Harrow, As Successor Trustee of the End of the Roa v. Street, As Former Trustee of the End of the Road T

OCR transcription for search; preserved printed pages are authoritative

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AUTHENTIG
U.S. GOVERT
INFORMAT

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FILED
ENTERED
MAR - 5 200
MAR ~ 5 2010
GLERE, US. BANKRGPICY COUR;
nom eTERK US BARKRUPTCT COURT aie CASTRICT OF CALERA

CENTNAL DISTRICT GF CALIFORNIA
BY Deputy Cesk

UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA

LOS ANGELES DIVISION

In
re Case No.: 96-1563 through 96-1572
FRUZHAUF TRAILER CORPORATION, | Jointly Administered
et al., Chapter 11
Debtors.
DANIEL HARROW, as Successor Adv. No.: 08-01865RN
Trustee of the End of the
Road Trust and American
Trailer Industries, Inc., MEMORANDUM OF DECISION AFTER TRIAL
Plaintiff,
Vv. DATE: February 3, 2010
TIME: 9:00 a.m.
CHRISS STREET, PLACE: Courtroom 1645
Defendant.
INTRODUCTION

This adversary proceeding came before this Court pursuant to
the Venue Transfer Order signed by Judge Peter J. Walsh of the
United States Bankruptcy Court in the District of Delaware and
entered on or about October 9, 2008. The Complaint has been amended

twice. The second amended complaint avers virtually the same

ATED
ENT

LON

GPO

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factual allegations as the first amended complaint with certain
refinements. The causes of action have been reduced to the
following: six (6) counts of breach of fiduciary duties, one (1)
count for breach of liquidating trust agreement, one (1) count for
equitable forfeiture of compensation, and one (1) based on fraud.
Defendant Chriss Street (“Defendant” or “Street”) counterclaimed for
indemnification’.

In Courtroom 1645 of the above entitled Court, the Honorable
Richard M. Neiter, United States Bankruptcy Judge presiding,
conducted a two-day bench trial on February 3 and 4, 2010. Robert
T. Kugler, Robert L. DeMay and Jacob 8. Sellers appeared on behalf
of the Plaintiff Daniei W. Harrow (“Plaintiff” or “Harrow”) and
Phillip Greer appeared on behalf of the Defendant. No other
appearances were made.

The Stipulated Facts in the Amended Order Approving Joint

Pretrial Conference Statement? (“Amended PTO” or “Stipulated

Fact(s}”) as supplemented by the Supplemental Amendment to the

Pretrial Order Pursuant to the Court’s Order (“PTO Supplement”), the

164 Stipulated Exhibits for Trial (“Stipulated Exhibit(s)”) and

impeachment evidence marked as Exhibits 164, 165, 166, 168 and 169

(“Impeachment Exhibit(s)”)} govern the facts of this case, All

Stipulated Exhibits and the Impeachment Exhibits were admitted into

evidence at trial. The additional evidence consisted of testimonies

* This issue, however, is limited by the Delaware Bankruptcy

Court's decision on summary judgment in the adversary proceeding
entitled Street v. End of the Road Trust rendered on or about
September i7, 2008 by Judge Peter Walsh.

* The Amended PTO was entered on January 14, 2010.

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by the Plaintiff, Tasha Dolan, Abel Wenning, Plaintiff’s damages
expert, Tammy Lyons, and the Defendant.*? All witnesses were cross-
examined.

The Court has carefully considered the Stipulated Facts,
Plaintiff’s pretrial brief, the parties’ post-trial briefs, the
testimonies and all exhibits admitted into evidence. After trial,
the Court took the matter under submission and now renders its
Memorandum of Decision containing its findings of fact and

conclusions of law as required under Fed. R. Bankr. P. 7052.

STATEMENT OF EVIDENTIARY FACTS

This is a case where a fiduciary lost sight of his mandate to
liquidate trust assets for the benefit of the trust’s beneficiaries
by engaging in unsuccessful business ventures, self-dealing, and
violations of the liquidating trust agreement. This conduct caused
the trust to lose significant sums cf money otherwise available for
its beneficiaries and to delay their payment through seven (7) years
of the trustee’s tenure.

On October 7, 1996, Fruehauf Trailer Corporation, Maryland
Shipbuilding & Drydock Company, F.G.R. Inc., Jacksonville Shipyards,
Inc., Fruehauf International Limited, Fruehauf Corporation, The
Mercer Co., Deutsche-Fruehauf Holding Corporation, MJ Holdings,
Inc., and E.L. Devices, Inc. (collectively, the “Debtors,” and on
behalf oof their respective creditors and interest holders,

collectively, the “Trust Beneficiaries”), filed petitions for relief

under chapter 11 of the U.S. Bankruptcy Code. (Stipulated Fact J

> Defendant withdrew his introduction of the testimony and report of
his damages expert Dennis W. Sinclair on the second day of trial.

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1.) The Debtors’ Amended Joint Plan of Reorganization (“Plan”) was

confirmed on September 17, 1998 pursuant to an Order and Judgment
Confirming the Plan which was later amended by an order entered on
October 20, 1998. (Id. 9 2.) Tne Plan contemplated the creation of
a Delaware common law liquidating trust to liquidate the Debtors’
assets for the benefit of the Trust Beneficiaries. (Id. 97 4.) On

October 27, 1998, Street and the Debtors entered into a Liquidating

Trust Agreement (“Trust Agreement”) whicn created The End of the
Road Trust (“Trust”). (Id. @ 5.)

Trust assets were placed in six special purpose entities: (1)
JST Property Corp.; (ii) Hogan’s Creek Realty, Inc.; (i221)
Picketsville Realty, Inc.; (iv) Mayport Realty Inc.; (v) JSIi
Lexington Realty Inc.; and (vi) FrudeMex, Inc. (“FrudeMex”).
(Stipulated Fact J 10.) FrudeMex was a Delaware corporation formed

for the sole purpose of holding the stock of Fruehauf de Mexico,

S.A. de C.V. (“FdM”’), a Mexican operating company, and the most
valuable asset of the Trust. (id. 7 12.) As trustee, Street became
the sole director and President of FrudeMex. (Id.) At the time the

Trust was created, the Trust had an aggregate value of $21 million.

(Impeachment Exhibit 164.) In addition, the Pension Transfer

Corporation (the “PTC”’) was created and included in the Trust estate
to facilitate the ongoing sponsorship and administration of the
Fruehauf Trailer Corporation Employees’ defined benefit pension plan

(“Pension Plan”). (Stipulated Fact 97 11.)

Beginning December 31, 1998, FrudeMex underwent several
corporate form and name changes until November 8, 1999, when
FrudeMex {then, FDM, Inc.} ultimately changed its name to American

Trailer Industries, Inc. (*ATII”). (Id. 97 13.) During this time,

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Street was the sole director of ATII from November 19, 1999 through
August 1, 2005.

Defendant acted as trustee for the Trust from October 27, 1998,
to August 1, 2005 when Plaintiff took over as successor trustee.
(Id. @ 7.} Street's duties, responsibilities, limitations and
rights as trustee were as set forth in the Trust Agreement. The
Plan provided Street with indemnification for “claims arising out of

the good faith performance of duties under the Bankruptcy Code or

this Plan.” {Stipulated Fact 7 9.)

A. Limitations of the Trust

The express purpose of the Trust was set forth in Paragraph 2.3

of the Trust Agreement as follows:
“This Liquidating Trust is organized for the sole
purpose of conserving and liquidating the Trust
Estate for the benefit of the Beneficial
Interestholders as herein set out, with no
objective to engage in the conduct of a trade or
business (although companies whose stock is owned
by the Liquidating Trust may operate a business).
Pursuant to this express purpose, the Trustee is
hereby authorized and directed to take all
reasonable and necessary actions to conserve and
protect the Trust Estate and to sell, lease or
otherwise dispose of the Trust Estate, and to
distribute the net proceeds of such disposition
in as prompt, efficient and orderly fashion as
possible "

(Stipulated Ex. 15.) Paragraph 5.4.4 further restricted the

trustee’s powers under the Trust as follows:

“[t]he Trustee . . . shall not at any time enter
into or engage in any trade or business,
including, without limitation, the purchase of
any asset or property (other than such assets or
property as are necessary to preserve, conserve,
and protect the Trust Estate and to carry out
the purposes of Section Two, Section Seven, and
this Section Five) on behalf of the Trust Estate
or the Beneficial Interest holders.”

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(Id.) (Emphasis added. } There was no implied duty cutside of that
which was expressly stated in the Trust Agreement. (Id. 9 7.2.; see
also Stipulated Fact 7 8.) Moreover, for certain trust activities
such as:

(a) borrowing money in excess of $500,000 or
granting liens on any part of the Trust Estate

in excess of $500,000;

{b} selling assets of the Trust Estate with a
value in excess of $500,000;

(c) modifying the Plan;

(d) initiating and prosecuting litigation,
including but not limited to claim objections

with expected fees and costs in excess of
$250,000;

{e) disposing of or settling any claim of
litigation with a potential value to the
Liquidating Trust in excess cf $500,000; and

{f} foregoing or deferring the annual

distribution to Class A Beneficial Interest

holders,

Defendant was required to seek the Trust Advisory Committee’s

(“TAC”) prior approval. (Stipulated Exhibit 15 ¢ 5.4.1.)
B. Violations of the Trust Agreement
Contrary to the express limitations of the Trust, Street caused

the Trust to acquire the assets of a bankrupt trailer manufacturer,

American Trailer Manufacturing, Inc. (“ATM”) through the formation
of ATM Acquisition Corp., n/k/a American Trailer, Inc. between
October and November 1999. (Stipulated Fact I 30.) While there is

evidence that the TAC granted Street conditional approval to
purchase ATM for an aggregate price of $1,446,000, the evidence
suggests the same person signed for both TAC members. This cast

doubt on the efficacy of the TAC’s approval of the transaction’.

* The TAC members at the time the Consent of Trust Advisory Committee
was signed were Thomas Kempner of M.H. Davidson & Co. and Kevin
schweitzer of Paloma Partners. The last name of the person who

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(Stipulated Exhibit 46.) Indeed, the TAC approval provision of the

Trust Agreement does not contemplate purchasing assets but is
narrowed to selling Trust assets; thus, creating further doubt on
the efficacy of the TAC approval Defendant obtained for ATM’s

purchase. (Stipulated Exhibit 15 @ 5.4.1.) Notwithstanding, ATM

was ultimately purchased for the sum of $2,074,000 which exceeded

the “authorized” purchase price by $628,000. (Stipulated Fact 1

33.)

ATM never became profitable for the Trust. Testimony revealed
ATM was purchased in order for FdM, the Trust’s operating company,
to have a presence in the United States market by using ATM’s
trademark. Hence, the two companies engaged in business where ATIT
would cover ATM’s payroll and accounts payable and FdM would sell to
and purchase goods from ATM. Neither the TAC nor the Delaware
Bankruptcy Court authorized FdM or ATII to engage in such business

transactions with ATM. (Stipulated Fact J 44.) ATM eventually

dissolved in 7003. (Id. @@ 40.) There was no evidence that ATM’s
trademark was sold. This unauthorized business relation resulted in
a loss to FdM totaling $1,112,350.00.

Contrary to the express iimitations of the Trust, Defendant
also caused FdM and ATII to engage in unauthorized business dealings
with an entity called Dorsey Traiier Corporation (“Dorsey”), a

bankrupt trailer manufacturer in Alabama which Street caused the

Signed the Consent was unclear from the signed document. However,
it was clear that only one person signed the Consent (someone whose
name appears to be Michael “Berner”) even though it states that one
signature is from Sunrise Partners LLC by Down General Partners
Corp. and the other by Paloma Securities LLC by Paloma Partners
Management Company.

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Pension Plan to purchase in 2001. (Stipulated Fact FI] 45, 47-49.)

Dorsey was not an asset of the Trust. (Id. 7 46.) The Pension Plan
acquired Dorsey as a vehicle to enhance the sales and purchasing
power of ATII as Street was increasing the operations of the Trust’s
assets rather than liquidating them.

Dorsey’s acquisition was based, again, on Defendant’s desire to
establish a business presence in the United States by having a
factory and a trademark to use in the United States.° The intent,
according to various testimonies, was to create a synergistic
relationship between Dorsey and FdM from which Dorsey would
eventually emerge a profitable public company with Street as its CEO
and a substantial shareholder.

Similar to its dealings with ATM, ATII transferred funds to
Dorsey to pay for Dorsey’s expenses totaling $913,690.25 as Dorsey
had inadequate cash flow to pay for all of its operating costs.

(See Stipulated Fact 7 56.3} Likewise, FdM sold finished goods to

Dorsey and purchased materials from Dorsey’s suppliers (which FdM
paid by transferring funds through Dorsey). The Trust also advanced
additional funds to Dorsey totaling $29,2?42. (Id. @1] 53-54.) ATII
also paid for certain travel expenses totaling $126,131 which Street
and various ATII employees incurred in providing management services

to Dorsey. (Stipulated Fact I 59.) Neither the TAC nor the

Delaware Bankruptcy Court approved the foregoing transactions.
Dorsey never became profitable. In September 2004, Dorsey

again filed a chapter 11 petition in Alabama. (Stipulated Fact

* Without a license from Wabash National Corporation, FdM was not
authorized to conduct business in the United States under the
Fruehauf trademark because of Fruehauf’s licensing agreement with
Wabash.

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50.) FdM filed a ciaim in Dorsey’s bankruptcy case in the sum of
$2,681,363 and ATII filed a claim in the sum of $500,000. No
payments were made on account of these claims. The Trust’s total

loss, in connection with its business dealing with Dorsey, amounted

to $3,336,736. (Stipulated Fact 7 44.)

Defendant admitted at trial he was “hands-on” with respect to
the major activities of the Trust, the Trust entities, and all of
the aforedescribed transactions. Street was actively involved in
the day to day operations of Dorsey, ATM, ATII and FdM. Tasha
Dolan® testified Street approved fund transfers among the different
entities and engaged in regular meetings with his management team.

This Court finds Defendant’s justification for engaging in
business with these entities, to create a business presence in the
United States for Fruehauf de Mexico, contradictory to the express
purpose of the Trust to liquidate Trust assets for its
beneficiaries. The length of time Street managed the Trust (7
years) and caused these companies to engage in business in the
United States is evidence of the Defendant’s apparent intent not to
liquidate the Trust assets but to create a new trailer conglomerate
that conducted business from Mexico to the United States and vice
versa. Such vision did not result in profit but rather depleted
Trust funds to which Trust Beneficiaries would have been entitled.
The Trust did not contemplate such activity; rather, it expressly

prohibited it. (See Stipulated Exhibit 15 @(@ 2, 3 and 5.4.4.)

Defendant could not imply from the Trust’s express language that

such activities were authorized. {See id. J 7.2.)

® Tasha Dolan was the controller of the Trust, the CFO of Dorsey

and eventually its President.

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This Court rejects Defendant’s position that he cannct be held
liable for the acquisition of ATM and Dorsey because he did not have
the authority or right to approve such transactions. In his
testimony, Defendant acknowledged that he recommended to the TAC and
the Pension Plan committee the purchase of ATM and Dorsey, which
further proved his endorsement of such purchases and his ultimate
goal of building the Trust’s business rather than liquidating it.
Furthermore, even if the acquisitions were approved, nothing in the
record of this case suggests that the Trust Agreement or the
Bankruptcy Court approved of the multiple transactions among the
Trust, FdM, Dorsey and ATM which caused a significant depletion of
Trust funds.

This Court further finds absurd Defendant’s concern regarding
losing FdM’s Fruehauf license in Mexico as the reason behind his
attempts to obtain a brand name in the United States to continue
FdM’s operations. It is inconceivable that, on the advice of
counsel, Street decided not to pay the royalties required to use the
Fruehauf name when that was the only way to preserve the trademark
in Mexico (an asset of the Trust). Defendant admitted at trial that
losing the license would be “catastrophic”. Accordingly, stopping
payment on the royalties was fundamentally an imprudent decision and
not in the best interest of the Trust’s beneficiaries. The only
plausible explanation for the acquisition of ATM and Dorsey is that
Defendant was attempting to create an operating company that would
do business in the United States and Mexico that would go public and
enable Street to earn substantial sums as its CEO and as a major
shareholder. It was not to preserve the Trust assets while pursuing

their liquidation. It violated the Trust Agreement.

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This Court further rejects Defendant’s contention that he
undertook the foregoing actions to enhance the value of FdM.
Contrary to Plaintiff’s testimony that the Trust’s assets were

valued at $21 million at the Trust’s inception (Impeachment Exhibit

164), Defendant later testified that FdM’s value, the largest asset
of the Trust, was $250,000 at the Trust’s inception. The Court does
not find Defendant’s testimony credible given that throughout his
tenure, (i) FAM was the only company in the Trust with sufficient
cash flow to fund its operations in addition to the operations of
Dorsey and ATM; (ii) FdM was listed as having a value of $9.5
million in the Trust’s financial statements for 1999, 2000 and 2001
as prepared by Eisner LLP, the company’s auditors during Street’s

tenure (Impeachment Exhibit 164); and (iii) the Successor Trustee

valued FdM at $8 million at the time it was liquidated.

C. Improper Accounting

Testimony at trial was also telling of the extent of improper
accounting and Defendant’s failure to keep adequate books and
records during his term as trustee. Plaintiff testified when he
took over as successor trustee, the Trust’s books and records were
in disarray and no document-retention policy was in place to ensure
good record-keeping. Defendant did not refute Plaintiff's
testimony. Instead, he stressed that Ms. Dolan was in-charge of
accounting as the Trust’s controller. However, while Ms. Dolan was
responsible for managing the Trust’s books and records, Defendant
oversaw all management activities of the Trust including the
information placed in the Trust’s books. Defendant was provided
regularly with financial reports of the Trust having full knowledge

of any inadequacies in such statements.

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Second, Abel Wenning’s’ testimony revealed Defendant instructed
some members cf his team that certain transactions were not to be
highlighted cr disclosed in FdM’s regular books and records and its
financial statements such as loan agreements and transfer pricing
items that violated GAP rules in Mexico. Mr. Wenning maintained a
separate set of books for those agreements and transactions and even
set up a separate entity with an office address at his residence.
Street’s preferred means of communication with his management team
was oral and not written while only selective items found their way
into a company’s books. This lack of proper documentation evidenced
Street’s improper record-keeping as the Trust’s fiduciary. The
absence of proper books and records also prevented ATIT’s and FdM
accountants from opining on the consolidated financial statements
that would have enabled ATII to save over $1.5 million in taxes.
Later, this became a major obstacle to selling FdM.

D. Street's Compensation as Trustee and Self-Dealing

This Court adopts the decision of Judge Peter J. Walsh, as
contained in his Memorandum of Decision dated September 17, 2008,
which found that the Disclosure Statement, Plan and Trust Agreement
were the sole governing documents for Defendant’s compensation.

(Stipulated Exhibit 44.) In it, Judge Walsh found invalid the

provisions of the purported employment agreement with the Trust and
the purported employment agreement with FrudeMex to the extent that

they contradicted the Trust’s express language, which stated:

“ftt]he Trustee shall not manage, control, use
sell, dispose, collect or ctherwise deal with
the trust estate or otherwise take any action
hereunder, except as expressly provided herein,

; Mr. Wenning was in charge of FdM’s operations during most of
Street’s tenure.

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and no implied duties or obligations shall be
read into this Agreement in favor of or against
the Trustee. ” and

“[t]he Trustee may not modify the terms of this
Liquidating Trust Agreement unless the
Liquidating Trustee secures the written approval
of such modification from Class A Beneficial
Interestholders holding over 50% of the Class A
Beneficial Interest.”

(Stipulated Exhibit 15 49 7.2 and 5.4.3, respectively; Stipulated

Exhibit 44.) Accordingly, the provisions of the Disclosure

Statement as amended and dated July 28, 1998, the Plan and Trust
Agreement govern the terms of Street’s compensation.
Street’s compensation under the Trust Agreement was to be set

by a missing “Exhibit C” to the Trust Agreement. (Stipulated Fact

TI 70-71.) As disclosed in the Disclosure Statement, Street was
entitled to receive an annual salary of $200,000 for serving as
trustee and $50,000 for serving as Chairman and CEO of FdM.

(Stipulated Exhibit 14 § IV.L.1 and 2.) He was also entitled to

receive “all reasonable out-of-pocket expenses incurred in the
performance of his duties.” (Id. F1 IV.F.7.b. and IV.L.2.) As the
Chairman and CEO of FdM, he was provided with “all fringe benefits
and perquisites that [were] provided to senior executives of FdM,

all employee benefit plans, programs and arrangements. a”
(Id. @ IV.L.2.) The record dees not show any other basis for
compensation other than the foregoing.

In violation of the terms of his compensation, Defendant paid

himself the additional sum of $242,544 during his term from 1998-

2005. (Stipulated Exhibit 115.) The record in this case did not

prove his entitlement to any amount exceeding his authorized

compensation stated above. This Court finds it unnecessary to

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distinguish the source of Defendant’s compensation. Suffice to say,
Defendant was paid in excess of his entitled salary regardless of
which Trust entity paid him.

Similarly, FdM reimbursed Defendant’s personal expenses and
charitable contributions in violation of the authorized terms of his
compensation. The record demonstrates that Defendant’s company
credit card was used for both work and personal expenses. Testimony
showed FdM paid the entire balance on Defendant’s credit card
monthly upon his direction (i) with no expense reports submitted
despite a company policy to do so and {1ii) without distinguishing
between personal and work-related expenses. If there was a company
policy for expense reimbursements, Defendant seems to have placed
himself above such policy.

For example, FAM paid on Defendant’s behalf significant amounts
for travel to South America. No business purpose was shown for such
trips. Defendant’s position that traveling to South America might
have expanded FdM’s business was contrary to the purpose of the
Trust to liquidate its assets. He was hired to dispose of the
business, not grow it with all the attendant risks attributable to
an operating business.

Defendant’s reliance on a purported list of 100 or so different
fringe benefits he obtained monthly from a local Mexican attorney to
justify such personal expenses lacks credibility. First, evidence
of such a report and its authenticity was not presented at trial.
Second, even if such list of benefits existed, Defendant failed to
demonstrate that the personal charges made on his credit card FdM
reimbursed fell within those types of fringe benefits purportedly

available to a Director de General of a company in Mexico. Because

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of these reimbursements, the Trust lost $203,754. (Stipulated

Exhibits 108 and 109.3 It is a further viclation of his duty for a

fiduciary to permit a large sum of money to be paid to reimburse him
for his own personal gain.

This Court is not convinced by Defendant’s position that so
long as nobody objected, his personal expenses were paid properly
when he exercised control and decisions over ail Trust assets.
There is equally no evidence supporting Defendant’s position in his
post-trial brief that after deducting the offending “Mexican

benefits”, Street remained underpaid. (Defendant's Post-trial Brief

at 14.) No calculation or other reliable evidence leading to this
result was produced. Instead, the salary he received alone exceeded
the total base compensation to which he was entitled under the

Disclosure Statement as discussed above. (See Stipulated Exhibit

115.)

Likewise, testimony revealed that Defendant permitted his
companies, Street Asset Management Co. and Chriss Street and Co., to
use Trust assets, such as office space, telephone numbers, e-mails,
and personnel, without reimbursing the Trust for their use.
Defendant permitted Trust assets to be commingled with his personal
assets without any method of separation or allocation. Defendant's
testimony failed to prove otherwise.

Defendant’s initial term as trustee was for three years which
was automatically renewable for two one-year periods in the event
that the trust estate had not been fully liquidated at the end of

first three years. (Stipulated Exhibit 15 7 9.1.) At the end of

five years, Defendant could only extend his term further by seeking

court-approval within 6 months of the fifth year. Id. Defendant

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served for seven years from 1998 to 2005. After six years of
Street's control without liquidating FdM, Defendant vigorously
opposed the beneficiaries, through the reconstituted TAC, efforts to
replace him. This created a need for the TAC to seek intervention
by the bankruptcy court which resulted in another year of salary and
perks for Defendant.

E. Other Acts of Mismanagement

First, Defendant caused the Trust’s fiduciary liability and
director and officer liability policies to be changed into “runoff”
status without justification for the risk which made it difficult
for the successor trustee to obtain standard (non-runoff) coverage

without paying a substantially higher premium. (Stipulated Exhibits

135-137.)

Second, certain adversary proceedings pending at the onset of
the Trust went stale due to inactivity and lack of prosecution
during Defendant’s tenure.® Their dormant status made it difficult
for the successor trustee to revive and litigate the Trust’s
remaining claims. In one instance, the defendant had filed for
bankruptcy while the adversary proceeding was pending. In another,
testimony revealed the Trust had to settle for less money because of
witness depreciation. The delay in prosecution impeded meaningful

negotiations that may have led to a better return for the Trust.

* Upon his appointment, Street inherited the Debtors’ preferential
transfer actions entitled (1) Fruehauf Trailer Corp. v. Aluminum Co.
of Am., Inc., Adv. Pro #98+00497, (2) Fruehauf Trailer Corp. v. Gen.
Bearing Corp., Adv. Pro. #98-00485, (3) Fruehauf Trailer Corp. v.
Milner-Rigsby Co., Ltd., Adv. Pro. #98-00488, (4) Fruehauf Trailer
Corp. v. ATEC Assocs., Inc., Adv. Pro. #98-00504, and (5) Fruehauf
Trailer Corp. v. Nat’l Union Fire Co., Adv. Pro. #98-00514
(collectively, the “Adversary Proceedings”).

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However, because the loss sustained as a result of Defendant’s
overlooking such proceedings is speculative--the loss cannot he
quantified for purposes of Plaintiff's damages.

Third, Defendant also destroyed the Trust’s files contained in
an Apple computer the Trust owned by reformatting the hard drive
causing all information therein to be erased.

Lastly, evidence afforded proof Defendant attempted to derail
the sale cof FdM on two occasions. American Capital Services (“ACS”)
initially expressed interest in purchasing FdM in 2004. There were
contradicting testimonies from Plaintiff and Defendant on the
reasons why the saie did net close.” What was undisputed was that
ACS encountered difficulty in dealing with Defendant and vice versa.

No evidence was presented showing Defendant attempted to fix the

stalemate. Additionally, it was undisputed that Defendant
unreasonably withheld an essential environmental report. In 2005,
ACS renewed its interest in purchasing FdM. However, tax problems

emerged that caused the sale to fall apart. Testimony showed that
Defendant failed to effectuate the timely filing of consolidated tax
returns on behalf of the requisite entities during the early stages
of the Trust as advised by Trust counsel Haynes and Boone, LLP.

(Stipulated Exhibit 131.) Consequently, at the time of the second

sale to ACS, FdM’s auditors were unable to prepare and certify the
requisite consolidated financial statements. This resulted in

significant additional tax liability which caused ACS to lose

° Defendant testified the sale did not close because ACS offered a
low price for FdM. Plaintiff testified the sale did not close
because Defendant ignored due diligence requests, impeded due
diligence efforts and delayed the release of an environmental
report.

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interest in pursuing further the purchase of FdM. Eventually, the
Successor Trustee decided that FdM could not be sold and he
distributed its stock to the beneficiaries who held 80% of the

° This was due to the difficulty in

Debtor’s bonded indebtedness.’
selling FdM caused by the Defendant. At the hearing before Judge
Walsh, Defendant even attempted to purchase FdM claiming he had the
financing to accomplish the transition but Judge Walsh dismissed the
Defendant’s offer and approved the disposition of FdM’s stock to the
beneficiaries holding the largest claims against the Debtors.

F. Indemnification

The Trust Agreement permits indemnification of Defendant unless

he engaged in acts of gross negligence or willful misconduct.

(Stipulated Exhibit 15.) Defendant failed to introduce any reliable

evidence at trial in support of his right to indemnification. This
Court finds Defendant’s conduct described above falls within the
gross negligence and willful misconduct exceptions contained in the
indemnification provision.

If any of the above findings of fact are subsequently
determined to be conclusions of law, they shall be deemed to be so

designated.

CONCLUSIONS OF LAW
The laws of the State of Delaware and common law on trusts
govern the law for the Trust Agreement and the disposition of this
proceeding. Under trust law, the burden of persuasion to justify

the upholding of a transaction by an interested trustee rests on the

0 Cash was paid to the bondholders who held 20% of the Debtor’s
bonds.

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fiduciary and not the beneficiary. Stegemeier v. Magness, 728 A.2d
557, 563 (1999). A trustee must satisfy his burden by a
preponderance of the evidence. See e.g., In the Matter of the

Estate of Jacob Shulman, 568 N.Y¥.S.2d 660, 165 A.D.2d 499 (1991).

Here, the burden of persuasion rests on Street. He failed to
satisfy his burden as discussed below.

This Court rejects Defendant’s position that the “business
judgment rule” applies to a trust. Once a trust relationship is
established between a beneficiary and a trustee managing a
corporation for a trust, the fiduciary standards of care apply to
his conduct regarding the affairs of the corporation. Shulman, 568
N.¥.S.2d at 662, 165 A.D.2d at 502. In conducting a review of
allegations of self-dealing, the standards of trust law and

corporation law are different. Stegemeier, 728 A.2d at 562. Unlike

corporate law, self-dealing on the part of a trustee is virtually
prohibited under trust law. Id., at 563. The liability of a
trustee of a controlling interest in a corporation can arise through
imprudent corporate investment policy or a conflict of interest with
respect to corporate decisions. 568 N.Y.S.2d at 662 (citations
omitted). The principles of trust law impose a higher standard.
Stegemeier, 728 A.2d at 564.

Accordingly, this Court holds Street to a higher standard of
complete loyalty than that imposed on a director or officer of a
corporation and rejects the lesser standard of the “business
judgment rule”. He failed to meet the higher standard when he {1i)
allowed the depletion of Trust assets by facilitating the
transactions among FdM, the Trust, ATII, ATM and Dorsey for which

the Trust, ATII and FdM were never reimbursed; (ii) purchased

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companies with the ultimate intent of creating a public trailer
conglomerate for which he could serve as the CEO and a major

shareholder; (iii} permitted the payment of his personal expenses

without justification; (iv) risked losing the Fruehauf license by
not paying royalties; (v) hindered the sale of FdM; (vi) engaged in
improper accounting of books and records; and (vii} created

obstacles that made it difficult to replace him as trustee in an

effort to keep his position.

A. Counts I and II: Defendant breached his duty of loyalty
and good faith.

Under trust law, self-dealing occurs when the fiduciary has a
“personal interest in the subject transaction of such substantial
mature that it might have affected his judgment in material

connection.” Stegemeier, 728 A.2d at 564. A person acting in a

fiduciary capacity cannot also act for himself where he has duties
to perform for another. Id. Thus, even without a personal stake,

the duty of loyalty bars him from acting in the interest of third

parties at the expense of the beneficiaries. Wilshire Credit Crop.
v. Karlin, 988 F.Supp. 570, 574 n.4 (D. Md. 1997) (citations
omitted) . A trustee is under a duty to the beneficiary to

administer the trust solely in the interest of the beneficiary.

Restatement (Second) of Trusts, § 170(1) (1959).

Here, Defendant breached his duty of loyalty when he permitted
the Pension Plan to acquire Dorsey knowing the Trust would have to
provide funds and management to Dorsey as part of a scheme involving
the Trust, ATII and FdM tc do business with Dorsey so as to
establish a new trailer company where he would become the CHO. The

transactions among those entities were not a fair equivalent

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exchange, but instead, caused the Trust to lose money. Dorsey was
not an asset of the Trust but was owned by the Pension Plan.
Defendant also served as Dorsey’s President and CEO during his
tenure as trustee. Thus, any benefit to Dorsey inured to him and the
Pension Plan’s beneficiaries and not to the Trust’s beneficiaries.

Likewise, the proof of whether the TAC was fully informed and
approved of ATM’s acquisition or was even legally capable to do so
was weak and cannot be relied upon as a basis to absolve Defendant
of liability. Indeed, there remains a breach of duty of loyalty
when he permitted intercompany transfers between the ATM and FdM,
for which no equivalent exchange occurred, causing FdM to lose
$1,112,350.

Defendant also breached his duty of loyalty when he allowed
Trust assets to be diverted to pay for his personal expenses and to
pay his salary in excess of that authorized. The evidence
justifying such reimbursements is wanting of proof. This Court
finds incredulous Defendant’s reliance on a report of benefits
produced by a local chamber of commerce attorney in Mexico to
support his entitlement to such reimbursements without producing
evidence that the TAC or the Bankruptcy Court approved these
excessive salaries or reimbursements.

Issue preclusion or collateral estoppel bars the relitigation
of an identical issue between the same parties or party in privity
that has been adjudicated previously by a competent court and has

reached finality in the first proceeding. See Taylor v. Sturgell,

553 U.S. 880, 128 S. Ct. 2161 (2008). As such, the decision of
Judge Walsh with respect to the limitations on the terms of

Defendant’s employment and compensation has now become final as no

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appeal was taken of his decision. Based on the principles of
collateral estoppel, this Court adopts his opinion and will not
infer employment terms that are beyond what was set forth in the
Disclosure Statement, Plan and Trust Agreement.

The overwhelming evidence at trial showed that the Defendant
willfully engaged in self-dealing to advance his personal interest
ahead of that of the Trust’s beneficiaries. The Trust was not meant
to continue conducting business; it was meant to liquidate with
proceeds going to the beneficiaries. The acts presented at trial
were all directed toward one goal--that of establishing a presence
and conducting a business in the United States contrary to the
Trust’s express purpose. Throughout this process of creating an
international company, Defendant enriched himself by allowing Trust
assets to be used for his excessive salaries and his personal
expenses.

B. Count III: Defendant breached the Trust Agreement.

The trustee can exercise only his powers as

(a) are conferred upon him in specific words by the terms of
the trust or

{b) are necessary or appropriate to carry out the purpose of
the trust and are not forbidden by the terms cf the trust.

Restatement (Second) of Trusts § 186 (1959). The language of the

trust instrument will be “given their ordinary meaning and the court
will not consider extrinsic evidence to vary or contract express
provision of a trust instrument that are clear, unambiguous and

susceptible of only one interpretation.” Wilmington Trust Co. v.

Annan, 531 A.2d 1209, 1211 (Del. 1987).
The Trust Agreement expressly prohibited the Trust from

conducting any trade other than the preexisting business of the

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Trust. (Stipulated Exhibit 15 95.4.4.) It also prohibited

purchasing assets or property other than that necessary to preserve,
conserve, and protect trust assets in carrying out the Trust’s
purpose to liquidate. (Id. ) The main purpose of the Trust was to
“conserve[e] and liquidat[e] the Trust Estate for the benefit of the
Beneficial Interest holders. . . with no objective to engage in the

conduct of a trade or business (although companies whose stock is

owned by the Liquidating Trust may operate a business).” (Id.
92.3.) The Trust also precluded any investment other than interest-
bearing deposits or certificates of deposit, among others. (Id.
q5.4.5.)

Defendant breached the Trust Agreement when he affirmatively
recommended to the TAC ATM’s acquisition, procured its approval, and
ultimately purchased ATM with Trust assets. Under Delaware law, “an
interested transaction is not void but is voidable, and a court will
uphold such a transaction against a beneficiary challenge only if
the trustee can show that the transaction was fair and that the
beneficiaries consented to the transaction after receiving full

disclosure of its terms.” Stegemeier, 728 A.2d at 563 (citations

omitted). Defendant did not disclose the ATM acquisition to the
beneficiaries nor did the beneficiaries approve of it.

Even under a more relaxed rule, the court will carefully
scrutinize all the attendant circumstances before it can find that
the sale is not detrimental to the trust. Id., 728 A.2d at 563.
The purchase of ATM proved to be detrimental and unfair to the
Trust. In addition to the sums exceeding the purported TAC-
authorized purchase price (which this Court already found suspect),

conducting business with ATM proved te be unprofitable for FdM.

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Because ATM had inadequate cash flow, FdM paid all of its expenses
without reimbursement. ATM eventually dissolved resulting in FdM
losing $1,112,350.

Defendant also breached the fundamental purpose of the Trust
when he permitted FdM to conduct business through Dorsey creating a
loss to the Trust in the sum of $3,336,736. Street failed to
satisfy his burden of demonstrating that terms of the Trust allowed
the transfers made to Dorsey.

As further evidence of breaching the main thrust of the Trust,
Defendant’s actions derailed the sale of FdM. As discussed above,
Defendant breached the Trust Agreement when he failed to salvage the
souring deal with ACS, failed to file consolidated tax returns for
the Trust entities, failed to maintain adequate books and records
from which consolidated financial statements could be prepared and
certified, unreasonably withheld the requisite environmental report
and attempted for one last time to stop the liquidation of the
company before Judge Walsh. The foregoing facts present conclusive

evidence of Defendant’s blatant breach cf the Trust Agreement.

C. Count V: Defendant breached his duty to keep and render
accounts.

A trustee owes a duty to keep and render clear and accurate

accounts in administering trust assets. Restatement (Second) of

Trust, § 172 (1959). Testimony at trial not only showed the lack of
proper accounting with respect to the transactions among FdM,
Dorsey, ATM, ATII and the Trust but the intent to keep certain
information off of the Trust’s books and records. Most telling was
Abel Wenning’s testimony that Defendant instructed various members

of his team that certain transactions should not be disclosed in

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FdM’s regularly maintained books and records or its financial
Statements. Defendant controlled, had a full grasp of the Trust’s
financial information, and caused FdM to maintain a second set of
books under the name of a fictional entity. His preference not to
convey information in writing, which his staff knew, contributed to

the lack of proper documentation and improper record-keeping.

D. Counts VI and VII: Defendant breached his duty to preserve
Trust assets and pursue claims of the Trust.

A trustee owes a duty to preserve trust property and to use due

care to pursue claims cf the trust. Restatement (Second) of Trust,

§§ 176 and 177 (1959).

Defendant failed to preserve trust assets when he permitted the
Trust’s fiduciary liability and director and officer liability
policies to go into “runoff” status causing difficulty for the
successor trustee to obtain standard coverage at a higher premium.

(Stipulated Exhibits 135-137.) Street wilifully breached his duty

to preserve trust assets when he destroyed the Trust’s files
contained in the Apple computer which the Trust owned.

Defendant also breached his duty to pursue Trust claims when he
permitted certain adversary proceedings to become dormant making
them more difficult to prosecute and settle. The delay certainly
cost the Trust lost opportunity and money albeit difficult to

quantify.

E. Count VIII: Defendant breached his duty to keep trust
assets separate.

A trustee owes a duty to keep trust property separate from his
individual property and ensure proper designation to the trust.

Restatement (Second) of Trust, § 4179 (1959). In this case,

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Defendant breached this duty by permitting his companies, Chriss
Street and Co. and Street Asset Management Co., to use the same
facilities, personnel, and personal properties as the Trust's.
Street failed to present evidence of any contractual agreement or
allocations between his companies and the Trust that would establish
compensation to the Trust for his companies’ use of its office
space, personnel and properties. Because of this commingling of
assets, Defendant was enriched by having his companies not be
responsible for their own expenses that were provided by using Trust
assets.

The totality of the circumstances in this case and the
overwhelming evidence lead this Court to conclude that Defendant
breached the Trust Agreement and several of his duties to the Trust.

F. Damages

Under Delaware Code § 3581, a trustee’s violation of a duty
owed to a beneficiary is a breach of trust. Once established, a

court may order any equitable remedy including:

MA

(3) compelling the trustee to redress a breach of trust by
paying money, restoring property, or other means;
(4) ordering a trustee to account;

(7) reducing or denying compensation to the trustee;

(9) granting any other appropriate relief.”

Del. Code Ann. tit. 12 § 3581(b) (2010).

It is within the Court’s discretion whether a trustee, found in

breach of trust, shall receive full compensation, reduced
compensation or deny him all compensation. Restatement (Second) of
Trust § 243 (1958). Similarly, if a breach of trust occurs, the

court may impose a surcharge for losses to the trust due to the

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trustee’s faulty management. 568 N.Y.S.2d at 662. A beneficiary
may charge a trustee . . . the amount required to restore the value
of the trust property and trust distribution to what they would have

been had the breach not occurred.” Del. Code. Ann. tit. 12 §

3582(1).

Pursuant to Delaware Code § 3581, the Court finds that
Plaintiff, as the Successor Trustee under Trust Agreement, is
entitled to judgment against Street in the form of (i) money damages
arising from the Defendant’s breach of duty and breach of Trust
Agreement, and (ii) reduction in compensation of the Defendant in
excess of his authorized compensation including reimbursement for
his personal expenses.

G. Indemnification

Delaware law prohibits exculpation or indemnification of a

fiduciary for his willful misconduct. Del. Code Ann. tit. 12 §

3303(a). Defendant failed to prove at trial and in his Post-trial
Brief his entitlement to indemnification in this case. In addition,
Defendant failed to show evidence of the amount of reasonable
attorney’s fees might be entitled to be indemnified.

To the extent that he claims entitlement to indemnification
because he exercised good business judgment, Defendant is subject to
the fiduciary standards of loyalty and the business judgment rule
does not apply. Moreover, the defense that he did everything based
on advice of counsel cannot stand against the weight of evidence
showing he willfully engaged in various acts of self-dealing and
breach of duty which are an exception to the indemnification
provision of the Trust Agreement. This Court, therefore, finds that

the conduct described above amounts to gross negligence and willful

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misconduct in violation of the Trust’s limited authority granted to

Street.

If any of the above conclusions of law are subsequently

determined to be findings of fact, they shall be so designated.

CONCLUSION
For the reasons stated herein, the Court finds in favor of the
Plaintiff on Counts I-III, V-VIII that Defendant preached his
fiduciary duties to the Trust and violated the Trust Agreement.
Judgment will be entered against the Defendant in the amount stated

therein consistent with this Memorandum of Decision.

DATED: March 5, 2010 LOE

HONORABLE R{CHARD M. NEITER
United States Bankruptcy Judge

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NOTICE OF ENTERED ORDER AND SERVICE LIST

Notice is given by the court that a judgment or order entitled (specify) MEMORANDUM OF DECISION AFTER
TRIAL was entered on the date indicated as “Entered” on the first page of this judgment or order and will be
served in the manner indicated below:

l. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (“NEF”) - Pursuant to controlling
General Order(s) and Local Bankruptcy Rule(s), the foregoing document was served on the following person(s)
by the court via NEF and hyperlink to the judgment or order. As of_March 5, 2010, the following person(s) are
currently on the Electronic Mail Notice List for this bankruptcy case or adversary proceeding to receive NEF
transmission at the email address(es) indicated below.

US Trustee’s Office (Los Angeles): ustpregion16.la,ecf@usdoj.gov
Plaintiffs Counse! (Scott Blakeley): SEB@BandBlaw.com; (Bradley Blakeley): bblakeley@BandBlaw.com

[] Service information continued on attached page

ll. SERVED BY THE COURT VIA U.S. MAIL: A copy of this notice and a true copy of this judgment or order
was sent by United States Mail, first class, postage prepaid, to the following person(s) and/or entity(ies) at the
address(es) indicated below:

Defendant’s Counsel: Plaintiffs Counsel:
Phillip B Greer Robert Kugler and Robert DeMay
1280 Bison Suite B9 331 Leonard, Street and Deinard
Newport Beach, CA 92660 150 South Fifth Street

Suite 2300

Minneapolis, MN 55402
[] Service information continued on attached page

ill. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment or
order which bears an “Entered” stamp, the party lodging the judgment or order will serve a complete copy
bearing an “Entered” stamp by U.S. Mail, overnight mail, facsimile transmission or email and file a proof of
service of the entered order on the following person(s) and/or entity(ies) at the address(es), facsimile
transmission number(s), and/or email address(es) indicated below:

CL] Service information continued on attached page

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