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In Re v. Nannette Dumas

March 29, 2012


Appeal from the United States Bankruptcy Court for the Northern District of California Honorable Roger L. Efremsky, Bankruptcy Judge, Presiding Bk. No. 11-41750



Argued and Submitted on January 20, 2012 at San Francisco, California

Filed - March 29, 2012

Before: HOLLOWELL, DONOVAN*fn2 and DUNN, Bankruptcy Judges.

Joe Guerra (Guerra) and Raymundo Lujano (Lujano) (collectively, the Appellants) each appeal the order of the bankruptcy court that imposed over $200,000 in sanctions against them, jointly and severally, for concealing an insider connection between the debtor and the purchaser of the debtor's main asset.*fn3 We AFFIRM.


In 2001, Luis Aguilar (Aguilar) purchased real property in Lathrop, California (the Property) with two single family residences, which he rented out for income. Aguilar's ultimate goal was to construct townhomes on the Property. He sought a partner to assist him in developing the Property. Aguilar placed an advertisement for a developer and met Guerra as a result. He later entered into an agreement with Guerra to move the project forward. To that end, Aguilar and Guerra formed Avon Townhomes Venture (Avon).

Aguilar agreed to transfer the Property to Avon and to continue to make mortgage payments; Guerra agreed to take sole management control of Avon and was tasked with obtaining financing for the project, preparing construction plans, and obtaining building permits and approvals. Aguilar and Guerra were the sole shareholders of Avon, but Aguilar's interest in Avon was subordinated to the stock held by Guerra.

When Guerra made little progress in developing the Property, the relationship between Aguilar and Guerra soured. Aguilar had the rents from the residences paid to him directly and Guerra responded by "terminating" Aguilar's interest in Avon. Aguilar sued Guerra in October 2004, alleging damages for breach of contract and fraud.

On May 26, 2005, Guerra filed a chapter 11*fn4 bankruptcy petition for Avon.*fn5 Post-petition, Avon continued to act as the debtor-in-possession with Guerra serving as Avon's responsible individual. On November 10, 2005, Avon filed a motion seeking authority to sell the Property, as is, free and clear of ownership interests, to an entity known as Metricz, Inc. (Metricz) for $400,000 (Sale Motion).*fn6

Lujano is Metricz's Chief Financial Officer and sole shareholder. Robert Jaramillo (Jaramillo) is Metricz's President. Jaramillo executed the proposed purchase contract for the Property on behalf of Metricz.

In its Sale Motion, Avon stated that it and its equity owners were unrelated to Metricz. Additionally, Guerra stated in his declaration in support of the Sale Motion that neither he, Aguilar, nor Avon had any relationship or connection with Metricz.

Aguilar filed a limited objection to the Sale Motion. He consented to the sale, but proposed a competing bid by Thomas Sayles (Sayles). On December 7, 2005, the bankruptcy court conducted an auction for the Property, at which Metricz and Sayles participated (the Sale Hearing).*fn7 Jaramillo made the bids on behalf of Metricz. Metricz was the highest bidder at $610,000. At the Sale Hearing, Sayles and the United States Trustee (UST) expressed concerns that Guerra had some connection with Metricz. The bankruptcy court addressed the issue:

If there are any connections between anybody, then that becomes a concern. . . . From my perspective the absolutely most important thing is that a sale is done fairly; it's legitimate; everybody has a fair shot at buying; that there's no shenanigans; there's no inside deals; there's no undisclosed relationships; there's none of this stuff. . . . There's an integrity of the process that to me is the most important. And I'd rather lose a sale than have one - one tainted by some wrongdoings.

Hr'g Tr. (Dec. 5, 2005) at 27:20-28:17.

The bankruptcy court offered to continue the Sale Hearing; however, after a recess, the parties decided to go forward with the auction. During the recess, Guerra represented to the UST that there was no connection between Avon or Guerra and Metricz or Metricz's officers or agents, and that Metricz had been located through a real estate broker named Jim McClenehan (McClenehan) of a firm called Eagle Home Loan. The UST put that representation on the record.

The bankruptcy court then approved the sale. However, as a condition of the sale, it required Metricz to make two non- refundable deposits, $25,000 and $100,000, respectively, to Avon's attorney to be held in his trust account in advance of the close of escrow, or risk forfeiting its funds and losing the Property to Sayles for a back-up bid of $550,000. The final order authorizing the sale free and clear of interests and approving the sale to Metricz was entered on December 30, 2005. The sale closed on February 3, 2006.

In June 2006, Metricz filed an adversary proceeding against Avon, claiming Avon had represented that the Property had been granted valuable sewer rights from the City of Lathrop (Adversary Proceeding). It turned out that prior to the sale, Aguilar had the sewer rights terminated without Guerra's knowledge.*fn8 Metricz alleged that without the sewer hook-ups it was deprived of the opportunity to sell the Property for over $1 million. Avon sought a compromise of the Adversary Proceeding, which included 1 paying the City of Lathrop $50,500 for reinstatement of the sewer 2 hook-up rights. 3 The UST objected to the compromise because she was concerned 4 there was an undisclosed relationship between Avon or Guerra and 5 Metricz and possible collusion or misconduct related to the sale 6 of the Property. Her concern was based on her discovery that 7 incorporation documents showed that Metricz and Avon shared the 8 same street address in San Jose, California, and the attorney 9 representing Metricz, Samuel Goldstein (Goldstein), had 10 represented Guerra on prior (unrelated) matters. Additionally, 11 the UST was concerned that under the compromise, the estate would 12 be required to pay for the sewer rights even though the Property 13 had been sold "as is."

14 Thereafter, the UST sought conversion of Avon's case to 15 chapter 7. Rather than converting the case, on May 11, 2007, the 16 bankruptcy court appointed a trustee, Mohamed Poonja (the 17 Trustee), to investigate the facts surrounding Metricz's purchase 18 of the Property.

19 As part of his investigation, the Trustee conducted Rule 20 2004 examinations of Guerra and Lujano, as well as Jaramillo and 21 McClenehan. At those examinations, Guerra testified that he had 22 no communication or contact with anyone connected to Metricz 23 prior to the Sale Hearing.

24 On January 24, 2008, the Trustee filed a report summarizing 25 his investigation (Investigation Report). The Investigation 26 Report concluded that Guerra had concealed a relationship with 27 Metricz that preceded the sale of the Property. The Trustee found that Guerra had, in fact, played a role in Metricz's formation and directed the sale transaction to Metricz.

In March 2008, the Trustee discovered that funds drawn on Guerra's son's bank account might have been used to pay the non- refundable deposits for the purchase price of the Property. The Trustee conducted additional Rule 2004 examinations to determine if Guerra or Metricz was concealing Guerra's involvement in the purchase of the Property.

On April 8, 2008, the Trustee filed a motion requesting that the bankruptcy court issue show cause orders based on his investigation, which "uncovered irrefutable evidence" confirming that Guerra committed a fraud on the bankruptcy court when he denied in his declaration supporting the Sale Motion, as well as his statements at the Sale hearing, that he did not have any connection to Metricz (the OSC Motion). The Trustee asserted that the Appellants were aware of the relationship between Guerra and Metricz but conspired to give false testimony at their Rule 2004 examinations to conceal Guerra's insider purchase of the Property. The Trustee requested the Appellants "show cause why the [bankruptcy court] should not impose sanctions jointly and severally against them in amounts sufficient to make the estate whole for the costs of uncovering their fraudulent scheme."*fn9

On May 15, 2008, the bankruptcy court issued an Order to Show Cause (OSC). It ordered Guerra, Metricz, and Metricz's officers and agents, Lujano, Jaramillo, and McClenehan, to appear and show cause why they should not be sanctioned for misconduct. The OSC attached the OSC Motion and Investigation Report and required the parties to file memoranda, declarations and documentation addressing the Trustee's allegations "that they committed fraud upon the Court by actively concealing and misrepresenting an insider connection between Metricz as the purchaser of the [Property] and Avon and Guerra as Avon's responsible individual."*fn10 ...

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