Memorandum of Decision Re: Conversion of Inventory

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re L & L BUILDING MAINTENANCE,                                           No. 1-88-01195 INC., dba LAKEWOOD SUPPLY CO.,      Debtor. ___________________________/ J. TAYLOR HALEY, Trustee,      Plaintiff,    v.                                                                                                  A.P. No. 1-88-0186 F. D. STERLING, INC., et al.,      Defendants. ______________________________/
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 Sterling.      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 punitive damages.      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 conduct.      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                                                                                _______________________                                                                                                                            Alan Jaroslovsky                                                                                                                            U.S. Bankruptcy