Andringa v. Acker (In re Acker)

In re: Scott A. Acker and Amy S. Acker, Debtors.

Timothy J. Andringa et al., Plaintiffs, v. Scott A. Acker et al., Defendants.

Case No. 19-21349-kmp

Adv. No. 19-2089

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF WISCONSIN

March 31, 2021

Chapter 7

DECISION AND ORDER DISMISSING COMPLAINT

Plaintiffs Timothy and Robin Andringa seek a determination that their former neighbors and friends, Scott and Amy Acker, owe them a nondischargeable debt based on Mr. Acker's involvement in a restaurant offering that occurred approximately ten years before trial. The Andringas seek a $50,000 nondischargeable judgment pursuant to 11 U.S.C. § 523(a)(2)(A), § 523(a)(2)(B), and § 523(a)(4), representing the amount of the Andringas' October 2010 investment in a chain restaurant in New Berlin, Wisconsin called Quaker Steak & Lube. The Andringas allege that the Ackers obtained the $50,000 investment by false representations or a false written statement as outlined in § 523(a)(2)(A) and § 523(a)(2)(B). The Andringas further allege that the Ackers committed "fraud or defalcation while acting in a fiduciary capacity" and embezzlement under § 523(a)(4). The parties have tried the case, and based on the evidence presented at trial, the Court concludes that the Andringas failed to meet their burden to prove by a preponderance of evidence the elements of claims under § 523(a)(2)(A), § 523(a)(2)(B), or § 523(a)(4). Accordingly, and for the reasons stated below, the Court finds in favor of the Defendants, and dismisses the Andringas' adversary complaint.

Statement of Jurisdiction

The Court has jurisdiction pursuant to 28 U.S.C. § 1334 and the order of reference from the district court pursuant to 28 U.S.C. § 157(a). See Order of Reference (E.D. Wis. July 10, 1984) (available at www.wied.uscourts.gov/gen-orders/bankruptcy-matters) (last accessed March 30, 2021). As a proceeding to determine the dischargeability of a debt, this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and the Court may enter a final judgment. 28 U.S.C. § 157(b)(1).

Factual Background

In 2010, Sting Ray Hospitality Group LLC ("Sting Ray"), acting by and through Mr. Acker, approached Timothy and Robin Andringa about investing in New Berlin QSL, LLC ("NBQSL") as investors. Mr. and Mrs. Acker and Mr. and Mrs. Andringa were neighbors and friends, as were their sons. NBQSL was organized for the purpose of operating a Quaker Steak & Lube franchise restaurant location in New Berlin, Wisconsin. Ex. 1. p. 9, 11.

NBQSL was formed on May 31, 2010 as a manager-managed limited liability company organized under the laws of the State of Wisconsin and governed by Articles of Organization, anOperating Agreement, and the Wisconsin Limited Liability Company Act, Chapter 183 of the Wisconsin Statutes. Id. p. 4, 11. Mr. Acker was the original member of NBQSL, and was issued 140 units in NBQSL effective May 31, 2010 in exchange for his initial contribution of $2,500 in cash. Id. p. 4, 15. On September 5, 2010, Mr. Acker assigned and transferred his 140 units in NBQSL to Sting Ray and on that date Sting Ray became the Manager of NBQSL. Id. p. 15, 22, 49, 69. Sting Ray was a management company owned and managed by Mr. Acker and was responsible for the management of the operations of NBQSL and the management of the Quaker Steak & Lube location in New Berlin. Ex. 1 p. 9, 12, 47.

On September 14, 2010, Sting Ray, as the manager of NBQSL, and Mr. Acker sent an Offering Memorandum to the Andringas on behalf of NBQSL. Id. p. 1-292. The purpose of the Offering Memorandum was to sell units in NBQSL for an initial price of $1,000 per unit with a minimum purchase of 25 units ($25,000). Id. p. 4, 10, 41. Purchasers of the units would become members of NBQSL. Id. p. 4. The Offering Memorandum stated that a minimum number of 500 units would be sold for an aggregate subscription amount of $500,000 and that a maximum number of 700 units would be sold for an aggregate subscription amount of $700,000. Id. p. 4, 10, 41. NBQSL offered to sell the units for cash and also agreed to accept promissory notes for the purchase of the units, so long as those promissory notes were paid in full by the subscriber with accrued interest no later than ninety days after acceptance by NBQSL. Id.

The Offering Memorandum provided that the sale of the units would commence on September 7, 2010, and if subscriptions of $500,000 were not received and accepted by the close of business on October 15, 2010, the offering would be terminated and all subscribers would have their subscription payments returned in full with any interest earned thereon. Id. p. 4, 41. The Offering Memorandum stated in pertinent part:

The minimum number of Units that may be sold in the Offering is equal to five hundred (500) Units at the Subscription Price for an aggregate subscription amount of five hundred thousand and 00/100 dollars ($500,000.00) ("Minimum Offering"). The maximum number of Units that may be sold in the Offering is equal to seven hundred (700) Units at the Subscription Price for an aggregate subscription amount of seven hundred thousand and 00/100 dollars ($700,000.00) ("Maximum Offering"). The Offering will commence on the date of this Private Offering Memorandum. Notwithstanding the foregoing, if subscriptions for the Minimum Offering have not been received and accepted by on or before the close of business on October 15, 2010 (the "Minimum Offering Date"), the Offering will be terminated and all subscribers will have their subscription payments returned in full with any interest earned thereon.

Plaintiffs' Ex. 1 at 4, 41 (emphasis added). If NBQSL received and accepted subscriptions of $500,000 by October 15, 2010, then NBQSL would commence operations and Sting Ray would commence use of the proceeds of the offering. Id. p. 41.

In addition to the capital contributions made by the members of the LLC, NBQSL intended to borrow $900,000 from Mid America Bank. Id., p. 14, 32. The purpose of the bank loan was to finance the leasehold improvements to the New Berlin property, to purchase equipment and inventory for the restaurant, and to use as working capital for the restaurant. According to the Offering Memorandum, the bank loan was to be for a term of seven years with the initial interest rate expected to be 6%. A security interest in all the assets of NBQSL was offered to the bank as collateral for the loan and Mr. Acker signed a personal guarantee for the loan which was secured by a second mortgage on Mr. Acker's personal residence. The loan required NBQSL to raise a certain amount of equity capital and to refrain from making distributions to its members that would adversely affect the financial condition of NBQSL. The loan was supported by the United States Small Business Administration. Id. p. 40.

On or about October 5, 2010, the Andringas executed a Subscription Agreement and purchased 50 units in NBQSL for $50,000. Ex. 106B. Mrs. Andringa tendered a check made out to New Berlin QSL, LLC in the amount of $30,000 on October 5, 2010. Ex. 1A, p. 1181. She tendered a second check made out to New Berlin QSL, LLC in the amount of $20,000 on October 6, 2010. Ex. 1A, p. 1180.

The Andringas compiled checks showing that NBQSL had not raised $500,000 by October 15, 2010. Plaintiffs' Ex. 1A. Mr. Acker was not able to produce copies of promissory notes that showed investors had pledged more money to NBQSL or any other documents that demonstrated that he had collected more money. During his testimony, he was unable to say with certainty whether NBQSL had collected $500,000 in checks or promissory notes by the date stated in the Offering Memorandum. Notwithstanding, no capital contributions were returned to the members of the LLC, the bank funded the loan, construction started on the Quaker Steak & Lube location on October 12, 2010, and the restaurant opened in January 2011.

Mr. Andringa testified that the restaurant did "really well" in 2011, 2012, and 2013 and that it did "well" in 2014. NBQSL's balance sheets show that the loan with Mid America Bank was paid down to $701,203.12 by the end of 2012, to $572,203.09 by the end of 2013, and to $436,379.18 by the end of 2014. Ex. 1C, p. 1255, 1257, 1259. According to the Andringas' testimony, they received distributions in 2012, 2013, and 2014 in the total amount of $16,000-$18,000 as a result of their investment in NBQSL.

Mr. Acker confirmed that the New Berlin location had three solid years of business, but began to experience flat or declining sales in 2015. Mr. Acker attributed the declining sales to the financial problems being experienced by the franchisor, Quaker Steak & Lube. Quaker Steak & Lube, the franchisor, went bankrupt in 2015 and was purchased out of bankruptcy by TravelCenters of America, which saw the future of the franchise in food courts and travel plazas and not free-standing restaurants. Mr. Acker testified that the New Berlin restaurant received little to no support from Travel Centers of America, explaining that the corporate staff went from 44 people to 4 people, there was one field operations person for 60 restaurants, no purchasing department to obtain deals on food for the restaurants, and no marketing support.

After receiving nominal support from the franchisor and attempting to boost sales and cut costs, the Quaker Steak & Lube restaurant in New Berlin conducted its last day of business on March 18, 2018. Ex. 67. The Mid America Bank loan was paid off and NBQSL's lease and its equipment were sold to Point Burger Bar which started operating its own restaurant at the New Berlin location in April 2018.

The Ackers filed for Chapter 7 bankruptcy in 2019. The Andringas filed an adversary proceeding to have their $50,000 investment in NBQSL deemed nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), § 523(a)(2)(B), or § 523(a)(4), alleging claims of self-dealing, fraud, embezzlement, and intentional misrepresentation.

Analysis

I. The Andringas Bear the Burden of Proof.

...