Case No. 03-23051, AP No. 03-2128.United States Bankruptcy Court, W.D. New York.
September 26, 2006
DECISION ORDER
JOHN NINFO II, Chief Judge
BACKGROUND
On July 28, 2003, Great Lakes Boat Repair, Inc. (the “Debtor”) filed a petition initiating a Chapter 7 case and Michael H. Arnold, Esq. (the “Trustee”) was appointed as the Chapter 7 case trustee.
On August 4, 2003, seven days after the petition was filed, the Trustee commenced proceedings (the “Turnover Proceedings”) against Neil Baisch (“Baisch”) and others for the return of: (1) any and all of the Debtor’s inventory and equipment still in their possession; (2) the Debtor’s accounts receivable records still in their possession; and (3) cash proceeds from the collection of any of the Debtor’s accounts receivable, and for an accounting for any of the Debtor’s tangible or intangible assets that Baisch had
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obtained possession of in April 2003, but which were no longer in his possession.
The Trustee’s pleadings in the Turnover Proceedings included the declaration of Earl Peter Eaves, III (“Eaves”), the President and sole shareholder of the Debtor, which asserted that: (1) in April 2003, when the Debtor was in severe financial distress, Eaves and Baisch, who was in the process of acquiring the land on which the Debtor operated its boat repair business (the “Sodus Site”), began discussing Baisch’s interest in acquiring the Debtor’s business; (2) during the course of negotiations, Baisch orally offered to pay $200,000.00 in cash to acquire the Debtor’s assets and business operations, but later indicated that the purchase price would have to be paid over a three-year period; (3) on or about April 22, 2003, Eaves accepted Baisch’s oral offer of $200,000.00 plus the proceeds from Baisch’s future collections of the Debtor’s then outstanding accounts receivable; (4) on April 22, 2003 (the “Transfer Date”), after he had accepted Baisch’s offer, Eaves turned over all of the Debtor’s tangible and intangible assets and business operations to Biasch with the specific understanding, as represented to him by Baisch, that a written contract, incorporating the parties’ orally agreed upon terms, would be prepared by Baisch’s attorney and signed by the parties by the end of that week; (5) Baisch never produced a written contract
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of any kind, and the assets and operations of the Debtor had never been formally transferred to Baisch by a written bill of sale or other written documents; (6) Baisch never paid Eaves or the Debtor: (a) all or any portion of the agreed upon $200,000.00 purchase price; or (b) all of the proceeds from the collections of the Debtor’s accounts receivable, some of which remained in an escrow account with Baisch’s attorney; (7) on or about July 7, 2003, when Eaves demanded the return of all of the tangible and intangible assets of the Debtor, or the payment of the agreed upon $200,000.00 purchase price, Baisch barred Eaves from the business premises and denied him access to the Debtor’s assets; and (8) notwithstanding that Baisch had not obtained legal title in writing to any of the tangible or intangible assets of the Debtor, and had never paid any portion of the agreed purchase price, he continued to remain in control of the assets and continued to operate the Debtor’s business, both of which were property of the estate.
On November 13, 2003, the Trustee filed an Amended Complaint (the “Amended Complaint”) in the Turnover Proceedings which set forth various causes of action against Baisch. These causes of action were: (1) a first cause of action for specific performance under New York State Common Law (the “Specific Performance Cause of Action”), which alleged that: (a) Baisch and Eaves, as the President and sole shareholder of the Debtor, had entered into a
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prepetition oral agreement for Baisch to purchase all of the Debtor’s assets, including equipment, tools, inventory, computers, other tangible property, intangible personal property, customer lists, work in progress and good will, as well as the Debtor’s ongoing business operations, for the purchase price of $200,000.00 plus the proceeds of the collection by Baisch of the Debtor’s outstanding accounts receivable (the “Baisch Purchase Agreement”); (b) pursuant to the terms and provisions of the Baisch Purchase Agreement the Debtor, through Eaves as its President and sole shareholder, turned over physical possession and control of all of the assets covered by the Agreement on the Transfer Date; (c) Baisch then took possession and control of the Debtor’s assets and business operations, and began collecting its accounts receivable; (d) possession of the Debtor’s assets was turned over to Baisch pursuant to the Baisch Purchase Agreement, and in reliance upon Baisch’s further representations that there would be a written contract memorializing the terms and provisions of the Baisch Purchase Agreement prepared and signed by the end of the week of April 22, 2003; (e) Baisch never produced the promised written contract memorializing the Agreement; (f) Baisch has refused to pay the promised and agreed upon $200,000.00 purchase price for the Debtor’s assets and business operations; and (g) the Trustee was entitled to specific performance of the Baisch Purchase Agreement;
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(2) a second cause of action under New York State Common Law for unjust enrichment (the “Unjust Enrichment Cause of Action”), which alleged that: (a) Baisch remained in possession of all of the Debtor’s assets since the Transfer Date without paying any consideration for the use of those tangible and intangible assets and he substantially benefitted from that use and from being able to continue the operations of the Debtor’s business; (b) Baisch had been unjustly enriched by having the use of the Debtor’s assets and ability to operate its business without paying any consideration; and (c) the Trustee was entitled to compensatory damages by reason of Baisch’s unjust enrichment; (3) a third cause of action under New York State Common Law for fraud (the “Fraud Cause of Action”), which alleged that: (a) Baisch intentionally misrepresented to Eaves that he would have a written contract memorializing the Baisch Purchase Agreement prepared and signed by the end of the week of April 22, 2003; (b) Eaves justifiably relied upon those intentional misrepresentations; and (c) Eaves would never have turned over possession of the Debtor’s assets and the operation of its business if he had not relied upon Baisch’s intentional misrepresentations with regard to the preparation and execution of a written contract memorializing the terms and provisions of the Baisch Purchase Agreement, including the payment of the $200,000.00 purchase price, so the Trustee was entitled to compensatory damages
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caused by Baisch’s fraud; (4) a fourth cause of action under New York State Common Law for trespass to chattels (the “Trespass Cause of Action”), which alleged that on or about July 6, 2003, Baisch, notwithstanding Eaves’ demand for the return of all of the assets of the Debtor and the cessation of operation of the Debtor’s business, refused to: (a) turn over possession of the assets and cease operating the Debtor’s business; and (b) pay any compensation for the taking of those assets and the ability to operate the Debtor’s business, so that Baisch intentionally interfered with the Debtor’s property and the Trustee was entitled to compensatory damages; and (5) a sixth cause of action under New York State Common Law for conversion (the “Conversion Cause of Action”), which alleged that Baisch had converted the Debtor’s assets by taking possession of them and using them in a manner inconsistent with the rights of the Debtor and the terms and provisions of the Baisch Purchase Agreement.
On March 12, 2004, Baisch interposed an Answer to the Amended Complaint, which set forth as a second affirmative defense that the business of the Debtor had a negative value both at the Transfer Date and at the time of the filing of its bankruptcy petition.
The Court heard a number of pretrial motions and conducted a number of pretrial conferences in connection with the Turnover Proceedings, and then conducted a multi-day trial beginning in
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December 2005 and ending on March 9, 2006 (the “Trial”). Numerous witnesses testified at trial, including Eaves, Baisch and James L. Marasco, CPA (“Marasco”), a business valuation expert retained by the Trustee, and Raymond Schultheis, CPA (“Schultheis”), a business valuation expert retained by Baisch.
DISCUSSION
Based upon all of the pleadings filed and the proceedings conducted in connection with the Turnover Proceedings, the Court’s review of the exhibits admitted into evidence at the Trial and the testimony of the witnesses at Trial, at which time the Court had the opportunity to make a determination as to their credibility, the Court finds that: (1) the Trustee has failed to meet his burdens of proof under the Specific Performance, Fraud, Trespass and Conversion Causes of Action against Baisch; (2) the Trustee has met his burden of proof under the Unjust Enrichment Cause of Action against Baisch; and (3) the Trustee is entitled to damages against Baisch in the amounts of: (a) the proceeds from the collection of the Debtor’s accounts receivable that were not paid to the Debtor or for its benefit, to the extent that those payments alleged to have been for its benefit were approved by the Debtor or its attorney or are now approved by the Trustee; and (b) $65,000.00, representing the value of the tangible and intangible assets and
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business operations of the Debtor, including good will, which Baisch acquired on the Transfer Date, benefitted from, but failed to compensate the Debtor for.
The Court has made these findings for the following reasons:
1. In connection with the Specific Performance Cause of Action, having heard the testimony of Eaves and his spouse, Luzette Eaves, at Trial, and having made a determination as to their credibility, I find that their testimony, to the effect that Baisch specifically and unconditionally promised to pay $200,000.00 in exchange for the tangible and intangible assets and the business operations of the Debtor, was not credible.
I believe that the parties may have discussed that dollar amount, and it may even have been discussed as a maximum purchase price, because Eaves may have requested that amount, or he may have stated that he believed the amount of $200,000.00 was the reasonable value of the tangible and intangible assets and business operations of the Debtor. This is in part because it appears that $200,000.00 was the approximate amount that would have been necessary for Eaves to have paid off all or substantially all of the personal liabilities that he had incurred in connection with the operation of the Debtor’s business. Nevertheless, I do not
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believe that the parties unconditionally agreed to that purchase price.
Baisch, as a sophisticated businessman and the then or about to become owner of the Sodus Site, clearly knew that the assets and business operations of the Debtor would have substantial tangible and intangible value in his hands, both as a business which could generate substantial cash flow, but also as an important component of the future development he envisioned for the Sodus Site.[1]
However, given the state of the due diligence Baisch and his representatives were able to perform, which had been significantly impeded by the failure of Eaves to supply all of the financial information Baisch and his representatives had requested, I do not find it reasonable to conclude that Baisch would have unconditionally committed to the $200,000.00 purchase price.
2. Furthermore, in connection with the Specific Performance Cause of Action, it must fail because the alleged Baisch Purchase Agreement would violate the Statute of Frauds, since it was an oral agreement and not in writing. Also, for the reasons set
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forth below, I do not find that the Trustee has met his burden to show that a fraud exception exists.
3. In connection with the Fraud Cause of Action, the Trustee has alleged that: (a) Baisch knowingly misrepresented to Eaves that: (i) he would have his attorneys draw up a written contract that would incorporate the terms of the alleged Baisch Purchase Agreement and have it signed by the end of the week; and (ii) the contract would include the agreed upon purchase price of $200,000.00; and (b) Eaves, to his detriment and the detriment of the Debtor’s estate, relied upon those misrepresentations and turned over all of the assets and the business operations of the Debtor to Baisch.
As set forth above, I have found that the testimony of Eaves, to the effect that Baisch, individually, specifically and unconditionally agreed to pay $200,000.00 for the assets and business operations of the Debtor, was not credible. As a result, I do not find that Baisch made that alleged misrepresentation.
As to a representation that a written contract would be drafted and signed by the end of the week, it may very well be that Baisch made that promise to Eaves. However, the Court does not find that such a representation, if made, or even if made was without the intention to perform, was the primary
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reason that Eaves turned over the assets and business operations of the Debtor to Baisch on the Transfer Date.
Eaves was clearly dragging his feet on supplying all of the requested financial and related information about the Debtor and its business affairs to Baisch and his representatives, including the profitability and solvency of the business. This was clearly in part because the requested information would not have been favorable to him in connection with any sale negotiations. However, it appears to have also been in part because Eaves knew that: (a) Baisch ultimately wanted to acquire the assets and business operations as an important part of his long-range plan to develop the Sodus Site into a more elaborate facility with condominiums, restaurants and other services, in addition to the operations of the existing marina and a boat repair business; and (b) the Capital Group, Inc. (the “Capital Group”) and Baisch, who were receiving complaints from the marina customers at the Sodus Site, had to do something as soon as possible to insure that Baisch acquired the Debtor’s assets and business operations so they could meet the immediate need to get the boats of the marina customers in the water. This was necessary to collect the related revenues, but also to retain the good will of
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these customers in connection with the planned future development.
Eaves also knew that Baisch had or was in the process of purchasing the Sodus Site, and that at any time the Capital Group or Baisch, when Baisch acquired the Site, could give the Debtor a sixty (60) day notice of termination for its lease of the business premises. If that happened, because of the state of the finances of both the Debtor and Eaves personally, there would effectively be no business left that could be relocated or otherwise operated, as it was likely that HSBC Bank and/or other creditors would dismantle the insolvent business, which lacked capital and was in default on many, if not all, of its key obligations.
As a result of these factors and circumstances, Eaves knew that he could no longer operate or relocate the Debtor’s boat repair business and that Baisch, to some extent having been bankrolled by the Capital Group, was his only chance to obtain something more than the liquidation value of the Debtor’s assets. Eaves effectively had run out of time and Baisch was now the only game in town.[2]
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It is most likely that, from his discussions with Baisch, Eaves believed that when the dust cleared, Baisch would pay him the reasonable value of the Debtor’s assets and business operations.
Those factors and circumstances, along with the promise of a $1,000.00 weekly salary, which the Debtor could no longer generate for Eaves, is why I believe Eaves turned over the Debtor’s assets and business operations to Baisch on the Transfer Date.
4. In connection with the personal liability of Baisch, although his plan may have been to acquire the assets and business operations of the Debtor through the wholly owned corporation he had recently formed, Great Lakes Yacht Works, Inc. (“Yacht Works”), Baisch never took the necessary steps or observed the necessary formalities to in fact have Yacht Works acquire the assets and business operations from the Debtor, either on the Transfer Date or at any subsequent time. Rather, I find that Baisch acquired and took possession of those assets and operations on the Transfer Date in his individual capacity.
Baisch has produced no written bill of sale, lease agreement, management agreement or other documentation to evidence the acquisition from the Debtor of the Debtor’s tangible and intangible assets by Yacht Works or any other
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corporation. On the other hand, the evidence is clear that Baisch acquired ownership, possession and control of all of those assets and the Debtor’s business operations in his individual capacity on the Transfer Date.
As a sophisticated businessman, Baisch failed to cross his t’s and dot his i’s and obtain a written contract or other written document when he clearly obtained possession and control of the Debtor’s assets and began operating its business.[3] It may be that he then formally or informally transferred those assets and the operations to Yacht Works, or had that corporation manage the assets and operations acquired from the Debtor, but the Court has never been provided with any paperwork to evidence such a transfer or management agreement.
5. In connection with the Trespass Cause of Action, I find that Eaves did transfer ownership, possession and control of the Debtor’s tangible and intangible assets and its business operations to Baisch in his individual capacity on the Transfer Date, with the understanding that Baisch would pay a reasonable purchase price within a reasonable period of time. Because there was no written agreement between the parties,
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there was also no security interest in the assets retained by the Debtor, so that its demand on July 6, 2003 for the return of the assets and the cessation of the operation of the Debtor’s former business was without any legal significance, other than to constitute a continuing demand for the payment by Baisch of a reasonable purchase price for the Debtor’s assets and operations that he had and continued to benefit from.
6. In connection with the Conversion Cause of Action, it must fail because I have found that the Debtor, through Eaves, transferred ownership, possession and control of the Debtor’s tangible and intangible assets and the operation of its business to Baisch on the Transfer Date, subject to Baisch paying a reasonable purchase price within a reasonable period of time.
7. I find that the Trustee has met his burden to prove his Unjust Enrichment Cause of Action against Baisch.[4] Baisch has benefitted from the acquisition of the Debtor’s assets and the operations of its business, and he has failed to pay anything for that benefit.
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8. In connection with the Unjust Enrichment Cause of Action, Baisch is liable for the value of the Debtor’s tangible and intangible assets that he acquired on the Transfer Date when they were being used in a going concern business operation. The Debtor’s intangible assets included its reputation for doing excellent boat repair work over many years in this service area, a backlog of work, its telephone number where potential customers in the service area knew they could obtain boat repair services, and its employees in place who: (a) had built the reputation for doing excellent boat repair work; and (b) had the knowledge, experience and ability to put the boats of marina customers at the Sodus Site in the water, which Baisch, as the owner or soon-to-be owner of the Site, desperately needed to have happen in order to collect the related revenues and maintain the good will of those customers for his future development plans.
Furthermore, through the use of its tangible and intangible assets, the Debtor’s business operations had generated in excess of $2,000,000.00 in gross sales over the prior three fiscal years.
As to the benefit received by Baisch from his acquisition of the assets and business operations of the Debtor, it may be true that as operated by Eaves, with the overhead expense of
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the building that housed the Debtor’s operations at the Sodus Site (the “Repair Building”), the Debtor’s business was not profitable. However, its tangible and intangible assets and its operations, as more fully discussed above, as a going concern, had significant value to an acquirer of those assets, especially to Baisch as the acquirer of the Sodus Site, which included the Repair Building. Baisch had any number of options that Eaves did not have with respect both to the Site and the Debtor’s assets and operations. These included: (a) eventually moving the operations to a different more economical building that could be erected at the Site as part of the overall future development of the Site; (b) relocating the boat repair business to a different site (the business had been very profitable when located in downtown Sodus); or (c) renting out portions of the Repair Building to other entities, or otherwise using portions of the building himself in connection with his overall development scheme for the Sodus Site.
As a result, the potential drain on profitability of the Repair Building could easily be minimized when the boat repair business and the Site were controlled by Baisch and the business and the Building were included within the overall plan for the future development of the Sodus Site.
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Furthermore, I do not know the terms under which Baisch acquired the Sodus Site from the Capital Group. Those terms may have essentially minimized the indirect costs of the Repair Building from the time of acquisition.
9. Schultheis made no attempt to value the tangible and intangible assets and business operations of the Debtor in the hands of Baisch. He only valued the Debtor’s business as it was on the Transfer Date being operated by Eaves. On that basis, it was admittedly insolvent and unprofitable. He made this valuation even though there can be no question that in the hands of Baisch the Debtor’s tangible and intangible assets and business operations: (a) could and would produce significant cash flow; and (b) provided continuing good will and an important service for the current and anticipated users of the ultimately developed Sodus Site.
10. Marasco, on the other hand, valued these tangible and intangible assets and the Debtor’s business operations utilizing the Capitalization of Earnings methodology that did take into consideration the earnings potential of these tangible and intangible assets in the hands of an acquirer such as Baisch, using generally accepted accounting principals.
However, I believe that this acceptable and correct valuation method, under the facts and circumstances of this
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case, resulted in a value that is too high. Nevertheless, the expert testimony did set a range of value, between zero, set by Schultheis, and $130,000.00, set by Marasco.
Marasco’s valuation, Exhibit 46 at Trial, utilized the Capitalization of Earnings method based upon the Debtor’s gross sales of in excess of $600,000.00 per year for the three proceeding fiscal years. At Trial, on cross examination, the attorney for Baisch raised a number of valid concerns with respect to some of the individual components of the Marasco valuation.
Notwithstanding that I agree with the valuation method chosen by Marasco, as a result of the valid concerns raised on cross-examination, I believe that it is appropriate to discount the Marasco valuation by fifty percent (50%). This results in a Capitalized Earning and going concern value for the Debtor’s tangible and intangible assets and business operations of $65,000.00, which I find is the benefit that Baisch was unjustly enriched by.
CONCLUSION
On or before October 30, 2006, Baisch shall pay to the Trustee $65,000.00, or the Trustee shall submit a separate judgment for that amount.
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Attached is the first page of Defendant’s Exhibit J1 at Trial, which is an accounting of the Debtor’s accounts receivable collections. On or before October 30, 2006, Baisch shall pay the Trustee the agreed upon unpaid proceeds of the collections of the Debtor’s accounts receivable. Should Baisch and the Trustee not be able to agree on this amount, the parties shall notify the Court and this matter shall be scheduled on the Court’s Trial Calendar for November 15, 2006 at 9:00 a.m. in order to set a hearing for the Court to determine the correct amount to be paid. If the correct amount is agreed upon, but Baisch fails to pay it on or before October 30, 2006, the Trustee shall submit a separate judgment for that amount.
IT IS SO ORDERED.
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