LL Lifestyle Inc. v. Vidal (In re Vidal)

In re ROBERTO EDMUNDO VIDAL DebtorLL LIFESTYLE, INC. Plaintiff¹

v.ROBERTO EDMUNDO VIDAL Defendant

Bankruptcy No. 10-14071

Adversary No. 10-0335

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

Dated: September 6, 2012

Chapter 7

OPINION

In the above-captioned adversary proceeding, the plaintiff, LL Lifestyle, Inc. ("LL Lifestyle"), seeks to have declared nondischargeable, under 11 U.S.C. § 523(a)(2), (a)(4) and/or (a)(6), an unliquidated, disputed debt owed by the debtor, Mr. Roberto Vidal. The debtor opposes such relief.

The parties' dispute, which has been pending for a number of years, arises from the debtor's investment in LL Lifestyle, a New York corporation, and the ultimate purchase of a yacht by VP Maritime, Inc., an entity controlled by the debtor (and a non-debtor individual). In essence, LL Lifestyle complains that the debtor promised to purchase a yacht for use by it, but instead, while serving as a director of LL Lifestyle,improperly used corporate funds toward the purchase of a yacht and denied LL Lifestyle the use of the vessel. The debtor counters that his yacht purchase was consistent with a compromise proposed by the plaintiff, and was done with the plaintiff's consent. Moreover, Mr. Vidal contends that the plaintiff's lack of access to the vessel arose because it proposed leasing terms the debtor found to be unacceptable.

Evidence was offered over a multi-day period² and the parties have submitted post-trial memoranda. This proceeding is now ripe for final determination.

I.

After consideration of the evidence presented and the parties' post-trial submissions, I find that the following material facts were proven.

1. LL Lifestyle was a business organized as a C corporation under the laws of the state of New York in January 2006, with its principal place of business in New York, New York. 1 N.T. at 32-33; 2 N.T. at 109.

2. LL Lifestyle was intended to operate as a luxury vehicle club, whereby individuals and corporations would pay a yearly membership fee for the right to use the company's luxury yachts and automobiles and to "participate in the lifestyle that those assets bring along." 1 N.T. at 7; 2 N.T. at 7. As explained by one of its former officers:

It was a membership based club, and people would buy membership, just like you would buy membership to a gym or a vacation club; they were very big at that time. It was built on, I think, the vacation club model. So you had one yacht orboat or car, and the idea was that you would put so many members per vehicle. And at some point, the vehicle would pay for itself and produce profit. So that's what—so those members were buying membership to the club, and in return, they were allowed to use the vehicles.

1 N.T. at 101; see also ex. D-3 at 46 (LL Lifestyle intended to use a business model similar to NetJets).

3. LL Lifestyle had two classes of stock: voting common stock and non-voting Series A preferred stock. Exhibit D-3 at 54 (Private Placement Memorandum).

4. The company authorized 10,000,000 shares of common stock and issued 5,350,000 of those shares by October 2006 (the date indicated on the private placement memorandum describing such securities). Holders of common stock were entitled to vote, with a voting majority necessary for corporate decisions. Common stock holders could also receive dividends, as determined by the board of directors. Exhibit D-3 at 54.

5. LL Lifestyle authorized 4,000,000 shares of Series A preferred stock and issued 85,000 of those shares by October 2006. Holders of Series A preferred stock were not entitled to vote on general corporate matters, but were entitled to vote on certain matters as required "by law or pursuant to the Certificate of Designation." Series A preferred stock holders were entitled to receive a 5% cash dividend annually, payable quarterly in arrears. Exhibit D-3 at 54-55.

6. At the time of the company's incorporation, Mr. Donald Choi was the chief executive officer and the owner of the largest equity interest in the company, 1 N.T. at 43, 70; 2 N.T. at 83, Mr. Jonathan Lapin was chief operating officer, 1 N.T. at 19, and Mr. Lance Fieldman was corporate president, 1 N.T. at 68-69. 7. Company directors were chosen by a vote of common stockholders, with each board vacancy requiring a majority vote. 2 N.T. at 113. Thereafter, corporate decisions were to be made by the board of directors, with each decision requiring the affirmative vote of at least seventy-five percent of the board. 2 N.T. at 56.

8. Four of the company's initial investors—Mr. Choi, Mr. Lapin, Mr. Fieldman and Michael Sison—held approximately sixty percent (60%) of the company's stock and, thus, could constitute the majority of common stockholders required to approve director appointments and other corporate decisions. 2 N.T. at 113.

9. LL Lifestyle's board of directors initially had four members: Mr. Choi, Mr. Lapin, Mr. Fieldman and Mr. Sison. 2 N.T. at 13 and 109. Mr. Sison was removed from the board soon after his appointment. Id.

10. To the extent that LL Lifestyle held formal director meetings, Mr. Lapin acted as though he was corporate secretary and prepared and transmitted minutes via email. 1 N.T. at 35-36; exs. LL-14, 15, 16.

11. During the corporation's existence, its officers were not paid salaries. 1 N.T. at 35, 106.

12. From its inception until early 2007, the company did not follow normal corporate formalities:

Well, the company wasn't really — initially when we first formed it in 2006 [we] didn't really have any formal Board meetings. This was something that was not to, you know, we're focused on the business, you know. So, we weren't following or doing what, I guess, they're saying we were supposed to do. When Roberto Vidal came aboard and he said, "Oh, you guys gotta make sure your corporate covenants are together. You gotta do this. You gotta do that." So, we had our very first Board Meeting on February 12th, [2007,] when the letter of agreement was signed.

2 N.T. at 17 (testimony of Mr. Choi).

13. LL Lifestyle ceased operations by the latter part of 2007. 1 N.T. 27-28; 2 N.T. at 67. LL Lifestyle was dissolved by the state of New York in 2011. 2 N.T. at 67.³

14. While it operated, LL Lifestyle offered several types of membership, with initial and annual fees depending upon the type of membership purchased. 1 N.T. at 101-103; exs. D-3 (Private Placement Memorandum); D-11 (Executive Summary). Among the membership options was a "founding" or "lifetime" membership for a $100,000 fee. 2 N.T. at 11.

15. In addition to different types of memberships, LL Lifestyle also offered "concierge" services to its members for an additional cost. 2 N.T. at 8-9 (testimony of Mr. Choi regarding membership, stating: "I was heavily involved in the New York night life and things like that, so I knew everybody at most of the restaurants, the clubs, etcetera and it was a lifestyle most people can't attain or get access to without . . . knowing me.So I offer that as an additional service on top of the membership. . . ."). Providing such services was, in the opinion of LL Lifestyle, one significant way in which it differed from its competitors. See ex. D-3 at 37.

16. In early 2007, LL Lifestyle had obtained approximately 10 individual and corporate memberships. 1 N.T. at 70; 2 N.T. at 10-12. Three of the memberships purchased were "founding memberships," generating $300,000 in revenue. The remaining memberships produced approximately $200,000 in revenue. 2 N.T. at 10-12.

17. At the time relevant to this dispute, LL Lifestyle offered its members access to a Boston Whaler fishing boat, three Sea Ray powerboats, a 40 foot Atlantis yacht, a Lamborghini sports car and a Volkswagen Phaeton. 1 N.T. at 7-9; 2 N.T. at 16; Exhibit D-3 (Private Placement Memorandum) at 21. LL Lifestyle, however, did not own any of the water craft or vehicles in its "fleet." 2 N.T. at 11-14; ex. D-101 at 18-19 (Mr. Choi's deposition).

18. Except for a Sea Ray powerboat purchased by Net Powerboats, an entity controlled by Mr. Choi, 2 N.T. at 12, and the Volkswagen Phaeton, owned by Mr. Choi, 2 N.T. at 15, the other vessels and vehicles were obtained after LL Lifestyle was incorporated and were titled in the name of, and financed by, individuals or groups of individuals involved with LL Lifestyle. 2 N.T. at 12 (testimony of Mr. Choi that "The boats had to be done individually because . . . the company LL Lifestyle was just too new, had no credit history. So they wouldn't give any loans to the business. . . . So we had to put it towards the individuals, and then find a way to put those assets back into a shell company that could hold and maintain the assets.").

19. Those individuals, such as Mr. Lapin, informally agreed to allow LL Lifestyle to utilize the vessels or vehicle; there were no written agreements granting LL Lifestyle access to those assets, 1. N.T. 27, 38-39.

20. LL Lifestyle typically funded the down payment and monthly financing payments, by making payments directly to the pertinent seller and financing institution. 1 N.T. at 7-9 (Testimony of Lapin: "Q. Okay. And for each of these assets that you just enumerated, how much did LL Lifestyle contribute? A. Well, they took care of the down payments and the usual payments."); 1 N.T. at 21-23, 39-42.

21. For example, Mr. Lapin was involved in the financing of four of LL Lifestyle's assets. He financed a Sea Ray powerboat in his own name. He and his sister financed the purchase of a Lamborghini and a 40-foot Atlantis yacht, and he and his father financed the purchase of a Boston Whaler fishing boat. 1 N.T. at 7-9; 2 N.T. at 14. (Mr. Lapin's father and sister may have received shares of LL Lifestyle stock. See 1 N.T. at 38-39.) Mr. Sison also financed the purchase of an asset for LL Lifestyle. 1 N.T. at 9; 2 N.T. at 14.

22. Although the individual was liable for financing payments on assets used by LL Lifestyle, it was expected that such payments would actually be made by LL Lifestyle from...