Hulbert v. Cheeks (In re Cheeks)

467 B.R. 136

56 Bankr.Ct.Dec. 52

In re Darryl CHEEKS, Debtor.Mark Hulbert, Sr., Plaintiff,

v.Darryl Cheeks, Defendant.

Bankruptcy No. 10 B 27605.

Adversary No. 10 A 01934.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

March 7, 2012.

McJessy Ching & Thompson LLC (Kevin P. McJessy, Chicago, IL), for Movant or Plaintiff.

Thomas M. Hartwell, for Respondent or Defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

JACK B. SCHMETTERER, Bankruptcy Judge.

In this Adversary proceeding, trial was held on Plaintiff's action to bar discharge of debts assertedly owed him by Defendant. Having considered stipulations of the parties, the evidence received at trial, and the arguments of counsel, the following Findings of Fact and Conclusions of law are made and entered. Pursuant thereto, judgment is separately entered in favor of Defendant.

INTRODUCTION

This Adversary Proceeding relates to a voluntary Chapter 7 bankruptcy case filed by Darryl Cheeks (“Defendant” or “Cheeks”). Mark Hulbert (“Plaintiff” or “Hulbert”) filed his Adversary Complaint herein seeking determination, in one count, that his claims against Defendant are not dischargeable under 11 U.S.C. § 523(a)(2)(A) because Defendant allegedly misrepresented facts and committed fraud.

Plaintiff owned 40% of Chicagoland Foods Military Consortium (“CFMC”) and served as its secretary and a director. Defendant was the president and treasurer of CFMC and owned 60% of CFMC. There was a Shareholder's Agreement between Hulbert and Cheeks relating to CFMC. Defendant also owned other companies including Taylor Cheeks & Associates, Black Rhino, The Shire Group, Chicagoland Barbecue, Inc. (“CBI”) and DKL d/b/a “Blues.” Plaintiff contended that Defendant promised that CFMC's business profits would be divided equally between them, but that Plaintiff never received his share of profits.

Post-trial, Plaintiff also argued that the debt owed him is non-dischargeable under 11 U.S.C. § 523(a)(4) because Defendant misappropriated assets of CFMC, thereby establishing Defendant's defalcation while acting in a fiduciary capacity. (Pl.'s Proposed Findings ¶ 28) Plaintiff further argued that Defendant embezzled funds owing to him personally. ( Id.)

Plaintiff obtained judgment against Defendant in District Court for the amount of $225,000 in damages and $53,730 in attorney's fees and costs. (Pl.'s Ex. 57) However that judgment was by default, and no Findings of Fact or Conclusions of Law were made or entered.

JURISDICTION

Jurisdiction lies under 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the District Court for the Northern District of Illinois. This is a core proceeding under 28 U.S.C. § 157(b).

FINDINGS OF FACT

Chicagoland Foods Military Consortium

1. Chicagoland Foods Military Consortium, Inc. was an Illinois corporation formed in 2003. (Stip. ¶ 3; Pl.'s Ex. 12)

2. Cheeks was president of CFMC from its formation to its dissolution. (Testimony of D. Cheeks)

3. At all times, CFMC's corporate office was maintained at 1480 Renaissance Drive, Park Ridge, Illinois. (Stip. ¶ 5; Testimony of M. Hulbert)

4. CFMC was dissolved in 2009. ( Id. ¶ 6; Testimony of D. Cheeks; M. Hulbert)

5. The initial owners of CFMC stock were Cheeks and Hulbert. Cheeks owned 600,000 Class A voting shares

or 60% of CFMC issued stock and Hulbert owned 400,000 or 40% of CFMC Class A shares. (Stip. ¶ 15, 19; Pl.'s Ex. 13)The Class A voting shares were the only voting shares in CFMC that were issued. (Pl.'s Ex. 13)

6. There was a shareholders agreement between Cheeks, Hulbert, and CFMC executed on July 5, 2003. (Pl.'s Ex. 13) In his testimony, Hulbert could remember only what he recalls as a personal guarantee from Cheeks. He could not remember other provisions in the agreement. (Testimony of M. Hulbert) That agreement was introduced into evidence. (Pl.'s Ex. 13)

7. Cheeks was the president, treasurer, and a director of CFMC. (Stip. ¶ 14)

8. Hulbert was the secretary and also a director of CFMC. ( Id. at ¶ 15) Since the time CFMC was formed and continuing until at least September, 2006, Hulbert worked for CFMC as its primary sales and marketing director of CFMC products. (Testimony of M. Hulbert)

9. At trial, it was disputed whether CFMC ever had properly installed board members. (Testimony of C. Cheeks; M. Hulbert; C. Cheeks; K. Erickson)

The “Legal Agreement” Between CFMC and CBI

10. On January 1, 2003, Cheeks signed a “Legal Agreement” in which CFMC incurred $750,000 of debt. (Stip. ¶ 29; Testimony of D. Cheeks; Pl.'s Ex. 2) Pursuant to that agreement, CBI agreed to sell accounts it held with branches of the U.S. military to CFMC in exchange for a promissory note. (Pl.'s Ex. 2) This document was signed by Cheeks in his capacity as “President & CEO, The Chicagoland Companies.” ( Id.) Conflicting testimony was presented as to whether this sale was authorized by CFMC board members. (Testimony of C. Cheeks; D. Cheeks; M. Dice; M. English; M. Hulbert) Payment were made from CFMC to CBI pursuant to the Legal Agreement. (Stip. ¶ 31; Pl.'s Ex. 66)

Deferred Compensation Trust

11. Cheeks established a “Deferred Compensation Trust” account with Anthony James Asset Management in the names of Plaintiff and Defendant. (Stip. ¶¶ 34, 36; Pl.'s Ex. __)

12. Cheeks caused $200,000 to be transferred from CFMC to Anthony James Asset Management as Trustee to fund that account. (Stip. ¶ 35; Pl.'s Ex. 15)

13. Between October 2006 and December 2006, the account was liquidated. (Stip. ¶ 38; Pl.'s Ex. 19)

Other Entities Owned or Controlled by Defendant

14. Chicagoland Barbecue, Inc. (“CBI”) was an Illinois corporation with its principal place of business located at 1480 Renaissance Drive, Park Ridge, Illinois. Cheeks was the president, treasurer, and a director of CBI. (Testimony of D. Cheeks; M. Hulbert) CFMC's books and records, including all of its checking account records and bank account records, were maintained at 1480 Renaissance Drive, Park Ridge, Illinois. (Stip. ¶ 18) Defendant also separately owned other companies including: Taylor Cheeks & Associates; Black Rhino; DKL d/b/a “Blues;” and the Shire Group. (Stip. ¶ 22)

15. Taylor Cheeks & Associates was an Illinois accounting firm, of which Cheeks was a partner. ( Id. at ¶ 23) Black Rhino is an Illinois accounting firm owned by Cheeks formed after Taylor Cheeks & Associates dissolved. ( Id. at ¶ 24) Cheeks and his accounting firms acted as CFMC's accountant for purposes of preparing and filing federal tax returns of CFMC but not for preparing audits. ( Id. at ¶ 16)

16. DKL d/b/a Blues, The Shire Group, Black Rhino CFMC, and CBI all maintained office space at 1480 Renaissance Drive, Park Ridge, Illinois. (Stip. ¶ 27–28; Testimony of D. Cheeks)

Use of CFMC Assets

17. Assets of CFMC were used to pay the expenses of other companies owned or controlled by the Defendant. (Pl.'s Ex. 1) CFMC paid to Renaissance Northwest Highway, LLC rent for office space leased at 1480 Renaissance Drive and also used by Black Rhino, DKL d/b/a Blues, The Shire Group, and Houston–Rogers Consulting. (Testimony of D. Cheeks; Pl.'s Ex. 39–41, 71) CFMC paid re:Genesis Corp. for computer hardware, software, and technical support services provided to Black Rhino, DKL d/b/a Blues, The Shire Group, and Houston–Rogers Consulting. (Pl.'s Ex. 36–38, 71) CFMC paid Five Point Capital Leasing for financing charges from the purchase of office furniture used by Black Rhino, DKL d/b/a Blues, The Shire Group, and Houston–Rogers Consulting. (Testimony of D. Cheeks; Pl.'s Ex. 44, 71) CFMC paid Avaya Financial Services for the financing of telephone equipment used by Black Rhino, DKL d/b/a Blues, The Shire Group, and Houston–Rogers Consulting. (Testimony of D. Cheeks; Pl.'s Ex. 42, 71) Cheeks testified that all of these expenses were paid proportionately by each entity (but evidence of this was not supplied). (Testimony of D. Cheeks) Plaintiff's expert witness, John Shoults, testified that he could find no records of an apportioning agreement or that expenses were otherwise apportioned. (Testimony of J. Shoults)

District Court Litigation

18. On October 24, 2006, Hulbert requested that Cheeks produce the corporate records of CFMC and CBI. (Stip. ¶ 39; Testimony of M. Hulbert; Pl.'s Ex. 22)

19. On January 23, 2007, Hulbert filed a lawsuit captioned Mark Hulbert, Sr. v. Darryl Cheeks and Chicagoland Foods Military Consortium in the United States District Court for the Northern District of Illinois, case number 07CV0423. (Stip. ¶ 33; Pl.'s Ex.)

20. On July 23, 2010, District Judge Milton I. Shadur entered a default Judgment Order against Defendant and in favor of Plaintiff for the total amount of $279,430. (Pl.'s Ex. 57; Testimony of M. Hulbert)

Additional Facts

21. Additional facts set forth in the Conclusions of Law will stand as additional Findings of Fact.

CONCLUSIONS OF LAW

The Complaint here was amended by post-trial motion whereby pleadings were amended to conform with proof at trial under Fed. R. Bankr.P. 7015. (AP Dkt. No. 103) As thus amended it seeks to bar discharge under 11 U.S.C. § 523(a)(2)(A) of a debt allegedly owed to Plaintiff by Defendant. Section 523(a)(2)(A) excepts from discharge any debt: “For money, property, services ... to the extent obtained, by—false pretenses, a false representation, or actual fraud....” Plaintiff also seeks to bar dischargeability under 11 U.S.C. § 523(a)(4), which prevents discharge of a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny....” Plaintiff's additional mention of 11 U.S.C. § 523(a)(2)(B) was not supported by argument or evidence.¹

Standards Under Statutes Asserted by Plaintiff.

False pretenses under 11 U.S.C. § 523(a)(2)(A) include express or implied misrepresentations or conduct intended to create or foster false impression. Memorial Hosp. v. Sarama (In re Sarama), 192 B.R. 922, 927 (Bankr.N.D.Ill.1996); ColeMichael Invs., LLC v. Burke (In re Burke), 405 B.R. 626, 645 (Bankr.N.D.Ill.2009). False...