Brower v. MUFG Union Bank, N.A.

Background

Robert Brower, Sr. and Patty Brower married in 1980. Brower later founded Coastal Cypress Corporation, first a California corporation and later, after a 2017 merger, a Delaware corporation. The dispute involved Coastal shares purportedly held by Brower, Patty Brower’s trust, Wilfred “Butch” Lindley, Richard Babcock, and Anthony Nobles.

Brower also formed American Commercial Properties, Inc. using money he had saved before his marriage. The parties disputed whether Brower later transferred those shares into Patty Brower’s separate ownership. The transfer was supported by a gift card stating “ACP is now yours,” a signed note, and a stock transfer.

Brower had filed for bankruptcy before the 2017 Coastal merger. The Bankruptcy Court determined that at least 57% of Coastal belonged to Brower’s bankruptcy estate. It also determined that Lindley’s purported shares were void, that all of the American Commercial Properties shares belonged to the bankruptcy estate, and that the Coastal merger should be set aside because it was unauthorized under Bankruptcy Code § 549.

Appeal and legal standard

The appellants raised five issues: whether Lindley had provided sufficient consideration for his shares; whether Brower had transferred the American Commercial Properties shares into Patty Brower’s separate property; whether the Coastal merger was void under Bankruptcy Code § 549; whether MUFG Union Bank’s claims were time-barred; and whether the Bankruptcy Court improperly resolved disputed facts and credibility questions at the summary judgment stage.

The district court reviewed the Bankruptcy Court’s summary judgment decision anew. Summary judgment is appropriate when there is no genuine dispute about a material fact and the moving party is entitled to judgment under the law.

Lindley’s Coastal shares

Under California law, corporate shares may be issued for consideration such as money, labor, services actually provided to the corporation or for its benefit, or property received by the corporation. When the consideration is not money, the corporation’s board must determine its monetary value by resolution. Shares issued in violation of these requirements are void, and the recipient does not become a shareholder.

Lindley claimed that he provided grape crops, helped Coastal and related entities with land, grape-growing, and wine production efforts, helped obtain and install equipment, and lent credibility through his reputation in the wine industry. The district court upheld the Bankruptcy Court’s conclusion that these services were not valid consideration. Coastal’s board had not determined the monetary value of the services by resolution, and the services were provided to Great American Wineries, Inc., not Coastal. The court therefore affirmed the finding that Lindley’s Coastal shares were void.

The court also rejected Lindley’s argument that a good-faith purchaser defense preserved his shareholder status. Unlike the purchaser in one of the cases Lindley cited, Lindley received the shares directly from Coastal and had not provided valid consideration for them. Because his original shares were void, he also had no valid interest to exchange for shares in the Delaware corporation.

American Commercial Properties shares

California law allows spouses to change separate property into the other spouse’s separate property, but the change is valid only if a writing contains an express declaration by the spouse whose property interest is adversely affected. The writing must clearly and unambiguously state an intent to change the property’s ownership or legal character.

The district court held that the gift card’s statement, “ACP is now yours,” could be interpreted in several ways and did not expressly state that the ownership or character of the shares was being changed. The stock transfer alone also did not establish the required express declaration. The court therefore affirmed the finding that the shares had not become Patty Brower’s separate property and belonged to Brower’s bankruptcy estate. The court also noted that Patty Brower’s counsel had previously conceded that the signed note was inadmissible, although the appellants relied on it on appeal.

Coastal merger

Bankruptcy Code § 549 allows a trustee to avoid a transfer of estate property that occurs after a bankruptcy case begins and was not authorized by the court. Because Brower owned at least 57% of Coastal when the merger occurred, the district court concluded that the merger was carried out without Bankruptcy Court authorization and violated § 549. It affirmed the Bankruptcy Court’s decision to set aside the merger between the California and Delaware corporations.

Statute of limitations

The appellants argued that California’s three-year limitations period for certain liabilities created by statute barred MUFG Union Bank’s claims. The district court rejected that argument. It held that MUFG Union Bank sought a determination that the Coastal and American Commercial Properties stock already belonged to Brower’s bankruptcy estate, rather than an action to void stock transfers. Relying on the reasoning discussed in the opinion, the court concluded that the claims were not time-barred and affirmed the Bankruptcy Court on that issue.

Disposition

Judge Edward J. Davila affirmed the Bankruptcy Court’s findings that Lindley’s Coastal interest was void, the American Commercial Properties shares were property of Brower’s bankruptcy estate, the Coastal merger was void, and MUFG Union Bank’s claims were not time-barred. The court also rejected the argument that the Bankruptcy Court improperly resolved disputed facts or credibility issues at summary judgment and ordered the clerk to close the file.