Complaint Review: Southport Asset Management - Sonoma California

William Utnehmer participated in a general partnership for real estate development.  In connection with the development of a luxury residence, Utnehmer provided the plaintiffs with a loan agreement, a promissory note and a private offering memorandum.  To summarize, the documents provided that the plaintiff would make a loan of $100,000 at 12% interest secured by a lien against the property.  Conditional upon the drafting and execution of a formal operating agreement, $50,000 of the loan would be re characterized as an equity contribution with a 10% annual preferred return and a 35% share of the profits, prorated based on the equity contribution.  The agreements were executed, and the loan was funded, but the operating agreement was never prepared.  The plaintiffs received interest payment in the three years that followed, but no principal.

After the plaintiffs retained counsel to enforce the obligation, Utnehmer and his spouse agreed to pay $50,000 in installments of $2,000 per month and that the remaining $50,000 would be recharacterized as equity upon the sale of the property and paid along with a 10% preferred return and their prorated share of 35% of the net proceeds.  Only $4,000 was paid, and when the property was sold for $3,725,000, Utnehmer apparently told the plaintiffs he could not pay them from the proceeds.  The plaintiffs brought and action, which resulted in a default judgment for $213,645.17.

Thereafter, Utnehmer and his spouse filed a chapter 7 bankruptcy case, and the plaintiffs brought an action to render the debt nondischargeable.  The complaint plead causes of action under Bankruptcy Code Sections 523(a)(2) (fraud) and 523(a)(6) (willful and malicious injury), which were unavailing, but prevailed under Section 523(a)(4), which was raised at trial and not challenged as untimely.

Bankruptcy Code Section 523(a)(4) provides that a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny” is nondischargeable.  The phrase “while acting in a fiduciary capacity” has long been interpreted to require the existence of an express trust (arising by agreement) or technical trust (arising by statute or by law).  The Ninth Circuit previously applied a very low standard to “defalcation,” holding that it includes any failure to account sufficiently, regardless of benign intent.  In re Lewis, 97 F.3d 1182, 1186-1187 (9th Cir. 1996).  To summarize, the claim that arises when a trustee takes property out of trust is not dischargeable in bankruptcy.

The bankruptcy court applied In re Lewis in finding that there was a defalcation.  However, there was a subsequent change in the law when the Supreme Court of the United States decided Bullock v. BankChampaign, N.A., 133 S.Ct. 1754 (2013), in which the Court rule that “defalcation” includes “a culpable state of mind requirement akin to that which accompanies application of the other terms in the same statutory phrase.  We describe that state of mind as one involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior.”

 

 

What are the consequences of an improperly formed partnership? The case of Utnehmer v. Crull (In re Utnehmer), 2013 WL 5573198 (B.A.P. 9th Cir October 10, 2013), recently decided by the Bankruptcy Appellate Panel of the 9th Circuit here in California, may shed some light on this question.

The Facts

In 2005, real estate developer William Utnehmer, the debtor and defendant in this case, undertook to develop a luxury property in Venice, California. Mary and Patrick Crull, the judgment creditors and plaintiffs in this case, were offered an opportunity to participate in the project, which they accepted. Utnehmer sent the Crulls a packet of documents, which included a cover letter, a loan agreement for $100,000, a promissory note, and a private offering memo. The loan agreement provided that $50,000 of the initial $100,000 was intended to be superseded by execution of a formal operating agreement which would recharacterize the $50,000 of the Crull's interest as an investor's equity interest in a limited liability company to be formed, with an annual preferred return, and a percentage participation in profits on a prorated basis. At the time these documents were exchanged, the documents for formation of the limited liability company and the operating agreement were allegedly being drafted. The parties subsequently executed a promissory note, which was consistent with the loan agreement but made no reference to the expected recharacterization of the $50,000 as an equity interest.

In June 2008, the property sold for $3,725,000. Other project creditors were paid, but Utnehmer told the Crulls that he could not pay them, so they sued him in state court and obtained a default judgment for the balance due under the note. Utnehmer countered the default judgment by filing a Chapter 7 bankruptcy petition. The petition named the Crulls as creditors and sought to discharge the debt, and the Crulls countered by filing an adversary complaint to determine whether the debt was dischargeable.

The Courts' Rulings

At trial, the bankruptcy court found that the loan agreement created a partnership between Utnehmer and the Crulls, and, therefore, the debt could not be discharged. In reaching its ruling, the bankruptcy court relied on the defalcation criteria set out by Bankruptcy Code Section 523(a)(4), and the standard established by Lewis v. Scott, 97 F.3d 1182 (9th Cir. 1996). Defalcation is the misappropriation or embezzlement of money or funds held by an official trustee or other fiduciary, and section 523(a)(4) provides that a person who files for chapter 7 bankruptcy cannot discharge debts owed, which occurred due to fraud while acting in a fiduciary duty. Under Lewis, defalcation "includes innocent, as well as intentional or negligent defaults so as to reach the conduct of all fiduciaries who were short in their accounts."

Utnehmer appealed the bankruptcy court's decision, and the appellate court reversed, finding that (1) the standard established by Lewis had been abrogated by the United States Supreme Court in Bullock v. Bank Champaign, N.A. 133 S. Ct. 1754 (2013) (a defendant must have knowledge of or gross recklessness in respect to the improper nature of the relevant fiduciary behavior for a finding of defalcation), and (2) the terms of the loan agreement did not support a finding of a partnership between the Crulls and Utnehmer. The court specifically held that "where the parties purport to establish a partnership to engage in business at a future time or upon the happening of a contingency, the partnership does not come into being until the time specified or until the contingency is removed." Because the loan agreement did not indicate any intent to form a partnership or LLC at the time it was executed, or at any point before the execution of the operating agreement or LLC formation, it was insufficient to establish a partnership between the parties. Without a partnership, Utnehmer did not owe the Crulls a fiduciary duty under section 523(a)(4).

Protect Yourself

The above case illustrates a very unfortunate and expensive consequence of an improperly formed partnership. Don't get yourself in a similar situation. Forming a partnership requires the services of an experienced attorney

 

 

William (Bill) Utnehmer, a non practicing attorney boasts a successful and long standing reputation as both attorney and real estate developer in Southern California. The truth is he has multiple victims that he has taken for over 1 Million $$ through various shady contracts, conveniently misguiding victims using his knowledge of contracts and laws. Bill Utnehmer currently has multiple counties in California with court filings including fraud, real estate foreclosure, and fraudulent lease agreements. Bill Utnehmer has a stealth and stylish floor plan of supposed friends, accomplishments and references, but not one-including his now bankrupt former partner would agree From former contractors, multiple individuals and banks in Southern California, Utnehmer has certainly proven one fact. He is a scammer. BEWARE of anything that he and his 10 + companies are boasting. Companies Include

MUT VENTURES

CW DEVELOPMENT PARTNERS

CWDP

WOLFE COMMERCIAL

THREE NAVY PROPERTIES

CHANGE THE WORLD INC

SIG ENERGY

ZIG ENERGY

CW BUILDING DESIGN

SAN FRANCISCO LAND & CATTLE

W DEVELOPMENT Currently Bill Utnehmer has moved to Rustling Ridge Vineyard (Sonoma) that he supposedly owns, but this has not been verified. Bill Utnehmer is a one of a kind-and many hard working individuals have learned the hard way, what that kind is the hard way