Opinion
No. 99 C 8316
January 10, 2001
MEMORANDUM OPINION AND ORDER
On November 16, 1999, Bankruptcy Judge Katz entered Findings of Fact and Conclusions of Law in two non-core adversary proceedings that were consolidated for trial before him. In one action, the Debtor, an insurance agency formerly known as Rose-Tillman, Inc., sued Craig Johnson, a former owner and officer of the company, to recover more than $850,000 in unpaid loans and the profits he allegedly misappropriated from Rose-Tillman's National Crane Operator's Association ("NCOA") crane liability insurance program. In the other case, the Debtor sued to set aside as a fraudulent conveyance Mr. Johnson's transfer of real estate in Wisconsin to his wife Renee. Defendants have filed timely objections to most of Judge Katz's Findings of Fact and Conclusions of Law. For the reasons set forth below, with one minor exception, we accept Judge Katz's Findings of Fact and Conclusions of Law in their entirety and will enter judgment in favor of the Debtor as the Bankruptcy Court recommends.
Because the parties agree that this was a non-core proceeding pursuant to 28 U.S.C. § 157(c)(1), we assume that the reference to 28 U.S.C. § 157(b)(2)(E) in Conclusion of Law No. 40 is a clerical error.
The Legal Standard
The standard of review of a bankruptcy court's findings of fact and conclusions of law is set forth in 28 U.S.C. § 157, which provides:
A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.28 U.S.C. § 157(c)(1); see Bankruptcy Rule 9033(d) ("The district judge shall make a de novo review upon the record or, after additional evidence, of any portion of the bankruptcy judge's findings of fact or conclusions of law to which specific written objection has been made in accordance with this rule. The district judge may accept, reject, or modify the proposed findings of fact or conclusions of law, receive further evidence, or recommit the matter to the bankruptcy judge with instructions.") Accordingly, we will conduct a de novo review of the record with respect to each Finding of Fact and Conclusion of Law to which defendants object.
Discussion
Findings of Fact
Defendants' first set of objections is to Judge Katz's credibility determinations. In Finding of Fact Nos. 9-11, Judge Katz states that he reviewed the demeanor of the witnesses and the substance of their testimony and found the defense witnesses, Craig Johnson, Renee Johnson and Richard Van Weir, to be incredible. Defendants attack these findings not by pointing out the consistency and accuracy of these witnesses' testimony, but by assailing the credibility of plaintiff's witnesses. Implicit in defendants' argument is the assumption that Judge Katz only rejected the defense witnesses' testimony because he found the testimony of plaintiff's witnesses more compelling. Judge Katz, no doubt, found plaintiff's witnesses more believable than those who testified for defendants, but that is not why he rejected the testimony of the Johnsons and Mr. Van Weir. Rather, he found that Mr. and Mrs. Johnson's actions, demeanor and "convenient memories" belied their testimony and that the documentary evidence in the case contradicted Mr. Van Weir's. (Findings Fact Conclusions Law, ¶¶ 10-11.) Having thoroughly reviewed the record in this case, we agree that Mr. and Mrs. Johnson and Mr. Van Weir were not credible witnesses.
Even if the credibility of plaintiff's witnesses were crucial to Judge Katz's findings, defendants would still not prevail. The bulk of defendants' argument about the infirmities of the testimony of plaintiff's witnesses is devoid of cites to the trial transcript. (See Defs.' Mem. Regarding Rulings Made Judge Katz at 6-10.) Arguments about testimony unsupported by citations to the record are not specific objections requiring our review.
Mr. Johnson's trial testimony is contradicted by both his deposition testimony and the documents admitted into evidence in this case. At trial, Mr. Johnson testified that he had an agreement with Jordan Rubens, one of the principals of MMPJ, to use the proceeds of the NCOA program to pay off his loans from Rose-Tillman. (8/20/98 Tr. at 57-58.) In fact, he testified that one of the reasons he decided to sell to MMPJ was Mr. Rubens' agreement that he could pay off his loans in that manner. (Id. at 63-64.) In his deposition, however, he had no recollection of any such agreement (Id. at 57-60), and in the stock purchase agreement he executed, Mr. Johnson "represent[ed] and warrant[ed]" that the debt he owed Rose-Tillman for his officers' loans would "remain after the Closing a fully enforceable obligation of Johnson to Rose-Tillman." (Pl.'s Ex. 1 at 20.) Similarly, Mr. Johnson testified at trial that he signed the NCOA joint venture agreement as nominee for his wife Renee, not as nominee for Rose-Tillman. (8/20/98 Tr. at 74; 8/25/98 Tr. at 15.) But, as Mr. Johnson admitted, the stock purchase agreement says nothing about Renee Johnson's purported ownership of the NCOA program (Pl.'s Ex. 1; 8/20/98 Tr. at 74). In fact, Schedule 1.3 to that agreement says that "[Mr.] Johnson, acting as nominee for Rose-Tillman, has a 50% joint venture partnership interest in the National Crane Association Joint Venture." (Pl.'s Ex. 1 at 89.) The joint venture agreement also says nothing about Mrs. Johnson's purported interest (Pl.'s Ex. 18), and a letter that Mr. Johnson admitted during his deposition to having sent Rose-Tillman's lawyer in 1993 states: "We need to amend the joint venture agreement to replace myself as nominee with Rose-Tillman, Inc." (8/20/98 Tr. at 87-91; Pl.'s Ex. 23.) Moreover, Mr. Johnson admitted that he did not report the NCOA distributions on his income tax returns for 1993 or 1994 (8/20/98 Tr. at 67), both of which state that the NCOA income should have been credited to Rose-Tillman, not the Johnsons. (Pl.'s Exs. 84, 30).
MMPJ is the name of the entity formed by Martin Shape, Marvin Silverman, Perry Gantman and Jordan Rubens that purchased a two-thirds interest in Rose-Tillman in 1993.
We refer to the page numbers hand-written in ink on Plaintiff's Exhibit 1.
The same inconsistencies crop up in Mr. Johnson's testimony about the transfer of the Wisconsin property to his wife. He testified that he transferred the property to his wife in 1989. (8/20/98 Tr. at 111-12.) Yet, the deed evidencing the transfer was not recorded until five years later, just days before Mr. Johnson's resignation from Rose-Tillman. (Pl.'s Ex. 45; 8/20/98 Tr. at 43.) Moreover, Mr. Johnson listed the property as an asset in his personal financial statements dated December 31, 1990 and April 1, 1993. (Pl.'s Ex. 50 at 2; Pl.'s Ex. 5.)
The entire tenor of Mr. Johnson's testimony is one of evasion. The following colloquy between plaintiff's counsel and Mr. Johnson concerning the date of the sale of Rose-Tillman to MMPJ is illustrative:
Q. Do you remember when the closing was?
A. No.
Q. Is there something that would refresh your memory as to when the closing was?
A. No.
Q. Nothing would refresh your memory?
A. I don't know. Maybe something.
* * *
Q. Calling your attention to page one of Exhibit 1 [the purchase agreement]. I ask you whether that refreshes your recollection when the closing was?
A. Not specifically. It's dated, though.
Q. So after looking at that, you have no recollection?
A. I didn't say I don't have any recollection. I said I don't know specifically when.
Q. What is your best recollection?
A. The end of March 1993.
Q. It wouldn't have been after March 1993, would it have been?
A. Yes, there was some documents that were submitted after March 1993.
Q. I asked you when the closing was.
A. (No response.)
Q. The closing would have been after March of 1993?
MR. RUECKERT: He's answered.
THE COURT: He didn't answer the question. Overruled. The question is, "could the closing have been after March 1993?"
THE WITNESS: No.
BY [PLAINTIFF'S COUNSEL]:
Q. So the closing was sometime before April 1st 1993; is that correct?
A. Yes
(8/20/98 Tr. at 44-46.)
At another point, Mr. Johnson was asked whether the transfer of the property to his wife had anything to do with their prenuptial agreement. He said he was not sure (9/15/98 Tr. at 10) though in his deposition he was certain that the transfer had nothing to do with that agreement. (Id. at 10-11.) Given the inconsistency, Mr. Johnson was asked whether the statement in his deposition was incorrect. His response: "I am not sure." (Id. at 11.) At trial, Mr. Johnson was also not sure whether: (1) he reported the alleged repayment of his officers' loans to the IRS (8/20/98 Tr. at 67); (2) the purchase agreement disclosed Mrs. Johnson's interest, or the fact that Rose-Tillman had none, in the NCOA joint venture (id. at 77, 86); (3) he intended, at the time the joint venture was formed, to market the NCOA program to Rose-Tillman's customers (id. at 83-84); and (4) he sent a letter to Rose-Tillman's lawyer in 1993 requesting that the joint venture agreement be amended to substitute Rose-Tillman for him as nominee (id. at 87). Mr. Johnson's memory lapses and hesitations were largely confined to issues that did not favor his case, a fact that renders his testimony highly suspect.
There are similar problems with Mrs. Johnson's trial testimony. She testified, for example, that she was told "the basics" about the NCOA program at the time she entered into the joint venture in 1992. (9/15/98 Tr. at 88.) In her deposition, however, she testified that no one told her anything about the joint venture when she became a partner in it. (Id. at 89.) Moreover, her assertion of participation in the NCOA joint venture is seriously undermined by her testimony that: (1) she never reviewed the joint venture agreement with an attorney or her husband (id. at 90); (2) "no one ever told [her] what the NCOA was all about" (id. at 92); (3) she never had any involvement in the NCOA (id.); (4) she never had any conversations with Richard Van Weir, the other partner in the joint venture, about it (id. at 99); (5) her husband ran the partnership affairs with Mr. Van Weir (id. at 99-100); (6) she did not know what her husband did with respect to the joint venture (id. at 100); (7) she never signed any documents allowing her husband to use her NCOA proceeds to pay off his officers' loans (id. at 93); (6) no one asked her permission to terminate the joint venture (id. at 95-96); and (7) no one ever explained to her why it was terminated (Id. at 96).
The documents admitted into evidence also contradict Mrs. Johnson's claim. Neither the purchase agreement nor the joint venture agreement discloses her alleged interest in the NCOA program (Pl.'s Exs. 1, 18), and she did not include the distributions from the joint venture as income on her tax returns for 1993 and 1994 (Pl.'s Exs. 84, 30).
Mrs. Johnson's testimony about the transfer of the Wisconsin property is also suspect. At trial, she said her husband transferred the property to her to induce her to cosign for a loan. (9/15/98 Tr. at 100-01.) That testimony is dramatically different from what she said in her deposition, which was:
"Question: Was there a reason why [Mr. Johnson] put [the property] in your name?
Answer: I don't know what the reason was. You'd have to ask him.
Question: You have no knowledge why it was put in your name?
Answer: No.
Question: Is that answer no?
Answer: No. I do not know why."
(Id. at 101-02.) In short, Mrs. Johnson's testimony, as Judge Katz found, was worthy of little credence.
Richard Van Weir was also thoroughly discredited. As he admitted, he is a "good personal friend" of Mr. Johnson, a relationship that seems to have colored his version of events. (8/21/98 Tr. at 6.) Like the Johnsons, Mr. Van Weir testified that Craig and Renee Johnson, not Rose-Tillman, were his partners in the NCOA joint venture. (Id. at 17, 26). The joint venture agreement, of course, says nothing of the sort (Pl's Ex. 18), and the contract Mr. Van Weir and Mr. Johnson signed with Don Martin, the day-to-day manager of the joint venture, identifies the NCOA as a "Joint Venture of Equipment Insurance Managers, Inc. [Mr. Van Weir's company] . . . and Rose-Tillman, Inc." (Pl.'s Ex. 19.) Mr. Van Weir's account of the formation of the joint venture is not only contradicted by the documents, it borders on the fantastic. According to his testimony, Mr. Van Weir planned to enter into the NCOA joint venture with Rose-Tillman, and towards that end started negotiations with his good friend, and Rose-Tillman's CEO, Mr. Johnson. (8/21/98 Tr. at 20-21.) On December 1, 1992, in anticipation of closing the deal, Mr. Johnson and Mr. Van Weir hired Don Martin to manage the NCOA and entered into a management agreement with him that listed Rose-Tillman as one of the joint venturers. (Id. at 21-22; Pl's Ex. 19.) However, at some point during the next thirty days, Mr. Van Weir learned for the first time that Rose-Tillman was no longer the broker of record for the NCOA clients and was having serious financial problems. (8/21/98 Tr. at 22-23.) Thus, he made the deal on December 31, 1992, with the Johnsons personally rather than Rose-Tillman. (Id. at 23-24; Pl.'s Ex. 18.) In other words, Mr. Van Weir would have us believe that he was entirely ignorant of Rose-Tillman's financial decline and its loss of broker-of-record status for the NCOA clients, both of which happened long before December 1992 (8/17/98 Tr. at 19, 45-49; Pl.'s Ex. 20; 1/6/99 Tr. at 110-11), despite his close personal relationship with Mr. Johnson, his familiarity with the business of Rose-Tillman and his admission that he knew Rose-Tillman lost the NCOA clients "over a period of time in 1992." (See 8/21/98 at 6, 10-11.) We agree with Judge Katz that Mr. Van Weir was not a credible witness.
Defendants also argue that Finding of Fact No. 7, that Mr. Johnson's January 1995 resignation from plaintiff was not due to any action of the corporation, is erroneous. Once again, we disagree. The only evidence supporting the notion that Mr. Johnson was "forced" to quit is his own testimony, which, as we noted above, is incredible. Rather, the record supports the inference, suggested by Finding No. 7, that Mr. Johnson left the company in an effort to avoid his debts.
The next Finding of Fact with which defendants take issue is No. 14, which states: "There was no conveyance of the [Wisconsin property] from Craig Johnson to Renee Johnson prior to December 29, 1994." Defendants argue that Mr. Johnson did indeed transfer the property to his wife in 1989, as evidenced by the quit claim deed dated December 31, 1989. The deed was not recorded until 1994, they say, because of an attorney error. (1/6/99 Tr. at 104-07; 8/20/98 Tr. at 113-14.) The attorney who allegedly made this error, however, did not testify. Rather, the only evidence defendants offered to prove that there was a bona fide transfer in 1989 was the testimony of Mr. Johnson. Standing alone, his tale is suspect. It is difficult to believe that Mr. Johnson's lawyer just happened to find a deed that he had misplaced for five years and record it just days before Mr. Johnson left Rose-Tillman. Moreover, any shred of credibility it might have had is destroyed by Mr. Johnson's personal financial statements dated December 31, 1990 and April 1, 1993, in which he lists the property as one of his assets. (Pl.'s Ex. 50 at 2; Pl's Ex. 5.) Finding of Fact No. 14 is fully supported by the record.
As a legal matter, the transfer took place on December 29, 1994, as well. For purposes of the Wisconsin Uniform Fraudulent Transfer Act, a transfer of real property is made "when the transfer is so far perfected that a good-faith purchaser . . . cannot acquire an interest in [it] that is superior to the interest of the transferee." WIS. STAT. § 242.06(1)(a). Thus, the transfer took place when the deed was recorded, not when it was prepared.
Defendants' objection to Finding of Fact No. 16, that Mrs. Johnson did not pay Mr. Johnson any money as consideration for the transfer of the Wisconsin property, is similarly unfounded. Both Mr. and Mrs. Johnson admitted that no money changed hands in the transaction and, for a change, none of the other evidence contradicted them. (8/20/98 Tr. at 112-13; 9/15/98 at 100.) Thus, we are perplexed by defendants' objection to this finding, which is, in any event, misplaced.
Finding of Fact No. 17, which states that Mr. Johnson was insolvent when he transferred the Wisconsin property to his wife in 1994 or became insolvent as a result of the transfer, is also supported by the record. According to Mr. Johnson's financial statement of April 1, 1993, he had $1,620,700 in assets and $1,040,900 in liabilities. (Pl's Ex. 5.) It is apparent, however, solely from the face of the financial statement that Mr. Johnson understated his liabilities. Though he claimed the market value of three pieces of property as assets, he excluded the mortgages on two of the three pieces from his liabilities. (Id.) Moreover, on the "Notes Payable to Banks — see Schedule E" line in the liabilities section, Mr. Johnson recorded $736,000, which is $251,800 less than the obligations that are listed on Schedule E. In total, Mr. Johnson had at least $1,435,000 in liabilities on April 1, 1993, $394,800 more than appear on the financial statement.
Mr. Johnson also had liabilities that he did not disclose anywhere on the financial statement, including his $2700 per month alimony and child support obligation and his Rose-Tillman officers' loans. (See Pl's Ex. 67, Mot. Recons. at 3.)
Mr. Johnson said he did not acquire any substantial assets in the last half of 1993 or in 1994. (9/15/98 Tr. at 32-42.) So his financial condition was substantially the same as that reflected on the April 1, 1993 statement when he transferred the property at the end of 1994. The transfer reduced his assets by $780,000, the market value of the property, from $1,620,700 to $840,700, and his liabilities by $265,000, the outstanding mortgage amount, from $1,435,700 to $1,170,700. Thus, after the transfer, Mr. Johnson's liabilities exceeded his assets by at least $330,000. In other words, the transfer of the property, as Judge Katz found, made Mr. Johnson insolvent.
In reality, it appears that Mr. Johnson was insolvent even before the transfer. In August 1994, he asked a state court to reconsider its entry of judgment against him for failing to meet his financial obligations under a settlement agreement. His non-performance was not wilful, he told the court, but was the result of a cash-flow problem: his monthly expenses exceeded his monthly income. (Pl.'s Ex. 67, Mot. Recons., Ex. D, Monthly Statement Income Expense.)
Finding of Fact No. 18 states: "Craig Johnson transferred the property to Renee Johnson in December 1994 by way of a Quit Claim Deed dated December 31, 1989 with the actual intent to hinder, delay or defraud creditors of defendant Craig Johnson in violation of the Wisconsin Uniform Fraudulent Transfer Act, WSA §§ 242.01-242-11." The Wisconsin statute sets forth a number of factors that may be considered in determining whether a transfer was made with "actual intent to hinder, delay or defraud" creditors. They include whether: (1) the transfer was made to an insider; (2) the debtor retained possession or control of the property after the transfer; (3) the transfer was concealed; (4) the debtor had been sued or threatened with suit before the transfer was made; (5) the transfer was of substantially all of the debtor's assets; (6) the debtor absconded; (7) the debtor removed or concealed assets; (8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred; (9) the debtor was insolvent or became insolvent shortly after the transfer was made; and (10) the transfer occurred shortly before or shortly after a substantial debt was incurred. WIS. STAT. § 242.04(2). The evidence on these and other factors overwhelmingly supports the conclusion that Mr. Johnson transferred the Wisconsin property to his wife with the intent to defraud his creditors.
The transfer was to an insider, Mr. Johnson's wife. See WIS. STAT. 242.01(7)(a)(1) (defining insider as a relative of the debtor). After the transfer, Mr. Johnson held himself out to, among others, the IRS and the Richmond Bank, as the whole or partial owner of the property. (See 9/15/98 Tr. at 22-23; Pl's Exs. 49, 51, 55, 84.) Mr. Johnson was a defendant in a number of lawsuits at or near the time of the transfer (see, e.g., Pl.'s Exs. 67, 69, 86; 9/15/98 Tr. at 58-64), which may have played a role in the transfer decision. In addition to the pending litigation, however, Mr. Johnson faced the very real threat of future litigation with plaintiff. At the time of the transfer, Mr. Johnson's departure from the company, with his officers' loans due and owing and the NCOA joint venture in his pocket, was just days away. (8/20/98 at 43; Pl.'s Ex. 45.) He would understandably have been concerned that plaintiff would sue him to recover its assets. Further, as we noted above, the transfer of the property rendered Mr. Johnson insolvent, and he received no cash, property or other "value" in return for it. Compare WIS. STAT. § 242.03(1) ("Value is given for a transfer . . . if, in exchange for the transfer . . ., property is transferred or an antecedent debt is secured or satisfied . . . .") (emphasis added) with 9/15/98 Tr. at 100-01, 8/20/98 Tr. at 111-12 (testimony by the Johnsons that Mrs. Johnson agreed to guarantee a new business loan for her husband as consideration for the property transfer). Perhaps most probative of Mr. Johnson's intent, however, is a factor not specifically listed in the statute: his attempt to conceal the real date of the transfer. If Mr. Johnson had truly transferred the property to his wife for valuable consideration in 1994, there would have been no reason for him to spin the tale of a 1989 transfer, a story the rest of the record squarely refutes. In short, the record plainly supports Judge Katz's finding that Mr. Johnson transferred the Wisconsin property to his wife with the intent to defraud his creditors.
We touched on Finding of Fact No. 19, which states that Mr. Johnson transferred the property without receiving reasonably equivalent value for it, in our discussion on intent. According to the Wisconsin statute:
Value is given for a transfer . . . if, in exchange for the transfer . . ., property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor's business to furnish support to the debtor or another person.
WIS. STAT. § 242.03(1). The only consideration Mr. Johnson allegedly received in exchange for the property was his wife's agreement to guarantee a loan a he needed to purchase another business. (9/15/98 Tr. at 100-01; 8/20/98 Tr. at 111-12.) Mrs. Johnson's agreement to guarantee a new business loan, about which defendants proffered no evidence but their own testimony, neither secured nor satisfied an antecedent debt. It was, therefore, not "value" within the meaning of the statute.
Finding of Fact No. 20, which states "Renee Johnson acquired title to the [Wisconsin] Property with the knowledge of, and active participation with defendant Craig Johnson's attempts to defraud creditors," is, in essence, another credibility finding. As we stated above, we are in complete agreement with Judge Katz that Mrs. Johnson's testimony on the transfer of the Wisconsin property was wholly unbelievable. There is no error in Finding of Fact No. 20.
The next factual finding that defendants contest is No. 25. It states: "In 1992, representatives of [plaintiff] met with Richard Van Weir and others to discuss the establishment of a joint venture to pursue insurance sales to crane operators." Once again, defendants' objection is unfounded. Mr. Van Weir, Mr. Johnson and Mr. Holler, a former co-owner of Rose-Tillman, all testified that such a meeting occurred in 1992. (8/21/98 Tr. at 20-21, 44-45; 8/25/98 Tr. at 48; 8/17/98 Tr. at 45-48.) There is no contrary evidence.
Finding of Fact No. 26, which states that Rose-Tillman, not Mr. Johnson, entered into the NCOA joint venture with Mr. Van Weir's company at the end of 1992, and No. 28, which says that the joint venture agreement was signed by Mr. Johnson as nominee for Rose-Tillman, are also supported by the record. As we noted above, Mr. Johnson's claim that he signed the NCOA joint venture agreement as nominee for his wife Renee, rather than Rose-Tillman, is contradicted by: (1) the stock purchase agreement and the joint venture agreement, which never mention Mrs. Johnson's purported interest (Pl.'s Exs. 1, 18); (2) the 1993 letter Mr. Johnson sent to Rose-Tillman's lawyer, stating that the joint venture agreement had to be amended "to replace [Mr. Johnson] as nominee with Rose-Tillman, Inc" (8/20/98 Tr. at 87-91; Pl.'s Ex. 23); (3) the Johnsons' joint tax returns for 1993 and 1994, both of which say that the NCOA income should have been credited to Rose-Tillman (Pl.'s Exs. 84, 30); and (4) the contract Mr. Van Weir and Mr. Johnson signed with Don Martin, the day-to-day manager of the joint venture, which identifies Rose-Tillman as one of the joint venturers (Pl.'s Ex. 19). The only contrary evidence is the incredible testimony of the Johnsons and Mr. Van Weir. Finding of Fact Nos. 26 and 28 will stand.
Next, defendants challenge Finding of Fact No. 29, that Rose-Tillman was paid the proceeds of the joint venture through Mr. Johnson until his resignation from the company in January 1995. Once again, that is what the evidence shows. Both Mr. Rubens and Mr. Johnson testified that Mr. Johnson endorsed the NCOA distribution checks over to Rose-Tillman in 1993 and 1994 and that he stopped doing so after he left the company in 1995. (8/19/98 Tr. at 75-76, 89-90; 8/20/98 Tr. at 47-51.) There is no contrary evidence.
Finding of Fact No. 31 states:
After January 1995, the portion of the [NCOA] proceeds, which had previously been paid to [plaintiff], were wrongfully diverted and paid to Craig Johnson and Renee Johnson. Richard Van Weir, a close friend of Craig Johnson, knowingly participated in the termination of the joint venture without the consent of [plaintiff], and formation of a new joint venture with Renee Johnson.
As we noted above, the evidence establishes that Rose-Tillman, not Craig or Renee Johnson, was a party to the NCOA joint venture and that the Johnsons kept Rose-Tillman's portion of the joint venture proceeds after Mr. Johnson left the company in 1995. The evidence also establishes that together Mr. Van Weir and the Johnsons terminated the original joint venture, without Rose-Tillman's consent, and created a new one in which Renee Johnson was substituted for Rose-Tillman. (8/21/98 at 27, 52, 60-61; Defs.' Exs. 14, 15.) There is no error in Finding of Fact No. 31.
Next, defendants object to Finding of Fact No. 32, which states:
Subsequent to January 9, 1995, defendant Craig Johnson has appropriated unto himself and his wife Renee Johnson, the distributive share of Rose Tillman in the NCOA joint venture. The amounts diverted, and paid to Renee Johnson are $141,935.00, $62,508.00, $25,000.00, and an additional $60,000.00 being held by an entity controlled by Richard Van Weir for a total of $289,443.00.
Mr. Johnson admitted that he did not turn the NCOA distributions over to Rose-Tillman after he left the company in 1995. Moreover, the Johnsons' tax returns and the tax returns and business records of the NCOA establish that the Johnsons appropriated a total of $289,443 of Rose-Tillman's proceeds from the joint venture after Mr. Johnson's departure from the company. (Pl.'s Exs. 22, 28, 41; 8/21/98 Tr. at 76-81.) Finding of Fact No. 32 is correct.
Finding of Fact No. 35 says that Mr. Johnson owed Rose-Tillman $579,211 for his officers' loans as of March 31, 1993, and $866,888 for his officers' loans as of July 1998. Number 37 states that the NCOA distributions were not used to pay down Mr. Johnson's debt. With one minor exception, the credible evidence establishes that both are correct. The purchase agreement, which Mr. Johnson executed at the end of March 1993, says: "On the date hereof, . . . Johnson is indebted to Rose-Tillman in the aggregate principal amount of $579,211 . . . as a result of one or more loans from Rose-Tillman." (Pl.'s Ex. 1 at 20.) Agnes Brassfield, who was the comptroller of Rose-Tillman from June 1993 through November 1995, verified that number. (9/23/98 Tr. at 79.) She also said that Mr. Johnson borrowed an additional $60,000 between March 31, 1993 and December 1994, and that she calculated his total debt to the company as of July 1998 to be $856,888 ($601,692 in principal and $255,196 in interest computed at seven percent per annum). (Id. at 80-83.) Moreover, Ms. Brassfield and Mr. Rubens both testified that the company had not agreed to, and did not, apply the NCOA distributions to Mr. Johnson's debt. (Id. at 85-87; 8/19/98 Tr. at 75-77.) The only contrary evidence is the incredible testimony of Mr. Johnson. Thus, Finding of Fact No. 35 contains a clerical error, Mr. Johnson owed $856,888 not $866,888 to Rose-Tillman as of July 1998, but is otherwise correct. Finding of Fact No. 37 is entirely correct.
Defendants also object to Finding of Fact No. 36, that no part of Mr. Johnson's loans had been repaid by the time of trial. Mr. Johnson claims that he paid approximately $500,000 of his debt: $300,000 in NCOA distributions and $200,000 as a commission for helping MMPJ find a buyer for the assets of the company in 1995. (8/20/98 Tr. at 46-54.) As we just noted, however, the NCOA distributions were not, in fact, applied to Mr. Johnson's debt. Nor is there any credible evidence to support his claim of a $200,000 commission. Martin Shape, the principal of MMPJ who allegedly promised the commission to Mr. Johnson, denies having done so. (9/23/98 Tr. at 62-63.) Moreover, defendants proffered no evidence from Mr. Barrett, the attorney for the committee of unsecured creditors who allegedly sanctioned the commission, on that topic. (See 2/1/99 Tr. at 138-47.) Once again, that leaves Mr. Johnson's uncorroborated testimony as the only evidence on the alleged commission. Like Judge Katz, we believe Mr. Shape, and Ms. Brassfield and Mr. Rubens, both of whom testified that Mr. Johnson had not repaid any portion of his loans, rather than Mr. Johnson. (9/23/98 Tr. at 80-83; at 8/19/98 Tr. at 90.)
The last Finding of Fact to which defendants object relates to Mr. Johnson's counterclaim for MMPJ's alleged breaches of his employment agreement. It is No. 39 and states: "There has been no evidence of the actual amount of monies due to Craig Johnson for earned and unpaid commission or unpaid salary." Though Mr. Johnson testified that MMPJ withheld "three or four" of his paychecks, he could not remember the gross amount of his paycheck. Defendants offered no other evidence to prove up that amount or the amount of any allegedly unpaid commissions. In other words, the record validates Judge Katz's finding. (1/6/99 Tr. at 65-66; 2/1/99 Tr. at 27-29.)
Mr. Johnson also said that the company failed to make three child-support payments to his ex-wife, as it was required to do, but he could not remember the amount of his child support obligation either. (1/6/99 Tr. at 65-66; 2/1/99 Tr. at 27-29.)
Defendants try to vault this evidentiary gap by claiming that Mr. Johnson's damages are measured not by the amount of the missing paychecks, but by the what he would have earned had MMPJ faithfully performed the contract: $195,000 per year for nine years. According to Mr. Johnson, MMPJ breached the employment agreement by: (1) failing to pay his salary and child-support obligations; (2) decreasing the company's revenues, on which Mr. Johnson's compensation was based, by driving off key employees and provoking insurance companies into canceling their policies with Rose-Tillman; and (3) jeopardizing Mr. Johnson's broker's license, under which the company sold insurance, by attempting to appropriate client funds.
There are several problems with Mr. Johnson's argument. First, the employment agreement says nothing about Mr. Johnson's child-support obligations. (See Pl's Ex. 2 at 7-23.) If MMPJ failed to make such payments, it may have violated a court order, but it did not breach the employment agreement. Moreover, even assuming that a decrease in Rose-Tillman's revenues, and therefore Mr. Johnson's compensation, attributable to MMPJ's acts of misfeasance or malfeasance constitute a breach of the employment agreement, there is no credible evidence that such acts occurred. Defendants did not call as witnesses: (1) any of the former Rose-Tillman employees whom MMPJ allegedly drove off; (2) any employees of the insurance companies that MMPJ allegedly provoked into canceling their policies with Rose-Tillman; or (3) any employees of Holian Industries or Steel Supply, the clients whose funds Rose-Tillman allegedly attempted to steal. Nor did defendants introduce any documents that: (1) established the dates of, or the reasons for, the Rose-Tillman employees' departures or the consequent decrease in revenues; (2) verified the reasons for the policy cancellations and established that the cancellations were attributable to MMPJ's actions; or (3) verified the existence of the "contra" accounts in which Mr. Johnson said the misappropriated client funds were deposited. The only evidence that defendants introduced on any of these issues was the testimony of Mr. Johnson, a thoroughly discredited witness. (See 1/6/99 Tr. at 52-64.) Like Judge Katz, we find Mr. Johnson's uncorroborated testimony insufficient to prove his breach of contract claim.
That leaves only one potential breach: the missing paychecks. Even assuming that MMPJ's failure to give Mr. Johnson these checks constituted a breach of the employment agreement. Mr. Johnson could recover only the amount of those checks. As we said at the start of this discussion, Judge Katz correctly found that defendants offered no proof of that amount. As a result, Mr. Johnson can recover nothing on his counterclaim.
Conclusions of Law
Defendants also object to three of Judge Katz's five Conclusions of Law. Conclusion of Law No. 42 states: "Defendant Craig Johnson is in possession of property that belongs to the estate and should be turned over pursuant to § 542 of the Bankruptcy Code, namely, monies misappropriated from the NCOA joint venture, and officers' loans which have not been paid." The Bankruptcy Code defines property of the estate as "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The bankruptcy case started in 1997. As Judge Katz correctly found, Rose-Tillman, not Mr. or Mrs. Johnson, was a partner in the NCOA joint venture, and no portion of Mr. Johnson's officers' loans has been repaid. Thus, when the bankruptcy case started Rose-Tillman had a right to half of the proceeds of the NCOA joint venture and all of the money, including interest, that Mr. Johnson had borrowed from it. There is no error in Conclusion of Law No. 42.
Defendants also object to Conclusion of Law No. 43, which says that "[t]he transfer of [the Wisconsin property] to Renee Johnson is a fraudulent conveyance subject to being set aside by the Court pursuant to the Wisconsin Fraudulent Transfer Act, WSA § 242.01-242.11." In relevant part, the Wisconsin Uniform Fraudulent Transfer Act provides that:
A transfer made or obligations incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(a) With actual intent to hinder, delay or defraud any creditor of the debtor;
WIS. STAT. § 242.04(1)(a). As we noted above, Judge Katz correctly found that Mr. Johnson transferred the Wisconsin property to Mrs. Johnson in December 1994 with the actual intent to hinder, delay or defraud Rose-Tillman. Consequently, defendants' objection to Conclusion of Law No. 43 is unfounded.
Finally, defendants contest Conclusion of Law No 44. It states:
Oak Hollow Farms, Inc. is a corporation wholly owned by defendant Renee Johnson. The transfer of any interest to it by virtue of a lease dated January 1, 1994 executed by Renee Johnson is rendered void since it was made with knowledge of and participation in acts of Craig Johnson, in defraud of [sic] creditors. The transfer of the leasehold interest in the [Wisconsin property] to Oak Hollow Farms, Inc. by Renee Johnson is a fraudulent conveyance subject to being set aside by the Court pursuant to the Wisconsin Fraudulent Transfer Act, WSA § 242.01-242.11.
Mrs. Johnson, who is in possession of at least some of the NCOA distributions, is a "debtor" within the meaning of the Wisconsin Uniform Fraudulent Transfer Act. See WIS. STAT. §§ 242.01(6). Thus, any asset that she transferred with the intent to hinder or defraud her creditors is a fraudulent transfer. WIS. STAT. § 242.04(1)(a). The record establishes that Mrs. Johnson transferred a leasehold interest in the Wisconsin property to Oak Hollow Farms, Inc. with the actual intent to defraud Rose-Tillman. She transferred the leasehold interest to an insider (see WIS. STAT. § 242.01(7)(a)(4) (defining insider as "[a] corporation of which the debtor is a director, officer of person in control"), she retained control of the property after the transfer, and the rent she charged, $450 per month, was wholly unreasonable for twenty-three acres of land with a horse barn and training arena. (9/15/98 Tr. at 5, 25, 82-83, 86; 1/6/99 Tr. at 27; Pl's Ex. 48.) Moreover, the record establishes that Mrs. Johnson executed this ten-year lease, with an optional ten-year extension, only three days after Mr. Johnson transferred the property to her, and just days before he left Rose-Tillman. (Pl's Exs. 45, 48.) Finally, defendants provided no explanation for the lenient terms or suspicious timing of the lease. If leasing the land provided Mrs. Johnson or her company with some legitimate tax or other advantage, why did she wait until January 1994 to do so, a year after she incorporated her company and five years after she claimed the property was transferred to her by her husband? In short, the record amply supports Judge Katz's conclusion that the lease between Renee Johnson and Oak Hollow Farms, Inc. was a fraudulent transfer under Wisconsin law.
Conclusion
For the reasons set forth above, plaintiff is entitled to judgment in its favor on all of its claims against defendants and on the counterclaim Mr. Johnson asserts against it. Plaintiff has seven days from the date of this Memorandum Opinion and Order to file a calculation of the amount currently due from Mr. Johnson, including interest, for his officers' loans. Defendants have seven days thereafter to file any specific objection to that calculation. After the Court receives those submissions, we will enter a final judgment as recommended by the Bankruptcy Court.