Memorandum Decision Determining that Defendant is not Indebted to Plaintiffs

Original Filed October 10, 2000

UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA

FINAL MEMORANDUM DECISION DETERMINING THAT DEFENDANT IS NOT INDEBTED TO PLAINTIFFS 10/10/00 - FINAL Case No. 96-58772-ASW Chapter 7 Adversary No. 97-5060 In re Janice Mardell Sutherland, Debtor(s). Robert Emsweiler, Marietta Manguray, Inez Bernard, and Frances Reich, Plaintiffs, vs. Janice Mardell Sutherland, Defendant. FINAL MEMORANDUM DECISION DETERMINING THAT DEFENDANT IS NOT INDEBTED TO PLAINTIFFS Before the Court is a complaint filed by the Plaintiffs above-named At trial, upon oral motion by Debtor, the complaint was dismissed as to Plaintiff Marietta Manguray, due to her failure to appear at trial to testify and submit to cross-examination. (collectively, "Creditors") against the Chapter 7 Unless otherwise noted, all statutory references are to Title 11, United States Code (11 U.S.C., the Bankruptcy Code), as amended in 1994. Debtor in the above-numbered case ("Debtor"). The complaint alleges that Debtor is indebted to Creditors for damages in amounts to be proven, and seeks judgment for such damages as well as a determination that such debt is non-dischargeable pursuant to §523(a)(2) and/or §523(a)(4); Creditors' complaint does not cite §523a)(6) but does allege, inter alia, willful and malicious conversion; that tort is not excepted from discharge under either §523(a)(2) or §523(a)(4), but is excepted from discharge pursuant to §523(a)(6). recovery of attorney's fees is also sought. Creditors are represented by Sally A. Williams, Esq. and Debtor is represented by Donald Mah, Esq. of Howard, Lytle, Petersen & Mah. After trial, a written tentative decision (“Tentative Decision”) was issued on October 18, 1999 with a preliminary finding that Debtor was not shown to be indebted to Creditors, but calling for further briefing of certain issues that were raised by the evidence at trial. Counsel agreed upon a briefing schedule that was extended several times by stipulation, and each party eventually filed one brief. All of the stipulated briefing schedules, except the last, provided for Creditors to file two briefs, including one in rebuttal. The Court inquired of Creditors’ counsel whether a rebuttal would be filed and was told that the lack of provision for rebuttal in the final stipulated briefing schedule was an oversight -- the Court then asked whether Creditors intended to seek leave to rebut or to submit the matter, and received no response. Under such circumstances, the matter is deemed submitted for decision without a rebuttal from Creditors. This Final Memorandum Decision, together with the Tentative Decision, constitutes the Court's findings of fact and conclusions of law, pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure. I. PROVISIONS OF TENTATIVE DECISION As set forth in the Tentative Decision, Creditors gave funds to CFN (a corporation) for investments secured by real property known as Lot 47, which investments were not made. Debtor was a shareholder and the President of CFN but testified that Creditors’ investments were handled by CFN officer Michael Dean and that Debtor was not involved in any misapplication of Creditors’ funds; Creditors did not establish at trial that Debtor participated in misapplication of their funds. The Tentative Decision held that, even if CFN were indebted to Creditors for having handled their investments contrary to their instruction, Creditors did not pierce the corporate veil of CFN and show that CFN was the alter ego of Debtor, such that Debtor should be liable for the debts of CFN. The Tentative Decision pointed out that evidence at trial raised some issues that required further briefing. The evidence referred to was: Debtor admitted that she knew by March 1992 that Lot 47 had been sold, but did not disclose that information to Creditors; and Debtor admitted that CFN charged Creditors for attorney’s fees incurred in the Eagle/Ozenbaugh Creditors gave their funds to CFN for the purpose of making a loan to Eagle Development in exchange for a first deed of trust on Lot 47. An involuntary bankruptcy petition was later filed against Eagle and/or its principal, Donald Ozenbaugh, by trade creditors and CFN. bankruptcy case, which case was not commenced until July 1992 (months after Debtor knew that Lot 47 had been sold) and so could not have involved Lot 47. The unresolved issues raised by such evidence are set forth following. II. ISSUES The Tentative Decision asked the parties to brief the following three issues. Creditors exceed the scope of the briefing called for by the Tentative Decision, and argue that Debtor is directly liable (as opposed to vicariously liable for CFN’s debt) for her own breach of fiduciary duty to Creditors. Debts for breach of fiduciary duty per se are not excepted from discharge, though debts for defalcation by a fiduciary are, under §523(a)(4) -- but a fiduciary within the meaning of that statute must be in a position equivalent to the trustee of an express trust with a res, see Ragsdale v. Haller, 780 F.2d 794 (9th Cir. 1986); In re Evans, 161 B.R. 474, 478-79 (9th Cir. BAP 1993). Here, Creditors’ funds (the res) were given to CFN (not Debtor) and it was CFN (not Debtor) who was in the position of a trustee with respect to such funds; therefore, Debtor was not a fiduciary for purposes of §523(a)(4). If Debtor breached any duty imposed by non-bankruptcy law upon fiduciaries, a debt caused by such breach is not excepted from her bankruptcy discharge unless it is non-dischargeable under some other subsection of §523(a). A. Can actual fraud under §523(a)(2)(A) consist of dishonest acts performed after a creditor's money has been acquired (i.e., a "cover-up")? Creditors cite examples of criminal liability for one who participates in a “conspiracy” by “aiding and abetting” another who performed the original wrongful act. Even if (as Creditors urge) the “criminal model” could properly be applied to this civil action, Creditors do not address the issue of whether covering-up someone else’s fraudulent taking constitutes fraud that is non-dischargeable in bankruptcy under §523(a)(2)(A). Had Debtor participated in a scheme to divest Creditors of their funds under false pretenses, she would have been an actor subject to liability for her own acts, even if her role was a minor or indirect one. However, Debtor was not shown to have conspired with Dean to take Creditors’ funds and the fact that Debtor did not inform Creditors that Lot 47 had been sold, although wrong, does not in and of itself prove that she conspired with anyone in a plot to obtain Creditors’ funds through fraud in the first place. Debtor cites cases from other jurisdictions holding that §523(a)(2)(A) applies only when fraud results in a debtor obtaining something, and points out that CFN (not Debtor) is the one that received and applied Creditors’ funds. The question asked was not whether Debtor obtained anything by concealing CFN’s application of Creditors’ funds, it was whether Debtor’s actions taken after CFN acquired and applied Creditors’ funds can constitute fraud by Debtor within the meaning of §523(a)(2)(A). Even if Debtor’s argument were responsive to the ques-tion, it is not entirely correct. See In re Arm, 87 F.3d 1046 (9th Cir. 1996), holding that §523(a)(2)(A) applies when a debtor “par-ticipated” in fraud and received an “indirect benefit”. Debtor may be said to have benefitted indirectly from CFN’s handling of Creditors’ funds, because CFN’s income was derived from loan fees and Debtor was a shareholder of CFN whose salary was paid from CFN’s income. Debtor may also be said to have benefitted indi-rectly from CFN charging Creditors for attorney’s fees incurred in the Eagle/Ozenbaugh bankruptcy case, because CFN’s retirement plan was a creditor in the case and Debtor was a beneficiary of the plan. Under §523(a)(2)(A), a Chapter 7 discharge does not discharge a debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by -- (A) false pretenses, a false representation, or actual fraud....”. Where one gives money without having been induced to do so by misrepresen-tation, but a misrepresentation occurs later, the misrepresentation does not create a claim for relief under §523(a)(2)(A) based on the creditor’s loss of the money given, because the misrepresentation is not what caused the creditor to give the money. In In re Aboukhater, 165 B.R. 904 (9th Cir. BAP 1994), the debtor borrowed money and promised to repay it according to the terms of an unsecured note -- when the debtor filed bankruptcy without repaying, the creditor sought to except the debt from discharge under §523(a)(2)(A) as having arisen from fraud, but did not allege that the debtor had misrepresented his intent to repay at the time the loan was made; rather, the creditor alleged that the debtor concealed assets when the creditor tried to collect. The Court held (at 910): The record indicates that the creditor failed to allege facts sufficient to support a claim under [§523(a)(2)(A)], in that the fraudulent acts complained of were not part of the transaction through which money or property was obtained. The fraudulent acts complained of, concealment of assets, occurred subsequent to the transaction. The statute requires that, in order for a debt to be excepted from discharge, it must be a debt for something that was “obtained by” fraud -- in other words, the fraud must have caused the debt to arise (i.e., the creditor would not have given the money but for the fraud). In this case, Creditors suffered two losses: first, they lost the funds that they gave to CFN for investment in Lot 47, and also incurred attorneys’ fees in litigation with a title company concerning their interest in Lot 47; second, they paid approximately $5,000 of the attorneys’ fees incurred by CFN in the Eagle/Ozenbaugh bankruptcy case. In order for Debtor’s own acts (as opposed to acts by CFN) to constitute fraud under §523(a)(2)(A), such acts must be shown to have caused either or both of Creditors’ losses. With respect to Creditors’ losses flowing from their attempted investment in Lot 47, Debtor told Creditors that CFN would lend their funds to Eagle to pay off the existing first deed of trust on Lot 47 and that Creditors would receive a new first deed of trust to secure their loan. It is undisputed that Creditors’ funds were not applied to pay off the existing first deed of trust and that Creditors did not receive a new first deed of trust on Lot 47, but Debtor claims to have had no part in CFN’s misapplication of the funds. According to Debtor, the funds received by CFN were handled by Dean and Debtor did not discover the misapplication until after Lot 47 had been sold; Creditors did not establish at trial that Debtor participated in the misapplication, or knew of it before it was done or while it was being done, or knew that Lot 47 was going to be sold before the sale. Debtor said at trial that a March 1992 inter-office memo “must have” put her on notice that Lot 47 had been sold, but she did not tell Creditors; she also said that CFN continued to receive funds from Ozenbaugh and disburse them to Creditors as interest payments until December 1992. By the time Debtor received notice of the sale, the damage to Creditors had been done -- at that point, the property that was to have served as Creditors’ collateral was gone, and Creditors had nothing but an unsecured claim against whoever received their funds. It is not clear who did receive Creditors’ funds. The documentary evidence at trial suggested that the funds may have been deposited into various escrows to make up shortages. However, Creditors all testified that they were receiving restitution payments in connection with criminal proceedings against Ozenbaugh, so it appears that Ozenbaugh and/or Eagle did receive at least some of Creditors’ funds. It may be that, had Creditors known in March 1992 that they had lost their collateral, they could have successfully moved at that time to recover their funds from some source, but there was no showing to that effect at trial. Debtor’s failure to tell Creditors about the sale did not cause Creditors to lose the funds they gave to CFN, or to incur attorneys’ fees in later litigation with a title company over Creditors’ interest in Lot 47. The cause of those losses was CFN’s failure to acquire for Creditors a first deed of trust on Lot 47. With respect to Creditors’ payment of attorneys’ fees charged to CFN for the Eagle/Ozenbaugh bankruptcy case, it has not been established that Debtor’s knowledge of the Lot 47 sale caused those losses either. Debtor testified that Creditors’ agreements with CFN called for them to pay attorneys’ fees “if there was anything required to protect the security”, but the language of the documents is not that limited -- the agreements provide that funds “advanced by [CFN] on the [Creditors’] behalf for trustee’s fees, costs, expenses and/or attorney fees shall be repaid by the [Creditors]”. Attorney Lytle testified that his firm’s clients in the Eagle/Ozenbaugh bankruptcy case were trade creditors and CFN in its capacity as an unsecured creditor; he said that he did not know whether CFN’s unsecured claims were held by CFN’s retirement fund or whether they were asserted on behalf of CFN’s own clients, or both. Creditors have not argued or shown that they did not hold unsecured claims in the Eagle/Ozenbaugh bankruptcy case -- indeed, the fact that all of the Creditors have received restitution payments in Ozenbaugh’s criminal case suggests that they did hold claims against Eagle and/or Ozenbaugh. The parties’ contracts entitled CFN to charge Creditors for attorneys’ fees without limiting such fees to those incurred to protect collateral. It appears that Creditors did hold unsecured claims against Eagle and/or Ozenbaugh, and Lytle testified without contradiction that his representation of CFN in the Eagle/Ozenbaugh bankruptcy case was for unsecured claims that could have been held by CFN’s clients. It is certainly possible that, had Creditors been told in March 1992 that their collateral was gone, they might have elected not to spend any money asserting unsecured claims in the Eagle/Ozenbaugh bankruptcy case when it was commenced four months later, but it is equally possible that they would have elected to pursue that remedy It appears that Eagle and/or Ozenbaugh owned substantial amounts of real property, so the bankruptcy case was not obviously one without assets in which pursuit of unsecured claims would clearly be futile. -- Creditors did not offer evidence on that point at trial. Creditors’ payment of attorney’s fees charged to CFN by Lytle’s firm for the Eagle/Ozenbaugh bankruptcy was not caused by Debtor’s failure to disclose the sale of Lot 47, because the parties’ contracts called for Creditors to pay attorneys’ fees incurred on their behalf by CFN regardless of whether Creditors held secured or unsecured claims against their borrower. When Debtor learned in March 1992 that Lot 47 had been sold, she was a licensed real estate broker. As such, Debtor had a general duty of full disclosure pursuant to the California Business & Professions Code, and she should have told Creditors about the sale as soon as she knew of it. Failure to disclose material facts can constitute either a misrepresen-tation or a false pretense for purposes of non-discharge-ability, see In re Haddad, 21 B.R. 421 (9th Cir. BAP 1982), affirmed without opinion, 703 F.2d 575 (9th Cir. 1983). However, Debtor did not learn of the sale until it had taken place, and the fact that the sale had occurred was not material to Creditors’ decisions to give their funds to CFN because the funds were given prior to the sale, nor was it material to loss of those funds through CFN’s misapplication of them because the misapplication was made prior to the sale. The sale did not cause Creditors to give their funds to CFN, nor did it cause Creditors to lose those funds -- had Creditors been told of the sale on the very day that Debtor learned of it, they still would have suffered their losses, which had already occurred at that point. Accordingly, though Debtor may have breached a duty owed to Creditors under state law, such breach did not cause Creditors’ losses and did not give rise to debts that are non-dischargeable under §523(a)(2)(A). B. Can a corporate principal who participates in a cover-up of corporate wrongdoing be held liable for such a cover-up as her own wrongful act, without the necessity of a creditor piercing the corporate veil? Creditors quote Granoff v. Yackle, 196 Cal.App.2d 253, 257, 16 Cal.Rptr. 394 (1961): The applicable law was clearly stated by Mr. Chief Justice Vanderbilt in Hirsch v. Phily, [4 N. J. 408, 73 A.2d 173 (1950)]. ... In re- versing the judgment, the Chief Justice said (73 A.2d 173, at p. 177): "It is well settled by the great weight of authority in this country that the officers of a corporation are personally liable to one whose money or property has been mis- appropriated or converted by them to the uses of the corporation, although they derived no personal benefit therefrom and acted merely as agents of the corporation. The underlying reason for this rule is that an officer should not be permitted to escape the consequences of his individual wrongdoing by saying that he acted on behalf of a corporation in which he was interested. 152 A.L.R. 703; 3 Fletcher on Corporations, §§ 1140-1142." (See also Hinkle Iron Co. v. Kohn, [229 N.Y. 179, 128 N.E. 113]; Alexander v. Coyne, [143 Ga. 696, 85 S.E. 831].). Creditors also quote Doctors’ Co. v. Superior Court, 49 Cal.3d 39, 44-45, 260 Cal.Rptr. 183 (1989) (“Doctors’”): ... corporate directors and officers who directly order, authorize or participate in the corporation’s tortious conduct ... may be held liable, as con- spirators or otherwise, for violation of their own duties towards persons injured by the corporate tort. (See Wyatt v. Union Mortgage Co., [24 Cal.3d 773, 157 Cal.Rptr. 392, (1979)]. Wyatt v. Union Mortgage Co., cited by Doctors’, explains the basic principle (at 24 Cal.3d 785): Directors and officers of a corporation are not rendered personally liable for its torts merely because of their official positions, but may become liable if they directly ordered, authorized or participated in the tortious conduct. (United States Liab. Ins. Co. v. Haidinger-Hayes, Inc. (1970) 1 Cal.3d 586, 595, 83 Cal.Rptr. 418, 463 P.2d 770.) Personal liability, if otherwise justified, may rest upon a "conspiracy" among the officers and directors to injure third parties through the corporation. (Golden v. Anderson (1967) 256 Cal.App.2d 714, 719-720, 64 Cal.Rptr. 404; cf. Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 576, 108 Cal.Rptr. 480, 510 P.2d 1032; Wise v. Southern Pacific Co. (1963) 223 Cal.App.2d 50, 72, 35 Cal.Rptr. 652.) Shareholders of a corporation are not normally liable for its torts, but personal liability may attach to them through application of the "alter ego" doctrine (see, e. g., Associated Vendors Inc. v. Oakland Meat Co. (1962) 210 Cal. App.2d 825, 836-837, 26 Cal.Rptr. 806), or when the shareholder specifically directed or authorized the wrongful acts. The theory of these cases is inapposite here, because Debtor was not shown to have “directly ordered, authorized or participated in” CFN’s failure to apply Creditors’ funds to acquire a first deed of trust on Lot 47. What Debtor did was fail to disclose the sale of Lot 47, of which she received notice in March 1992 -- that was long after Creditors gave their funds to CFN in February 1991 and CFN failed to place a first deed of trust on the property for the benefit of Creditors, and after the property was sold. As discussed above, Debtor’s failure to tell Creditors about the sale did not cause Creditors to lose funds in connection with their attempted investment in Lot 47, nor did it cause them to lose funds paid to attorneys for work done in the Eagle/Ozenbaugh bankruptcy case, nor is there evidence that it exacerbated those losses. By the time Debtor received notice that Creditors’ intended collateral had been sold, Creditors had already suffered the loss caused by CFN’s failure to acquire a first deed of trust for them. Had CFN applied Creditors’ funds to obtain a first deed of trust on the property, Creditors would have received the proceeds from sale of the property -- because CFN did not place a first deed of trust on the property for Creditors, Creditors received nothing from the sale and were left with an unsecured loan -- but it has not been shown that Debtor’s failure to tell Creditors about the sale when she received notice that it had occurred contributed to that result in any way. Creditors argue that Debtor did participate in a scheme by which CFN improperly took funds from other investments held by Creditors, under the guise of using them to invest in Lot 47. Creditors’ explanation of what they allege was done, and why, is far from clear, but they seem to say that Debtor and CFN sought to protect investments made by CFN’s retirement plan in some way at the expense of Creditors. Debtor correctly points out that this theory was not proven at trial: Creditor Enswiler Enswiler is one of the Creditors. His attorney stated at trial that Enswiler's name is misspelled in the caption of Creditors' complaint, but the complaint has never been amended to correct that error. testified that his entire $25,000 investment for Lot 47 was made in the form of his own check; Creditor Reich testified that she gave Debtor her own check for $3,230.77 and authorized Debtor to combine it with $8,769.23 in proceeds from another investment, to make a total investment of $12,000 for Lot 47; Creditor Bernard was not asked about the source of her $14,000 investment for Lot 47. All of the Creditors testified that they did not generally authorize “rollovers” of funds from one investment to another, but none of them testified that unauthorized rollovers occurred with respect to their investments for Lot 47; in fact, the testimony was to the contrary. C. What role does the commission of actual fraud play in piercing a corporate veil, where the corporate form is not shown to be a sham? Creditors cite state and federal cases for several general propositions, none of which is on point here. Damerel v. North American Bond & Mortgage Co., 133 Cal.App. 290, 24 P.2d 237 (1933) is cited for the proposition that (in Creditors’ words) “a wrongdoer may not urge separate entity as a shield”. In that case, a corporation disclaimed responsibility for wrongful acts of its agent but was held liable when the actor was found to have authority to act for the corporation -- the Court’s statement as paraphrased by Creditors pertained to the corporation’s attempt to separate itself from its agent, and is dictum in any other context. In re Hedgeside Distillery Corp., 123 F.Supp. 933, 948-49 (N.D.Ca. 1952), aff’d, Anglo Calif. Nat’l Bank of S.F. v. Schenley Industries, Inc., 215 F.2d 651 (9th Cir. 1954) is cited for the proposition that “the corporate veil may at times be pierced to do equity and justice, but never to accomplish the reverse”. In that case, the Court declined to pierce the corporate veil because equity would not have been served thereby; the Court’s statement quoted by Creditors is dictum under any other circumstances (and does not apply to the question asked in the Tentative Decision, which was whether the veil had to be pierced at all when fraud was committed). Mich. Nat’l Bank v. Hardman Aerospace, 36 Cal.App.3d 196 (1973) is cited for the proposition that (in Creditors’ words) “the corporate entity should be ignored where it can be used as a shield against liability for wrongdoing”. In that case, a corporation agreed to sell its wholly-owned subsidiary to another corporation under a complex transaction in which the subsidiary being sold also acted as the maker of a note involved in the sale; in litigation to rescind the sale, the Court declined to recognize the subsidiary as a separate corporate entity under the facts of that case: A noted commentator states that the fiction of corporate entity may be and should be disregarded in the interests of justice to prevent fraud. (Fletcher, Cyclopedia of the Law of Corporations (rev. ed. 1963) § 25, pp. 97-98.) Respectable authority is to the same effect. In Phoenix Safety Inv. Co. v. James (1925) 28 Ariz. 514 [237 P. 958] the court disregarded the corporate entity in a case where a corporation was being used to sue a defendant in an effort to cut off defenses that would have been available against the real plaintiff. At bench this was precisely the objective of Dayco. The same result should follow when an individual uses the existence of a corporate entity as part of a scheme to perpetrate a fraud. The Court’s statement paraphrased by Creditors is dictum outside the specific context of that case. Creditors also cite Stanford Hotel Co. v. M. Schwind Co., 180 Cal. 348, 181 P.780 (1919) for the proposition that the corporate veil will be pierced when an entity “reorganizes” under a new name but with substantially the same stockholders and directors, for the purpose of carrying on the business of the former entity while avoiding its liabilities --Creditors argue that this is “akin” to what occurred when CFN fired Dean and Creditor took over the management, but the two situations are plainly distinguishable and Creditors cite no authority for treating the latter as the equivalent of the former. Debtor cites Automotriz del Golfo de Calif. S. A. de C. V. v. Resnick, 47 Cal.2d 792, 796 (1957) (“Automotriz”), which holds that: It is the general rule that the conditions under which a corporate entity may be disregarded vary according to the circumstances in each case. [citations omitted] It has been stated that the two requirements for application of this doctrine are (1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow. [citations omitted, emphasis supplied] If a corporation commits fraud, the second prong of the test (inequitable result) will exist. The question in the Tentative Decision was whether the first prong (no separate corporate personality) must also exist when a corporation has committed fraud, or whether veil piercing is unnecessary to impute the corporation’s liability to its shareholders when fraud has been committed. The parties have cited no authority that is directly responsive to the question in the Tentative Decision, nor has the Court found any. Many cases use broad language such as “where the recognition of the fiction of separate corporate existence would foster an injustice or further a fraud the courts will refuse to recognize it”, Gordon v. Aztec Brewing Co., 33 Cal.2d 514, 522, 203 P.2d 522 (1949), but examination of the facts always reveals that the two entities in question did not have separate personalities (i.e., the first prong), due to common ownership, commingling of assets, inadequate capitalization, failure to observe corporate formalities, etc. Under those circumstances, the fact that treating a corporation as a separate entity would “further a fraud” merely meets the test’s second prong (inequitable result) after the first prong (no separate corporate personality) has been met. As stated in Automotriz, “the conditions under which a corporate entity may be disregarded” are those reflected by the two-prong test: both a lack of separate personalities, and an inequitable result. There appears to be no authority for disregarding a corporate veil if the corporate form is not shown to be a sham, even when fraud has been committed. Accordingly, shareholders who do not take part in fraudulent corporate acts performed by other corporate principals are not liable for claims against the corporation based on the fraud. That is not to say that, if a shareholder participated in fraud committed by a corporation, the shareholder could not be held liable for the shareholder’s own fraudulent acts unless the corporate form could be shown to be a sham. Under such circum-stances, the corporation would be liable for its acts and the shareholder would be liable for the shareholder’s acts -- in that case, the shareholder would bear direct liability, rather than being vicariously liable for the acts of the corporation, and veil piercing applies only when vicarious liability is imposed. As discussed above, Debtor was not shown to have participated in CFN’s application of Creditors’ funds (and Debtor’s own failure to disclose the sale of Lot 47, though wrong, did not cause Creditors’ losses), so Debtor has no vicarious liability for debts caused by CFN’s acts unless the corporate veil is pierced, which it was not. Creditors argue that the veil should be pierced because CFN was shown to have been inadequately capitalized, based on Debtor’s testimony that "there were several months sometimes” when she went without salary due to CFN not “making money”. It was not shown when that happened, and it could have been long before or long after Creditors’ losses occurred. Further, the testimony suggests that Debtor (who was a corporate shareholder and officer as well as an employee) was to receive salary only from profits, and the fact that CFN may have had no profits at some point does not mean that CFN lacked sufficient capital to meet its current and anticipated liabilities. That testimony does not establish under-capitalization, nor does the evidence as a whole. CONCLUSION For the reasons set forth above, Debtor has not been shown to be vicariously liable for any debt owed to Creditors by CFN, nor to be directly liable for any of Creditors’ losses. Counsel for Debtor shall submit a form of judgment so providing, after review by counsel for Creditors as to form. Dated: ______________________________ ARTHUR S. WEISSBRODT UNITED STATES BANKRUPTCY JUDGE CANB DocumentsNorthern District of California