 Appellants next contend that, as a matter of law, no breach
8 of fiduciary duty occurred pursuant to NRS 86.286(6) because the
9 bankruptcy court found that Paulson’s actions were taken in
10 compliance with View’s Operating Agreement and Nevada LLC
11 statutory law.16 Appellants did not raise the applicability of
12 NRS 86.286(6) in the bankruptcy court. In general, we do not
13 consider an issue raised for the first time on appeal. Cold
14 Mountain v. Garber, 375 F.3d 884, 891 (9th Cir. 2004). However,
15 we may exercise our discretion to consider the issue for the
16 first time on appeal when the issue is purely one of law.
17 Jovanovich v. United States, 813 F.2d 1035, 1037 (9th Cir. 1987)
18 (identifying the “narrow and discretionary exceptions to the
19 general rule against considering issues for the first time on
20 appeal”). Whether the statute precluded the bankruptcy court
21 from finding Paulson liable for breach of fiduciary duties is an
22 issue purely of law. Therefore, we consider it.
23 In construing View’s Operating Agreement, which Paulson
24 conceded was ambiguous, the court stated, “. . . if Alternative
25 Article X is deemed to be the controlling Article, Paulson seems
26
16
27 Appellants do not contend on appeal that Paulson owed no
fiduciary duties to Appellees. In fact, Paulson admitted that he
28 owed such duties at trial.
-30-
1 to be acting within the operating agreement provisions.” The
2 court further found that under Nevada law, Paulson was
3 authorized under the “default rule” as the controlling member of
4 View and default manager to have caused the merger. Finally,
5 the bankruptcy court found that Appellees did not have a claim
6 under Nevada’s statute governing LLC merger because under
7 NRS 92A.150, only a member holding a majority interest in an LLC
8 may effect a merger of that entity.
9 Because of these rulings, Appellants contend that Paulson
10 is entitled to rely on NRS 86.286(6), which protects managers
11 and members of Nevada limited liability companies who rely in
12 good faith on LLC operating agreements from claims for breach of
13 fiduciary duty. The statute provides:
14 Unless otherwise provided in an operating agreement, a
member or manager or other person is not liable to a
15 limited-liability company, another member or manager,
or to another person that is a party to or otherwise
16 bound by an operating agreement for breach of
fiduciary duty for the member, manager or other
17 person’s good faith reliance on the provisions of the
operating agreement.
18
19 While it is true that generally a member of an LLC is not
20 liable to the LLC or any other member for actions taken in
21 compliance with the operating agreement, NRS 86.286(6) also
22 requires that the member must have relied on the provisions in
23 good faith. Appellants overlook this requirement. We have
24 difficulty perceiving how Paulson could rely on the ambiguous
25 provisions in the operating agreement in good faith.17
26
17
27 As the bankruptcy court observed inequitable action does
not become permissible simply because it is legally possible.
28 (continued...)
-31-
1 Furthermore, under Nevada law, a fiduciary relationship imposes
2 a duty of utmost good faith. Hoopes v. Hammargren, 725 P.2d
3 238, 242 (Nev. 1986). Common sense dictates that good faith
4 reliance on an operating agreement’s provisions must mean
5 reliance that is honest as opposed to dishonest. Indeed, the
6 bankruptcy court recognized the good faith requirement
7 underlying Paulson’s fiduciary duties and found that “Paulson’s
8 actions do not measure up.”
9 In addition, the court found that “Paulson could have used
10 his majority holdings to ultimately cause a merger of View,
11 however, if he did, Paulson owed Falls and Huerta the duty of
12 proceeding fairly, both procedurally and substantively.” The
13 court found “[h]e did neither, proceeding in secret and offering
14 a price for Falls’ interest in View that was risible.
15 Throughout . . . he acted as if these standard [fiduciary]
16 duties did not apply to him, and as if his majority ownership
17 and his position as manager gave him carte blanche to do as he
18 pleased.”
19 In awarding punitive damages, the bankruptcy court found
20 “Paulson’s perfidy was malicious . . . he intended to injure
21 Huerta and his affiliates . . . specifically designed to deprive
22 Huerta of his property without giving Huerta any realistic
23 opportunity to defend. Such conduct was also oppressive . . .
24 [i]t was ‘despicable’, in that it knowingly subjected Huerta to
25 unjust financial hardship, and was a contributing cause to
26
17
27 (...continued)
Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del.
28 1971).
-32-
1 Huerta’s bankruptcy filing.” In the end, the court found
2 “[t]hat anyone who would act with such blatant disregard of his
3 core duties of loyalty and good faith fits any standard
4 definition of ‘despicable.’” Taken together, these findings
5 demonstrate that Paulson did not rely on View’s Operating
6 Agreement in good faith when he undertook the merger.
7 Accordingly, Appellants’ reliance on NRS 86.286(6) as a basis
8 for reversal is misplaced.
9 C. The Bankruptcy Court Did Not Err When It Found Paulson
Breached His Fiduciary Duties Owing To Go Global
10
11 Appellants next argue that the bankruptcy court erred when
12 it found Paulson breached fiduciary duties owing to Go Global
13 when he dissolved MCD. Again, Appellants do not contend that
14 they did not owe Go Global fiduciary duties; rather, they assert
15 that Paulson did not breach those duties because he complied
16 with NRS 86.490(1). Specifically, at the time of the
17 dissolution, Paulson held 40% interest and both Barnes and Go
18 Global held 30%. Appellants contend that the evidence shows
19 that Barnes participated in the dissolution and signed the
20 dissolution papers. Therefore, Appellants argue, Paulson and
21 Barnes with 70% interest were authorized under NRS 86.490(1) to
22 dissolve the entity.
23 The statute provides:
24 1. Before the commencement of business by any
limited-liability company where management is vested
25 in one or more managers and where no member’s interest
in the limited-liability company has been issued, at
26 least two-thirds of the organizers or the managers of
the limited-liability company may dissolve the
27 limited-liability company by filing with the Secretary
of State a certificate of dissolution to dissolve the
28 limited-liability company.
-33-
1 Again, Paulson’s alleged compliance with this statute does
2 not mean that his dissolution of MCD was proper because his
3 fiduciary duties to a minority member, Go Global, existed
4 concurrently with the statutory requirements. See Coggins v.
5 New England Patriots Football Club, Inc., 492 N.E.2d 1112,
6 1117-18 (Mass. 1986) (“A showing of compliance with statutory
7 procedures is an insufficient substitute for the inquiry of the
8 courts when a minority shareholder claims that the corporate
9 action will be illegal or fraudulent as to him.”).
10 At trial, Paulson testified that he did not instruct Barnes
11 to dissolve MCD. Paulson’s testimony also revealed that once he
12 informed Barnes that he did not want to do business with Huerta,
13 Barnes suggested that they dissolve the MCD. Finally, Paulson
14 testified that he did not talk to Huerta in August 2009 and say
15 that he would like to dissolve MCD because the parties were in
16 other litigation over Waterstone and due to other business
17 problems with View and Gaming.
18 In its FFCL, the bankruptcy court found that Paulson had
19 wrongfully dissolved MCD as part of his squeeze-out scheme and
20 to divest Go Global of its interest in MCD without notice or
21 consent. By implication, this finding shows the bankruptcy
22 court found Paulson’s testimony disingenuous. Therefore, we
23 cannot conclude that the bankruptcy court’s findings were
24 clearly erroneous when they are based on a plausible view of the
25 evidence as a whole. “Where there are two permissible views of
26 the evidence, the factfinder’s choice between them cannot be
27 clearly erroneous.” Anderson v. City of Bessemer City, N.C.,
28 470 U.S. 564, 574 (1985). Further, the bankruptcy court
-34-
1 indicated that it would consider matters from the Waterstone
2 Action, including the credibility of the parties and witnesses.
3 To the extent the bankruptcy court’s findings were based on
4 credibility determinations, the court’s findings warrant even
5 greater deference. Id. at 575. Accordingly, Appellants’
6 reliance on NRS 86.490(1) as a basis for reversal is misplaced.
7 D. The Bankruptcy Court Did Not Err When It Failed to Hold a
Second Hearing on Punitive Damages
8
9 Appellants next complain that the bankruptcy court erred by
10 failing to heed the mandatory language under NRS 42.005(3),
11 which required the court to conduct a subsequent hearing on the
12 amount of the damages after it determined that punitive damages
13 would be assessed. In its ruling, the bankruptcy court
14 acknowledged that NRS 42.005(3) contemplated a two-step process,
15 but found that “all parties waived the benefit of this section.”
16 NRS 42.005 provides:
17 1. Except as otherwise provided in NRS 42.007, in an
action for the breach of an obligation not arising
18 from contract, where it is proven by clear and
convincing evidence that the defendant has been guilty
19 of oppression, fraud or malice, express or implied,
the plaintiff, in addition to the compensatory
20 damages, may recover damages for the sake of example
and by way of punishing the defendant. Except as
21 otherwise provided in this section or by specific
statute, an award of exemplary or punitive damages
22 made pursuant to this section may not exceed:
23 (a) Three times the amount of compensatory
damages awarded to the plaintiff if the
24 amount of compensatory damages is $100,000
or more; or
25
(b) Three hundred thousand dollars if the
26 amount of compensatory damages awarded to
the plaintiff is less than $100,000.
27
2. The limitations on the amount of an award of
28 exemplary or punitive damages prescribed in
-35-
1 subsection 1 do not apply to an action brought
against:
2
(a) A manufacturer, distributor or seller of
3 a defective product;
4 (b) An insurer who acts in bad faith
regarding its obligations to provide
5 insurance coverage;
6 (c) A person for violating a state or
federal law prohibiting discriminatory
7 housing practices, if the law provides for a
remedy of exemplary or punitive damages in
8 excess of the limitations prescribed in
subsection 1;
9
(d) A person for damages or an injury caused
10 by the emission, disposal or spilling of a
toxic, radioactive or hazardous material or
11 waste; or
12 (e) A person for defamation.
13 3. If punitive damages are claimed pursuant to this
section, the trier of fact shall make a finding of
14 whether such damages will be assessed. If such
damages are to be assessed, a subsequent proceeding
15 must be conducted before the same trier of fact to
determine the amount of such damages to be assessed.
16 . . .
17 4. Evidence of the financial condition of the
defendant is not admissible for the purpose of
18 determining the amount of punitive damages to be
assessed until the commencement of the subsequent
19 proceeding to determine the amount of exemplary or
punitive damages to be assessed.
20
21 On its face, subsection 4 is a codification of the
22 presumption that evidence of a defendant’s wealth can taint a
23 determination of liability. Thus, the purpose of the second
24 hearing requirement under subsection 3 is to avoid this
25 prejudice.
26 Under subsection 3, the use of the word “must” in the
27 phrase “subsequent hearing must be conducted . . . to determine
28 the amount. . . .” implies that the second hearing requirement
-36-
1 is mandatory. However, the mandatory effect of subsection 3,
2 like many other rights, may be lost by a defendant who fails to
3 act promptly to preserve its protection. A waiver of one’s
4 rights can be implied by that person’s conduct. Mahban v. MGM
5 Grand Hotels, 691 P.2d 421, 423 (Nev. 1984).
6 From at least March 9, 2012, Appellants had notice that
7 Appellees were seeking punitive damages and that they were
8 relying on NRS 42.005, among other authorities, because
9 Appellees mentioned the statute in their Bench Brief on
10 consequential and punitive damages. Appellees’ post-trial brief
11 incorporated their pre-trial brief on punitive damages.
12 However, Appellants never raised their statutory right to a
13 second hearing in the bankruptcy court and have offered no
14 excuse for their delay in raising the deficiency for the first
15 time on appeal.18 Therefore, we conclude that Appellants’ right
16 to a second hearing is untimely asserted.
17 Moreover, there is no Nevada authority holding that a
18 defendant’s financial condition is an essential element to prove
19 entitlement to punitive damages. Instead, NRS 42.005(1) sets
20 forth the requirements for assessing punitive damages and also
21 places limitations on the amount subject to certain exceptions.
22 These limitations, which applied to Paulson, are tied to the
23 amount of compensatory damages and not to a defendant’s
24
25
26
18
27 Indeed, the bankruptcy court noted that Appellants’
post-trial brief incorrectly stated that Huerta was not relying
28 on NRS 42.005.
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1 financial condition.19 It is therefore not surprising that
2 Appellants make no offer of proof regarding the prejudice
3 Paulson suffered without the benefit of a second hearing nor do
4 they point to any specific evidence admitted at trial about
5 Paulson’s financial condition that made the procedure unfair.
6 Under these circumstances, the bankruptcy court’s failure to
7 hold a second hearing on the amount of the punitive damages does
8 not amount to reversible error.20
9 E. The Bankruptcy Court Did Not Err When It Refused to Quiet
Title to the Cabins In Favor Of Defendants
10
11 In their counterclaim, Appellants sought declaratory and
12 injunctive relief with respect to ten cabins located on the
13 Property. In addressing the counterclaim in the FFCL, the
14 bankruptcy court found that “[g]iven that Paulson did not
15 prevail on his substantive claims, there is no plausible
16 rationale for quieting title in any of Paulson’s entities, and
17 thus that claim for relief is denied. No opinion is expressed
18 on the title to, or the legal or beneficial interest in, the
19 cabins at issue.”
20 On appeal, Appellants assert that the bankruptcy court’s
21
19
22 In contrast, the limitations set forth in
NRS 42.005(1)(a) and (b) do not apply to certain types of actions
23 specified in NRS 42.005(2)(a)-(e).
20
24 Appellees argue that NRS 42.005(3) is inapplicable to the
adversary proceeding and cite nonbinding case law from Oregon in
25 support, DeMendoza v. Huffman, 51 P.3d 1232 (Or. 2002). It is
26 unnecessary for us to delve into whether Civil Rule 42(b), rather
than NRS 42.005(3), should apply to the bifurcation issue when
27 the bankruptcy court specifically relied upon NRS 42.005(3) in
its ruling and found that the parties had waived the second
28 hearing requirement.
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1 denial of their declaratory relief claim was in error because
2 under NRS 92A.250(1)(b), Lodge took title to the cabins from
3 View upon the execution of the merger. Under this statute,
4 entitled “When a Merger Takes Effect,” a merger takes effect
5 when the title to all real estate and other property owned by
6 each merging constituent entity is vested in the surviving
7 entity without reversion or impairment. In other words, the
8 surviving corporation assumes the liabilities and assets of the
9 subsumed corporations as a matter of law when the merger is
10 completed. Among other things, this obviates the necessity of
11 creating a separate instrument reflecting the change in
12 ownership of each such liability and asset. According to
13 Appellants, the bankruptcy court found Paulson caused the merger
14 of View with Lodge consistent with Nevada law and such a finding
15 triggered this statute. We are not persuaded.
16 NRS 40.010 governs Nevada quiet title actions and provides:
17 “An action may be brought by any person against another who
18 claims an estate or interest in real property, adverse to the
19 person bringing the action, for the purpose of determining such
20 adverse claim.” Under Nevada law, a plea to quiet title does
21 not require any particular elements, but “each party must plead
22 and prove his or her own claim to the property in question” and
23 a “plaintiff's right to relief therefore depends on superiority
24 of title.” Chapman v. Deutsche Bank Nat’l Trust Co.
25 (Chapman II), 302 P.3d 1103, 1107 (Nev. 2013). Moreover, such
26 an action requests a judicial determination of all adverse
27 claims to disputed property. Clay v. Scheeline Banking & Trust
28 Co., 159 P. 1081, 1082–83 (Nev. 1916).
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1 In their counterclaim, Appellants assert superior title to
2 the cabins based on a valid merger of View into Lodge. However,
3 the record is replete with evidence that the merger was
4 accomplished by Paulson’s wrongful conduct. Thus, we fail to
5 see how equitable title to the cabins would have passed to Lodge
6 after the merger.21
7 Further, the unchallenged testimony of Huerta was that the
8 deeds from the straw men to View were unrecorded at the time of
9 the merger. At trial, Huerta testified that he purchased nine
10 cabins and that the ownership rights were in View. He also
11 testified that the cabins were held by straw men who were
12 individuals and not by View. Finally, Huerta testified that he
13 obtained quitclaim deeds from most of the straw men, but not all
14 of them, and that none of the quitclaim deeds had been recorded.
15 Therefore, because View was not the title record holder, legal
16 title would not have transferred to Lodge as a result of the
17 merger. In short, Appellants did not prove their claim to the
18 cabins based on a valid merger nor did they show they had
19 superior title.22 Accordingly, the bankruptcy court did not err
20 by denying Appellants’ quiet title claim.
21 The bankruptcy court did not decide the title to, or the
22
23
21
The bankruptcy court found that the requirements for a
24 constructive or resulting trust were not met.
25 22
On appeal, Appellants do not challenge the bankruptcy
26 court’s factual findings related to Paulson’s breach of fiduciary
duties. Moreover, as previously noted, Paulson’s alleged
27 compliance with the merger statute does not trump inequitable
conduct. See Schnell, 285 A.2d at 439; Coggins, 492 N.E.2d at
28 1117-18.
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1 legal or beneficial interest in, the cabins. Because we are a
2 reviewing court, we decline to decide these issues for the first
3 time on appeal.
4 F. The Bankruptcy Court Did Not Err When It Failed to Credit
Daniel DeArmas’ Deposition Testimony
5
6 Paulson relied upon a portion of DeArmas’ deposition to
7 corroborate his concerns regarding Huerta’s business ethics
8 which led Paulson to disassociate himself from Huerta and also
9 to show that the one million dollar payment in the C-Bar/Huerta
10 transaction that ultimately went to Go Global was an effort on
11 Huerta’s part to artificially boost his basis in the
12 Mt. Charleston property. On the latter point, Paulson argued
13 that the one million dollars should be netted out against the
14 three million dollars in consideration, with the ultimate
15 conclusion that Huerta at most invested two million, not three
16 million, in the Property.
17 The bankruptcy court found that Paulson had failed to
18 designate this testimony in his Bankr. Local Rule 7032 Statement
19 or, if he had, he did not enter it into evidence at trial. The
20 court further found that the parties did not stipulate to admit
21 this portion of the deposition. Nonetheless, the court stated
22 that “this fact can be inferred from the testimony at trial.”
23 Paulson contends that he clearly designated relevant
24 portions of the DeArmas testimony in his Local Rule 7032
25 Statement on March 9, 2012, and that the parties stipulated to
26 admission of the deposition transcript for the court to review,
27 rather than reading them into the record. The record supports
28 Paulson’s assertion. Regardless, the trial court incorporated
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1 Appellants’ arguments that relied on the testimony in its
2 ruling, assuming the testimony to be in evidence. Accordingly,
3 the asserted error is harmless and not a ground for reversal.
4 VI. CONCLUSION
5 For all these reasons, we AFFIRM.
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