Sam's Na, Inc. v. U.S. Small Bus. Admin. (In re Sam's Na, Inc.)

In re: SAM'S NA, INC, Debtor

SAM'S NA, INC, Plaintiff, v. U.S. SMALL BUSINESS ADMINISTRATION, et al., Defendants.

Case No. 13-90259-BHL-11

Adv. No. 14-59035

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF INDIANA NEW ALBANY DIVISION

October 19, 2016

MEMORANDUM IN SUPPORT OF JUDGMENT

This adversary proceeding was initiated on October 15, 2014, by the filing of a Complaint to adjudicate the rights of multiple parties to certain insurance proceeds due as a result of a fire that occurred at a restaurant operated by the Plaintiff, Sam's NA, Inc. (the "Plaintiff"), on or about December 9, 2013. Plaintiff settled with the U.S. Small Business Association and with Blackstone Capital. The controversy between Plaintiff and the related defendants Sam's Food and Spirits, LLC, Sam's Indiana, LLC, Main Street Management Associates, LLC, and Douglas K. Gossman (collectively, the "Defendants") continued to trial before this Court on Plaintiff's Second Amended Complaint beginning on May 16, 2016 and concluding on May 19, 2016. At trial, the parties presented evidence on the issues of breach of contract, breach of warranty, fraud, constructive fraud, conversion, and unjust enrichment. Based upon the evidence presented, the Court now makes the following Findings of Fact:

1. In and about 2000, Sam Anderson ("Anderson") operated a restaurant business (the "Business") at 3800 Payne Koehler Road, in New Albany, Indiana, through an entity called On the Waterfront, Inc. ("OTW") d/b/a Sam's Food & Spirits.

2. In that year, OTW sold the restaurant Business to a newly formed entity named Sam's Food & Spirits, LLC ("SFS"), which was owned and controlled by Main Street Management Associates, LLC ("MSMA") and Doug Gossmann ("Gossmann").

3. Anderson retained ownership of the real property (the "Real Estate") through his entity known as Anderson Rentals, LLC ("Anderson Rentals") which leased the property to SFS. After the sale, Anderson continued to manage the restaurant as an employee of SFS.

4. In 2008, Anderson needed to liquidate his interest in the Real Estate in order to pay, among other things, obligations attendant to divorce proceedings. At that time, the parties agreed that Anderson Rentals would sell the real property to a newly formed entity called Sam's Indiana, LLC ("Sam's Indiana"), which was also controlled by Gossmann.

5. In or about February of 2008, Gossmann executed an Equipment Purchase Agreement which effectively transferred all the business equipment from SFS to Sam's Indiana. There was no evidence that Gossmann's attorney, who prepared the document, or Anderson, was aware of its execution.

6. In February of 2008, an appraisal for financing purposes was conducted of all the personal property located on the premises of 3800 Payne Koehler Road. Anderson was present during the inventory and testified that Gossmann told him the Small Business Association (the "SBA"), a potential lender, would be taking a lien on fixed assets. Anderson testified that the SBA would not accept used equipment as collateral for the loan and so, by check dated March 14, 2008, SFS issued a check to Anderson for $120,000.00 to make the loan close.¹

7. The Real Estate transaction was in two parts. The first closing occurred in March 2008 at which Anderson Rentals was paid $1.25 million for the Real Estate through a first and second loan to Sam's Indiana from Stock Yards Bank.

8. In July 2008, Sam's Indiana then refinanced the debt through the SBA, which took a mortgage on the Real Estate and a security interest in equipment and fixtures (the "Business Assets"). There was no evidence that Anderson was present at the closing or was privy to any discussions with the SBA.

9. In the Spring of 2010, Anderson approached Gossmann and Gossmann's business associate, Kevin Wagner ("Wagner"), to buy back the Sam's Food & Spirits restaurant (the "Business"). Attorney John Kraft represented the purchaser and Attorney Richard Mains represented the sellers.

10. During negotiations, the issue was raised as to whether SBA consent was required for the transaction. It was apparently concluded that consent was required inasmuch as the Asset Purchase Agreement (the "APA") referenced consent and contemplated written consent as an attachment to the APA.

11. Both Attorney Kraft and Attorney Mains testified that while the issue of SBA consentarose in negotiations, they were not informed by the sellers or their representatives that the Business Assets were subject to any lien or other encumbrance. Likewise, neither was informed by Defendants that Sam's Indiana, which was not a party to the APA, actually owned the Business Assets. Specifically, Mains participated in the negotiation and revision of the APA in conjunction with Wagner, and was at no time informed that the transaction was anything other than what was stated in the APA.

12. Bill Fensterer ("Fensterer") is the President of Capital Access Corporation ("Capital Access"), an entity through which the SBA administers loans in Kentucky. He testified that he may have had a casual conversation with Gossmann, but that at no time was he asked to obtain SBA consent for the APA sale, nor was he aware of any impending sale of SBA-encumbered assets.

13. The transaction closed on April 21, 2010. Gossmann signed the APA on behalf of the "Selling Party," identified in the APA as MSMA and SFS. He testified that he did not closely review the APA before he signed it. At issue in this case is Section 2.03 of the APA which states in pertinent part as follows:

"SFS has, as of the date of this Agreement, good and marketable title to all of the Assets, free and clear of all claims, liens, charges, mortgages, security interests or encumbrances whatsoever. . . ."

14. Consideration for the purchase was $776,000.00 which was mainly a debt swap. SFS and Gossmann owed OTW on a note related to the purchase of the Business in 2000 and for unpaid rent to Anderson Rentals between 2000 and 2008, which Anderson forgave. The purchaser (Sam's HP) also agreed to assume certain of the seller's liabilities, which are particularly described in Section 1.02 of the APA. Among the liabilities assumed by Sam's HP was SFS' obligation to Blackstone Capital in the approximate amount of $265,000. Plaintiff Sam's NA, as successor ininterest to Sam's HP, failed to make timely payments on that debt pursuant to the APA, which is evidenced by Blackstone Capital's proof of claim for $468,164.29 in Plaintiff's bankruptcy.

15. In addition, the APA also required the purchaser to enter into a lease agreement with Sam's Indiana for the Real Estate (the "Lease Agreement"). Section 4.07 provides that "simultaneously with the closing on the APA, Purchaser shall enter, and Purchaser and Selling Party shall cause Sam's Indiana, LLC to enter, the lease agreement for the Real Property in the form attached hereto as Schedule 'G.'"

16. Other relevant provisions in the APA pertaining to representations, warranties, and indemnification are the following:

Section 2.12 warrants against undisclosed liabilities specifically stating that "[t]he Assets are not, or at closing will not be, subject to any liability, commitment, indebtedness or obligation of any kind whatsoever. . . ."

Section 6.01 provides that "[t]he representations and warranties made by the parties under this Agreement or pursuant hereto shall survive the closing for a period of twelve (12) months. Except as restricted by the foregoing, the covenants and agreements of the parties hereto, including the indemnification obligations, shall survive the closing."

Section 6.02 (b) requires Defendants to indemnify Plaintiff for, among other things, "[a] breach of any representation, warranty, covenant or agreement of the Selling Party contained or made pursuant to the Agreement" which specifically includes damages and reasonable attorney's fees and expenses.

17. The uncontroverted testimony at trial proved that neither parties' attorneys were aware of any fact that contradicted the APA or otherwise gave rise to any conclusion that the parties bargained for something other than what was set forth therein.

18. As a further matter, the APA identified the "Purchaser" as Sam's HP, but Sam's HP was not the ultimate purchaser. Anderson testified that a new entity was the intended operator but it had not yet been fully incorporated. Anderson formed Plaintiff, Sam's NA, on or about June 18, 2010 to operate the Business using theBusiness Assets.

19. The rights and assets arising out of the APA were thereafter assigned to Plaintiff, but there was no written assignment from Sam's HP to formalize that arrangement. In his deposition, Anderson testified that written assignment instruments would have been prepared by his accountant, Mark McCormick ("McCormick"), and that the documents would have been destroyed by the December 2013 fire. McCormick testified by affidavit that he was never asked to prepare and never did prepare any written assignment documents for Anderson or any of his entities.

20. Subsequent to the 2010 transaction, Anderson operated the Business through Plaintiff, utilizing the Business Assets and paying rent to Sam's Indiana for the Real Estate pursuant to the Lease Agreement. The Business Assets were recorded and accounted for on the accounting books of Plaintiff from the entity's inception. The Business Assets were never recorded on the books of Sam's HP or any other of Anderson's business entities.

21. In February 2013, Plaintiff filed the instant Chapter 11 proceeding at which time Plaintiff had actual possession and beneficial use of the Business Assets. Shortly thereafter, the Defendants herein obtained bankruptcy counsel who entered her appearance on May 16, 2013.

22. In December 2013, the restaurant experienced a total loss due to fire, after which and through dealings with Plaintiff's insurer, Secura Insurance Company ("Secura"), Plaintiff discovered that the Business Assets were encumbered by the SBA lien. Following the loss of the Business

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