Meyer v. Grady (In re Grady)

607 B.R. 659

IN RE Everett E. GRADY and Kathryn E. Grady, Debtors.

Michael Meyer, Meyer Technology Solutions, LLC, Christopher Meyer, Meyer Capital Group, LLC, Plaintiffs,

v.Everett E. Grady and Kathryn E. Grady, Defendants.

Case No. 17-70853

Adv. No. 17-07043

United States Bankruptcy Court, C.D. Illinois.

Signed September 10, 2019

Michael Samuel Shapiro, Michael Paul Tomlinson, Tomlinson & Shapiro, P.C., Chicago, IL, for Plaintiffs.

Everett E. Grady, pro se.

Kathryn E. Grady, pro se.

Mary P. Gorman, United States Bankruptcy Judge

Before the Court after trial is a complaint objecting to the Debtors' discharges. For the reasons set forth herein, judgment will be entered against the Debtors and their discharges will be denied.

I. Factual and Procedural Background

Everett E. Grady and Kathryn E. Grady ("Debtors") filed their voluntary petition under Chapter 7 on May 24, 2017. On their schedules, they listed ownership of an 88% interest in Kaegem Corporation ("Kaegem") valued at zero and a potential sale of "partially developed software" by Kaegem to ProHub, Inc., ("ProHub") for an unknown amount. They scheduled debts to Michael Meyer in the amount of $75,000, Meyer Technology Solutions, LLC ("Meyer Technology") for $115,619.22, Christopher Meyer for $25,000, and Meyer Capital Group ("Meyer Capital") for $50,000. All of those debts were listed as business debts that were not subject to setoff and were undisputed. Nevertheless, the Debtors also disclosed their involvement in pending litigation with the Meyer individuals and entities and scheduled a potential claim with unknown value against Michael Meyer and Meyer Technology.

On their Statement of Financial Affairs ("SOFA"), in response to a question regarding either ownership or involvement as an officer or director in a business, the Debtors listed both Kaegem and ProHub. With respect to Kaegem, the Debtors described the business as "performing employee background checks" and said that the business began in 2012 and was continuing to operate. ProHub was listed with an address in care of a Delaware law firm and was described as a business that began operating in "2/2017" and was "preparing to conduct compliance verification." No ownership interest in ProHub was scheduled, but disclosure was made that "Debtor is on board of directors."

Michael Meyer, Christopher Meyer, Meyer Technology, and Meyer Capital (collectively "the Meyers") timely filed their adversary complaint seeking to deny the Debtors their discharges or, alternatively, requesting that any debt owed by the Debtors to the Meyers be excepted from the Debtors' discharges. In their complaint, the Meyers allege that Kaegem was incorporated in 2012 by the Debtors and that both Debtors were, at all relevant times, both officers and directors of Kaegem. They also allege that Kathryn Grady is the owner of 88% of Kaegem's stock. Kaegem was described as a company that "sold compliance management software in order to perform employee background checks, driver's license checks, and the like." They claim that Meyer Technology assisted the Debtors and Kaegem in the development of the software. The Meyers allege that, when the Debtors and Kaegem had trouble paying Meyer Technoloy for its work, a series of transactions occurred whereby Michael Meyer and Meyer Technology received Kaegem stock in partial payment for work done. Subsequently, through another series of transactions, all of the Meyers became shareholders of Kaegem.

The Meyers claim that, in 2014, they began to have questions about the financial condition of Kaegem and concerns about whether some of the affirmative representations that had been made to them when they acquired Kaegem stock were accurate. They allege that their investigation established that a representation made by the Debtors that they had personally invested $1.5 million in Kaegem was false and that, despite representations to the contrary, the Debtors had been taking significant distributions from the company. Meyer Technology and Michael Meyer stopped work on the Kaegem software, and, in 2017, the Meyers filed a lawsuit against the Debtors for breach of fiduciary duty, common law fraud, unjust enrichment, and violations of the Illinois Business Corporation Act. Several months after the lawsuit was filed, the Debtors filed their bankruptcy case.

In their counts seeking to have the Debtors discharges denied, the Meyers allege that the Debtors made false statements in their petition, at their creditors meeting, and at subsequent examinations taken pursuant to Bankruptcy Rule 2004. They also allege that the Debtors concealed assets and refused to comply with court orders regarding the production of documents. Kathryn Grady is accused of violating the court order regarding the scheduling of her Bankruptcy Rule 2004 examination ("2004 examination").¹

Although the Debtors were represented by counsel in the filing of their bankruptcy, they represented themselves in this adversary proceeding. They filed an answer denying many of the allegations of the complaint. After a significant period of discovery, the counts seeking denial of discharge were tried. The only witnesses called at trial were the Debtors.

Everett Grady, called as a witness by the Meyers, testified that he incorporated Kaegem in 2012 as a business to develop compliance software. He said he had an ownership interest in Kaegem but then clarified that his wife Kathryn actually owned 88% of Kaegem's stock. He testified that, over the years, both he and Kathryn have served in various positions as corporate officers; he described himself as being in charge with Kathryn playing a more limited role in the business operation.

Much of Mr. Grady's testimony focused on ProHub. He admitted that the reference to one of the Debtors being on the board of directors of ProHub in their SOFA was not true. He acknowledged that he had retained an attorney in Delaware to incorporate ProHub but that, after the incorporation, no shares had been issued and, accordingly, ProHub had no shareholders and no board of directors.

Mr. Grady admitted that, when asked about whether Kaegem and ProHub were his businesses at his creditors meeting conducted by James Inghram, the Chapter 7 trustee ("Trustee"), he denied that ProHub was his business, stating affirmatively that "[i]t is not." The Trustee had also inquired about the proposed sale of Kaegem's software to ProHub and asked Mr. Grady if a valuation had been discussed. Mr. Grady told the Trustee that Kaegem was going to receive a 15% royalty over a ten-year period and denied that any up-front payment would be received.

The Meyers' attorney had also questioned Mr. Grady at the creditors meeting, and, at trial, Mr. Grady admitted that, when asked which of the Debtors was on the board of directors of ProHub, he said that he had asked to be on the board but "[i]t hasn't been granted because we don't have a signed agreement yet." When asked at the creditors meeting who the shareholders of ProHub were, Mr. Grady said that he did not know and offered that "I've been dealing with their legal counsel and a project manager." When asked who the legal counsel for ProHub was, Mr. Grady said he would have to get that information. And, when asked who the project manager was, he named "Wade Osborne." Further, Mr. Grady said that he had been looking for investors or venture capital and that, after reaching out to a number of people, he had been "approached by the legal counsel" of ProHub.

Mr. Grady admitted that, near the conclusion of the creditors meeting, the Trustee had again asked about the potential software sale to ProHub, summarizing what he had heard: "[Y]ou approached the people, employees of ProHub, about selling the software to ProHub. Correct?" Mr. Grady acknowledged that he had answered: "Correct." Mr. Grady also admitted telling the Trustee that, referring to ProHub, he had reached out to "them" to make a cash sale but "they" would not agree.

After acknowledging that he had given the above testimony at the creditors meeting, Mr. Grady admitted that he knew ProHub had no shareholders or employees, that the "they" he had referred to was himself, and that "their legal counsel" was really his own legal counsel. He provided no explanation for the repeated misrepresentations other than to say that he "mispoke."

Mr. Grady also admitted that he and his wife had been ordered to attend a 2004 examination requested by the Meyers and that his examination had occurred September 21, 2017. He agreed that, when asked at the 2004 examination about being approached by ProHub's legal counsel as he had testified at the creditors meeting, he said that he actually had been given the attorney's name and had reached out to her. He also admitted saying that the attorney had told him that she represented ProHub and that he had not asked her who the shareholders of ProHub were because he was just trying to "have an initial conversation." At the 2004 exam, Mr. Grady said again that he did not know who the shareholders of ProHub were but finally—after repeated questioning—admitted that he had incorporated ProHub through the Delaware attorney.

Mr. Grady admitted at trial that the order directing the Debtors to appear at the 2004 examinations also required them to produce a number of documents and that he had not produced all of the requested documents. Instead, he filed a response indicating that many of the documents did not exist. Nevertheless, he admitted during the 2004 examination, and again at trial, that he had a corporate book for ProHub and some records regarding the incorporation of ProHub that should have been produced. At trial, he also identified a three-page document consisting of minutes of Kaegem board of directors meetings held February 10, 2017, and September 27, 2017. He admitted that he had not produced the minutes of the February meeting at his 2004 examination and that none of the Kaegem minutes had been produced until a deposition on ...