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West v. J. Greg Allen Builder, Inc.

Court of Appeals of Indiana

December 28, 2017

Jeff West, Appellant/Defendant/Cross-Appellee/Counterclaim Plaintiff,
J. Greg Allen Builder, Inc., and Princeton Homes, Appellees/Plaintiffs/Cross-Appellants/Counterclaim Defendants, and Greg Allen, Cross-Appellant/Counterclaim Defendant.

         Appeal from the Johnson Superior Court The Honorable Marla Clark, Judge Trial Court Cause No. 41D04-1102-CT-14

          Attorneys for Appellant/Cross-Appellee Thomas W.Vander Luitgaren Emily M. Gettum Greenwood, Indiana

          Attorneys for Appellees/Cross-Appellants Timothy H. Button Laura S. Reed Justin O. Sorrell Riley Bennett Egloff LLP Indianapolis, Indiana

          BRADFORD, JUDGE.

         Case Summary

         [¶1] Appellant/Defendant/Cross-Appellee/Counterclaim Plaintiff Jeff West served as president of J. Greg Allen Builder, Inc. ("GABI"), beginning in 2002 and Princeton Homes ("Princeton") beginning in 2008. Appellees/Plaintiffs/Cross-Appellants/Counterclaim Defendants GABI and Princeton were founded and owned by Cross-Appellant/Counterclaim Defendant Greg Allen (collectively, "Cross-Appellants"). While president of GABI and Princeton, West, with the assistance in some cases of Kim Hutchinson, directed multiple unauthorized payments to himself and others, oversaw multiple unauthorized transfers of funds from Princeton to GABI, borrowed money from GABI that he did not repay, failed to maintain proper records, and caused GABI to fail to fulfill certain contractual obligations. After discovering West's activities, Allen sent a letter to GABI's and Princeton's subcontractors, suppliers, and certain customers indicating that West and Hutchinson had withdrawn company funds for their own use and disguised the withdrawals as payments to a lumber company.

         [¶2] In February of 2011, Princeton and GABI sued Hutchinson and West, making claims against West for violating GABI's employee manual, conversion, theft, unfair competition, negligence, tortious interference with a business relationship, usurpation of corporate opportunity, misappropriation of trade secrets, unjust enrichment, and fraud. West filed a countersuit against Cross-Appellants for, inter alia, defamation. Following trial, a jury found in favor of GABI and against West on the theft claim in the amount of $4000.00 and on the breach of fiduciary duty claim in the amount of $220, 000.00. The jury also found in favor of West on his defamation counterclaim, awarding him presumed damages of $50, 000.00 against each Cross-Appellant and punitive damages in the amount of $300, 000.00 against Allen, which the trial court later reduced to $150, 000.00. West contends that there is insufficient evidence to sustain the jury's verdict against him for breach of fiduciary duty or the amount of damages awarded on that claim. Cross-Appellants contend that there is insufficient evidence to sustain the jury's verdict against them for defamation or the award of punitive damages against Allen. While we disagree with the first three contentions, we agree that there is insufficient evidence to sustain the award of punitive damages against Allen.

         Facts and Procedural History

         [¶3] Allen founded GABI in 1986 and Princeton in the late 1990s. GABI built custom homes, and Princeton built semi-custom homes. Allen was president of GABI until West became president in 2002. West also became president of Princeton in December 2008. West hired Kim Hutchinson to be his assistant, type contracts and specifications, perform basic accounting and data entry, issue checks, and keep the books for GABI and Princeton.

         [¶4] As president of GABI and Princeton, West's responsibilities included supervising employees (including Hutchinson) meeting with customers, making sales, managing customer relationships, creating budgets, controlling budgets and costs, overseeing the construction process, bidding on construction projects, obtaining bids from subcontractors and suppliers, forecasting annual overhead, reviewing reports of income and expenses, approving bills, and providing monthly financial reports to Allen. West received compensation from GABI of $338, 367.80 during that time period.

         [¶5] During West's presidency, GABI and Princeton both used an accounting software system called "Timberline." Hutchinson was the primary employee who input data into Timberline for both GABI and Princeton. West prepared financial statements, such as balance sheets, which Hutchinson then typed into the computer system. With some regularity, Allen received reports generated by the Timberline system, and his knowledge of the condition of GABI was limited to what West reported. Bills that came in for GABI and Princeton were separated by company and job and sent to Hutchinson, who provided them to West for approval. It was West's responsibility to direct Hutchinson which bills to pay, after which Hutchinson would issue the checks.

         [¶6] West resigned from GABI and Princeton on June 3, 2010. Brent Glover resigned a couple weeks later. Hutchinson resigned on August 27, 2010. After West left, an internal investigation began in June of 2010. This investigation uncovered numerous accounting discrepancies and financial irregularities.

         [¶7] For example, before the end of December 2009, Allen sent an email to all company employees stating that there would be no bonuses that year. However, on December 29, 2009, Hutchinson, at West's direction, issued bonus checks, including a $2000.00 check to West, a $1000.00 check to Hutchinson, and a $1000.00 check to Glover. At West's direction, these bonus checks were posted from the construction account (not payroll) and were posted in Timberline as if they had been written to Carter Lee Lumber Company. Furthermore, approximately twenty additional unauthorized checks worth approximately $80, 000.00 or $90, 000.00 were written to West from the construction account. All of the checks were concealed by having been falsely posted in the Timberline system. While Hutchinson was under West's supervision, similar checks were issued to Hutchinson totaling over $400, 000.00 and were also concealed by being falsely posted as payments to Carter Lee.

         [¶8] It was discovered that files were missing numerous documents and records, including purged checks. Almost all of the checks that were missing were posted in the Timberline system as being paid to Carter Lee. It also was discovered that health insurance costs had been paid out of GABI's construction account as direct costs when they should have been paid and characterized as indirect costs. Numerous unauthorized inter-company transfers were uncovered, namely fifteen to sixteen unauthorized transfers from Princeton to GABI between December 2008 and June 2010, totaling approximately $655, 000.00, for which the proper procedures were not followed. All of these funds were transferred directly from Princeton to GABI, in contravention of established company policy.

         [¶9] Accounting discrepancies were discovered relating to homes which had been built for West and his son, Evan. The investigation revealed that a promissory note related to West's house existed which had not repaid, and about which Allen had been unaware. Further, in August 2009, Allen discovered that West, without Allen's knowledge or approval, had begun building a home in downtown Indianapolis for West's son, Evan. When Allen asked West about the home, West admitted it was for his son, and asked for an employee discount, which Allen granted on the condition that West get accounting personnel from another division to watch the books to avoid preferential treatment. West built the home, but never obtained the required oversight from another accounting division. West also made numerous improvements to Evan's home, which were not indicated in the budget presented to Allen and were not charged to Evan. As of West's resignation from GABI on in June 2010, GABI still was owed approximately $58, 000.00 for Evan's home and approximately $54, 000.00 for West's home.

         [¶10] Serious accounting discrepancies were uncovered regarding amounts due to subcontractors and suppliers. Soon after West's resignation, GABI began receiving phone calls from subcontractors and suppliers, asking for the money they were owed. Further investigation revealed that many of GABI and Princeton's records were inaccurate, including balance sheets, records of outstanding debt, and accounts payable. For example, the accounts-payable records consistently under-reported the amounts owed to subcontractors and suppliers, in some cases by as much as ninety percent. The amount owed to Carter Lee Lumber was under-reported by approximately $300, 000.00, the amount owed to Collins Drywall approximately $160, 000.00, and the amounts owed to several other subcontractors were under-reported as well. Allen ended up using $803, 000.00 of his personal funds to cover the shortfall. As of West's resignation, GABI owed its subcontractors and suppliers approximately $2.4 million, all of which debt had been incurred before West's resignation. Moreover, on December 15, 2009, when Allen met with West to discuss cash flow, West informed Allen that he projected $465, 000.00 of gross profit. As it happened, there was no meaningful profit.

         [¶11] On October 1, 2009, Mark and Alicia Fujihara entered into a contract to buy their first home from GABI. At closing in June of 2010, the Fujiharas asked whether they would receive documentation proving they owned their home, and West informed them that Hutchinson was working on the deed and would send it to them later. The Fujiharas did not receive a deed at closing, or even shortly after. Instead, after closing, the Fujiharas received demand letters from contractors who had not been paid by GABI under West's watch, which forced GABI to retroactively pay the contractors. Further, in breach of its contract with the Fujiharas (again under West's watch), GABI failed to provide the Fujiharas with title insurance. Allen himself was forced to provide personal funds of approximately $65, 000.00 to pay for the lot on which the Fujiharas' home had been built so that GABI could give a deed to the Fujiharas.

         [¶12] After West's departure, Allen and other staff discussed with Hutchinson the unpaid promissory note and the unpaid vendor invoices, at which point Hutchinson responded that she was just doing what West told her to do. On June 30, 2010, Hutchinson prepared and signed a statement ("the Statement"). In the Statement, Hutchinson admits that West directed her in late 2009 to write checks to herself, Glover, and West as bonuses and to book those payments as payments to Carter Lee Lumber to conceal the payments from Allen. Hutchinson also admits West directed her to make draws of approximately $625, 000.00 on Princeton's line of credit, and rather than use those funds for Princeton jobs as they were drawn, to transfer those funds to GABI to pay its expenses, and to conceal the payments. West also instructed Hutchinson not to tell Allen that GABI was operating at a substantial loss and had incurred and accumulated substantial unpaid bills. Hutchinson later testified that she signed the Statement despite believing it to contain falsehoods.

         [¶13] Following these discussions with Hutchinson, Allen confronted West about what he had done. Allen presented West with a document showing what Allen knew about as of that date, and substantiating amounts West should pay back to Allen and GABI. In total, Allen asked him to pay back $196, 546.00. When Allen showed West the Statement, he agreed that he would pay the amounts back.

         [¶14] Following that interaction, Allen discovered that West owed GABI and/or Allen approximately $303, 862.61, including: $56, 765.00 for the promissory note on West's personal home; $82, 448.76 for interest on the promissory note through September 10, 2010; $55, 000.00 which was underpaid on West's son's home; and $2199.00 in interest due for using company money for an extra five months after closing on West's son's home without Allen's knowledge. On January 18, 2011, Allen issued a letter through GABI and Princeton ("the Letter") to those entities' subcontractors, suppliers, and certain customers in Marion and Johnson Counties, indicating that West and Hutchinson had engaged in a mismanagement scheme, including financial misreporting and unauthorized withdrawal of company funds.

         [¶15] On February 8, 2011, Princeton and GABI filed suit, asserting four claims against Hutchinson and eleven claims against West, namely, for violating GABI's employee manual, conversion, theft, unfair competition, negligence, tortious interference with a business relationship, usurpation of corporate opportunity, misappropriation of trade secrets, unjust enrichment, and fraud. On April 1, 2011, West filed a counterclaim against GABI and Princeton for breach of settlement agreement and contribution and filed a wage claim. West also asserted a claim for defamation against all Cross-Appellants. On ...

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