Vuong v. Lopez-Flores

Background

Phu K. Vuong and Mosaic Real Estate Investment, LLC appealed a judgment from a bankruptcy adversary proceeding. Jacqueline Lopez-Flores was the bankruptcy debtor, and Saul Roberto Flores was a non-debtor. Vuong and Mosaic had provided loans and investments involving several related real-estate and construction entities, including UGFB, 95 Hamilton, Iron Springs, Blaze, and Ground Zero Construction.

Their claims included two loan-based claims secured by deeds of trust against Lopez-Flores’s residence, investment-based claims involving the related entities, claims seeking to prevent discharge of debts under Bankruptcy Code sections 523(a)(4) and 523(a)(6), objections to Lopez-Flores’s discharge under section 727, and a request for damages related to the Minnesota Property litigation. The bankruptcy court held a four-day trial.

Bankruptcy Court Judgment

The bankruptcy court denied Lopez-Flores’s discharge under 11 U.S.C. § 727(a)(2), finding that she concealed significant interests in the Blaze litigation and related entities with intent to defraud creditors. It also denied discharge under § 727(a)(4)(A), based on multiple false statements concerning her residence and interests in related entities. The court denied the § 727(a)(7) claim concerning conduct in an earlier bankruptcy case. Because Lopez-Flores’s discharge was denied, the bankruptcy court found Vuong and Mosaic’s § 523(a) claims moot, although it considered the § 523(a)(6) claim’s merits to determine whether it could support another theory of liability.

The bankruptcy court partially denied Claim 7. That claim sought $138,828.63 based on two promissory notes. The court found the loans’ interest terms usurious and canceled the interest, allowing a total claim of $93,066.67. It denied Claims 10 and 11, which sought a combined $698,104 based primarily on investments in the related entities and on amounts paid to settle the Minnesota Property litigation. The court found that Vuong and Mosaic were investors rather than creditors of Lopez-Flores and Flores personally, and that they had not established a basis for holding the individuals liable under an alter-ego theory.

The bankruptcy court also denied Vuong and Mosaic’s motion for reconsideration of the judgment and claims, denied their request to amend the complaint after trial to add an alter-ego and common-law fraud claim, and ruled on their evidentiary objections. It granted the motion to strike testimony concerning exhibits LLLL-9 and LLLL-12 but denied it as to other exhibits, and it sustained some objections while overruling others.

District Court Review

The district court reviewed legal conclusions independently, factual findings for clear error, and evidentiary and reconsideration rulings for abuse of discretion. The court affirmed the bankruptcy court’s partial denial of Claim 7 because Vuong and Mosaic did not argue the usury issue in their opening appellate brief, which waived the issue.

As to Claims 10 and 11, the district court upheld the conclusion that the investments were capital contributions rather than loans because the operating agreements required a board-approved promissory note for member loans. It also upheld the conclusion that alter ego is not an independent claim for damages; it is a way to impose liability for an existing claim against another entity. The court found that Vuong and Mosaic had not established a qualifying underlying claim or the California requirements for alter-ego liability. The related entities were sufficiently separate in purpose and management, and the record did not show that treating them as separate entities would produce an inequitable result.

The district court upheld the rejection of the claims based on Bankruptcy Code § 523(a)(4), California Penal Code § 496(c), and § 523(a)(6). It agreed that the evidence did not show that Lopez-Flores or Flores acted as fiduciaries, committed theft with the required criminal intent, or converted Vuong and Mosaic’s money. The court also affirmed the denial of payment for the Minnesota Property settlement because Vuong and Mosaic had not pleaded an underlying tort supporting the “tort of another” theory.

Finally, the district court affirmed the bankruptcy court’s denial of reconsideration, denial of leave to amend, and denial of reconsideration concerning the admission of exhibits and the motion to strike Flores’s testimony. The district court’s final disposition was to affirm the bankruptcy court judgment.