United States District Court, N.D. Indiana, South Bend Division
MONA C. TRACY and TERAH TRACY, Plaintiffs/ Counter-Defendants
PAUL J. MINNE and JEAN M. MINNE, Defendants/ Counter-Plaintiffs
OPINION AND ORDER
L. Miller, Jr. Judge
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.
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.
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
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.
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.
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.
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.
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).
Tale of Phoenix Pallet
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
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
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.
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.
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.
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.
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.
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.
Pallet had $425, 000 in gross sales in 2010 (a partial year
of operation), and lost $179, 000.
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.
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.
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.
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.
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
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.
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.
told the Tracys about the promissory note and the security
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
Pallet had $1, 239, 000 in sales in 2011 - a 290 percent
increase over 2010 - but lost $149, 000.
year 2012 saw sales increase, the Madisons step aside as
officers and shareholders, and the Tracys emerge from the
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 ...