In an unpublished decision, the Bankruptcy Appellate Panel for the Ninth Circuit affirmed the Bankruptcy Court’s multi-million dollar judgment in a contentious partnership dispute hallmarked by the judgment debtor’s attempts to take over distressed multi-faceted real estate development projects from his business partner . Paulson v. Go Global, Inc. (In re Go Global, Inc.), BAP No. NV-12-1596-JuKiKu (Jan. 13, 2014).
Real estate developer Carlos Huerta (“Huerta”) financed and managed, through various entities and companies, several development projects in Southern Nevada, including substantial holdings that he financed or ran with Hugo Paulsen (“Paulson”), beginning in 2002, until the relationship and projects deteriorated in 2009. At that time, as the court held, Paulson embarked on a “blitzkrieg” of legal actions, secret transactions, and allegations of criminal conduct against Huerta, all meant as leverage to take over some of the assets of the partnership that still held some value.
In Paulson’s attempts to disassociate himself from the projects he held with Huerta, Paulson (who had made substantial cash contributions to buy into certain of the projects) asserted that his ownership and economic interests in some of these projects were more than what was documented, accused Huerta of criminal conduct, sued Huerta for fraud, rejected Huerta’s offers to settle the various disputes, sought to buy Huerta out of the development projects at values not reflecting the various ownership percentages, and executed corporate documents (like mergers and leases) without proper authority.
The court’s factual recitation of the details of the various development projects and of Paulson’s actions is detailed and complicated, the sum of which focus on Paulson’s attempts, made with and through a team of legal advisors and others, to divest Huerta of his ownership interests in their multiple development entities and projects. Paulson also made a personal loan to Huerta’s father-in-law, which was guaranteed by Huerta, which went unpaid, and the court found that Paulson took Huerta’s default as additional justification for his attempts to separate from Huerta. In reviewing the litany of corporate documentation, deal details, and Paulson’s actions, the court found that the corporate documentation was “hopelessly ambiguous”, that the corporate actions Paulson attempted to take were “not particularly clean”, that Paulson’s actions were motivated by Paulson’s stated desire to see Huerta walk with nothing, and that Paulson made capital calls when he knew Huerta could not meet them. The fall out resulted in multiple state court lawsuits, three chapter 11 filings, and multiple adversary proceedings.
Holding and Analysis
The court reviewed and adopted the bankruptcy court’s detailed findings of fact and conclusions of law, which found Paulson’s testimony not credible, that he had engaged in a pattern of practice and conduct solely meant to divest Huerta from his interest in the development projects without appropriate or fair compensation, and that Paulson did these things in derogation of the fiduciary duties Paulson admittedly owed Huerta.
The issues raised on appeal were somewhat limited, and included claims of error regarding the sufficiency of pleadings, the scope of the fiduciary duties owed co-members of limited liability companies in Nevada, and the procedures required by state law to impose punitive damages.
The court addressed in detail the requirements of a party’s ability to amend pleadings pursuant to Federal Rules of Civil Procedure 15(b) and 54(c). Huerta did not specifically allege state law claims for relief in the operative complaint, yet the court held that Paulson had been put on sufficient notice of the state law breach of fiduciary duty claims, defended them in a motion for summary judgment, did not object to the evidence presented at trial on those claims, and therefore did not suffer any prejudice when the bankruptcy court deemed the complaint amended after trial to conform to those claims. Amendments to conform the pleadings to proof adduced at trial are permissible under Rule 15(b) unless prejudice would result in the defense of the matter. The review of that type of amendment is reviewed on an abuse of discretion standard, and because of the factors outlined above, neither the bankruptcy court nor the BAP found any such prejudice.
Several pieces of damaging evidence were presented at trial, from communications between Paulson and his advisors regarding the overarching plan to bury Huerta, Paulson’s admission at trial he was aware he owed Huerta fiduciary duties, and the court’s finding that Paulson was motivated, in his own words, to keep any money out of Huerta’s “slimy paw”. In the face of that damaging evidence adduced at trial, the result is not that surprising. While some of Paulson’s actions may have been devised in technical accordance with applicable law and corporate documentation, the overall goal of one partner to sink the other did not appear to sit well with the fact finder. Given the standard of review applicable to factual determinations, the appellant’s claims of legal error faced an uphill battle.
These materials were prepared by Jamie Dreher, a partner in Downey Brand, LLP, in Sacramento, California (firstname.lastname@example.org), with editorial contributions from ILC member Asa Hami of Sulmeyer Kupetz, A Professional Corporation in Los Angeles, California. Mr. Dreher is a member of the Insolvency Law Committee.