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In re Shields

November 18, 2010

IN RE: RICHARD J. SHIELDS, DEBTOR.
NEIL MCLEAN, APPELLANT,
v.
THE BANKRUPTCY ESTATE OF RICHARD J. SHIELDS, BY AND THROUGH MICHAEL F. BURKART, CHAPTER 7 TRUSTEE, APPELLEE.



The opinion of the court was delivered by: Garland E. Burrell, Jr. United States District Judge

Bankruptcy Court Case No. 06-22377-C-7

Adv. Proc. No. 08-02352

ORDER AFFIRMING IN PART, AND VACATING AND REMANDING IN PART, APPEAL OF ADVERSARY PROCEEDING

Appellant Neil McLean ("McLean") and bankruptcy trustee Appellee Michael F. Burkart ("Burkart") appeal from the judgment of the United States Bankruptcy Court in an adversary proceeding brought by Burkart on behalf of the bankruptcy estate of Richard J. Shields ("Shields") against McLean. Jurisdiction over the appeal is under 28 U.S.C. §§ 158(a)(1) and (c)(1).

I. Factual Record on Appeal

Shields operated a trucking company named Shields Trucking in 2004. (Excerpt of Record ("ER") 9, ¶¶ 2-3.) McLean made various loans to Shields that could be used as a down payment to buy Shields Trucking.

Id. 18, 34:21-35:7; 40:19-23; 94:10-18. Shields did not repay the loans, and McLean filed a lawsuit in Butte County Superior Court in which he alleged Shields defaulted on the loans and had fraudulently obtained the loans. Id. 11, ¶ 18; 21, Ex. M.

Shields began negotiating the sale of Shields Trucking to SoCal D&D Services, Inc. ("D&D") in 2005. Id. 23, 15:22-24. D&D was prepared to pay $3.25 million for Shields Trucking. Id. 23, 21:9-16. Shields was to retain $200,000 in accounts receivable after the sale. Id. 9, ¶ 51. At the time, Shields owed his creditors $1,595,080.00 in secured debt and $1,527,769.00 in unsecured debt. Id. 20, Ex. 17.

When McLean's attorney, Russell Longaway ("Longaway"), learned of the possible sale of Shields Trucking to D&D, Longaway wrote a letter to D&D stating that McLean is the "equitable owner" of Shields Trucking and that any transfer of the business by Shields would be a "fraudulent transfer within the meaning of California law." Id. 20, Ex. 16. Subsequently, D&D withdrew its offer to purchase Shields Trucking based on the contents of this letter. Id. 23, 36:10-12.

Shields filed for bankruptcy in this district in July of 2006. Shields declares he was forced to file for bankruptcy due to the unconsummated sale of Shields Trucking to D&D. Id. 9, ¶ 71. Burkart commenced an adversary proceeding on behalf of the bankruptcy estate against McLean and Longaway in July of 2008, based on the unconsummated sale of Shields Trucking. Id. 1. The complaint in this adversary proceeding included claims for interference with prospective economic advantage and violation of California Business and Professions Code section 17200 et seq. ("section 17200"). Id. 1, ¶¶ 63-72; ¶¶ 83-93. The adversary proceeding was tried in the bankruptcy court. The bankruptcy court ruled in favor of the bankruptcy estate on the interference with prospective economic advantage claim and entered a $300,000 judgment. Id. 25, 2:9-11. The bankruptcy court also ruled that McLean's claim against the estate for the unpaid loans is equitably subordinated to other claims under 11 U.S.C. § 510(c)(1). Id. 25, 2:14-17.

II. Issues Raised by McLean

McLean raises seven arguments on appeal: 1) the bankruptcy court applied the wrong measure of damages to Burkart's interference with prospective economic advantage claim; 2) the bankruptcy court erred in including $200,000 of the $300,000 judgment because this amount is comprised of the value of accounts receivable Shields had before filing for bankruptcy, and the value of the accounts receivable became part of the bankruptcy estate; 3) the bankruptcy court erred in using a $27,000 figure to estimate the tax consequence of the unconsummated sale; 4) the bankruptcy court erred in qualifying Burkart's witness, Dennis Diver ("Diver"), as an expert witness; 5) the bankruptcy court erred in admitting into evidence several financial statements and documents concerning Shields Trucking; 6) the bankruptcy court erred in admitting Kenneth Herold's deposition transcript into evidence; and 7) the bankruptcy court erred in equitably subordinating McLean's claim against the estate.

A. Measure of Damages for Interference with Prospective Economic Advantage

The issue concerning McLean's challenge of the bankruptcy court's method of measuring damages for Burkart's interference with prospective economic advantage claim is reviewed under the abuse of discretion standard. See Traxler v. Multnomah Cnty., 596 F.3d 1007, 1014 n.4 (9th Cir. 2010) ("The... court's award of damages... is reviewed for an abuse of discretion...."). A court "abuses its discretion when its 'decision is based on an erroneous conclusion of law or when the record contains no evidence on which [it] rationally could have ...


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