CHRISTOPHER J. REDMOND, Trustee of the Bankruptcy Estate of Ashraf Fouad Hassan and Irina Hassan, et al., Plaintiffs,
ASHRAF FOUAD HASSAN, et al., Defendants.
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND JUDGMENT
ORTRIE D. SMITH, SENIOR JUDGE UNITED STATES DISTRICT COURT.
A. Procedural History
This is an adversary proceeding arising from the Chapter 7 bankruptcy filed by Debtors Ashraf Hassan and his wife, Irina Hassan. The suit was originally brought by the Trustee and Kansas Express International, Inc. (“Kansas Express”), but at trial the Court inquired whether the corporation was a proper plaintiff. After trial, Plaintiffs filed a Supplemental Trial Brief confirming that Kansas Express is no longer a party in interest and the Trustee is the sole Plaintiff in this matter.
Ashraf Hassan (“Hassan”) is a defendant, but Irina Hassan is not. The other individual defendants named in the Amended Complaint are: Bilal Said, Mark Murphy, Al Moser (“Moser”) and Diane Moser. The following entities are also named as defendants:
. International Football Club, Inc. (“IFC”)
. Overland Park Sports Complex, LLC
. Terra Sports Group
. Terra Venture, Inc.
. Terra Venture Investments, LLC
. Analytical Management Laboratories, Inc.
. The Murphy Law Firm
. Final Touch, Inc.
. Kansas City Limousine, Inc.
. Budget Limousine, Inc.
The first six entities are referred to collectively as “the Said Companies.”
Moser and his wife settled the claims asserted against them, and the settlement was approved in April 2007. This settlement also encompassed the claims against Final Touch, Kansas City Limousine, and Budget Limousine. Murphy and The Murphy Law Firm also settled the claims asserted against them; the settlement was approved in August of this year.
Said was represented by counsel and defended the claims against him until counsel was permitted to withdraw in February 2008. Counsel for the Said Companies also withdrew. Thereafter, Said’s participation stopped. The Said Companies could not represent themselves because they were corporations and LLCs. While Said may have been technically representing himself at this time, he did not fulfill his obligation of advising the Court where he could be contacted. The Record reflects that the parties mailed some of their filings to an address purportedly belonging to Said, but Said never provided the Court with an address for the mailing of Court orders. A pretrial conference was held in May 2012, but Said did not appear. See Order dated September 9, 2012. A second pretrial conference was held in April 2014; the Order setting the conference stated that attendance was mandatory for all parties and that failure to appear would “result in the striking of that party’s pleadings and, in the case of any non-appearing defendant, the entry of default.” Order dated April 3, 2014. Still lacking Said’s address, the Clerk of Court could not mail a copy of the April 3 Order to Said. Nonetheless, the Trustee delivered a copy to Said via Federal Express. Said did not appear at the pretrial conference, and on April 28 the Court issued a written Order (not a text entry, as has been intimated) finding Said and the Said Companies to be in default. That same Order declared that the issue of damages was intertwined with the Trustee’s claims against Hassan, so a final judgment would be deferred until after trial. Again, the Clerk of Court could not send this Order to Said.
In early August, Said re-retained the attorney who had previously represented him. Counsel entered his appearance on August 29, and filed a Motion for Reconsideration of the Entry of Default at approximately 3:30 p.m. on the day before trial. However, when presented documentation that the Trustee delivered the April 3, 2014 Order to Said via Federal Express, counsel moved in open court for leave to withdraw the Motion for Reconsideration. This requested was granted; thus, Said remains in default and he is deemed to have admitted the Amended Complaint’s factual allegations.
Counsel did not re-enter an appearance on behalf of the Said Companies. The Said Companies also remain in default and are deemed to have admitted the Amended Complaint’s allegations.
Hassan was represented by counsel when the bankruptcy was filed, and later by different counsel in this adversary proceeding. However, at some point counsel was permitted leave to withdraw and Hassan began representing himself in this matter. A bench trial was held on September 10 and September 12 of this year so evidence could be presented on the claims against Hassan and to establish the damages as to Said and the Said Companies.
B. Factual Findings
In addition to testimony and other evidence offered at trial, the Trustee submitted testimony from three witnesses via depositions. Hassan testified, as did Said. The Court has considered all of the evidence presented. All findings with respect to Hassan are supported by the preponderance of the evidence. Some findings involving Said are based on the admissions he is deemed to have made by virtue of his default, while other facts involving Said (particularly those related to damages) are supported by the preponderance of the evidence offered at trial. The Court’s discussion will specify facts that have been deemed to have been admitted by virtue of the defaults. The Court will occasionally cite to the depositions submitted but generally will not parse out each witness’s testimony in resolving the disputes; it should be presumed the Court has considered all of the evidence and resolved any conflicts in the manner set forth below. As a prelude, however, the Court declares it found very little of Hassan’s or Said’s testimony to be worthy of belief.
1. Hassan’s Bankruptcy and Sale of His Business
Hassan operated a limousine and taxi service that has been referred to at various times as Kansas Express, Kansas Express, Inc., Kansas Express International, Inc., Kansas International, Inc., and Black Tie Limousine. Kansas Express and Black Tie Limousine appear to have been fictitious names for the corporations. Regardless, the corporations under which Hassan operated never issued stock and did not follow corporate formalities; all were forfeited for failing to file annual reports. Hassan started his business in approximately 1999, but began experiencing difficulty in and after 2002. In April 2003 he contacted American Business Masters (“ABM”) to help locate a buyer for the business. According to the listing agreement with ABM, a selling price of $800, 000 was settled upon but the Record is not clear whether Hassan or ABM suggested this price. Hassan testified it was ABM, but the Court is not convinced this is true – but even if ABM suggested the $800, 000 figure, it did so based on financial information Hassan provided, which did not include information demonstrating that the business was experiencing a downturn. In fact, the financial information Hassan supplied not only reflected that the business was profitable, but it also reflected net assets (excluding goodwill) of over $322, 000. Included in the goodwill (which was described as “PRICELESS” and thus incapable of being added to the $322, 000) was the business’s customer list of “[o]ver 2, 000 repeat clients.” Ultimately, it does not matter who suggested the price: the salient points are that (1) in April 2003 Hassan was trying to sell the business for $800, 000 and (2) he represented the business had substantial assets, including a very respectable customer list. However, nobody wanted to buy the business for that price.
Hassan and his wife filed for bankruptcy under Chapter 7 of the Bankruptcy Code on or about February 3, 2004. They did this with the assistance of an attorney, Kenneth Gay. Among the filings in connection with the bankruptcy was a Schedule B, listing the couple’s personal property. Under the category for “[s]tock and interest in incorporated and unincorporated businesses, ” the Hassans’ Schedule B lists stock in Kansas International, Inc. and assigns a value of zero dollars. The value was derived after a conversation Gay had with Hassan, and was based on information supplied by Hassan. However, had Gay seen the information Hassan supplied to Broadmoor Capital (which will be discussed shortly), he would have had further discussions about the matter with Hassan and likely would have amended Schedule B to reflect a higher value. Gay Dep. at 43.
The Trustee attempted to gather more information about the business in order to confirm the valuation of zero and to determine if the business had any assets. The Trustee posed questions about the business during the 341 meeting (held in late February 2004), and Hassan indicated that the business had no value, was not operating, and had no assets. These representations were not true: Hassan was still operating the business, Hassan Dep. at 33-40, and as will be discussed he also believed the business had value. Nonetheless, his omissions and false representations persuaded the Trustee that the stock (and, hence, the business) had no value and that no further action was justified at that time.
Hassan did not reveal to the Trustee his pre-filing attempts to sell the business for hundreds of thousands of dollars – actions that demonstrate Hassan’s belief the business had some value. Hassan did not reveal the financial information he provided to ABM. And, he did not amend his Schedule B or otherwise reveal his other pre- and post-discharge efforts to sell the business.
The Bankruptcy Court entered a discharge on May 18, 2004. Earlier that month Hassan approached Moser about buying the business for $550, 000. Hassan related that he was “desperate to sell” because he was trying to raise money to fund development of a soccer complex. Moser’s interest in buying the business intensified after Hassan represented the limousine business netted twelve to fifteen thousand dollars per month.
Hassan then contacted Steve Lord, who at that time was the COO of Broadmoor Capital, Inc. (“Broadmoor”). Hassan told Lord that he had a friend interested in buying Kansas Express and asked Lord and Broadmoor to facilitate the sale. Broadmoor’s role was to house the documents related to the sale, make them available for Moser’s review, and facilitate the exchange of documents and information between Moser and Hassan. Hassan provided financial information to Lord for this purpose. Neither Lord nor Broadmoor evaluated the financial data, conducted an independent investigation, or provided any information to Moser that was not initially provided by Hassan; Broadmoor acted only as a conduit for Hassan’s information and a place to store materials. Included in the information Hassan supplied to Broadmoor (which was then provided to Moser) were revenue and income statements for 2003 and the first four months of 2004. This information revealed that in 2003 the business earned revenue of nearly $616, 000 and had an adjusted net profit of over $186, 000. The figures for the first four months of 2004 were comparable to those from the first four months of 2003. All of these figures were consistent with Hassan’s representation to Moser that the business netted $12, 000 to $15, 000 monthly. Hassan also arranged for Moser to receive a copy of the Asset List attached to the Listing Agreement with ABM (which was described on page 4, above).
Despite not providing any advice to Moser or Hassan about the transaction, Lord suggested to them that an attorney he knew – Murphy – might help them prepare the sale documents. At the initial meeting with Murphy, Hassan revealed that the corporation was in default. Murphy indicated he could alleviate this problem and recommended that the parties construct the transaction as a sale of the company’s stock. To that end Murphy prepared a Stock Purchase Agreement, which represented that Hassan owned all of the stock in Kansas Express International, Inc. and expressed the parties’ agreement that Hassan would sell all of the stock to Moser for $550, 000. Hassan also agreed to a covenant not to compete. The Stock Purchase Agreement represents a series of attached exhibits set forth the company’s assets, liens, and contracts are attached (although those exhibits are not included with Exhibit 28). These and other provisions make clear that the parties intended for Kansas Express’s stock to be transferred from Hassan to Moser.
Half of the sale price was to be paid in cash, and half of this amount was to be paid with a promissory note from Moser to Hassan. The Stock Purchase Agreement was signed by Hassan and the Mosers on or about May 28, 2004, and the closing date was set for July 1. By June 28, Moser had paid Hassan $129, 420.
Moser learned of Hassan’s bankruptcy between June 28 and the closing date, and brought the matter to Murphy’s attention. Murphy suggested that the problems posed by Hassan’s bankruptcy could be avoided if the transaction was re-characterized as a sale of services instead of a sale of the business or a sale of assets. To that end he prepared a new “Agreement” (which was backdated to May 28 even though it was Dated: or about July 6) wherein Hassan agreed to provide his services to Moser’s limousine company for one year in exchange for $300, 000 plus incentive payments based on the performance of Moser’s new limousine company. Like the Stock Purchase Agreement, the Agreement included a covenant not to compete; unlike the Stock Purchase Agreement, the Agreement specified that $50, 000 of the sale price was attributable to the covenant. Despite purporting to be a services agreement, the Agreement contains many provisions one would expect to see only in a contract for the sale of a business or its assets. For instance, the Agreement
. Provides that all car leases will be assigned to Moser’s company,
. Requires Hassan to provide Moser with access to all of Kansas Express’s “plants, properties, books, and records” to Moser so that he can “make such investigation” as Moser deems necessary, “provided that such investigation shall not unreasonably interfere with the operations of Kansas Express, ”
. Makes representations about Kansas Express’s corporate status, finances, assets and obligations, and Hassan’s ownership of Kansas Express’s stock, and
. Prohibits Kansas Express from incurring additional liabilities or selling any assets.
At closing, Moser paid Hassan $171, 000, bringing Moser’s total payments to $300, 420.
Moser testified the Agreement was just a reformulation of the parties’ agreement that did not change its substance; the parties’ intent remained to transfer the assets of Hassan’s limousine business to Moser. Hassan does not deny this fact. Indeed, Hassan’s and Moser’s subsequent actions confirm their shared understanding that Hassan was selling the business to Moser. However, by the end of July Moser came to understand Kansas Express’s operations and finances were not as Hassan had described, and he attempted to rescind the deal. Moser returned the office keys, did not pursue the assignments of property interests Kansas Express was obligated to make, and walked away. Hassan refused to return any of Moser’s money.
Shortly thereafter, Hassan met with Murphy to discuss his options. Murphy thought it prudent to consult an attorney with greater expertise in bankruptcy, and to that end consulted with Judge Cynthia Norton. Murphy contacted Judge Norton on July 26and told her he had a client who had a bankruptcy issue involving the sale of his business’s assets. Murphy revealed that the transaction was completed as the sale of assets and then “restructured as something else because the seller was in bankruptcy.” Norton Dep. at 14, see also Norton Dep. at 29. She expressed doubt that the maneuver would work but agreed to talk to Murphy’s client. Shortly thereafter, Hassan called Judge Norton and described the sequence of events, including execution of the Stock Purchase Agreement and the transaction’s re-characterization to make it appear to be a contract for services and not a sale of assets. Judge Norton adhered to her initial belief that this attempt to avoid the bankruptcy laws was unlikely to succeed and told Hassan he needed to discuss the transaction’s details with his bankruptcy attorney.
Hassan followed Judge Norton’s advice – but only to a point. He saw Gay later that day and revealed the Agreement. He explained that Murphy had prepared and designed the Agreement to be a contract for services so that it would not appear to be a sale of the business’s assets. However, he did not reveal the transaction’s entire history generally or the Stock Purchase Agreement specifically. Gay sent the Agreement to the Trustee, along with a letter setting forth his client’s position that the Agreement reflected “an agreement not to compete and to provide consultation to” Moser and Moser’s company. Gay would not have written this letter if he had known about the Stock Purchase Agreement; upon being presented with it during his deposition, Gay believed the Stock Purchase Agreement clearly reflected that the transaction was really for the sale of property belonging to the bankruptcy estate.
The Trustee reviewed the Agreement and concluded that despite the large amount of money being paid to Hassan the payment appeared to be for Hassan’s services so the money did not constitute property of the estate. Meanwhile, Moser had contacted the Johnson County District Attorney to complain about what he believed to be Hassan’s fraudulent conduct. An investigation was initiated, and in early 2005 an investigator met with the Trustee. The investigator presented a copy ...