Wirum v. Goel (In re Signet Solar, Inc.)

532 B.R. 750

In re Signet Solar, Inc., Debtor.

Andrea A. Wirum, Trustee, Appellant

v.Prabhakar Goel, et al., Appellee.

Andrea A. Wirum, Trustee, Appellant

v.Bhupendra B. Patel, Appellee.

No. C–14–5161 EMC

No. C–14–5162 EMC

United States District Court, N.D. California.

Signed June 9, 2015

Dennis D. Davis, Goldberg, Stinnett, Davis, & Linchey, San Francisco, CA, for Appellant.

Asim M. Bhansali, Robert Adam Lauridsen, Keker & Van Nest, LLP, San Francisco, CA, Patrick Michael Costello, Vectis Law Group, Palo Alto, CA, Robert Joseph Yorio, Carr & Ferrell LLP, Menlo Park, CA, for Appellee.

ORDER ON APPEAL

EDWARD M. CHEN, United States District Judge

Currently pending before the Court are two appeals of bankruptcy adversary proceedings. The debtor in bankruptcy (Chapter 7) was the company Signet Solar, Inc. (“Signet”). The trustee for Signet filed claims for relief against two of Signet's founders and members of the board of directors, namely, Prabhakar Goel and Bhupendra B. Patel. According to the trustee, Mr. Goel and Mr. Patel breached their fiduciary duties to Signet. The trustee also asked that any claims of Mr. Goel (and an affiliated company) and Mr. Patel against Signet be equitably subordinated because of their alleged misconduct. The bankruptcy court granted Mr. Goel and Mr. Patel's motions to dismiss and denied leave to amend. The trustee now appeals that order.

I. FACTUAL & PROCEDURAL BACKGROUND

As a formal matter, there are two complaints filed by the trustee—one against Mr. Goel (and an affiliated company) and one against Mr. Patel. The complaints, however, are substantially the same. For convenience, the Court largely cites to the allegations in the Goel complaint.

As alleged, Signet was a company “formed in 2006 to market a new form of thin-film silicon panel to the solar photovoltaic industry.... Signet developed, manufactured, and deployed the world's largest thin-film silicon photovoltaic modules, lowering the cost of installed solar arrays without the use of toxic or rare materials.” FAC (Goel) ¶ 10. Signet itself was a holding company. It operated its manufacturing and sales activities through a wholly owned German subsidiary, which shall hereinafter be referred to as “German Signet.” FAC (Goel) ¶ 11. Both Mr. Goel and Mr. Patel were founders of Signet as well as members of the company's board of directors. In fact, Mr. Goel was the chairman of the board. See FAC (Goel) ¶ 8; SAC (Patel) ¶ 8.

From the outset, Signet had a specific business plan. Initially, Signet's manufacturing facility (owned by German Signet) would be operated at 20 megawatt production levels “until it obtained a foundation of customers and orders which would allow it to expand to 40 megawatt production.” FAC (Goel) ¶ 16. It was expected that Signet would have a negative cash flow, “which would only turn positive upon the upgrade of its manufacturing facility to a 40 megawatt production level.” FAC (Goel) ¶ 17. “[T]o reach this capacity, ... additional capital would need to be raised from investors, and ... Signet would need to maintain [a] Bank of America line of credit at a level in excess of $15,000,000.” FAC (Goel) ¶ 17. Signet had a line of credit with Bank of America in the amount of $16,500,000. As a formal matter, the line of credit was taken out in the names of the company's founders, but Signet guaranteed the line of credit. See FAC (Goel) ¶ 14.

Although in liquidation terms Signet was formally insolvent at all relevant times (i.e., if liquidated, its liabilities would exceed its assets), see FAC (Goel) ¶ 19, the company was as a practical matter successful, securing over $30 million in equity financing by 2008. See FAC (Goel) ¶ 13. By October 2009, Signet began to look for additional outside investment in order to advance funds to German Signet, which, as noted above, owned and operated Signet's manufacturing facilities. “The purpose of the cash infusion was to provide funds to German Signet to pay current obligations and to allow German Signet to begin the process of increasing its manufacturing plant to 40 megawatt capacity.” FAC (Goel) ¶ 18.

In October 2009, Signet received funding proposals backed by two different entities, EMCO Group and NCM Strategic Partners, LLC. See FAC (Goel) ¶¶ 21–22. Both of these proposals “required the founding shareholders, including Goel and Patel, to make certain concessions, including an agreement to extend the due dates on loans made by the founders to Signet.” FAC (Goel) ¶ 25. On November 8, 2009, at a Signet board meeting, Mr. Goel and Mr. Patel suggested an alternative sponsored by themselves. See FAC (Goel) ¶ 26.

On November 12, 2009, EMCO delivered a new funding proposal to Signet. Under the EMCO term sheet, EMCO would “provide financing to Signet totaling $12,500,000 from EMCO and $4,000,000 from other investors pursuant to a Series C stock offering.” FAC (Goel) ¶ 27. Mr. Goel and Mr. Patel, however, did not approve of the EMCO term sheet because it “would have subordinated loans made by Goel and Patel to Signet, would have changed control of the board of directors and would have required the resignations of Goel and Patel from the board of directors.” FAC (Goel) ¶ 27.

On November 17, 2009, another Signet board meeting was held, where management recommended approval of the EMCO term sheet. Mr. Goel and Mr. Patel voiced opposition and again proposed an alternative. More specifically, Mr. Goel and Mr. Patel proposed that they would provide $4,000,000 in cash to the company and thereafter raise an additional $16,000,000 from other investors. See FAC (Goel) ¶ 32. On November 22, 2009, Mr. Goel circulated the Goel/Patel term sheet for consideration. See FAC (Goel) ¶ 35. On November 23 or 24, 2009, Signet held another board meeting, without Mr. Goel and Mr. Patel being present, and classified the Goel/Patel term sheet as secondary. See FAC ¶ 37.

On November 27, 2009, German Signet gave notice to the German government (as required by German law) that it was insolvent. German Signet had to cure the insolvency within three weeks or it would have to begin insolvency proceedings (again, as required by German law). German Signet needed approximately $5 million to cure the insolvency. See FAC (Goel) ¶¶ 36, 39.

On December 3, 2009, the Signet board met yet again, this time with all members present. At that meeting, the board ultimately agreed to the Goel/Patel term sheet (over the EMCO term sheet), largely based on Mr. Goel and Mr. Patel's “unqualified promise to each contribute $2,000,000 to Signet to cover its immediate needs.” FAC (Goel) ¶ 42. “A key part of the board's decision to accept the Goel and Patel proposal was the fact that it provided much needed short term funding in the form of Patel and Goel's agreements to each loan $2 Million to the company.” FAC (Goel) ¶ 43.

Although Mr. Goel fully funded his $2 million promise, see FAC (Goel) ¶ 63, Mr. Patel did not—instead advancing only $300,000. See FAC (Goel) ¶ 64. Mr. Patel knew or should have known that he could not fund the full $2 million at the time of his promise. Moreover, Mr. Goel knew or should have known the same at the time of his promise because Mr. Patel had been heavily borrowing from Mr. Goel. See FAC (Goel) ¶¶ 45–46, 93. Furthermore, on December 19, 2009, Mr. Patel explicitly advised Mr. Goel that he could not fund the $2 million to Signet. See FAC (Goel) ¶ 58.

In the meantime, Signet circulated a detailed description of a Series C Preferred Stock offering (technically, a convertible debt offering). See FAC ¶¶ 50, 53. The Series C solicitation stated that “the purpose of the solicitation was to raise funds to meet Signet's equity obligations sufficient to trigger a German government grant critical to the facility upgrade, as well as providing Signet sufficient capital to qualify for lease financing for the 40 megawatt upgrade.” FAC (Goel) ¶ 52. German Signet's success was key to Signet's success because, in December 2009, “Signet's only asset other than its bank account balances, was its investment in German Signet.” FAC (Goel) ¶ 44; see also FAC (Goel) ¶ 19 (alleging that, “at the November 8, 2009 meeting of the Signet board of directors, the company reported cash of only $27,000 and $4.4 million dollars of delinquent (German Signet) accounts payable”). However, as of December 2009, “Signet's investment in German Signet was worthless unless Signet carried out its Business Plan, because all of Signet's loans to German Signet were subordinate to grants made by the German government (approximately 25 million Euros) to German Signet.” FAC (Goel) ¶ 44. Ultimately, the Series C solicitation secured $3,238,000 in investment by January 2010.

See FAC (Goel) ¶ 54. Most of the funding came from friends and associates of the founders. See FAC (Goel) ¶ 55.

Signet treated the $3 million as a loan and then loaned those funds to German Signet, but later Signet was told that the funds loaned were not enough to avert German Signet's insolvency. See FAC (Goel) ¶¶ 54, 61–62, 65, 100. On January 25, 2010, Signet informed German Signet that it would not be able to provide the necessary additional funds. See FAC (Goel) ¶ 68. Subsequently, Mr. Goel contacted German Signet and falsely stated that Signet did have more funds. See FAC (Goel) ¶ 70.

Throughout this time, Mr. Goel was motivated to maintain control of Signet and/or keep Signet “propped up” because he had another venture, Gold Solar Energy, LLC, which had applied for a permit to build a solar farm in the state of Nevada, and, in the attempt to secure approval of the permit, he falsely represented to the state that Gold Solar had a ready supply of solar units pursuant to a joint agreement with Signet. There was in fact no such agreement with Signet. See FAC (Goel) ¶¶ 82–85, 92. Mr. Goel was also motivated to get funds to German Signet and keep it “propped up” so that he could divert its inventory to his own solar farm companies at below cost. See FAC (Goel) ¶ 101. Mr. Patel went along with Mr. Goel,...