In re: Robert Brower Sr.

Background

Robert Brower, Sr. founded Coastal Cypress Corporation in 1982. In January 2011, Anthony Nobles agreed to purchase 200,000 Coastal shares for $200,000 and paid that amount into a joint personal account held by Brower and his wife. Brower later transferred $50,000 to Coastal's account. On the same day, Coastal issued Brower a $50,000 promissory note, which Coastal later repaid with principal and interest. Bank records showed only one $50,000 transfer between Brower and Coastal during the relevant period.

The Bankruptcy Court previously determined that 150,000 of Nobles' shares were void for lack of consideration, meaning the corporation had not received something of value in exchange for those shares. After a trial on the remaining 50,000 shares, the Bankruptcy Court ruled that those shares were also void for lack of consideration. Nobles appealed to the district court.

Issues on Appeal

Nobles raised three issues: whether MUFG Union Bank had standing to seek declaratory relief; whether the 50,000 shares were void under California Corporations Code section 409; and whether the Bankruptcy Court failed to provide the findings of fact and legal conclusions required by Federal Rule of Civil Procedure 52(a).

Standing

The district court concluded that MUFG had Article III standing, the constitutional requirement that a plaintiff show a concrete injury, a connection between that injury and the challenged conduct, and a likelihood that the requested relief will remedy the injury. The transfer of the 50,000 shares diluted Brower's ownership interest in Coastal, reduced the value of his bankruptcy estate, and increased the risk that MUFG would not be repaid. The court found that declaring Nobles' shares void could increase the value of the estate and therefore could redress MUFG's injury.

The court treated shareholder direct-versus-derivative standing as a form of prudential standing, meaning a judicial limitation on who may assert certain rights rather than a constitutional jurisdictional requirement. Nobles raised that argument for the first time on appeal and did not show exceptional circumstances justifying consideration of the waived issue. The court therefore declined to consider his shareholder derivative-standing argument. It likewise declined to consider his third-party-beneficiary argument because he had not raised it below and had raised it for the first time in his reply brief.

Validity of the 50,000 Shares

The district court reviewed the Bankruptcy Court's factual finding for clear error. It held that the record did not leave it with a firm conviction that the Bankruptcy Court had made a mistake. Nobles' money had first been transferred to Brower's personal account, and the $50,000 later transferred to Coastal was accompanied by a promissory note from Coastal to Brower. Coastal repaid that note, and there were no other $50,000 transfers from Brower's account during the relevant period. The district court concluded that these facts reasonably supported the finding that the transfer to Coastal was a loan from Brower, not Nobles' payment for the shares.

Nobles argued for the first time on appeal that Brower acted as Coastal's agent when he received the payment. The court declined to consider that argument because it had not been raised at trial and the factual record did not establish whether Brower's authority included receiving payment for the shares. The court also declined to consider Nobles' ratification argument because he raised it for the first time on appeal and for the first time in his reply brief.

Rule 52 Argument

The court rejected Nobles' argument that the Bankruptcy Court failed to explain why the shares were property of Brower's bankruptcy estate. The district court said Nobles misread the Bankruptcy Court's order. The order did not transfer Nobles' shares to the estate; it expressly declared them void for lack of consideration and thereby erased Nobles' ownership interest. The Bankruptcy Court therefore was not required to make findings about a transfer of ownership to the estate.

Disposition

The district court AFFIRMED the Bankruptcy Court's order and judgment.