United States District Court, W.D. Kentucky, Bowling Green Division
THOMAS C. BUTZ; and SHAWN C. BUTZ APPELLANTS/CROSS-APPELLEES
CLARENCE CAMPBELL; and DONNA CAMPBELL APPELLEES/CROSS-APPELLANTS
MEMORANDUM OPINION AND ORDER
N. STIVERS, CHIEF JUDGE UNITED STATES DISTRICT COURT.
matter is before the Court on appeal and cross-appeal from
the United States Bankruptcy Court for the Western District
of Kentucky. The issues have been briefed and the matter is
ripe for adjudication. For the reasons provided below, the
Bankruptcy Court's decision is AFFIRMED IN PART and
REVERSED IN PART.
and early 2010, Appellants/Cross-Appellees Thomas and Shawn
Butz (“Thomas” and “Shawn”,
collectively “Debtors”) began discussing the idea
of opening a boutique shop selling flip-flops featuring
“popits.” (Trial Tr. 12:25-13:3, DN 4). Popits
are interchangeable charms that attach to the thong of flip
flops and feature an assortment of designs. (Trial Tr.
13:5-9). The popit brand was entirely web-based when Shawn
met its owner, Donald Ray (“Ray”), and discussed
with him opportunities for opening a brick-and-mortar store
in either Las Vegas or Hawaii. (Trial Tr. 13:10-19). The
Debtors eventually decided to open their store on Waikiki
Beach in Honolulu, Hawaii, and soon thereafter began making
preparations. (Trial Tr. 18:12-14).
discussing the idea with Ray, Debtors secured financing for
the store. Shawn operated an Illinois corporation named Shawn
Renee Fashions, Inc. (“SRF”) that sold
merchandise and “did wedding shows, ” and Thomas
had a thirty-year career as a mechanical engineer. (Trial Tr.
12:8-11, 11:3-4). Thomas received a severance package when
his former employer was bought out in 2008. (Trial Tr.
11:10-15). Debtors also tapped their retirement and savings
accounts to fund the flip-flop shop, resulting in about $400,
000 of capital for the new business. (Trial Tr. 64:14-21).
drew up a business plan and set out to obtain financing from
several financial institutions. Because the couple had no
previous retail experience, however, Debtors were unable to
obtain additional financing from a bank. (Trial Tr.
19:14-21). This led them to approach their relatives for
loans for the store. (Trial Tr. 20:7-11). Thomas, who handled
all the business's finances, estimated in his business
plan that the startup costs to build out the store and
acquire inventory would be approximately $750, 000. (Trial
Tr. 16:6-10, 20:18-20).
obtaining $100, 000 from Thomas' parents, Debtors
approached Shawn's parents, Appellees/Cross-Appellants
Clarence and Donna Campbell (“the Campbells”).
(Trial Tr. 20:12-17). The Campbells initially agreed to loan
Debtors $240, 000. (Trial Tr. 20:15-17). Thomas then had an
attorney in Chicago prepare the loan documents. (Trial Tr.
22:3-25:18). Debtors represented to the Campbells that they
were receiving a security interest in Debtors' personal
property. (Trial Tr. 24:17-24). A UCC-1 Financing Statement
was filed in Illinois perfecting the Campbells' valid
first lien. (Trial Tr. 25:2-10). Under the terms of the loan
documents, Debtors were required to make interest-only
payments to the Campbells at a rate of 15% until July 1,
2011, when the principal would become due. (Compl. Objecting
Discharge 9, DN 13-1).
Campbells wired $240, 000 to SRF's business account on
June 14, 2010. (Trial Tr. 26:6-19). Two days later, $200, 000
was transferred from the SRF business account into the SRF
savings account. (Trial Tr. 27:1-4) The $100, 000 loan from
Thomas' parents was also deposited into SRF's savings
account. (Trial Tr. 27:4-13).
their family's financing, Debtors began searching for
real estate for the store, but the initial building and
inventory costs were higher than Debtors anticipated. (Trial
Tr. 27:21-24). Debtors then requested and received an
additional $60, 000 loan from the Campbells that was
documented in an addendum to the original loan agreement.
(Trial Tr. 28:10-22). Additionally, Debtors obtained an
investment from Thomas' sister and brother-in-law of
approximately $200, 000. (Trial Tr. 30:8-12, 32:3-14,
33:12-19). This investment was documented similarly to the
other family loans and contained a monthly payment schedule
store did not open until April 2011, months later than the
projected January open date. (Trial Tr. 28:2-9). The store
was located in a high-end retail area on Waikiki Beach with a
monthly rent of $16, 000 on top of the $15, 000-20, 000
Debtors paid a realtor to find the location. (Trial Tr.
18:12-18, 104:23-105:3). Due to Debtors' miscalculations
of startup costs, the business account's cash balance
when the store opened was only $1, 500. (Trial Tr. 34:18-23).
regularly transferred business account funds to cover their
personal and living expenses. They paid themselves $8, 000
per month in addition to hourly wages in order to have the
business cover health insurance. (Trial Tr. 35:23-36:15).
Debtors also lived at the Trump Hotel in Honolulu for seven
months, for which the business paid $36, 172. Debtors
contended it was the only place they could live on short
notice within a reasonable distance of the store. (Trial Tr.
Debtors lived at the Trump Hotel, they paid $9, 579 for their
son and a hired worker to stay at another hotel. (Trial Tr.
62:7-25). Bank records also show that in 2010, while they
were trying to start the business, Debtors sent another son
to a private camp at a cost of $30, 000 from the business.
(Trial Tr. 55:16-25).
card transactions from the business account also contained
several debit card withdrawals for personal expenses.
Numerous purchases from QVC, Nordstrom, and other high-end
retailers were made, but Shawn claimed she was buying
products to use as samples to test consumer preferences for
the store's inventory. (Trial Tr. 56:5-23). Shawn
testified she would take ideas from these products and
incorporate them into the designs of her own products. (Trial
Tr. 87:20-89:12). Debtors had no licensing agreements or
permission from retailers to display or resell their
products. (Trial Tr. 60:2-5). Bank records also show $3, 900
was spent at Chanel and $1, 700 was paid to Chicago Cosmetic
Surgery-neither of which Debtors could explain. (Trial Tr.
90:15-25). Seventy-three items were purchased online with
corporate funds in 2010, and only twenty were returned to the
sellers. (Trial Tr. 90:15-25). Shawn claimed, without any
supporting documentation, that unreturned items were given to
Ray in exchange for merchandise. (Trial Tr. 89:15-19).
of Ray, bank records also show numerous checks made payable
to “cash” in February 2011 for $9, 055; $4, 410;
$18, 900; and $59, 211.25. (Trial Tr. 37:2-7). Debtors
testified these payments were for inventory and that Ray
required wire transfers directly to his Wells Fargo account.
(Trial Tr. 37:8-20). Without any supporting documentation,
there was no way to trace these funds directly to inventory
costs. Because Ray only gave the business a discount on
inventory when bought in bulk, Debtors acquired excess
inventory. (Trial Tr. 21:8-11).
flip-flop venture flopped. Debtors realized in September and
October 2011 that they would not make their projected sales
goal and their gross sales did not cover their expenses.
(Trial Tr. 39:10-23). By May 2013, Debtors had to close the
store. (Trial Tr. 41:19-20). They forfeited their $120, 000
security deposit on the store, sold the remaining business
assets, and sold remaining inventory back to Ray at a loss.
(Trial Tr. 41:21-42:8, 104:14-22). The Campbells, who had a
lien on these assets and proceeds, received no payments.
(Trial Tr. 41:21-42:8, 104:14-20).
Donna Campbell (“Donna”) testified that she saw
packages from QVC in the store and that Thomas stated the
items had been factored in the budget. (Trial Tr.
111:19-112:10). Donna further testified that she did not know
that any of the money she and her husband loaned would be
used for anything other than business expenses, or that the
money would be used by Debtors for living expenses. (Trial
made interest only payments on the loan to the Campbells from
June 2010 to August 2011. Debtors did not make the principal
payment due on July 1, 2011, but did make additional
interest-only payments in 2012. (Trial Tr. 29:15-30:5).
Debtors stopped paying on the loan in September 2012, leaving
an outstanding balance of $328, 589 owed to the Campbells.
(Trial Tr. 29:25-30:5).
tendered an exhibit to support their claim that they
personally invested $401, 969 into the failed store from
several different bank accounts. (Trial Tr. 64:2-16). At
trial, Debtors acknowledged the exhibit was incorrect because
those contributions were traced to the Campbells' loan.
(Trial Tr. 64:14-76:21). Thomas testified he had lost many of
the business records either because they were left behind in
Hawaii or auctioned off when Debtors failed to pay storage
fees in Chicago. (Trial Tr. 64:14-76:21). The Campbells
obtained many of the records for this case from third parties
by subpoena, but Debtors produced little documentation
showing how the loaned funds were used for the business.
(Trial Tr. 75:5-25).
March 13, 2015, the Campbells filed a complaint in Ohio state
court against Debtors asserting claims for breach of
contract, unjust enrichment and fraud in the inducement.
In re Butz, No. 15-10340(1)(7), 2018 WL 314871, at
*3 (Bankr. W.D. Ky. Jan. 5, 2018). On April 2, 2015, Debtors
filed a Voluntary Petition seeking relief under Chapter 7 of
the United States Bankruptcy Code. Id. On March 22,
2016, the Campbells initiated the adversary proceeding