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Tracy v. Minne

United States District Court, N.D. Indiana, South Bend Division

December 12, 2018

MONA C. TRACY and TERAH TRACY, Plaintiffs/ Counter-Defendants
v.
PAUL J. MINNE and JEAN M. MINNE, Defendants/ Counter-Plaintiffs

          OPINION AND ORDER

          Robert L. Miller, Jr. Judge

         A December 30, 2010 meeting at the Kokomo, Indiana, Cracker Barrel played a pivotal role in the short life of a business called Phoenix Pallet. It was there that the original shareholders Mona and Terah Tracy and Mike and Tammy Madison first met Jean and Paul Minne, one whom would become a shareholder and the other president of the closely held corporation. The original shareholders hoped Mr. Minne and his money would save their business.

         Phoenix Pallet manufactured, refurbished, and sold wood pallets. It was incorporated in February 2010 and was struggling by the time of the Cracker Barrel meeting. Mr. Madison had asked Phoenix Pallet's accountant, David Rushenberg, to keep an eye out for possible investors, and Mr. Rushenburg had suggested Mr. Minne, whose personal accounting work Mr. Rushenburg had done for years. That led to the December 2010 Cracker Barrel meeting.

         Mr. Minne had put quite a bit of money into Phoenix Pallet even before the Cracker Barrel meeting. He had gone to Phoenix Pallet's Elkhart, Indiana facility, looked at records, asked questions, and saw promise in the company. He put $50, 000 into Phoenix Pallet in October 2010 and another $40, 000 in November, through Mr. Madison. Mr. Minne was enthusiastic at the Cracker Barrel meeting. He expressed the belief that he could have Phoenix Pallet making a profit in six months and the shareholders' next annual meeting would be held in Las Vegas. Mr. Minne had two conditions that had to be met before he participated any further. First, since he would have the most money tied up in Phoenix Pallet, he insisted on being president. That condition seems to have been agreed to immediately. Second, he wanted to continue spending winters in Florida, where the Minnes had been going for Mrs. Minne's health. Again, all present agreed to that condition.

         Not everyone at the Cracker Barrel had the same understanding of what it means to spend winters in Florida. The Madisons lived in Elkhart, Indiana, near the Michigan border. The Tracys lived in Terre Haute, Indiana. The Minnes lived about 150 miles north of the Tracys, in White Pigeon, Michigan. Maybe “winter” means something different to people from southern Michigan than it does to people southwest central Indiana, but the Tracys understood Mr. Minne to mean two or three months, and the Minnes had been spending five or six months in Florida.

         Mr. Minne thinks he presented a third condition: that he be paid enough to be pay for his country club dues. The record doesn't support that belief. Both Tracys and both Madisons testified that they remember nothing about Mr. Minne being paid, and Phoenix Pallet's financial records don't reflect any salary payments. The minutes say nothing about pay (though the minutes also said nothing about winters in Florida, either, and everyone agrees that was discussed). Mr. Minne's memory on this point is faulty.

         The Cracker Barrel meeting participants agreed that Mrs. Minne would become a shareholder with one-third of the shares. The Minnes understood that the Tracys were silent partners, while the Madisons worked at Phoenix Pallet.

         Despite the enthusiasm Mr. Minne brought to the Cracker Barrel meeting, Phoenix Pallet never made a profit, and closed with a crash slightly more than four years later.

         The Tracys, citizens of the state of Indiana, and the Minnes, citizens of the state of Michigan, have sued each other on various state law claims. Well over $75, 000 is in controversy, so the court has jurisdiction under 28 U.S.C. § 1332(a). The parties agree that Indiana law provides the rule of decision. A bench trial was held from August 13 through August 16, 2018. This memorandum is meant to satisfy the court's obligation under Fed.R.Civ.P. 52(a).

         The Tale of Phoenix Pallet

         2010

         When the Tracys and Madisons formed Phoenix Pallet, Mona Tracy and Tammy Madison were issued slightly more shares than their spouses in the event opportunities arose for a woman-owned business. Tammy Madison was named president. Even though the bylaws didn't provide for a position of vice-president, the shareholders immediately selected Mike Madison vice-president. Mr. Madison was to run the plant while Mrs. Madison ran the office. The Tracys weren't strictly silent partners but wanted to stay in the shadows. Mrs. Tracy had her own business that supplied pallet manufacturers, and preferred that her role in Phoenix Pallet not become widely known.

         Each couple put an initial investment into the business. The Tracys provided equipment worth $99, 613 to Phoenix Pallet through a sale on credit at annual six percent interest rate. The Tracys also provided five computers. Phoenix Pallet leased a site that met all its needs, including electrical service, but might have been larger than needed (200 yard x 100 yards) at the company's outset. The company entered the market with one expected arm tied behind its back: Phoenix Pallet applied for a Small Business Association loan of $150, 000 through 1st Source Bank, but was turned down and received a $50, 000 line of credit instead; that rejection led both couples to put more money into the business for outstanding bills, paying themselves back as income came in. Mrs. Madison and Mrs. Tracy incurred Phoenix Pallet debt on credit cards.

         As 2010 proceeded, it became apparent that Phoenix Pallet needed a source of more money. It had a net loss of about $145, 000. Mrs. Madison wasn't able to keep the Tracys completely up-to-date on the financial information as she struggled with the accounting program the Tracys had provided, but the Tracys knew the company was struggling.

         Mr. Rushenburg (Phoenix Pallet's accountant) told Mr. Madison that Mr. Minne might be interested in investing. Mr. Minne visited the Phoenix Pallet plant in Elkhart and the Madisons gave him free rein of the corporate records and financial information. Based on those visits and examinations, Mr. Minne came to believe that Phoenix Pallet could become a successful undertaking if sales could be increased. Mr. Minne didn't discuss the investment with his wife. The Tracys didn't know of, and didn't object when they learned of, Mr. Minne's $90, 000 investment.

         The Kokomo Cracker Barrel meeting described at the outset of this opinion ensued. By the end of 2010, Mr. Minne was president of Phoenix Pallet, Mr. Madison was vice-president (notwithstanding the absence of mention of that office in the bylaws), and Mrs. Madison was secretary-treasurer. The Tracys, the Madisons, and Mrs. Minne each owned a third of the shares of Phoenix Pallet.

         Mr. Minne believes he asked the Tracys whether the equipment they had provided to Phoenix Pallet was a capital contribution to the company or a loan on credit, and that they told him it was a capital contribution. He left the Kokomo Cracker Barrel meeting with the belief that the equipment was a capital contribution, and now says he wouldn't have invested had he known Phoenix Pallet didn't own that equipment. Mr. Minne's understanding was incorrect and he might have misunderstood what he was told. No other evidence in the case corroborates his memory; Mr. Tracy specifically remembers telling Mr. Minne the equipment was there on a six percent loan. The day before the Tracys met Mr. Minne for the first time at the Cracker Barrel meeting, Mr. Rushenberg produced an amortization schedule for the equipment. It doesn't appear that the Tracys shared the amortization schedule with Mr. or Mrs. Minne, but it's most unlikely that the Tracys would have told Mr. Minne the equipment was a capital contribution with an amortization schedule in hand.

         The Tracys, Madisons, and Minnes all moved forward with the hope that Phoenix Pallet would do better in 2011. Everyone honestly believed that Phoenix Pallet would be profitable if it could increase sales by $90, 000. The Madisons returned to Elkhart, the Tracys returned to Terre Haute, and Minnes set out for Florida.

         As of the end of 2010, Mr. Minne was the largest investor at $90, 000. The Tracys had put in $68, 900 and the equipment. The Madisons had invested $32, 409.94.

         Phoenix Pallet had $425, 000 in gross sales in 2010 (a partial year of operation), and lost $179, 000.

         2011

         The Tracys drew even more deeply into the shadows in 2011 as Mr. Tracy suffered two serious health issues, and Phoenix Pallet became a less significant factor in their lives. Mr. Minne didn't speak with the Tracys during all of 2011.

         Back in Elkhart, Mrs. Madison worked less and less in the office as she took other jobs and another bookkeeper was hired. Mr. Madison continued to put in 60-hour weeks running the plant and, when Mr. Minne was away, running the business. Neither the Tracys nor the Madisons put more money into the business, but Mr. Minne made short-term advances totaling $183, 000 during the course of 2011. Sales increased dramatically from 2010 to 2011, rising to $1.24 million, but Phoenix Pallet continued to lose money.

         Mr. Minne was an investor in three other businesses. Golf Properties was a real estate holding company. Elkhart Logistics and Fabric Technologies serviced the recreational vehicle industry. Golf Properties paid Mr. Minne a weekly management fee of $525 on Phoenix Pallet's behalf, and Phoenix Pallet reimbursed Golf Properties. Mr. Minne testified that he did this so Phoenix Pallet wouldn't be saddled with the payroll expenses connected with his management fee. Phoenix Pallet also used, while not paying for the use of, Elkhart Logistics trucks. At times, Fabric Technologies made loans to Mr. Minne, who in turn would pass the money along to Phoenix Pallet, and Phoenix Pallet would repay Fabric Technologies. As time went on and relationships soured, the Tracys would demand that Golf Properties and Elkhart Logistics be removed from the Phoenix Pallet facility, but nothing in the record suggests that anyone lost a penny by virtue of Mr. Minne's having involved his other businesses in the Phoenix Pallet enterprise.

         As 2011 drew to a close, Mr. Minne realized he was the only one putting money into Phoenix Pallet and that Phoenix Pallet was likely to need more money from him to operate in 2012. He decided he wanted to protect his investment. He had an attorney draw up a promissory note and a security agreement for $200, 000 (with annual interest at 5 percent) he thought he had put into the company. The attorney told Mr. Minne it would better if another officer signed on Phoenix Pallet's behalf, as opposed to Mr. Minne signing as both president and creditor. When the Minnes were home from Florida for Christmas, he and Mr. Madison executed the note and security agreement, with Mr. Madison signing as vice-president. A copy of the note and security agreement were kept at the Phoenix Pallet office, and Mr. Minne had a UCC statement filed with the secretary of state's office.

         Mr. Madison doesn't remember signing the papers, and given the thickness of the eleven-page security agreement, he thinks he would have read it and remembered it. The Tracys seem to think Mr. Minne used Mr. Madison's signature stamp to give himself a security interest in Phoenix Pallet. They point out that the signature on the note reads “Mike A. Madison, ” as “Vice President, ” and the file name at the bottom of the document reads, “msw\corp\phoenixpi-spn\jvw\amb. The security agreement is signed “Mike Madison” (again as Vice President), spells Mr. Minne's name correctly, and the characters within the signature are of significantly greater weight (thickness) than the signature affixed to the promissory note. The file name at the bottom of this document is “msw\agree\pmpp-secag\jvw\mj.”

         It is more likely than not that Mr. Minne didn't forge Mr. Madison's signatures. First, testimony from both Madisons indicate that it wouldn't have been unusual for Mr. Madison to sign as “Mike A.” on one line and as “Michael” on another. Second, although the relationships between the shareholders and officer of Phoenix Pallet soon took a nosedive, they were fine at the end of 2011. Mr. Minne and Mr. Madison were working well together. At some time - maybe in 2011 - Mrs. Madison became uncomfortable with Mr. Minne's checkwriting practices, but speculation is required to think Mr. Minne know that by the end of 2011. And the Tracys had been the mutest of silent partners to that point. Finally, the Madisons and Tracys hadn't put money into Phoenix Pallet for more than a year; they had chosen Mr. Minne to provide money. The Tracys and Madisons would have been hard pressed to deny Mr. Minne a security interest to the extent of his investment, and there's no basis to find Mr. Minne thought he had to go under the table to get a security interest.

         Mr. Minne's method of handling the transaction didn't comply with the Phoenix Pallet bylaws. First, the bylaws didn't create an office of vice president, so strictly by the bylaws (and ignoring how Phoenix Pallet had operated since its creation), Mr. Madison couldn't sign as vice president. Second, the bylaws provide that, “[u]nless otherwise provided by the Board of Directors, all contracts, leases, commercial paper and other instruments in writing and legal documents, shall be signed by the President and attested by the Secretary. All bonds, deeds, and mortgages shall be signed by the President and attested by the Secretary. All certificates of stock shall be signed by the President and attested by the Secretary.” The directors hadn't amended that provision or established another way to execute instruments of that sort. Mr. Minne had never seen the bylaws by the end of 2011; Mrs. Tracy had the bylaws.

         No one told the Tracys about the promissory note and the security agreement.

         Finally, it appears that the $200, 000 figure referenced in the note was simply plucked from the air as a rough estimate of what Mr. Minne thought he had put in by December 2011. Available records suggest that Mr. Minne's contributions in 2011 were closer to $170, 000 than to $200, 000, and had invested $90, 000 in 2010. Some of what Mr. Minne put into Phoenix Pallet in 2011 was repaid. These were interest free short-term loans to tide the company over until revenue came in. Phoenix Pallet financial records are too fuzzy to tell with any degree of confidence how close the contributions and repayments came to evening out; Plaintiffs' Exhibit 37 indicates that Phoenix Pallet paid just under $17, 000 directly to Mr. Minne and $42, 000 through Golf Properties in 2011. That process of money-in-money-out continued through 2014.

         Phoenix Pallet had $1, 239, 000 in sales in 2011 - a 290 percent increase over 2010 - but lost $149, 000.

         2012

         The year 2012 saw sales increase, the Madisons step aside as officers and shareholders, and the Tracys emerge from the shadows.

         Around April 2012, the Madisons notified the Tracys and the Minnes that they were going to file for bankruptcy. To keep their creditors from reaching Phoenix Pallet, they resigned their positions as officers and shareholders, and backdated their resignations to December 31, 2011. Mr. Madison remained at Phoenix Pallet as plant manager. He was paid $1, 000 a week and ran the manufacturing facility and, when Mr. Minne was in Florida, he ran Phoenix Pallet. The Madisons signed a resignation form, as did the Minnes and the Tracys separately, all dated ...


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