CEO's Personal Bankruptcy and Corporate Opportunity Results in Loss

[sorrycharley]

My question involves bankruptcy in the state of: California.

I, along with another shareholder, were minority shareholders (15% each) in a startup C Corporation. Our business received a $150,000 SBA loan in March 2011, on which our CEO/President signed as personal guarantor.
Like many new businesses, we were struggling, and our operating capital was running out. However, things were looking better for us, as we had just made a couple of deals that were going to start bringing in revenue.
We were actively looking for outside help from investors to help us through the two months it would take to have everything in place to make good on the above mentioned business deals. An investor agreed to get involved with us, was very impressed with what we were doing and how we were generating attention in the press.
Things were looking up, right?
So, we were surprised when our CEO/President showed up and said he could no longer work with us and that our new investor was no longer interested in coming on board. Furthermore, he refused to allow us to continue with a separate fundraising drive we had been working on for over one month, which, by our estimates, would have brought in between $35,000 and $50,000, plenty to get us through the next couple months. There was no changing his mind. He was out, and he told us that we would have to change to Corporation's business name, as well, given that he owned the trademark for it and it was "one of the only things left of any value" of the business.
He would declare personal bankruptcy, default on the business loan, and the bank would liquidate our business.
All of the above has since happened, but not in that order.

But here is where it gets interesting.
As it turns out, on the eve of his "resignation" announcement, he sent our would-be investor all of our business "stuff". Original business plan, client/industry/investor contacts, projections, etc. Our CEO/President was starting a new, competetive business with the investor. Because our CEO regularly used one of our personal computers at work, we saw emails between our CEO and investor that state that their plan was for the new business to buy the old business' infrastructure from the bank during a liquidation sale. Our CEO's bankruptcy would give them a fresh start, since the old business had worked out the kinks and were on a number of investors' radars. They were actually shopping around a business/venture plan to investors stating that the old business was the new business' pilot program.

Our CEO filed personal bankruptcy 45 days ago. He owes me and my other partner $15,000 from personal loans. He didn't list us as creditors. He also failed to list his two previous addresses and another second, current address where he stores tools and equipment that is helping him generate income for his new business.
He failed to include some assets on his Voluntary petition (around $10,000). He stated $0 in income from 2011, but he was paid around $20,000 from our business.
And finally, even though the new business of his is not incorporated yet, he has received income from it, but didn't mention it --surprise-- on his Voluntary
Petition. The list goes on.

I'm not sure how to approach this situation, but I do think it's in my best interests to have his BK dismissed, so that I can go after him for the personal loan. I'm not sure if I should contact the Trustee. I mean, he did intentionally destroy an asset that he owned 70% of, and that his other partners had invested around $50,000 into, not to mention $150,000 from the bank.

The real problem for me is that I have been left penniless by this and my access to legal help is, well, extremely limited.

Suggestions?

Sincere Thanks for taking the time to read this.

[Mr. Knowitall]

You can retain a business lawyer to evaluate the evidence for possible action in the bankruptcy court, possible injunctions against the investor and (former) CEO, possible fraud claims against the CEO and "tortious interference"-type claims against the investor.... There's a lot to sort through here, there are a lot of complicating factors, and it's much more complex than the type of issue we can analyze in this type of forum (even if I thought it would be a good idea for you to share the amount of information we would need to get started - and I don't think that would be a good idea).

[sorrycharley]

Thank you so much for sifting through my post. You are a brave soul, Mr. Knowitall.
At least it's good to know that the investor might be liable for his role.
Now, to find talented and creative legal representation who might assist a victm on a budget.....where's that forum?

If I may pester you for one more piece of advice. Would a judgement of fraud against my ex-partner by the BK court or SBA be something that I could "piggy-back" or use as evidence in my own action against him or the would-be investor? Or, would an attorney find my case to be more attractive with a higher likelihood of success with same judgement? Or would there be any drawbacks --for my future action-- in a fraud judgement in favor of the State?

Again, Thanks!!

[Conrad Hunter]

The state is not going to do a thing. This is a civil matter. If you can demonstrate fraud to the SBA/bank, then chances are it will be a federal thing. Be careful what you wish for though, you just might get it. It is possible the outcome of this will put him in such a situation you will never get any money back. The bank might, but not you. If you just want to wreck him as much as possible and don't care about seeing a dime, then this approach might work.

First, you need to file your claims with the bankruptcy court before the deadline, which unless they are exempt from discharge like a fraud judgment, might be counterproductive.

You need to find a good business/financial attorney and file a civil action for fraud, breach of contract and fuduciary duty. Even though he owned 70 percent, he owes the minority shareholders a legal duty to protect their interests.

Another way to look at it (and you really need an attorney) is that he doesn't file his debt to you and thus it is never discharged in bankruptcy. You can sue for it later, within the SOL.

Another approach is to file your claim, sue him and tell that bankruptcy court of the fraud which will mean likely he will not be able to discharge the debts to you and other investors and might mean that his bankruptcy gets dismissed for fraud on the bankruptcy court and he doesn't get to file for BK for many years. Wrecking his bankruptcy and suing him might be the best approach.

Again, you will really need to find an attorney. This ain't going to happen pro se.


Judgments for intentional torts, like fraud, can not be discharged in bankruptcy. Of course he could get a BK discharge before you get a judgment. Again, if he does not list the debts, they can not be discharged.

Unless the corp has filed for bankruptcy, that 200k must have purchased something. Those assets belong to the corporation and if they are squandered by the majority shareholder, then that is a tort claim too. How does he own the trademark? I would want to see that loan agreement. I have trouble believing there is an SBA loan to a corporation where the corporation did not own the intellectual property. Would not the trademark and any other intellectual property been part of the investment of the majority stockholder? What did he put in for that 70 percent of the stock? That should be detailed in the board minutes, etc., perhaps in the bylaws. All those documents you mention are also assets of the corporation and can't be spun off to the disadvantage of the stockholders forced behind. Anything created for the corporation is the property of the corporation and not the majority stockholder.

If it was me, I would sue him into the ground and squeeze blood from the turnip for the next 20 years if I had to.

[sorrycharley]

Thank you for your reply. I didn't get an email informing me of your response, so apologies for waiting to reply.

I like your suggestion of wrecking his BK and suing him. I don't consider myself a vindictive person, but this guy is a real scumbag (learned this too late) and showed me no mercy. The only polite thing to do is to return the favor.

I contacted the Trustee and sent him a few documents that he requested. He hasn't gotten back to me.....hope that's not a bad sign.

So, I guess I need to file an objection to the BK discharge. I had hoped that the Trustee might recommend a discharge after I gave him information about hidden assets and unreported income, and many other "errors" on the Voluntary Petition.

The bank has already liquidated the business assets.
Regarding the trademark, it was in my partner's name before we incorporated. Honestly, I think the bank was incredibly sloppy during this whole process. I've talked to them and their attorney and they don't seem that fired up about the facts here. Then again, they're only stuck with 25% of the outstanding balance.
He lied --by omission-- about what he had in the business before I got involved. Turns out that when he said "cash" he meant cash + sweat equity. I would have never matched his cash input had I known this. He was a very good friend, so I just trusted him. Lesson learned.

I'm in a tough financial spot at the moment, but as soon as I have the means, I plan on filing suit. It kills me how much justice really costs.

Would it be too difficult for me to file an objection on my own? Do you know of any resources for me to, at least, get the ball rolling on this and take it up on my own?

Thanks!