3 ABR 349 UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

In re: Case No. A93-00009-DMD	)
	)	Chapter 11
PAMELA K.M. LARSON,	)
Debtor.	)
____________________________________	)
DANIEL LOURIE,	)
Plaintiff,	)	Bancap No. 93-3021
	)	Adv. No. A93-00009-001-DMD
v.	)
PAMELA K.M. LARSON,	)
Debtor.	)
____________________________________	)

MEMORANDUM DECISION AND ORDER

     This is an action arising under state law to determine the ownership of certain condominium units and contract receivables. It is fundamentally a partnership dispute but includes certain corporate aspects as well. This court has jurisdiction through the consent of the parties and 28 U.S.C. § 157(b)(2)(0).

Background

     Daniel Lourie (Lourie) is an excavating contractor. After working over 15 years in Alaska, he decided to move to Seattle and continue his business there. Prior to leaving, he met the defendant, Pam Larson (Larson), at the Pines Club in Anchorage. Larson was a new realtor with Century 21 New Horizons Realty. She subsequently acted as a realtor for Lourie's purchase of 10 condominium units in late 1989. Lourie paid $157,831.42 for these units and Larson received a full commission.

     Lourie moved to Seattle. He continued to purchase condominiums, however. Through Larson, Lourie purchased an additional 23 units in "Southwood." The total purchase price of the units was $393,240.98. Lourie obtained a loan from First National Bank of Anchorage for $346,342.00 but lacked the additional cash necessary to close the loan.

   3 ABR 350 Through an oral agreement, the terms of which are disputed, Larson agreed to waive commissions of $20,000.00 in return for an equity interest in the condominiums.

     Lourie eventually purchased another 16 condominiums. Larson received commissions on the additional purchases. Some of the condominiums were sold. Currently, 30 condominium units remain as disputed partnership assets along with 8 notes receivable arising from sales of other units. First National Bank of Anchorage retains a lien against the condominiums for approximately $390,000.00. This lien arose following Lourie's refinance of the condominiums. The condominiums have appreciated substantially since their purchase in 1989 and early 1990.

     Larson obtained a power of attorney from Lourie to manage the properties in his absence. While most condos were originally titled in Lourie's name, they were subsequently transferred to a corporation, DPL Enterprises, Inc. (DPL). Larson controlled DPL. Like most enterprises that she controlled, records of DPL and the rental records of the condominiums were either poorly kept or nonexistent. Larson treated the condos and their rental income as her personal property and frequently took rents and proceeds of loans from the corporation for her personal use. After initially keeping the property management of DPL with her employer, Century 21 New Horizons, she ultimately established a separate office, Century 21 Banister-Gray, as well as a separate property management company. She kept extremely poor records of her activities on behalf on DPL and continued to withdraw large sums of money from the rental accounts for her personal use.

     Lourie became frustrated with Larson's "management" of the condos. He seldom received the most routine cash flow statements on the properties. He repeatedly attempted to seize control of the condos' property management. Finally, after instituting a state court accounting action, he filed this suit in bankruptcy court following Larson's Chapter 11 filing. Through stipulation, Hoffmann property management now controls the condos. They cash flow well. Current excess cash flow is being applied to delinquent assessments due condominium associations. These past-due obligations arose under Larson's management.

     Through a chance reading of the legal notices in an Anchorage paper, Lourie found 12 boxes of records that were about to be sold for past due

3 ABR 351 rent on Larson's storage space. Lourie filed a complaint against Larson with the State Real Estate Commission. Fred Strand, C.P.A., was retained by the state as well as by Lourie to conduct an examination of the books of DPL, Larson, Banister-Gray, and related entities. After voluminous amounts of study, he issued a report that was updated before trial. While each side disputes the assumptions underlying his conclusions to some extent, there is a tacit consensus that his fundamental accounting procedures and mathematics are correct. The following chart illustrates Strand's conclusions, compared to conclusions espoused by each of the parties regarding capital contributions.

	DAN LOURIE	DAN LOURIE ¹	PAM LARSON	PAM LARSON	PAM LARSON
	(Strand/Artus)	(Oczkus)	(Strand)	(Artus)	(Oczkus)
December 31, 1989, per books	$212,109.29	$50,442.29	-	-	-
Contributions, per books of 1990	$54,890.47	$54,890.47	118,049.32	118,049.32	118,049.32
Withdrawls, per books of 1990	-18,571.31	-18,517.31	-67,832.61	-67,832.61	-42,832.61
Adjustment for withdrawl of rent in 1990	-	-	-113,940.00	-56,970.00	-
December 31, 1990, as adjusted	$248,428.45	$86,761.45	-$63,723.29	-$6,753.29	$75,216.71
Contributions, per books of 1991	-	-	700.00	700.00	700.00
Withdrawls, per books of 1991	-4,010.13	-4,010.13	-60,880.42	-60,880.42	-56,743.42
Adjustment for with-drawls of rent in 1991	-	-	-46,920.00	-46,920.00	-
SUBTOTAL - December 31, 1991	$244.419.32	$82,751.32	-$170,823.71	-$113,853,.71	$19,173.29

Larson deeded 15 condominiums to herself and 15 to Lourie through DPL to allegedly terminate the partnership. Lourie feels all remaining assets shall vest with him and that Larson has no viable interest in such assets.

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Analysis

     While the details surrounding the parties' financial relationship are difficult to determine, primarily due to Larson's negligence in maintaining records, the fundamentals are readily apparent. First, DPL was never a real corporation. No shares of stock were issued, no corporate income tax returns were filed, and very few corporate formalities were obeyed. DPL was simply a shell utilized for the transaction of partnership business. It was an account that Larson treated as her own, for the most part, while ignoring her partner's interest in the properties and plundering rents.

     This leads to the fundamental factual issue to be resolved by the court: What was the partnership relationship of the parties? Under Lourie's scenario, Larson should be limited to the percentage that her capital contribution bore to the acquisition cost of the Southwood properties. If she contributed $20,000.00 and the acquisition cost was $400,000.00, she is limited to a 5% interest in the partnership assets. Lourie further maintains that the initial 10 units he purchased were to remain his property free and clear of any interest of Larson.

     Larson maintains that she was to be a 50% partner with Lourie on all units, including the first ten units purchased by him. She denies that there was any limitation placed on her partnership interest based upon capital contributions. She states that she is entitled to 50% of the remaining partnership assets under their agreement.

     As the agreement of the parties was never placed in writing, I must decide whom to believe. It is not a hard choice. I believe Lourie for a number of reasons. First, Larson's actions indicate that she is not trustworthy. Her taking of rents, use of proceeds from partnership loans to refinance personal obligations, failure to maintain records, and general demeanor lead me to conclude that she is not a credible witness or an honest person. Her statements as to their financial relationship could have been proved quite easily through a simple partnership agreement or the maintenance of appropriate records -- records she has constantly failed to produce despite dogged efforts by Lourie. Moreover, Judy Frost, who served as Larson's corroborating witness, had little knowledge of the ownership structure and the context of an alleged conversation in Lourie's home. Frost's recollection is

3 ABR 353 simply mistaken. Secondly, Lourie was not in a financial position to make a huge gift to Larson. Larson had done nothing to deserve an interest in the first units whatsoever. She received a commission on the sale. Similarly, much to Lourie's surprise, Larson did not contribute commissions on any properties other than the initial Southwood purchase. There was no reason for Lourie to gift her another $78,000.00, or any other amount for that matter. He needed the money for his business. He was not a man of immense wealth, and had other obligations that were outstanding.

I concur with Lourie regarding the responsibilities of a managing partner. His counsel states:

The managing partner that controls the books has the affirmative duty to provide an accounting. II Fromberg and Ribstein on Partnership, § 6.05(c). If the partnership books are carelessly kept by the partner who has responsibility for them doubts may be resolved against that partner on an accounting. II Fromberq and Ribstein on Partnership, § 6.05(b). The partner who keeps the records has the burden of showing errors in a balance sheet prepared from those records by a court appointed auditor. Essay v. Essay, 141 N.W.2d 436 (Neb. 1966). In a dissolution of partnership suit, all doubts and obscurities created by the managing partner's negligent failure to keep adequate records were resolved against him by the trial court. Couri v. Couri, 447 N.E.2d 334 (Ill. 1983).

Plaintiff's Trial Brief, February 3, 1994, at pp. 4-5. Any doubts regarding contributions should and will be resolved adversely to Larson.

I find that the proposed amendments to the financial statement of F.M. Strand submitted by Lourie through his attorney, William Artus, are appropriate. I specifically find that the $25,000.00 submitted by Larson to the DPL account has already been accounted for by Mr. Strand. The amount of rents wrongfully taken by Larson in 1990 should be reduced to $56,970.00 from Strand's $113,940.00. I find Strand's numbers for book withdrawals and stolen rents for 1991 to be reasonable and adopt them as my own. Under this analysis, Larson has a negative capital account of some <$113,853.71>.

Simply making these determinations does not end my analysis. I concur that Larson is entitled only to a percentage ownership in the remaining assets. However, because Lourie never gave the partnership his interest in the first ten condominiums, his capital account is

   3 ABR 354 overstated. As counsel for Larson has pointed out, the capital account must be adjusted to provide for removal of the additional units owned by Lourie outright. This leaves Lourie with a net capital contribution of $86,761.45.

     Larson contributed $20,000.00 in deferred commissions to the Southwood project. The original loan for the purchase of the condominiums was obtained solely by Lourie from First National Bank of Anchorage in the amount of $346,342.00. In accordance with their true agreement, the loan is to be treated as Lourie's equity contribution. As such, Larson had but a 5.1% interest solely in the Southwood condominiums, after credit of her unpaid commission of $20,000.00. The total purchase price was $393,240.98. Everything except for the commission was contributed by Lourie. Thus Larson has a maximum of a 5.1% interest in Southwood and any remaining partnership assets.

     Assuming that Larson has a 5.1% interest in all remaining partnership property, her partnership interest is valueless. After removing the first ten condominiums from the partnership, Lourie has a capital account of $86,761.45. Larson has a negative capital account of <$113,853.00>. In accordance with AS 32.05.350, the assets of the partnership shall first be applied to debts owing creditors other than partners. This would include First National Bank for about $390,000.00, approximately $10,000.00 in condominium association dues, as well as any outstanding payables. The next item due would be the liabilities payable to partners in respect of capital. Here, Larson would have nothing receivable as she has a negative capital account. Lourie would be entitled to a full return of capital, together with attorney's fees and accountant's fees for this proceeding. Following payment of capital, the parties would be entitled to a partnership share of profits. Here, Larson would not be entitled to any profits until her negative capital account was paid in full, plus interest on the negative account at 10.5% per annum.

3 ABR 355
Reducing my analysis to numbers, here is a rough illustration of my findings:

Estimated Distribution to Partners
Assuming Net Sale Proceeds of $2,800,000.00

Net Sales Proceeds	$2,800,000.00
Less Outstanding Partnership Liabilities	<400,000.00>
Less Estimated Capital Contributions Due Lourie (including attorney's fees and accountant fees)	<120,000.00>
Balance	$2,280,000.00

Distribution of Partnership Profits:
Lourie:	94.9% x $2,280,000.00 =	$2,163,720.00
	94.9% x $113,854.20 =	$108,047.64

Lourie's Distribution:		$2,271,767.64

Larson:	5.1% x $2,280,000.00 =	$116,280.00
	Less negative capital	<113,854.20>
	Plus 5.1% x <$113,854.20>	5,806.56

Larson's Distribution:		$ 8,323.36

While the parties have not submitted definitive evidence in regard to the value of partnership assets and the amount of liabilities, it is obvious that the net value of the assets, which consist primarily of 30 modest one- and two-bedroom condominiums in Anchorage, Alaska, is under $2.8 million, and the court takes judicial notice of that fact. Should Larson object, she should file a motion for reconsideration, and the court will schedule a further hearing for valuation purposes.

Conclusion

Pam Larson betrayed the trust bestowed upon her by Daniel Lourie. She plundered Lourie's personal and partnership assets for her own gain. Lourie is entitled to retention of all partnership assets. While there may be some legitimate quibbling about the precise dollar amount of the capital account, my findings in regard to the correct amount of her partnership interest make these findings largely immaterial. Therefore,

3 ABR 356
IT IS ORDERED:

1. The capital accounts of the parties as of December 31, 1991 are as follows:

	DAN LOURIE	PAM LASRON
	(Strand)	(Artus)
December 31, 1989, per books	$50,442.29	-
Contibutions, per book of 1990	54,890.47	118,049.32
Withdrawls, per book of 1990	-18,571.31	-67,832.61
Adjustments for withdrawl of rent in 1990	-	-56,970.00
December 31, 1990, as adjusted	$86,761.45	-$6,753.29
Contributions, per books of 1991	-	700.00
Withdrawls, per boks of 1991	-4,010.13	-60,880.42
Adjustments for withdrawls of rent in 1991	-	-60,880.42
SUBTOTAL - December 31, 1991	$82,571.32	-$113,853.71

     2. Larson is entitled to treat all accounting fees, attorney's fees, and costs incurred in this proceeding and any state court action as capital contributions to the partnership which are payable prior to any distribution of partnership profits. If the parties cannot stipulate to an amount within ten days, the plaintiff shall submit formal motions with affidavits and itemized statements detailing the charges. The defendant shall submit objections within five days and the court will rule upon the fees without further notice or hearing.

     3. Except as set forth in paragraph 4, each party shall pay their own costs and attorney's fees.

     4. The parties' partnership did not include any of the following properties as they were to remain the sole and separate property of Daniel Lourie:

Unit 3-3, Woodland Lakes Condominiums
Unit 4-7, Woodland Lakes Condominiums
Unit 3-7, Woodland Lakes Condominiums
Unit 4-3, Woodland Lakes Condominiums
Unit 2, Northwood Condominiums
Unit 4, Northwood Condominiums
Unit 6, Northwood Condominiums
Unit B-l, Victoria Hills Condominiums
Unit C-2, Victoria Hills Condominiums
Unit F-2, Victoria Hills Condominiums

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The defendant shall convey any interest she possesses in such properties to the Plaintiff within 20 days of this order. Should she fail to carry out this order, the clerk of the United States Bankruptcy Court is authorized to execute conveyances on her behalf.

     5. Plaintiff Lourie shall obtain a written release of the defendant Larson from First National Bank of Anchorage and any other partnership creditor upon all partnership liabilities. Within 30 days of the date of this order, Lourie shall file copies of the releases with the court.

     6. If Lourie obtains and files the releases, Larson shall execute appropriate conveyances of all remaining partnership assets to Lourie, including any held in her name as an individual. Should Larson fail to comply with this order, the Clerk of the U.S. Bankruptcy Court is authorized to issue conveyances on her behalf.

     7. Should Lourie be unable to obtain the releases required by paragraph 5 hereof, all partnership assets shall be sold and the proceeds distributed in accordance with AS 32.05.050. Lourie shall receive 94.9% of the partnership profits and Larson shall receive 5.1% of the partnership profits resulting from the sale of the remaining 30 condominiums and 8 notes receivable. Larson shall receive no distribution until her negative capital account has been fully repaid.

     8. Should either party desire clarification of this order for implementation purposes, they may request a status conference and/or file an appropriate motion for clarification.

     9. Except as to the relief granted hereunder in paragraphs 1-8 hereof, the remainder of plaintiff's complaint is dismissed without prejudice, each party to pay their own fees and costs.

     This is not a final order. At the earliest, no final order and judgment will be entered until the 30-day period set forth above has expired.

          DATED: February 24, 1994.

	BY THE COURT
	DONALD MacDONALD IV
	United States Bankruptcy Judge

N O T E S:

3 ABR 349 1. This column has a diminished capital account due to the fact that the first ten units purchased by Lourie were not partnership property. Additionally, I have made some minor corrections to Mr. Oczkus's mathematics.