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Butz v. Campbell

United States District Court, W.D. Kentucky, Bowling Green Division

May 2, 2019




         This 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.

         I. BACKGROUND

         In 2009 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).

         After 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).

         Thomas 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).

         After 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).

         The 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).

         With 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 with interest.

         The 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).

         Debtors 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. 61:6-12).

         While 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).

         Credit 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).

         Speaking 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).

         The 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).

         Appellee/Cross-Appellant 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 Tr. 112:11-21).

         Debtors 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).

         Debtors 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).

         On 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 ...

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