Howard Indus., Inc. v. BADW Grp.

HOWARD INDUSTRIES, INC., Plaintiff, v. BADW GROUP, LLC, and BRANDON WALDROP, Defendants.

No. 2:16-CV-168

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TENNESSEE GREENEVILLE DIVISION

May 14, 2020

MEMORANDUM OPINION

Plaintiff Howard Industries, Inc. seeks judgment against defendants BADW Group, LLC, and Brandon Waldrop in the amount of $384,314.88, for actual damages, as well as prejudgment and postjudgment interest. The Court conducted a bench trial on January 24, 2019. Having carefully reviewed and considered the evidence and testimony presented, the Court is now prepared to issue its findings of fact and conclusions of law. See Fed. R. Civ. P. 52(a)(1) ("In an action tried on the facts without a jury . . . the court must find the facts specially and state its conclusions of law separately.").

I. PROCEDURAL BACKGROUND

In an amended complaint, Plaintiff alleges that defendant Brandon Waldrop ("Waldrop") was the sole member of defendant BADW Group, LLC ("BADW"). [Doc. 25, p. 1]. The amended complaint further alleges that BADW was a retailer which sold commercial lighting products and, from March 28 through May 6, 2016, made numerous purchases of such items from Plaintiff on an open account. [Id., p. 2-3]. According to the amended complaint, BADW bought a total of $384,314.88 of commercial lighting products from Plaintiff on that open account, for which no payments were ever made. [Id.]. The amended complaint raises claims for sworn account and breach of contract as to BADW, and a claim for piercing the corporate veil as to Waldrop. [Id. at 3-4].

In late 2016, defendant BADW (through counsel) conceded liability for the full amount of damages alleged. [Doc. 18]. BADW's first attorney later withdrew. [Docs. 33, 36]. Replacement counsel appeared [docs. 37, 38] but also subsequently withdrew. [Docs. 58, 61].¹

As noted, the Court conducted a half day bench trial on January 24, 2019. Plaintiff appeared through counsel, and defendant Waldrop appeared pro se. Defendant BADW did not appear. See United States v. 9.19 Acres of Land, 416 F.2d 1244, 1245 (6th Cir. 1969) ("[A] corporate president may not represent his corporation before a federal court [and] a corporation cannot appear otherwise than through an attorney.") (citations and quotation omitted). As such, the Court granted default judgment in Plaintiff's favor as to BADW in the amount of $384,314.88. [Doc. 73]. Only the claim for piercing of the corporate veil remained at issue.

At the conclusion of trial, the Court directed the parties to file proposed findings of fact and conclusions of law. Plaintiff complied. [Doc. 75]. Defendant Waldrop did not, and the time for doing so has expired. [Doc. 15, p. 5].²

II. FINDINGS OF FACT

According to the testimony of Plaintiff's credit manager John Reid, Plaintiff sold lighting products to BADW on credit.³ Payment was due within 30 days of invoice. Reid further testified that BADW presently owed $384,314.88 and had owed that amount since May 6, 2016, notwithstanding Plaintiff's multiple demands for payment. The Court credits Mr. Reid's testimony.

Waldrop formed BADW, a Tennessee limited liability company, in 2014. [Trial exhibits, doc. 74, ex. 1, p. 10]. He was BADW's sole member. [Id., p. 47]. BADW sold lighting products—primarily online—to commercial and residential customers. [Id., p. 15]. BADW did not have a storage facility, warehouse, or brick and mortar store. [Id., p. 18]. Its office was in Waldrop's home. [Id.].

As of September 2017, Waldrop was married. His wife was not employed and had not worked since 2012. [Id., p. 10]. She had no income. [Id., p. 38]. Defendant Waldrop had neither a personal bank account nor a personal debit or credit card. [Id., p. 37-38].

BADW was initially funded by $20,000.00 in loans. [Id., p. 18]. Within three months, Waldrop transferred almost all of that money to himself. [Id., p. 67]. Thereafter, BADW was regularly funded by "numerous" merchant cash advances which would take a security interest in future receivables. [Id., p. 22-24, 71]. Waldrop testified that "I" was "hammered on the fees for the loans." [Id., p. 71]. As an example, two such loans came with origination fees of $1,200.00 and 2,000.00, respectively. [Id., p. 78].

The record is virtually devoid of corporate records for BADW. According to Waldrop, to the extent such records existed they were maintained within online subscription entities such as Yahoo! Small Business, Shopify, and QuickBooks. [Id., p. 11-13]. Waldrop explained that "I" eventually could not afford the cost of those services "so all the records were gone." [Id., p. 10].⁴

Waldrop and BADW essentially have no "corporate records whatsoever." [Id., p. 11]. Neither Waldrop nor BADW ever used an accountant. [Id., p. 12]. When asked whether he understood that a balance sheet shows assets, liabilities, and owner's equity, Waldrop responded in the negative. [Id., p. 41]. He does not know what an LLC "distribution" is.

According to Waldrop, BADW lost $71,052 in 2015 and $213,623 in 2016. [Id., p. 85]. Nonetheless, he regularly took cash out of BADW, allegedly for both business and personal expenses. He is "not sure" how much of the cash was used for business purposes, and again he has no records. [Id., p. 32-33]. Waldrop claimed that "I left most of myincome that I was owed in the business to keep the business growing. I only took out what I absolutely needed at that point in time to pay bills, food, shelter and so forth." [Id., p. 48]. He does not know how much money he withdrew from BADW for personal spending [id., p. 55] but testified that he had the right to take as much of BADW's money as he wanted.

BADW funds were used to purchase a desktop computer and laptop for Waldrop's use, yet those devices contained "no business-related data." [Id., p. 34]. Similarly, BADW purchased a new cell phone which Waldrop used as both his business and personal phone. [Id., p. 35-36].

BADW paid Waldrop's $1,110.00 monthly mortgage. [Id., p. 52, 72, 102]. Waldrop called that a "normal expense." [Id., p. 72]. He also applied BADW funds—by cash and by check—to pay for lawn care. [Id., p. 72-73, 77]. That, too, he deemed "a normal expense." [Id., p. 72-73]. Waldrop used $2,781.90 from BADW's account to pay for pet burial expenses. [Id., p. 78]. Waldrop stated that the bill was paid by check because "I didn't have collective thought to go withdraw the money" from BADW's account. [Id.].

Regarding purchases made with BADW's debit card at businesses such as Wal-Mart, Home Depot, Lowe's, and various restaurants, Waldrop "can't remember" whether and to what extent any were for business purposes. [Id., p. 49]. Waldrop also used BADW's checks and debit card at numerous other businesses including Best Buy, gas stations, The Vitamin Shoppe, Personal Touch Pet Grooming [Trial exhibits, doc. 74, ex. 2; doc. 55, p, 27, 80], Abercrombie and Fitch, Academy Sports, grocery stores, Farm Bureau Insurance, Parkway Discount Wine and Liquor, Kay Jewelers, FireworksSupermarket, Tractor Supply, Lighthouse Wine and Spirits, Petsense Store, Redbox DVD rental, PetSmart, Johnson City Power, Ross Stores, Evergreen of Johnson City (a gardening and landscaping center), Shamrock Beverage and Tobacco Shop, and Northside Wine and Spirits. [Trial exhibits, doc. 74, ex. 5, numbered ex. p. 9, 14-15, 20, 115, 135-36, 141-43].

In addition to the debit card purchases, Waldrop withdrew a cash total of $159,544.36 from BADW's bank account. [Trial exhibits, doc. 74, ex. 1, p. 70]. He claims that some of the cash was applied to taxes and customer refunds, but he has no supporting documentation. [Id., p. 94]. In his own words, "To the best of my knowledge, I can't remember what, you know, it was taken out for." [Id., p. 70].⁵

In May 2016, Waldrop moved BADW's remaining funds from one bank account into another to block automatic withdrawals from lenders and others. [Id., p. 86]. From the limited funds remaining in the new account, Waldrop withdrew $48,730.00 in cash. [Id., p. 87-89]. He has "no documentation" of how the money was spent. [Id., p. 87-89, 94, 97-98].

III. CONCLUSIONS OF LAW

The Court has already granted default judgment in Plaintiff's favor as to its claims against BADW. [Doc. 73]. The only remaining issue is whether the corporate veil should be pierced, and Waldrop held accountable for the entirety of the judgment against BADW. On that question, the Court concludes in the affirmative.

"As a general rule, members, owners, employees or other agents of a Tennessee limited liability company have no personal liability for the debts or obligations of the company." Edmunds v. Delta Partners, L.L.C., 403 S.W.3d 812, 828-29 (Tenn. Ct. App. 2012) (quotation omitted); see also Tenn. Code Ann. §§ 48-217-101(a)(1), 48-249-114(a)(1). This general rule originates from the "strong presumption" that a corporation is a separate legal entity. Dolle v. Fisher, No. E2003-02356-COA-R3-CV, 2005 WL 2051288, at *5 (Tenn. Ct. App. Aug. 26, 2005) (quotation omitted).

A party can overcome this strong presumption and hold the individuals behind the corporation liable for a debt—a process known as piercing the corporate veil—when that corporation lacks funds to pay the debt because of misconduct in the corporate hierarchy. Pamperin v. Streamline Mfg., Inc., 276 S.W.3d 428, 437 (Tenn. Ct. App. 2008). The corporate identity may be disregarded and the owner may be treated as identical to the corporation "upon a showing that it is a sham or a dummy or where necessary to accomplish justice." Kutty v. U.S. Dep't of Labor, 764 F.3d 540, 551 (6^th Cir. 2014) (quoting Schlater v. Haynie, 833 S.W.2d 919, 925 (Tenn. Ct. App. 1991)). "The '[c]onditions under which the corporate entity will be disregarded vary according to the circumstances present in the case, and the matter is particularly within the province of the [t]rial [c]ourt." Kutty, 764 F.3d at 551 (quoting Muroll Gesellschaft M.B.H. v. Tenn. Tape, Inc., 908 S.W.2d 211, 213 (Tenn. Ct....