FOR THE NORTHERN DISTRICT OF CALIFORNIA
L & L BUILDING MAINTENANCE, No. 1-88-01195
INC., dba LAKEWOOD SUPPLY CO.,
J. TAYLOR HALEY, Trustee,
v. A.P. No. 1-88-0186
F. D. STERLING, INC., et al.,
Memorandum of Decision
In December, 1987, defendant F. D. Sterling, Inc. and debtor L & L Building Maintenance,
Inc. agreed in principle that Sterling would purchase L & L's assets for their book value plus
$50,000.00 for goodwill. At the time, Sterling was a large building maintenance supplier looking
to expand its sales in Lake County and eliminate some of its competition. L & L was a small
customer and minor competitor of Sterling, solely owned by Gus Lovotti and his estranged wife.
At the time, Lovotti was in the midst of a contested marital dissolution, and needed state court
approval for the sale. Because of the time needed to obtain approval, and because Lovotti was
not able to spend the time on the business necessary to keep it going, the parties orally agreed that
Sterling would step in and operate L & L's business on a day-to-day basis until the sale could be
consummated. Sterling sent its employees to Lake County to run the business, and Lovotti took
one of them around and introduced him to L & L's customers.
After Sterling began running L & L's business, it started to realize how weak the business was.
The business had more debts than assets, and was unable to purchase inventory on credit due to
its delinquent status with its suppliers. Thus, Sterling was forced to stock the business itself in
order to keep it going.
Sterling began running L & L's business on April 1, 1988. Ten days later, on April 11,
Lovotti's bookkeeper wrote a long, rambling letter to L & L's attorney, sending a copy to Sterling.
Lost in the body of the letter was a paragraph stating that Lovotti would be returning to the
premises to get some of his personal effects. On or about April 17, Lovotti went to the premises
and found that the locks had been changed. He got the locksmith to let him in, and removed a
considerable amount of records and furnishings which he believed were not a part of the sale to
When Sterling's employees discovered and reported what had been taken, Sterling took the
position that Lovotti had taken too much and that as a result the agreement had been breached.
At the time, L & L owed Sterling about $49,000.00. Sterling loaded up all of the usable
inventory, regardless of source, and took it to its own premises. It wrote L & L a letter informing
it that the deal was off and demanding payment of the $49,000.00 in ten days. It applied the value
of the appropriated inventory to the debt, and treated it as its own.
Shortly after terminating its agreement with L & L, Sterling negotiated lease of the business
premises from Lovotti's former wife, who had been awarded the property in the dissolution. To
this day, Sterling operates the same type of business as L & L had operated, out of the same
premises, and with the same customers. L & L is completely out of business, and an involuntary
bankruptcy petition was filed against it on July 1, 1988.
In this adversary proceeding, the Trustee seeks avoidance of the transfer of the inventory as
a preference. She also seeks damages for conversion, including $50,000.00 in lost good will, and
All of the elements of a preference are present, in that the taking of the inventory was by a
creditor on account of an antecedent debt made within 90 days of bankruptcy and while the debtor
was insolvent. The transfer allowed Sterling to receive mare than its fair share under the
Bankruptcy Code. This much is not seriously contested by Sterling.
It is apparent to the court that L & L's business had no appreciable value in April of 1988.
Whether L & L is entitled to the benefit of its bargain in a breach of contract action is not before
the court. There is insufficient evidence for the assessment of any tort damages beyond the value
of the inventory Sterling took.
As to liability for taking the inventory, the court is convinced that more than just a preference
is involved. It was apparent that Lovotti was in difficult circumstances at the time, and was not
acting prudently. While Lovotti's actions may have justified Sterling's repudiation of its contract
to purchase the business, they did not justify the out-and-out appropriation of the inventory.
Based on the authority cited on the record by the court at the conclusion of plaintiff's case, the
court finds that Sterling converted the inventory. Lovotti's feeble efforts, five weeks later, to
salvage something by offering Sterling the dregs of the inventory in no way excuse Sterling's
The court finds that the inventory taken by Sterling had a value of $21,978.50 on the date of
the transfer. Pursuant to section 550(a) of the Bankruptcy Code, the court will order that this
amount, rather than the inventory itself, shall be recovered together with interest at the legal rate
from and after April 18, 1988.
Because Sterling used its superior position to bully Lovotti and improperly help itself to L &
L's inventory, the court will award punitive damages in the sum of $20,000.00. Plaintiff shall also
recover her costs of suit. The judgment shall be jointly and severally assessed against both Sterling
and its alter ego, defendant Santa Rosa Paper Company.
Counsel for plaintiff shall submit an appropriate form of judgment, which counsel for
defendants has approved as conforming to this decision. This memorandum constitutes findings
and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052.
Dated: September 30, 1989 _______________________