Plumber's Edge, Inc. v. Veino (In re Veino)

2016 BNH 012

In re: John Edward Veino, Debtor

Plumber's Edge, Inc.,, a.k.a J.I.T, Inc., Plaintiff v. John Edward Veino, Defendant

Bk. No. 13-12978-BAH

Adv. No. 14-1025-BAH

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW HAMPSHIRE

October 19, 2016

Note: This is an unreported opinion. Refer to LBR 1050-1 regarding citation.

Chapter 7

John F. Gallant, Esq.

Timothy J. Ervin, Esq.

Gallant & Ervin, LLC

Chelmsford, MA

Attorney for Plaintiff

Dawn DiManna, Esq.

DiManna Law Office

Fremont, NH

Attorney for the Defendant

MEMORANDUM OPINION

I. INTRODUCTION

The matter before the Court is the complaint filed by the plaintiff Plumber's Edge, Inc. ("PEI"), also known as J.I.T., Inc., against the defendant John Edward Veino (the "Debtor"). PEI seeks a determination that a judgment owed by the Debtor to PEI is excepted from discharge pursuant to 11 U.S.C. §§ 523(a)(2)(A) and/or (a)(4), or, alternatively, denial of the Debtor's discharge pursuant to 11 U.S.C. § 727(a)(A). The Court conducted a trial on August 4, 2016, at which the Debtor and Russell Dixon ("Dixon"), PEI's principal and sole remaining shareholder, testified, and twenty-nine exhibits were admitted into evidence. For the reasons set forth below, the Court will enter judgment in favor of PEI under 11 U.S.C. § 523(a)(4).

II. JURISDICTION

This Court has authority to exercise jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 157(a), 1334, and U.S. District Court for the District of New Hampshire Local Rule 77.4(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) and (J).

III. FACTS

The facts necessary to decide this case are not disputed. This adversary proceeding arises from a nearly twenty-year old dispute between the Debtor and Dixon. In 1988, the Debtor and Dixon, with three other partners, founded PEI as a plumbing, heating, and sewer supply company located in Chelmsford, Massachusetts. In addition to being a shareholder and director of PEI, the Debtor executed an employment agreement dated October 12, 1988 (the "Employment Agreement"), engaging him as PEI's General Manager.¹ In paragraph 16 of the Employment Agreement, the Debtor acknowledged that PEI's customer list was a "valuable, special and unique asset" of the business, and agreed that he would not "during or after the term this Agreement, disclose the list . . . or any part thereof . . . for any reason or purpose whatsoever."² The Debtor further agreed not to disclose "details concerning [PEI's] manner or method of doing business."³ On the same date, the Debtor, Dixon, and the other partners executed a Covenant Not to Competeand Buy-Sell Agreement (the "Non-Compete Agreement").⁴ In the Non-Compete Agreement, the shareholders, including the Debtor, agreed that following the transfer of their shares, they would not

either directly or indirectly, as a principal, agent, employee, shareholder, or otherwise, engage or participate in the ownership, management, operation or control of any business similar or identical to the type of business conducted by [PEI] at such time, within a twenty-five (25) mile radius of the principal place of the business. . . .⁵

The Non-Compete Agreement also provided PEI the option to re-purchase a shareholder's stock upon their exit from PEI, and a mechanism by which that purchase price would be valued.⁶

According to Dixon, although PEI had a rough start, it was able to capitalize on the City of Chelmsford's conversion from private to public sewer services, cornering the market and securing valuable supply contracts. By 1997, PEI had approximately $3,000,000.00 in annual sales. At that point, only the Debtor and Dixon remained with PEI, Dixon having bought out the shares of the other three partners.

The Debtor and Dixon's relationship soured in March, 1997. On May 28, 1997, the Debtor and Dixon convened a meeting of PEI's shareholders and directors.⁷ As a result of having acquired the shares of the other three original partners, Dixon held a supermajority of PEI's voting stock and was in full control of the board. Dixon successfully moved to immediately suspend the Debtor's employment at PEI, restrict the Debtor's access to PEI's property, and appoint himself as PEI's sole officer and director.⁸ The Debtor moved to be released from the provisions of theNon-Compete Agreement and to be allowed to seek employment anywhere outside PEI, but his motion was defeated by Dixon's vote.⁹ PEI terminated the Debtor in June, 1997.

Following the Debtor's termination from PEI, he and Dixon negotiated for some time about the buyout of the Debtor's shares. Although the Non-Compete Agreement should have established an agreed purchase price, the Debtor sought two to four times more than what Dixon was willing to pay.¹⁰ Rebuffed, the Debtor made several other offers to purchase Dixon's shares, which were also declined. Ultimately, PEI reacquired the Debtor's shares for $26,900.00 on June 10, 1998, in a sale approved by the United Bankruptcy Court for the District of Massachusetts, the Debtor having previously filed a voluntary Chapter 7 petition on December 6, 1996. The Court also notes that the Debtor's discharge was revoked in the Massachusetts case because he failed to disclose certain assets.

Notwithstanding his termination from PEI, the Debtor continued to meet with PEI's employees at his home. The Debtor explained that they were his friends and that they regularly enjoyed meals together. At trial, however, the Debtor admitted that at one of these social gatherings, he asked the current PEI employees to supply him with both the rolodex from his former desk and PEI's customer list (the "Rolodex" and "Customer List," respectively). He testified that he did not consider these items confidential information, and sought to minimize the importance of the Rolodex by noting the inclusion of non-business contacts, like his doctor and dentist. It is not disputed that the employees acceded to his request.

On March 16, 1998, despite the Non-Compete Agreement, the Debtor began working at County Supply, Inc. ("County Supply"), PEI's closest competitor, which was located two and one-half miles from PEI's place of business. At trial, the Debtor asserted that he knowingly violated the Non-Compete Agreement by accepting employment at County Supply only after failing to secure employment at thirty-five other businesses and being out of work for nearly a year. He admitted that he brought the Rolodex and Customer List to County Supply, and sold PEI's Customers the same types of products that he had sold to to them while working for PEI. Furthermore, the Debtor testified that he was aware these acts were a breach of his fiduciary duty to PEI.

Dixon testified that he learned from PEI customers that the Debtor was working at County Supply. After confirming these reports by observing the Debtor "behind the counter," Dixon commenced litigation in PEI's name against the Debtor on March 17, 1998 in the Middlesex County Superior Court (the "Superior Court") seeking injunctive relief against the Debtor and damages arising from his various breaches (the "Civil Action"). On July 10, 1998, the Superior Court entered a preliminary injunction against the Debtor enforcing the terms of the Non-Compete Agreement.¹¹ The Debtor's employment at County Supply ceased on July 13, 1998. During the course of discovery, County Supply produced to PEI the Rolodex and Customer List that the Debtor left behind when his employment at PEI ended.¹²

After obtaining a preliminary injunction in the Civil Action, PEI initiated arbitration of its claims against the Debtor pursuant to the Employment Agreement. The arbitration immediately stalled due to the Debtor's refusal to pay his half of the arbitrator's fee. Eventually, Dixon paid the full amount of the fee so that the arbitration could proceed. In June, 1999, the arbitrator entered an order enjoining the Debtor from "selling, transferring, assigning, encumbering or deeding theland and buildings or other assets owned by [the Debtor] on North Dorchester Road in Wentworth, New Hampshire . . ." (the "Transfer Injunction").¹³

Despite the Transfer Injunction, the Debtor increased the amount of the mortgage on the Wentworth property and, on July 11, 2000, deeded it to his sister as trustee of the Wentworth/Veino Revocable Family Realty Trust of 2000 (the "Trust").¹⁴ At trial, the Debtor could not comprehensively explain his rationale for the transfer to the Trust. Seven days later, on July 17, 2000, the arbitrator entered an award in favor of PEI in the amount of $88,986.00, plus fees and expenses (the "Arbitration Award"), apparently constituting the detriment to PEI's business on account of the Debtor's breaches.¹⁵ The Arbitration Award was subsequently confirmed by judgment of the Superior Court.

By a letter dated August 9, 2000, the Debtor, through counsel, informed PEI's counsel that he lacked any assets capable of satisfying the Arbitration Award and that the Wentworth property had been "taken back by the mortgage holder due to [the Debtor's] inability to refinance the balloon which came due on the note."¹⁶ Dixon and PEI eventually learned that this was false. In 2003, PEI filed an action in the Hillsborough County Superior Court seeking to collect the Arbitration Award. In lieu of further litigation, the parties entered into a settlement agreement by which the Debtor would pay to PEI a total of $58,936.92 in monthly installments of $600.00, with the obligation secured by a mortgage on the Wentworth property, in exchange for a full release (the "2003 Settlement"). Notably, although Dixon knew that the Wentworth property had not been taken by the mortgagee, he testified that he did not learn of the transfer to the Trust until after the2003 Settlement. The Debtor executed a promissory note, but never supplied the mortgage nor made any monthly payments.

At trial, the Debtor testified that he intended to comply with the 2003 Settlement, but was unable to make the payments due to the loss...