Opinion
Case No. SV03-13981-GM [Includes cases previously designated BK, Case Nos. SV031-3982-AG, SV03-13986-AG, SV03-13987-AG, and SV03-13989-AG, Adv. No. SV03-01425-GM.
August 29, 2005
PRELIMINARY MEMORANDUM OF OPINION AFTER TRIAL
Moshe Leichner has pleaded guilty to fraud and other criminal acts and has agreed to twenty years in federal prison and a restitution judgment of $98 million. This case is only a small part of the web of financial affairs created by Leichner. It involves issues of ownership of, title to, and payment for ten airplanes used in a flying school and relies on the credibility of the key witnesses to overcome the documentary evidence.
United States v. Moshe Leichner and Zvi Leichner, U.S.D.C. No. CR 03-568, U.S. District Court for the Central District of California.
After a five day trial and review of the evidence and the law, I find that the Trustee holds title to nine of the airplanes and that the Trustee and Katzman are each a 50% owner of the tenth plane. I further find that Katzman is liable for damages due to his secreting or destroying the logbooks for these planes, and that Katzman violated the preliminary injunction and the automatic stay. There will be a further evidentiary hearing to determine damages.
I. PROCEDURAL HISTORY
This adversary proceeding was brought in the bankruptcy proceedings of Midland Euro, Inc. ("MEI"), Midland Euro Exchange, Inc. ("MEE"), Midland Group, Inc. ("MGI"), and other Moshe Leichner and Zvi Leichner entities. The details of Leichner's financial schemes are alleged in the counterclaim and denied by Katzman, but do not directly deal with the ownership of these planes except that the Trustee contends that the Midland/Leichner entities implemented a scheme to use third parties to hold nominal legal title to assets with the express or implied agreement that the third parties were nominees and/or agents of Moshe Leichner and/or other Midland/Leichner entities. He further asserts that two of the corporations which were created for the purpose of holding title to aircraft owned by Leichner and/or Midland/Leichner entities were Continental Jet Management, Inc. ("Continental Jet"), a Nevada corporation, and EAL Jet Management, Inc. ("EAL Jet"). At trial Katzman did not dispute the purpose or structure of these entities.
On October 8, 2003, Simon Katzman ("Katzman") and Continental Flight Center, Inc. ("CFCI") filed this adversary proceeding against Christopher Barclay, Chapter 7 Trustee ("Trustee"), Moshe Leichner, Continental Air Care, Inc. ("CACI"), and Clyde D. Sorrells seeking to set aside fraudulent transfers, and requesting declaratory relief and an injunction as to nine aircraft and their spare parts. CACI and Sorrells were later dismissed by stipulation.
After a series of motions to dismiss, the Trustee answered the First Amended Complaint and filed his counterclaim against Katzman and CFCI [Continental Jet Management was later joined as a counter-defendant] for turnover, avoidance of fraudulent transfers, damages for violation of automatic stay, substantive consolidation, declaratory relief, and an injunction. At some point, which is not clear from the docket, the Trustee also filed a cross-claim against EAL Jet Management, which never answered and may never have been served. Default was entered against Continental Jet Management on August 24, 2004, but no judgment has been requested or entered. On April 7, 2004, Katzman filed a motion for turnover of copies of certificates of registration of nine aircraft and a motion for turnover of insurance proceeds. Judge Greenwald denied this at the continued hearing on May 19, 2004 on the grounds that the planes were grounded pending resolution of the Trustee's counterclaims, but the docket does not reflect an order on this motion. On April 21, 2004, the Trustee filed a motion for a preliminary injunction on counterclaims by the Trustee against Katzman and CFCI, which was granted on May 20, 2004, enjoining the transfer or encumbrance of the ten aircraft and their operation without the Trustee's written consent. On February 1, 2005, in preparation for Judge Greenwald's retirement, this case was transferred to me.
The counterclaim seeks a judgment for fraudulent transfer as to Continental Jet and Substantive Consolidation of EAL and Continental Jet.
A joint pre-trial order was entered on April 13, 2005. Three weeks before trial, Robert Yaspan, Katzman's attorney, withdrew without objection and William Schultz, who was originally identified as an expert witness for Katzman in the area of FAA laws, substituted in to serve as trial counsel. The trial commenced July 11, 2005 and concluded on July 15, 2005, at which time I submitted the matter for decision. This memorandum constitutes my findings of fact and conclusions of law.
There is no substitution of attorney on file as of August 5, 2005.
II. FACTUAL FINDINGS
This case focuses on the ownership of ten aircraft used in the operation of a flight school. The aircraft in question fall into two groups: (1) nine planes ("nine planes") first registered with the FAA to Continental Jet Management, Inc. and later transferred to Continental Air Care Inc. and (2) a Beech H-35 Bonanza aircraft ("Beech," "Bonanza," or "Beech Bonanza") initially registered with the FAA to MEI and Katzman and later transferred solely to Katzman. An eleventh aircraft was purchased, but it was seized by the FBI as a stolen plane before it could be registered. A list and description of all eleven planes is set forth in Attachment 1 hereto.
A. Facts Not Based on Credibility
Most of the facts are identified as undisputed in the Pretrial Order or the evidence is so clear that they might be considered uncontested. It is the application of these facts, along with the necessity to determine a few issues where credibility plays a role, that is the crux of this case.
Moshe Leichner and Simon Katzman knew each other for some years and were part of an Israeli flying club which meets at the Van Nuys Airport. In 1999 Leichner purchased the Beech Bonanza and in March 2000 it was registered in the names of Midland Euro, Inc. and Katzman, although Katzman testified that Leichner did not want to fly this plane because it was old. Sometime after the purchase of the Beech, Leichner and Katzman agreed to create a flight school at the Van Nuys Airport. To that end, California Flight Center, Inc. was incorporated in Nevada on July 31, 2001 with Katzman as treasurer. Although Katzman believed that Leichner was president, there is some confusion as to Leichner's official involvement because the only document in evidence is the Westlaw report of Corporate Records and Business Registration, which shows Israel Schwartz (Leichner's son-in-law) as president and secretary and Katzman as treasurer. This report was updated on October 6, 2003 and I do not have evidence of the status before that time. However, in testimony both Katzman and Moshe Leichner have represented that CFCI was a 50/50 joint venture or partnership between them. No one has raised the question of whether stock was issued and to whom.
Request for Judicial Notice #2.
In discussing the formation of CFCI, Katzman testified that when they decided to incorporate he went to the office of Michael Cardenas (Leichner's lawyer), who gave Katzman a certificate of the corporation which looked like a diploma and said that Leichner was president and Katzman was a trustee.
Katzman testimony, 7/12/05.
To add to the confusion, Katzman testified later concerning the lease from Continental Air Care, Inc., stating that it was necessary since Sorrells (the sole officer of Continental Air Care, Inc.) was not an owner of CFCI. As will be discussed later, the registered title to nine of the planes was in Continental Jet Management, Inc., a corporation owned by Leichner, but apparently not a partner with Katzman, or a shareholder, officer or director in CFCI. But Katzman testified that although CFCI could not fly planes without the written permission of the registered owner. A lease between CFCI and Continental Jet Management was not required because Leichner was part of Continental Jet Management and also part of the flight school.
Id.
Even more confusion is created because on September 4, 2002, Katzman signed (as president of CFCI) the lease with Continental Air Care, Inc. Given the state of the evidence presented in this case, it is impossible for me to make findings as to the composition or status of CFCI at incorporation or at any time thereafter.
Exhibit 19.
Once incorporated, CFCI acquired the use of ten airplanes, each of which was registered with the FAA showing Continental Jet Management as the legal owner.
Continental Jet Management, Inc. was incorporated in Nevada on January 22, 2001. As of October 6, 2003, Moshe Leichner was president and secretary and Vered Leichner was treasurer. All parties agree that Continental Jet was owned by Leichner.
Request for Judicial Notice #2.
Starting in the latter half of 2001, a series of nine planes were purchased, each was registered with the FAA in the name of Continental Jet Management. Katzman placed the respective registration statement inside each of the nine planes. There is no dispute that Leichner, directly or through his related entities (the "Leichner affiliates"), paid the full purchase price for six of the nine planes. However, there remains a dispute as to payment for the other three planes.
Stipulated Facts #1 and 4, Pretrial Order.
Stipulated Facts #2, Pretrial Order. Also see Attachment 1 to this Memorandum.
On November 20, 2000, Continental Air Care, Inc. was incorporated in Nevada with Clyde D. Sorrells as president, secretary and treasurer. Sorrells, who had sold EAL to Leichner, intended to start a medical airlift company. In September 2002, with Katzman's knowledge, Continental Jet transferred record ownership of the nine aircraft to CACI. Katzman made no written objection to this action. At about the same time as the transfer of registered ownership to CACI, CFCI (by Katzman) signed an aircraft lease with CACI to lease the nine aircraft to CFCI on a month-to-month basis. CFCI never paid any rent under the lease and the Trustee terminated the lease in October 2003.
Request for Judicial Notice #2.
Stipulated Facts #3, 5, 10 and 19, Pretrial Order.
This bankruptcy began as an involuntary proceeding after the arrest of Moshe Leichner in February 2003. On May 16, 2003 the Court appointed an interim Trustee and on June 18, 2003 the order for relief was entered. Thereafter the Trustee received an assignment of the nine aircraft from Sorrells on behalf of CACI. The Trustee demanded that Katzman turn over the nine planes together with their maintenance records and logbooks, but this did not occur, and on May 20, 2004 the Court granted an order enjoining Katzman and CFCI from operating, transferring or encumbering the nine planes and the Beech Bonanza.
Stipulated Facts # 11, 12, 13 and 14, Pretrial Order.
Stipulated Facts # 16, 18 and 23, Pretrial Order.
From the time of purchase until the Trustee was granted the injunction, the nine planes were used by CFCI as part of its flight school and aircraft rental business. In February 2004, the 1977 Piper with tail number N4861F crashed. The insurance company issued a check for $52,000 (payable to Continental Jet, CFCI, CACI, and possibly a fourth company) which Katzman alleges is still in his possession.
Stipulated Facts # 20 and 21, Pretrial Order.
Katzman and Midland Euro, Inc. jointly held title to the Beech Bonanza until less than one year before the bankruptcy was filed, when title was transferred by Leichner to Katzman as sole owner. The Beech is in operating condition and was used by Katzman after the injunction, though such use has since ceased. The remaining eight of the nine aircraft have been disabled for movement (wheels, etc., have been removed) and are still at the hanger and facilities of CFCI at Van Nuys airport.
Stipulated Facts # 9, Pretrial Order.
B. Credibility
Before applying the law, I must make findings on several facts which are not documented in writing, but rather are based on the credibility of one or more witnesses. These include (1) the terms of the involvement of Leichner and Katzman in CFCI; (2) the amount of money, if any, that Katzman paid for purchase of any of the nine planes or paid to Leichner in reimbursement for payment for the nine planes; (3) the amount of money that Katzman contributed to CFCI for insurance or other expenses; (4) the location of the logbooks for the eight surviving planes, the effect of their disappearance, and the decline in value of the planes due to their disappearance.
With the exception of the receipt for the two Israeli planes (discussed below), the written documents all support the Trustee's contention that Leichner entities paid for and owned the nine planes and 50% of the Beech and that CFCI had no ownership interest in the nine planes. Katzman disputes the Trustee's contention, claiming an interest based on payments that he alleges that he made to purchase these aircraft. However, there is no paper trail in support of Katzman's position. Katzman testified that all payments were made in cash and all agreements with Leichner were oral. Because of this lack of any written corroboration, I must determine whether Katzman's testimony is credible as well as the testimony of the witnesses who support him and whether this testimony outweighs the Trustee's documentary evidence.
"From the viewpoint of the Confrontation Clause, a witness under oath, subject to cross-examination, and whose demeanor can be observed by the trier of fact, is a reliable informant not only as to what he has seen but what he has heard." Ultimately, the credibility of the witness is up to the trier of fact.
Dutton v. Evans, 400 U.S. 74 (1970).
See Padilla v. Terhune, 309 F.3d 614, 620 (9th Cir. 2002).
[I]n this Circuit (as in others) the rule is that the trier of fact is at liberty within bounds of reason to reject entirely the uncontradicted testimony of a witness which does not produce conviction in his mind of the witness' testimony. This would be particularly true when the testimony comes from an interested party rather than a disinterested witness. Or, the demeanor of the witness may be controlling rather than his actual words `the whole nexus of sense impressions' which one gets from a witness. Of course a judge may not reject uncontradicted evidence arbitrarily.
Joseph v. Donover Co., 261 F.2d 812, 824 (9th Cir. 1959).
Furthermore, "positive uncontroverted testimony may be rejected if it contains inherent improbabilities or contradictions, which alone, or in connection with other circumstances, tend to contradict it."
White Glove Bldg. Maintenance, Inc. v. Brennan, 518 F.2d 1271 (9th Cir. 1975).
In this case, the two principal witnesses to the payments and agreements are Katzman and Leichner, neither of whom is credible. Leichner is currently imprisoned for defrauding people out of close to $100 million dollars. Katzman has made false statements or cooperated with the presentation of false statements throughout the existence of Continental Flight Center, Inc. His lack of truthfulness was particularly demonstrated at trial concerning the purchase of the Israeli airplanes and the issue of the "stolen" logbooks. His testimony at trial lacks credibility and does not outweigh the documentary evidence presented by the Trustee.
1. The Israeli Airplanes
Katzman testified that he bought planes 555CV and 222CV as a private transaction in Israel. The issue is whether Katzman or Leichner/MEI paid for the planes and how much they cost. Although both Leichner and Katzman claim that Katzman (through his parents) paid for the planes, Arvel Jett Reeves, the former general manager or vice-president of EAL, testified in his deposition that Leichner told him that Leichner had bought two Cessnas in Israel.
Reeves deposition dated April 1, 2004, 78:6-79:22.
Between Katzman and his mother, the story was told that Katzman saw an ad by Joseph Uziel (referred to in testimony as "Yossi"), a commercial airline pilot and Katzman's uncle's neighbor. Katzman asked his parents to pay for the planes and Uziel went to Katzman's parents' house in Israel to receive the payment. Although Mrs. Katzman was somewhat confused about the exact time, later clarification established that this was in spring 2002. Katzman and his parents spoke by phone while Uziel was at the parents' home and Katzman instructed them to pay Uziel the money. Katzman's father took $90,000 U.S. from the safe, giving it to Uziel, who prepared and handed Katzman's parents a receipt. Mrs. Katzman saw the receipt at that time and positively identified Exhibit 1004 as the document that Uziel handed her that night.
Although it does raise questions as to why someone has that much cash in their safe (Mrs. Katzman testified to having large amounts in the safe at all times), there is no reason to disbelieve Mrs. Katzman that she kept large amounts of cash readily at hand. But it also means there is no paper trail. The only piece of paper that might support Katzman's contention that his parents paid $90,000 for the two planes is the alleged receipt from Uziel, which is thus critical to proving Katzman's story of these events.
Although in her declaration (exhibit 1003) Mrs. Katzman never mentions a receipt, at trial Mrs. Katzman testified that she was given a receipt (Exhibit 1004) by Uziel when her husband paid him the money:
Schultz: Mrs. Katzman can you read English comfortably?
Dollinger (Translator for Mrs. Luba Katzman): Yes.
Schultz: Do you recognize that document?
Dollinger (Translator for Mrs. Luba Katzman): Yes.
Schultz: The document is signed by Yossi Uziel, is it not? Do you recognize that name?
Dollinger (Translator for Mrs. Luba Katzman): Yes.
Schultz: Do you remember the circumstances and did you receive this — I am sorry I started to ask you a bad question, let me ask you a better question. Did you receive this document from Mr. Uziel?
Dollinger (Translator for Mrs. Luba Katzman): Yes.
Schultz: Approximately can you tell from the document or do you have a recollection when that was?
Dollinger (Translator for Mrs. Luba Katzman): I don't have a clear recollection but we gave him the money before my husband passed away.
July 11, 2005, 3:19 p.m. Transcribed in chambers.
. . .
Gumport: And when did your husband die Mrs. Katzman?
Dollinger (Translator for Mrs. Luba Katzman): On December 15, 2002.
Gumport: So close in time to December 15, 2002 you handed $90,000 to Mr. Uziel, correct?
Dollinger (Translator for Mrs. Luba Katzman): Yes, perhaps a few months prior to this.
Gumport: And then Mr. Uziel gave you the receipt? Dollinger (Translator for Mrs. Luba Katzman): Yes. Yes.
July 11, 2005, 3:43 p.m. Transcribed in chambers.
Once Trustee's counsel Mr. Gumport pointed out that the receipt was dated in August 2003 and signed in September 2004, Mrs. Katzman's testimony became confused, though she still insisted that she had received the unsigned receipt in March 2002 when her husband paid the money.
Gumport: Would you please read to the Court the date on the receipt.
Dollinger (Translator for Mrs. Luba Katzman): February 17, 2004. But my husband was no longer alive.
Gumport: Well, does, is the date on the receipt accurate?
Dollinger (Translator for Mrs. Luba Katzman): According to this receipt it was in 2004 but we made the payment much earlier than that.
Gumport: So Mr. Uziel didn't give you the receipt when as you said you gave him $90,000, correct?
Dollinger (Translator for Mrs. Luba Katzman): We did but it was not this date. We gave him the receipt, we gave us the receipt. But I was not aware of the date.
Gumport: Are you telling me that someone changed the date on that document that you testified was the receipt for the $90,000 you gave to Mr. Uziel close in time to December 2002?
Dollinger (Translator for Mrs. Luba Katzman): I don't know. I don't know what to say about it. I don't know what to say about it. When he gave me the receipt there was no date. Yes.
Gumport: Isn't this a document that you had prepared after Mr. Katzman had been sued by the Trustee in 2003?
Schultz: Your Honor, I object to that question. There is no foundation for that.
Judge: Overruled.
Dollinger (Translator for Mrs. Luba Katzman): No, I did not prepare it.
Gumport: Do you know who prepared it?
Dollinger (Translator for Mrs. Luba Katzman): I received this from Uziel, from Yossi.
Gumport: In 2004?
Dollinger (Translator for Mrs. Luba Katzman): Yes it is possible. It is possible.
Gumport: Did you ask him to give you that receipt, Exhibit [1004] in 2004?
Because the Katzman parties had not pre-marked their exhibits and their exhibit list used the same numbers as those of the Trustee, I requested them to use numbers starting with 1001. At this point in the trial, the receipt was not referred to by a consistent number. Later it was identified as Exhibit 1004.
Dollinger (Translator for Mrs. Luba Katzman): When Simon was having problems regarding [indecipherable] the airplane I contacted him.
Gumport: You contacted Mr. Uziel?
Dollinger (Translator for Mrs. Luba Katzman): Yes.
Gumport: And you asked him to give you a receipt in 2004, is that correct? For an aircraft that you say you paid for in or about December 2002. Is that correct?
Dollinger (Translator for Mrs. Luba Katzman): Well, well when we met him for the first time and we gave him the money Simon made the phone call and it turned out that he is my brother's neighbor. And then he gave me this document and signed it.
Gumport: And that is in 2004?
Dollinger (Translator for Mrs. Luba Katzman): Yes.
Gumport: And, but you say you gave Mr. Uziel the money in or about December 2002, right?
Dollinger (Translator for Mrs. Luba Katzman): I am sorry your honor the interpreter has not been afforded the opportunity to complete the interpretation.
Judge: I am sorry so okay, so . . .
Dollinger (Translator for Mrs. Luba Katzman): Before the question, answer was given.
Judge: I am sorry, okay so complete the interpretation.
Dollinger (Translator for Mrs. Luba Katzman): What was the question?
Judge: We can play it back or you can ask it again.
Gumport: I am going to try and ask the same question again.
Judge: Part of the problem is that Mrs. Katzman really does understand English so she is tending to answer the question before the interpretation is through. So she really needs to wait. You will have to instruct her.
Dollinger (Translator for Mrs. Luba Katzman): Yes.
Gumport: When did Mr. Katzman make this phone call that you refer to?
Dollinger (Translator for Mrs. Luba Katzman): He called me up saying that he entered into a deal with Uziel and he came to our house and he made a deal with him about two airplanes. And I don't know how the airplanes where kept.
Gumport: Do you know how the money was transferred to Mr. Uziel?
Dollinger (Translator for Mrs. Luba Katzman): We gave him cash money at home.
Gumport: Was it cash money in U.S. Dollars?
Dollinger (Translator for Mrs. Luba Katzman): Yes Yes. Yes.
Gumport: And was the name of Mr. Uziel's company Galit Aviation?
Dollinger (Translator for Mrs. Luba Katzman): I really can not say.
Gumport: If I may approach Your Honor.
Judge: Okay.
Gumport: Mrs. Katzman do you see on Exhibit [1004] the letter that you say is Mr. Uziel's receipt is on the letterhead of a company called Galit Aviation?
Dollinger (Translator for Mrs. Luba Katzman): Yes, I can see it here but I did not know that the name of the company was Galit Aviation.
July 11, 2005, 3:51 p.m. Transcribed in chambers.
In his testimony, Katzman first tried to rehabilitate his mother, claiming that she had received the signed receipt when the money was allegedly transferred in March 2002. But he finally admitted that the receipt was only created at his behest at a later date for purposes of this litigation:
Schultz: This is the document that Simon's mother had yesterday. Do you recognize some or all of those documents Mr. Katzman?
Katzman: Yes I can.
Schultz: The first page says Galit Aviation on it. We talked at some length yesterday about the different dates that are on the face of that page. Do you have any knowledge of the dates that are on the face of that page?
Katzman: Yes, when I got the airplanes here in 2001/2002 I didn't have a receipt from Yossi, probably my Mom have the receipt in Israel. She — I never got nothing from my Mom. She just paid the airplane. The airplane came to Los Angeles harbor, and that's it. Then when Yaspan — Mr. Yaspan was my lawyer and on one occasion even Yossi, even Yossi Uziel, came to Yaspan's office to testify that "yes he had sold me the airplane." But Mr. Yaspan said you had to testify under oath. Under oath means if the guy is coming to the United States, is an airline pilot, and somebody is going to serve him a subpoena so he has to come to the Court. And I didn't want to do it to him. He is a friend of mine, who sold me the airplane. Now we have to go through all the rubicon that happened with Moshe that sucked me all the way inside without my my you know — I was very mad that I'm in this situation. So he came to Yaspan's office and testified in front of Yaspan, not under oath, that he sold me the airplane and my Mother and Father paid the money. I didn't have a receipt. Mr. Yaspan months and months after told me, "Simon I need something from Mr. Uziel." So I called Mr. Uziel and I asked him, "Yossi can you send me a receipt something that I bought the airplane from you?" So that's what I got. I have the receipt here dated 23 in August. I don't remember when was, but I remember it was like a year after I bought the airplane. He sent me an invoice — this is Yossi Uziel fax number and he sent it to me I don't remember if Mr. Yaspan or returned to my office and he just put you in your same name and everything but different on the dates. But it says that this letter went out on 23 of August but it really was done exactly on March 2002. But he signed it, you know. Probably my Mom saw the same papers signed by her but she never gave me the papers. I don't know if she had the papers in Israel. That is the issue with the dates right here. Yes, I called Yossi like a year after. "Yossi, you know I am going to Court and I don't have nothing to prove. I need something that you let me know." And he didn't even want to to — in Israel everybody does bad business with cash money. I never got into a cash money business here. I did it the hard way. Everybody — nobody knows what the other one — everyone wants cash money under the table for everything. So he didn't even put the amount of money that I in. And I put in $90,000 for those two airplanes. So he just said that he sold the airplane and imagine an airplane like this for $40,000 is the right price $45,000. I have here the original estimate some place, the brochure how much he wants for the airplane. He wants for the airplane I think $98,000. So I brought him down to $90,000. And I believe, I believe, I don't remember. I believe he sent me those airplanes here to the United States with some parts. Some parts on the airplane that I didn't even pay for them. I do not know who paid for them. The container came with extra parts in it. I was supposed to get some extra parts but, yes but then I saw a lot of parts that did. You know I don't know who picked up the parts. The parts still now are at the EAL office. I never picked up those parts. I never picked up those parts only the airplanes. The parts are still at EAL office. Some receipts I don't know what it was. Yes, they came like a year after. I called Yossi and I told him, "Yossi I told him I need a receipt or something." So right away he faxed it to me. He put it in to his computer. He put the date he wrote this letter to me.
Schultz: The actual letter recites the date of March 2002. Is that approximately to your recollection approximately when the $90,000 transaction occurred?
Katzman: Yes. Yes, I don't remember exactly the date but that was the month, yes
July 12, 2005, 5:17 p.m, Transcribed in chambers.
In his attempt to rehabilitate his mother's testimony, Katzman asserted that she may have received an earlier copy of the receipt, and when that could not be supported, he stated under oath that his mother does not read English:
Schultz: And then aside from what you have told us do you have any other information as to why there would be an August 2003 date on the top of the letter?
Katzman: Because I did not have received it yet and I am here and my Mom is in Israel. I did not bother to call my Mom to give her the original paper. I didn't know if she had it, the original paper. I had assumed she had. She had the original receipt with the signature of Yossi. So she can recognize it. She looked at it and she doesn't read English anyway and she said "Yes I recognize Yossi's signature." But this paper I got it from Yossi not my Mom. And this paper came like a year after because Mr. Yaspan told me, "I don't have any record that you bought the aircraft." So I called Yossi Uziel in Israel and told him, "Yossi just send me a paper with the price that I paid you and everything." He said, "Well I will send you a paper without the price, I don't want to know." He is a veteran of the Israeli Air Force.
July 12, 2005, 5:23:36 p.m. Transcribed in chambers.
However, as shown above, when Mrs. Katzman had earlier testified through an interpreter, she said in response to Katzman's attorney:
Schultz: Mrs. Katzman, can you read English comfortably?
Dollinger (Translator for Mrs. Luba Katzman): Yes.
July 11, 2005, 3:19 p.m. Transcribed in chambers.
I find that Katzman gave false testimony about this receipt and has damaged or even destroyed his credibility. His attempt to allege that his mother had a signed or unsigned copy of the receipt (Exhibit 1004) but that he never asked her for it makes no sense, primarily because of the difficulty in getting Uziel to prepare and sign Exhibit 1004. Further, because Exhibit 1004 has the August 2003 date typed into the body of the document, it could not have been created and given to Katzman's parents in March 2002.
As to Mrs. Katzman's testimony, it is possible that she simply doesn't remember enough of the details of the transaction to competently testify to them. However, she did testify in such a way that it is clear that she intended me to find that her husband gave Uziel $90,000 cash in her presence and that he received Exhibit 1004 at that time. She also testified that she recognized Uziel's signature on the receipt, though this was the only time that she had met him and the only time that she had any dealings with him. Whether as a lie or as a lapse of memory, I can not give sufficient credibility to her testimony to use it to overcome the documentary evidence which shows these planes registered in the names of Continental Jet Management.
Luba Katzman testimony, July 11, 2005.
Further, there is a question of whether the planes cost $60,000 rather than $90,000. The receipt [Exhibit 1001] does not show an amount, but a letter signed by Katzman to Fritz Companies authorizing them to pick up the planes upon arrival at the Los Angeles harbor (dated April 23, 2002) states that the total value of the shipment is $60,000. When asked to clarify the discrepancy between the $60,000 figure and the $90,000 that he asserted was paid for the planes, Katzman — once again — gave a series of conflicting explanations which reflect badly on both his credibility and his general truthfulness. Initially he testified that he thought the $60,000 was for insurance purposes. Then he said that Uziel gave him the $60,000 figure and he put it on the authorization letter. Then he indicated that $60,000 was the true value of the planes, since he had overpaid because they were in very bad shape. Then he stated that "I think this [Exhibit 1010] is what Yossi prepared over there and probably I signed it. I don't care."
Exhibit 1010.
Katzman testimony, July 13, 2005. Quote from July 13, 2005, 5:04 p.m. Transcribed in chambers.
I need not try to intuit the real reason for the $60,000 figure — whether to underinsure the planes, support Uziel in understating the amount of money received, or reflect the true sum paid for the planes. But as to credibility, it is important to note that these are mutually exclusive explanations and that when faced with a written document which conflicts with his oral testimony, Katzman again makes the unbelievable statement that Uziel prepared it even though it is on CFCI letterhead and there is no reason for Uziel to have drafted it.
2. The Stolen Logbooks
Katzman testified that about a month before the hearing on the preliminary injunction to prevent him from using these airplanes, the logbooks for all ten airplanes were stolen from his jeep and that he gave a police report which supports his version of this incident. Two copies/versions of the police report were turned over to the Trustee in discovery and a lot of trial time was spent looking at the differences between them. The Trustee focused on the addition of the word "logbooks" to the 1 page version that was provided to him in November 2004 (the "initial report"), though it was not on the 2 page version faxed to Trustee's counsel in January 2005 (the "complete report"). The Trustee testified that it is obvious that the word "logbooks" was written by a different person on the initial report. It is not obvious to me and I am in as good a position as the Trustee to make the decision, as neither of us are handwriting experts.
Exhibit 43.
Katzman explains the difference by recounting that he returned to the station immediately after he gave the report and told the officer that he had left off the word "logbooks," so the officer added it by pencil and gave him back his copy. I accept Katzman's version that the police officer added this in pencil on his copy, which explains why it is not on the complete version of the report that was later sent over and why it is darker than the other handwritten text. It also makes sense that Katzman would want the report to specify "logbooks" as that was the whole purpose of making the report. The Trustee also focused on page 2 of the complete report because it only speaks of 2 logbooks and not 2 boxes of logbooks. Katzman's counsel tried to support his client by showing all the other discrepancies between the two reports.
In reviewing these police reports, everybody is truly missing the forest for the trees. It is clear to me that the complete report took the initial report and added a typed page, which was prepared later, and that several weeks after the report was made by Katzman, it was reviewed by a supervising officer. The various other numbers and indications that were added were done in the police department after the initial report was taken. The difference in value from $1,000 to $1,500 was probably done to equate the front part of the report with the total that was on the typewritten page. So although many questions were asked on both sides about this, I find no wrongdoing by Katzman because of the two different versions of the report.
However that does not mean that I find that the logbooks where stolen. In fact the reports corroborate that Katzman is not credible.
Katzman testified at the trial that he had the logbooks in the back of his car when he stopped at the Ralphs market to meet a friend for lunch. He said that he went in and they ate lunch in the food court area and when he left he found that the soft top on his jeep had been slit and the items inside the car had been taken, including the boxes of logbooks:
The police report (Exhibit 43) also included a hand-held radio valued at $500. It is not clear whether this was the kind used in one of the airplanes.
Gumport: Mr. Katzman did you lose the logbooks for all 10 of the aircraft that you claim are yours?
Katzman: I did not lose it. They where stolen from me. So you can say I lost it; they were stole from me.
Gumport: Did they get stolen from you?
Katzman: Yes Sir.
Gumport: The logbooks for all 10 of the aircraft that you say are yours?
Katzman: For all 10 of the aircraft the logbooks were stolen.
. . . .
Gumport: And do you remember when they where stolen?
Katzman: I don't remember exactly the date, I don't remember exactly the date, I can't recall.
Gumport: Well where were the logbooks when at least twenty of them were stolen from you?
Katzman: The logbooks was in my jeep; I used to have a jeep with a soft top. I drove it, I drove it — the logbook was in my house. I took the logbooks from my house to the airport and I did not have a cabinet to put it in. Then I bought a cabinet and I want to put the logbooks in the cabinet in the airport and I brought it from my house. And when I stop at the Ralphs market, at the Ralphs market and I have to meet a friend of mine for it was lunch time I guess. I park my jeep outside the Ralphs market. I went to the Ralphs market — we bought some lunch over there at the salad bar — and when I came out somebody cut my top. It was a new jeep with a soft top. They cut my top and they stole my headset, they stole a leather jacket and then I find out they stole something else and they stole boxes of — some boxes — the old books that I have in those airplanes like two boxes whatever we have here, right there, it is not a lot of volume of boxes. It is like boxes we to put our [unintelligible] here like in the bench over
The police report, given at 10:30 a.m. on April 14, 2004 undermines Katzman's entire story:
"Victim stated that on 4-14-04 at approximately 1000 hrs he parked his vehicle in the parking lot located at the S/E corner of Devonshire and Balboa. He exited his vehicle and walked into Ralphs Supermarket (victim did not lock his vehicle). The victim returned to his vehicle approximately 5 minutes later and noticed his passenger side door open. When he entered his vehicle he noticed the property missing."
Exhibit 43, page 2 of "complete report."
This totally contradicts Katzman's testimony at trial that he stopped at Ralphs for lunch with a friend [which certainly was later than 10:00 a.m. and took more than 5 minutes] and that his soft-top was slashed by the thief in order to gain entrance to the car. His assertion that the logbooks where stolen from his car is thus discredited by his own conflicting words.
Further, as to Katzman's testimony that he kept the logbooks at home because he did not have a cabinet at the office at CFCI, he is discredited by the testimony of Shay Oved, who worked at CFCI from the beginning and has visited it throughout:
Judge: When the logbooks where kept in the office where were they physically kept?
Oved: Um that would be in Simon's office — again it's the whole office is one unit that was in Simon's office.
Judge: Were they laid out on a desk or file cabinet?
Oved: No, there was a file that you could open and pull out of there.
Judge: A file cabinet?
Oved: Yes.
Judge: When did you get that?
Oved: The what?
Judge: The file cabinet.
Oved: When would he . . .
Judge: Was it there when you went to work for the —
Oved: Oh. Yes.
Judge: It was there all the way through?
Oved: Yes.
July 14, 2004, 4:50 p.m. Transcript prepared in chambers. Several weeks after the trial ended, Katzman arrived at court with four blank logbooks what he stated were that kind that were stolen. I later asked the Trustee whether he would agree to allow these in to evidence, but he refused as he had no way of knowing if these truly were similar to the lost logbooks. However, for purposes of finding credibility of Katzman as to what storage was needed, the logbooks are between 4" tall by 7 1/4" long to 5 ½" tall by 7 1/2" long. They are each about 1/4" thick. Thus, for 11 airplanes, even if there were 6 logbooks per plane (a current one and a completed one for the engine, mainframe, and propeller), the total volume would not exceed 17" in length and 5 ½" in height, and they could easily fit in one or two desk or cabinet drawers.
After hearing Oved contradict his statement that he kept the logbooks at home because he had no cabinet in his office, Katzman changed his story and testified that he kept the logbooks at home because it was not safe to keep them in the hanger or in the planes at CFCI as people where breaking in to take radios:
Gumport: Is it your testimony that the next month you took all of the logbooks out of the office and put them in your jeep, is that right?
Katzman: I took those logbooks from my house to the jeep to bring it to the airport. In this time that I was talking to you, the logbooks was in my house not in the facility. I kept it over there for purposes of the alarm going on in the airport — lots of stealing airplanes over there, stealing radios — my hanger does not secure right. Everybody can go to the hanger. Mr. Cary Baxter does not fix the doors over there. So most of the time the aircraft books, the logbooks, my personal maintenance books are kept in my house. When I know the maintenance is coming in I bring the book, the specific book inside. But most of the time the book is kept in my house. Same day that the books got stolen I brought all of them to be review by my mechanic to the airport. But I didn't put it in the airport it was in my jeep and I went to lunch and they got stolen.
July 14, 2005, 5:07 p.m. Transcribed in chambers.
And as to Katzman's contention that radios were being stolen at the airport, Robert Chipperfield, a regular user of Van Nuys Airport and owner of a plane stored there, testified that the best radios had been removed from the 9 planes, but said that he has not heard of radios being stolen at the airport as most of the aircraft are locked.
Given these inconsistencies, the timing of the alleged theft of the logbooks is also highly suspicious. On March 9, 2004, the Trustee deposed Mr. Katzman and asked about the logbooks. Katzman said they were available for review but could not be taken from the office. He never mentioned that they were at home. On April 2, the Trustee filed a motion for shortened time for a hearing on a motion for turnover of the registration certificates for the planes and on April 14 the logbooks were "stolen." It was clear to Katzman that the Trustee was moving toward possessing (and possibly selling) the planes. The "theft" of the logbooks could — and did — stop that cold in its tracks.
Deposition of Simon Katzman, March 9, 2004, 19:6-20:9.
I find that the logbooks were not stolen but were hidden so that the Trustee could not take possession and sell the planes. I find that Katzman filed a false police report for the purpose of denying the Trustee the ability to sell the planes, thereby taking control of property of the estate and violating the automatic stay. I further find that Katzman's testimony cannot be relied on for purposes of disputing the written evidence presented to the court by the Trustee.
Given Katzman's lack of credibility, I give little if any weight to his uncorroborated testimony. Thus, to the extent that the countervailing evidence is based on Katzman's testimony or that of his mother, I must rule in favor of the Trustee. To the extent that the Katzman parties rely on the testimony of Leichner, his conviction for fraud is sufficient to impeach any evidence presented by him.
Federal Rules of Evidence 609.
III. ISSUES OF LAW
According to the Pretrial Order, there are eight issues of law which must be determined in this case. Each is discussed below. The First Amended Complaint filed by Katzman and CFCI asks for a determination of ownership of the nine planes in CFCI, an accounting of money that Katzman paid on behalf of the joint venture including $57,831.84 allegedly held by EAL, a declaration concerning the transfer to CACI, and an injunction against the Trustee to prevent him from taking possession of the planes. These seem to have been rolled into the eight issues in that I am generally required to find whether Katzman or CFCI had an interest in the nine airplanes. I find that they did not.
A. Whether there were Fraudulent Transfers
A series of transfers are in contention. As to the nine planes, any transfer from Leichner/Continental Jet to CFCI is disputed by the Trustee while the transfer from CACI to the Trustee is raised by Katzman. The Trustee also wishes to set aside the transfer of MEI's 50% interest in the Beech Bonanza to Katzman. While the parties divide this into two questions (intentionally fraudulent transfers and constructively fraudulent transfers), it is better to deal consecutively with each transfer rather than with each theory.
The controlling statues are as follows:
(a)(1) The Trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily —
(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
(B) (i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii) (I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or
III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured.Cal. Civ. Code § 3439.04:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:
(a) With actual intent to hinder, delay, or defraud any creditor of the debtor.
(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either:
(1) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.
(2) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.
Cal. Civ Code § 3439.04 was amended effective January 1, 2005 to renumber the subsections and to include a new subsection which the legislature stated is not new law, but is merely declaratory of existing law. Although not operative in this case, even considering this list, I find that no intentional fraudulent transfer occurred.
The first step in deciding the fraudulent transfer issues is to determine who owns the airplanes.
1. Who Owns the Airplanes a. The Beech Bonanza
There is no question that Katzman held full title to the Beech Bonanza at the time that this bankruptcy case was filed. The issue is whether the transfer of MEI's 50% interest to him constitutes an actual fraudulent transfer. This is discussed below.
b. The Nine Planes (1). Does Katzman Have a Direct Interest?
It is particularly interesting that Katzman did all of his asserted transactions in cash and without any receipts or other paper trail. In fact he has not even provided evidence that he declared the large sums of money that he (and his mother) assert were brought into the country from Israel. According to the U.S. Customs Service, an American citizen or visitor to the United States must declare any amount in excess of $10,000 that s/he brings into the country. Katzman testified that he went to Israel in November 2002 and brought back over $50,000 in cash given him by his father, which he used to pay for the Seneca (83DA). He asserted that on a previous occasion he also brought back over $50,000. Yet he never obtained copies of his customs declarations to support this testimony.
http://www.customs.ustreas.gov/xp/cgov/travel/vacation/kbyg/money.xml (8/9/05).
Luba Katzman testified to sending Katzman money via relatives and to bringing large amounts of money on each of her trips (she made 4 or 5 trips in the last 5 years). She estimated that during the last 5 years she gave Katzman about $285,000 beyond the $115,000 she paid for the three planes.
The fact that he contends he paid well over $200,000 in cash for the various planes is ironic, given his testimony (cited above): "In Israel everybody does bad business with cash money. I never got into a cash money business here. I did it the hard way." CFCI had no books of account, Katzman had no receipts; he did everything as a "cash money business." And Katzman knew that this was "bad business."
July 12, 2005, 5:17 p.m.
To the extent that Katzman wants me to rely on Leichner's testimony that Katzman paid for part of the planes, Leichner also testified that the planes were registered in CFCI, which is untrue. Further, Leichner's testimony is impeached by the deposition testimony of Arvel Jett Reeves that Leichner complained to Reeves that Leichner paid for the renovation of the CFCI office, the gas, the rent, and that "he gave Simon all these airplanes to use" but the flight school was not making any money.
Deposition of Moshe Leichner, November 6, 2002, Vol. I, 56:4-7.
Deposition of Arvel Jett Reeves, April 1, 2004, 95:4-96:19; 99:6-13.
The nine planes were registered to Continental Jet Management, Inc., which was a shell corporation for EAL when Leichner broke EAL into three corporate entities to protect it. Continental Jet did no business, but held title to these nine planes and others. Leichner had his various aircraft acquisitions held by Continental Jet to show lenders that he owned these planes. Thus, all planes acquired by Leichner, with the exception of two aircraft, were titled to Continental Jet. Katzman had no interest in Continental Jet.
As noted below, this is not a legal finding since EAL was never served.
Deposition of Arvel Jett Reeves, April 1, 2004, 136:12-20.
Testimony of Todd Citron, July 13, 2005.
Since there is no proof to overcome the Trustee's documentation and as Katzman's and Leichner's testimony lack credibility, I find that Leichner entities paid for all nine planes and that Katzman has no direct interest in any of them. Katzman's only interest could be through CFCI — if CFCI has an interest.
(2). What is CFCI and Does it Own the Nine Planes?
CFCI is a Nevada corporation, but as noted above it is unclear who are the shareholders. It had no meetings, no books and records, and Leichner and Katzman both spoke of themselves as "partners" (Leichner also spoke of a "joint venture"). It appears that CFCI is a mere shell and the real relationship is a joint venture or a partnership between Katzman and Leichner, and I will treat it as such. But that does not give Katzman or CFCI a 50% ownership in planes title to Continental Jet.
Katzman argues that even though title was held in the name of Continental Jet, the planes may still be property of the partnership. This is true in the case of real property when (1) the property is in the name of one of the general partners; (2) it is the understanding and intention of the partners that it is partnership property; and (3) the court ascertains this from the conduct or the course of dealings of the partners. Even if I extend this to personalty and decide that though title to the nine planes was held in the name of Continental Jet they really belonged to Leichner, the conduct of the partners and their course of dealings do not support a factual finding of intent on Leichner's part to contribute the planes to the partnership, since Leichner continued to treat the planes as his own and Katzman actively cooperated with him.
Cal. Corp. Code § 15010(4) and the cases cited by Katzman all deal with real property transfers.
In re Wingo, 89 B.R. 54, 57 (9th Cir. BAP 1988).
In re Fair Oaks, Ltd., 168 B.R. 397, 402 (9th Cir. BAP 1994).
Perelli-Minetti v. Lawson, 205 Cal. 642, 648 (1928), cited in In re Fair Oaks, Ltd., 168 B.R. 397, 402 (9th Cir. BAP 1994).
First the planes were registered in the name of Continental Jet. Then, without protest from Katzman, Leichner transferred them to CACI. The parties' understanding that neither Katzman nor CFCI had an interest in the nine planes is particularly obvious, since Katzman protested the transfer of "his plane" (the Beech Bonanza) to CACI (and that was set aside by CACI and Leichner), but made no such demand as to the nine planes.
In his First Amended Complaint (¶¶ 16, 17) Katzman alleges, "At the inception of the Joint Venture MOSHE and SIMON agreed that any aircraft purchased for CFC to operate, would bear the name of CFC as the registered owner of the airplanes." He goes on to list the planes that "MOSHE and SIMON each individually purchased . . . for use by CFC." Although I don't find this to be dispositive of the issue as the complaint is not signed by Katzman, his attorney (presumably with the knowledge and consent of Katzman) seems to admit that since the planes were registered in the name of Continental Jet they were not purchased for CFC and that Leichner and Katzman each owned all or part of the planes individually and were providing them to CFC for its use, not as a contribution of ownership to the partnership.
The transfer to CACI would not yield any benefit to Katzman or CFCI — the sole parties who could profit from this were Sorrells and Leichner. Leichner was investing in CACI, a corporation created by Sorrells to conduct a medical airlift business. Sorrells had talked to Leichner about investing, but instead of money, Leichner transferred the nine planes so that CACI could show them on their balance sheet to borrow money against the stock of CACI. Katzman knew of this deal from Leichner. To the extent that Katzman believed that the planes belonged to CFCI, he was a willing participant in a scheme to defraud potential lenders to CACI, who were to be led to believe that CACI owned the planes free and clear of all other claims.
To the extent that Katzman would have me do equity as to the transfer of these planes to CACI, the equitable doctrine of unclean hands applies since he cooperated with the transfer knowing that it would be used to defraud the lenders of CACI.
Katzman and Sorrells also discussed the transfer, as Sorrells wanted to make sure that the planes had insurance and were in working condition. Katzman never indicated to Sorrells that anyone other than Continental Jet had an interest in the planes. And when the new registrations came showing that CACI was the owner, Sorrells gave them to Katzman to put in the planes. Katzman accepted them without protest and displayed them in the planes. Katzman also notified the insurance company to add CACI to the policy.
Exhibit 24-32; Katzman testimony that he had to obtain a lease from CACI because the registration was now in that entity (July 12, 2005).
Katzman testimony, 7/12/05.
There was no transfer of interest from Leichner/Continental Jet to CFCI. Leichner allowed CFCI to use the planes, but ownership remained in Continental Jet.
2. Were Any Transfers Fraudulent? a. Transfer of the Nine Planes from Continental Jet to CFCI
As to the nine planes, they never belonged to CFCI and thus no transfer was made.
b. Transfer of the Beech Bonanza to Katzman
The Beech Bonanza was purchased on June 17, 1999 and registered to Midland Euro, Inc. and Katzman in March 2000. Midland Euro, Inc. (by Moshe Leichner, president) and Simon Katzman, as co-owners of the Beech, signed a Bill of Sale transferring it to CACI (filed 9/6/02, recorded 9/23/02). This was set aside a few days later (filed 9/12/02, recorded 9/23/02) and at that same time Leichner (as president of Midland Euro, Inc.) and Katzman (as co-owner of the Beech) executed a Bill of Sale transferring the plane to Katzman (filed 9/12/02, recorded 9/23/02).
Exhibit 33, page 224 is the Aircraft Registration Application signed by Sorrells on behalf of CACI on September 5, 2002; the Aircraft Bill of Sale to CACI was filed with the FAA on September 6, 2002 (pp. 226-7). This was set aside on September 12, 2002 (again with Katzman and Midland Euro, Inc. signing as co-owners) (pp. 222-3). On September 23, 2002, the Bill of Sale from Katzman and MEI to Katzman was registered by the FAA (p. 218).
Katzman testified that Leichner had paid $57,000 for this plane in 1999 and that about a month later Katzman reimbursed Leichner in the amount of $25,000, while in 2000 his mother paid another $25,000 to Leichner. Mrs. Katzman confirms the second payment to Leichner, which she testified was in cash at her home in Israel and for which there is no receipt. Katzman further testified that he did not pay Leichner the remaining $7,000 as he had done about $10,000 in repairs and cosmetic things — though his testimony is unclear as to whether these were on the Bonanza or something else.
Katzman also testified that in 2002 Leichner told him to change the registration because the Beech belonged to Katzman. Katzman failed to do so until after it was transferred to CACI and Katzman determined that he did not want "his plane" in the name of CACI.
Because of the credibility issues discussed above, I cannot accept this as sufficient evidence to show that the $50,000 payment was made. Also the dates and conduct do not support Katzman's contentions. For example, if Katzman had paid $50,000 to Leichner by the end of 2000, why did Leichner wait until 2002 to suggest that the title be changed? Why didn't Leichner give Katzman a signed Bill of Sale, since Leichner surely had the forms as EAL and Continental Jet owned other planes? Why did Leichner — on behalf of MEI — sign it over to CACI two years after MEI had no further interest in the plane? Why did Katzman sign a Bill of Sale to CACI which clearly stated that MEI was the co-owner of the plane if be had bought out MEI's interest two years earlier? And why did Katzman sign the Beech over to CACI if he was the sole owner and would get no benefit from that transaction?
Since there is no evidence of these cash payments and since Katzman lacks credibility, I must give substantial weight to the acts that are documented. As of early September 2002, Leichner and Katzman both acted as though a Leichner entity had a co-ownership of the Beech. Therefore I find that the transfer of MEI's 50% interest to Katzman took place in September 2002. Further, the transfer was without reasonably equivalent value. Unlike the information on Continental Jet (discussed below), I have taken judicial notice of a series of lawsuits and judgments against Leichner and/or MEI, Inc. which demonstrate that in 2002 the assets of Leichner, MEI, Inc., and the various other Leichner entities were unreasonably small to continue in business. Thus, the transfer of MEI's 50% ownership interest in the Beech Bonanza to Katzman shall be set aside pursuant to 11 USC § 548 (a)(1)(B) and Cal. Civ. Code § 3439.04(b).
c. The Transfer to CACI and from CACI to the Trustee
Katzman disputes that the Trustee properly obtained title from CACI as to the nine planes, since they belonged to the partnership at the time of the alleged transfer. I am a little unclear as to Katzman's theory: (1) is he asserting that Leichner had no interest in the planes at the time of the transfer to CACI (except to the extent that Leichner was a general partner of CFCI, which owned the planes) and thus the transfer to CACI is totally void and fraudulent as to CFCI since CFCI received nothing from CACI; or (2) is he contending that Leichner could only transfer 50% of the value of the planes to CACI, since Katzman was the other 50% owner by virtue of his status as a 50% partner in CFCI? As I have previously found, the nine planes belonged to Continental Jet and thus neither Katzman nor CFCI had any ownership interest and lack standing to dispute Continental Jet's transfer to CACI.
B. Whether the affairs of Continental Jet, EAL Jet and the Debtors were so hopelessly entangled that substantive consolidation of their assets would benefit all creditors.The Trustee, through his trial brief, says that substantive consolidation is not in dispute. Katzman is not a party to this claim for relief, though he testified that for him Leichner was Continental Jet. Continental Jet is in default and it appears that EAL was never served. If EAL was never served, I cannot make a finding of substantive consolidation.
Katzman testimony, July 15, 2005.
Assuming proper service was made and EAL's default was/is taken, I have very little evidence on this matter. The testimony is that only Continental Jet held title to the planes. There is no evidence as to the financial status of EAL or how it was run. The split up into three entities does not really resolve the matter. The evidence might be there, but it was not clearly pointed out to me. The Trustee will have ten days from entry of this Memorandum to designate the evidence which is already in the record and supports his request for judgment and to file a proof of timely service and request for entry of default as to EAL. If he does not, this counterclaim will be dismissed without prejudice.
C. Whether the Debtors, or any of them, made preferential transfers avoidable under 11 U.S.C. § 547.
This case was filed on May 8, 2003. Transfers to insiders would fall within the preference period dating back to May 9, 2002 and to non-insiders to February 7, 2003. There were no transfers between February 7, 2003 and the filing of the petition, and at the time of transfer of the planes to CACI it was not an antecedent creditor. Thus the only alleged preferences could be the transfer of the two Israeli planes and the Cessna 150 (#6211K) to CFCI and the 50% interest in the Bonanza to Katzman. Even though I have found that there was no transfer of any of the nine planes from Continental Jet to CFCI, if there had been a transfer I find no pre-existing debt and thus no preference.
The actual transfer of the Beech Bonanza took place in September 2002, which was within the insider preference period. Since Katzman claims to have been a general partner with Leichner in CFCI, he is an insider to Leichner. Assuming that Katzman had paid Leichner/MEI in 2000 for the plane, there is an antecedent debt that was satisfied by the 2002 transfer. However the plane was not owned by Leichner but by MEI, so I must find that Leichner was MEI and that MEI was insolvent at the time of the transfer. Since I have taken judicial notice of the financial condition of MEI and Leichner, the only remaining issue is the alter ego status of Leichner and MEI and this evidence is not obvious to me.
Because of my findings on fraudulent transfer of the Beech, I do not believe that I need to comb the record to establish that MEI and Leichner were one or to determine that the evidence does not exist in this adversary proceeding. If either party feels otherwise, he is to present additional briefs pointing me to the evidence which is in the record. This brief will be due 10 days after entry of this Memorandum. The opposing party will then have an additional 10 days to submit a brief dealing with that evidence and/or providing additional evidence from the record. No new evidence will be considered. If no brief is timely filed, I will dismiss this claim without prejudice.
D. Whether Katzman and/or CFCI violated the preliminary injunction granted by this Court's order entered May 20, 2004.
There is no evidence that Katzman/CFCI continued to fly the nine planes after the issuance of the preliminary injunction, but Katzman did fly the Beech Bonanza at least 6 times after that date. He claims ignorance that the injunction covered the Beech, but the order is short and clear and given Katzman's failure to cooperate with the Trustee, his disabling of the other airplanes, his action in hiding the logbooks, and his general lack of credibility, I find that he knowingly violated the injunction by flying the Beech Bonanza at least 6 times after knowledge of the injunction. However, the Trustee has not sought a contempt order and gives me no measure of damages. Since violation of the preliminary injunction is not in the complaint, it is included in this trial only by virtue of the Pretrial Order.
The Trustee seeks a permanent injunction against the use of all aircraft. That will be granted as to the nine planes. As to the Beech, since Katzman is a 50% owner he has the right to use the whole plane and cannot be divested of that right by his co-tenant. Katzman's co-ownership of the Beech is analogous to a partnership. As such, Katzman owes a duty of loyalty and duty of care to the partnership and must act as a trustee towards any property while in his possession. In addition, Katzman must also bear the responsibility of any taxes or costs that befall the Beech while the property is in his possession. Thus no permanent injunction will issue as to the Beech Bonanza. However Katzman is not to use it until he provides the Trustee with proof of insurance for the full value of the plane and for any liability caused by the plane, and with maintenance records showing that the plane is in an airworthy condition. Katzman is also to provide the Trustee with any other documents that would reasonably be required to protect the owner of an airplane.
See discussion at 16 Cal. Jur. 3d Cotenancy and Joint Ownership §§ 30, 58.
Cal. Corp. Code § 16404.
Chapin v. Streeter, 124 U.S. 360, 362 (1888).
E. Whether Katzman and/or CFCI violated the automatic stay of 11 U.S.C. § 362.
The nine planes belonged to CACI at the time of the filing, but on August 11, 2003 Sorrells — on behalf of CACI — signed a bill of sale for each of the planes, thereby transferring ownership to the Trustee. These were filed with the FAA on August 12, 2003. While the estate thus obtained an interest in the planes as of that date, CFCI still had a right to their use under the lease with CACI, which was in default for lack of payments but had not been terminated and was not to expire until September 2004. However, once the lease was terminated, the automatic stay required that CFCI/Katzman cease any act to exercise control over the nine planes and that they turnover the planes to the Trustee. The lease was terminated by an order entered on October 21, 2003 and Katzman/CFCI had notice of this as the order was served on their counsel. Turnover was demanded beginning in the fall of 2003 and once the lease was terminated, Katzman and CFCI were in violation of the automatic stay for their continuing use of the nine planes.
Exhibits 24-32.
Exhibit 19.
11 USC § 362(a)(3), § 542.
Request for Judicial Notice #30 is an unsigned copy of the Order. The docket reflects that this was entered on October 21, 2003 as docket #170.
Beyond his continued use of the planes, Katzman also actively prevented the Trustee from removing the planes from the CFCI premises. Katzman testified that he took the nose wheels off the planes to prevent Chipperfield (who was the Trustee's agent) from removing them and that when Chipperfield came with a tug, Katzman would not let him touch the airplanes. This is also a violation of § 362(a)(3), as is Katzman's secreting of the logbooks.
Katzman testimony, July 15, 2005.
Katzman is withholding the $52,000 insurance check for the Piper PA (#80908), which is property of the estate. He is immediately to turnover the check to the Trustee and to cooperate with the Trustee to make sure that a new check is either issued solely in the name of the Trustee or to endorse a new check over to the Trustee without delay.
F. Whether the Trustee is entitled to recover damages and/or fees and costs against Katzman and/or CFCI for withholding and operating the ten aircraft without the Trustee's consent.I have not been presented with records showing the amount of operations or flight time for the nine planes after the lease was terminated. In part this was because the logbooks have disappeared, although Katzman testified that he has computer maintenance records which presumably would show the usage during the time between the termination of the lease and the preliminary injunction. There is some testimony that planes lose their value when flown. These are older planes which were rented out or used in a flight school. While there is no doubt that they lost some value through use and the passage of time, I have no tools to measure this. However I do have evidence of the purchase prices of the planes, their general condition, their insured values, and the decrease in value due to the lack of logbooks.
According to Katzman's figures (which are undisputed except as to the cost of the two Israeli planes), the total purchase price for the eight remaining planes which had been registered to Continental Jet was $386,000. Robert Chipperfield testified to seeing appraisals of some or all of the planes, but they are not in evidence. He also testified that the planes were in a little less than average quality for their age at the time of his inspection in May 2004.
The appraisals are not in evidence. The only other estimate of value is that given by Katzman in March 2004, when he testified in his deposition that the planes had a total value of about $220,000. Deposition of Simon Katzman, March 9, 2004, 265:14-17. I find this no more credible than the balance of Katzman's testimony, particularly since some 18 months earlier Katzman had insured these for $363,000 (Exhibit 8) and — according to his testimony — he might have underinsured them.
The only other evidence that I have to estimate loss of value due to time and use is the amount of insurance carried on the planes and they don't match up well. Katzman testified that he may have underinsured the planes to keep the premiums down. But Exhibit 8 in comparison with Katzman's testimony and the first amended complaint show some planes insured at a much higher value than he asserts was paid, one of the Israeli planes totally uninsured, and the stolen plane insured even though it had apparently been taken by the FBI prior to this September 2002 policy.
Katzman testimony, July 15, 2005.
See Attachment 1.
Their value due to the lack of logbooks will have decreased substantially. Robert Chipperfield testified that the value will have dropped at least 25% and possibly as much as 50%-75% depending on the amount of maintenance that must be done to meet the standards. Forgetting the intentional secreting of the logbooks, if the planes had been turned over in Fall 2003 as required, the logbooks would not have been "stolen," since that act occurred in 2004. Thus, the loss of the logbooks is part of the damages that Katzman must pay for withholding the planes.
I simply do not have enough evidence to determine the damage for use from October 2003 through May 2004 or, incidentally, for Katzman's act in secreting the logbooks. I do not know the value without concern for the logbooks and have no evidence of other costs that were incurred by the Trustee due to the lack of turnover.
I will set a hearing to determine damages as set forth below.
As to the Beech Bonanza, as co-owner Katzman had a right to use it and there is no indication that he would have owed anything to MEI for that use. Thus, he owes nothing to the Trustee. However Katzman and the Trustee are now co-owners and there will be a negative impact on the value due to the lack of logbooks. Katzman had a responsibility to maintain the plane. As stated above, Katzman's co-ownership is analogous to a partnership and therefore, it is governed by the Uniform Partnership Act. Accordingly, Katzman owes a duty of care and a duty of loyalty to the partnership and any property in his possession. The duty of loyalty includes a duty to account to the partnership and hold as trustee for it any property. The issue of damage due to the lack of logbooks will be determined at the evidentiary hearing described below.
16 Cal. Jur. 3d, Cotenancy and Joint Ownership §§ 30, 58.
Cal. Corp. Code § 16404.
Id. at § 16404(b)(1).
Katzman testified that he would be entitled to a setoff or credit for his expected salary of $5,000 per month for 30 months and miscellaneous expenses that he paid (though he was willing to waive that and provided no figures or documentation for the items he identified: insurance, rent, maintenance, and draws). This is basically a moot issue, since I have determined that the partnership (CFCI) did not own the nine planes and there may not be any other assets for distribution and it appears that CFCI never made a profit.
Cal. Corp. Code § 16401 (h) states that "a partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership." The facts of Drdlik v. Ulrich, are somewhat similar to the present case. Three parties agreed to form a corporation to construct two houses on two hillside lots that one of them owned. One party was to transfer the lots to the new corporation for a set amount, which would be paid after the completed homes were sold, and was to advance all funds necessary to build the houses. The second party was to work out the financing and the third party was to supervise the construction. Each was to take a set share of the profits on sale of the houses.
203 Cal.App.2d 360 (Ct.App. 1962).
The corporation was formed, but the lot owner never recorded the deeds transferring title to the corporation. Because of unforeseen difficulties in construction, the houses were sold at a loss, with the lot owner keeping the money. The party who supervised the construction sued the lot owner for the reasonable value of his services. The Court of Appeal declared a non-suit and held that "the fact that a joint venture fails and there are losses rather than profits does not entitle one joint adventurer to sue another for services rendered on the joint venture."
Id. at 366.
The question here is whether Leichner's failure to actually contribute the planes to CFCI creates a failure of the partnership or joint venture and thus provides Katzman with a claim against Leichner's successor-in-interest [the Trustee] for the value of his services. I do not believe that it does in this case for several reasons, the primary one being that Katzman knew from the beginning that all planes were to be held in the name of Continental Jet and thus were at the sole disposal of Leichner. He actively cooperated in this. Whatever his exact agreement was concerning his contribution of labor, there are no time records, written documents, or accountings to support it. I am taking his word that he never received a salary, but again there are no written records to show where the money went since apparently Leichner paid most of the bills.
Further, there is no profit from the joint venture to be divided or from which Katzman can seek compensation. He was never an employee of the joint venture. At most, we have a joint venture or partnership which failed and should be dissolved (if there are any assets to sell). Katzman would be entitled to his share of those assets, but not an additional credit for work done for the benefit of the partnership/joint venture. Since this is not a dissolution action and the nine planes do not belong to CFCI, the request of Katzman for a setoff or any affirmative relief is denied.
The terms "partnership" and "joint venture" are used interchangeably. From a legal standpoint, both relationships are virtually the same. Courts have ruled that the rights and responsibilities of joint adventurers, as between themselves, are governed by the same principles which apply to partnerships. Zeiback v. Nasser, 12 Cal. 2d 1, 12 (1938).
Katzman demands that the trustee pay storage fees for the nine planes from the date of the preliminary injunction (starting May 20, 2004) through the present in the total amount of about $40,000. Since Katzman was wrongfully withholding the planes by disabling them and removing their wheels, he has no legitimate claim against the Trustee for storage fees. This request is denied.
Exhibit 1009. Katzman testimony, July 12, 2005.
IV. REMAINING ISSUES
If either party feels that I should supplement this Proposed Memorandum to add additional findings of fact, he is to present a very brief document directing me to the evidence which is already in the record. This is to be filed no later than 10 days after entry of this Memorandum and the other party will have 10 days thereafter to respond. If neither party feels that this is necessary, I will finalize my Memorandum to note this and enter the Memorandum and Order the findings, later to be supplemented as to damages.
There will be a limited discovery period on damages ending October 31, 2005. The parties are to exchange the identity of any experts and reports or appraisals by September 30, 2005. The parties are to exchange any other documentary evidence that they plan to admit and a witness and evidence list78 by November 18, 2005. The evidentiary hearing on damages for violation of the automatic stay, for violation of the preliminary injunction, and for Katzman's withholding and/or use of the planes without the trustee's consent and his withholding or destruction of the logbooks will be held on December 2, 2005 at 9:00 a.m.
(fn34) July 13, 2005, 5:39 p.m. Transcribed in chambers.