Owen Trust et al v. Schwalbe et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
LOHREY ENTERPRISES, INC., 	No. 08-12206
Debtor(s).
______________________________________/
OWENS TRUST, et al.,
Plaintiff(s),
v. 	A.P. No. 09-1001
RICHARD SCHWALBE, Trustee, et al.,
Defendant(s).
_______________________________________/
Memorandum After Trial
_________________
In 2003, Lohrey Investments LLC (“Investments”) was in Chapter 11 bankruptcy proceedings.
When it filed, its only significant asset was the real property at 8190 Murray Avenue in Gilroy. It
leased this property to an unrelated company operating a laundry.
When the laundry operator decided to close its business, Investments sought and obtained leave
of this court to purchase the laundry equipment remaining on the premises and some new equipment.
The lender financing the transaction was Owens Mortgage Investment Fund, now a plaintiff as Owens
Entered on Docket
January 12, 2010
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 09-01001 Doc# 43 Filed: 01/12/10 Entered: 01/12/10 14:22:42 Page 1 of 4

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1The purpose of the Vestin loan was to “take out” Owens as a lender. However, Owens
remains liable to Vestin and thus has an economic stake in the outcome of this case. For this reason,
the motion of defendant Podium to dismiss Owens from the case will not be granted.
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Trust (“Owens”). Pursuant to the agreement, Owens was given a security interest in the equipment
and filed a UCC-1 financing statement.
In 2006, plaintiff Vestin Mortgage, Inc. (“Vestin”) loaned Investments $16 million secured by
both the real property and the equipment Vestin thought Investments had purchased with the loan
made by Owens.1 On July 26, 2006, Vestin filed a UCC-1 financing statement identifying all of
Investment’s equipment as its collateral.
The principal of Investments was David Lohrey, who is not a party to this adversary
proceeding. Unknown to Owens, and later to Vestin, Lohrey formed another entity, Lohrey
Enterprises, Inc. (“Enterprises”), to operate the laundry business under the name West Coast Linens.
For tax purposes, Enterprises was the operator of the business and Investments was the landlord.
Lohrey treated both Investments and Enterprises as his alter egos. He did not tell Owens that he was
transferring money loaned to Investments by Owens to Enterprises and using those funds to purchase
equipment in the name of Enterprises, not Investments. Although this court had authorized
Investments to purchase the laundry equipment left by the former tenant, Enterprises was named as the
purchaser in the sale documents and the equipment was carried on its books, not Investments.
In June of 2008, Lohrey arranged for Enterprises to borrow $800,000.00 from defendant
Podium Financial Group under a sale and leaseback transaction. As part of this transaction, Podium
was to be given a security interest in all of Enterprise’s equipment. As part of its due diligence,
Podium conducted a search of financing records. However, it searched only under the name of
“Lohrey Enterprises, Inc.” and not under the name “Lohrey Investments, LLC.” Thus, it did not
discover the earlier UCC-1 filed by Vestin. Podium knew of the existence of Investments, having
required and obtained a written warranty by Investments that it had no interest in any of the equipment
on the premises.
Case: 09-01001 Doc# 43 Filed: 01/12/10 Entered: 01/12/10 14:22:42 Page 2 of 4

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The dispute now before the court is between Vestin and Podium over who has the senior
security interest in the laundry equipment. Vestin’s UCC-1 was filed first, but identifies the debtor as
“Lohrey Investments LLC,” when the equipment was actually owned by “Lohrey Enterprises, Inc.”
Podium’s UCC-1 was filed later, but accurately names the debtor. Podium blames Vestin (and its
predecessor in interest, Owens) with creating this situation by not verifying that the equipment was
being taken in the name of Investments. Vestin blames Podium for not discovering its UCC-1.
While Podium could have avoided this situation by searching under the name of Investments, it
was not obligated to do so. The primary failure was that of Vestin and its predecessor in interest
Owens. Had Owens made sure that its loan proceeds were in fact being used to buy equipment in the
name of Investments, subsequent transfer of the equipment to Enterprises would not have invalidated
its security interest. Bank of the West v. Commercial Credit Fin. Serv., 852 F.2d 1162, 1174 (9th Cir.
1988). However, neither the original equipment acquired during the 2002 Chapter 11 proceedings nor
that purchased with loans from Owens after that case was closed was ever in the name of Investments.
Pursuant to § 9502(a)(1) of the California Commercial Code, a financing statement is
sufficient only if it provides the name of the debtor. Section 9503(a)(1) requires that if the debtor is a
corporation the name on the financing statement must be the name on public records; § 9503(e)
provides that a financing statement may contain the name of more than one debtor. Since Investments
never actually acquired any of the equipment, it was incumbent upon Owens and Vestin to discover
that the equipment was actually owned by Enterprises (which the could have done by reviewing bills
of sale and invoices) and to file a UCC-1 identifying both Investments and Enterprises as debtors.
Their failure to do so rendered their UCC-1 defective and insufficient to perfect their security interests
against the later security interest of Podium.
For the foregoing reasons, judgment will be entered in favor of Podium and against Owens and
Vestin and declaring that Podium has a valid, enforceable, senior security interest in the equipment of
Enterprises.
This memorandum constitutes the court’s findings and conclusions pursuant to FRCP 52(a) and
Case: 09-01001 Doc# 43 Filed: 01/12/10 Entered: 01/12/10 14:22:42 Page 3 of 4

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FRBP 7052. Counsel for Podium shall submit an appropriate form of judgment forthwith.
Dated: January 12, 2010
SAlan Jaroslovsky
U.S. Bankruptcy Judge
Case: 09-01001 Doc# 43 Filed: 01/12/10 Entered: 01/12/10 14:22:42 Page 4 of 4