In re B & L Laboratories, Inc.

Decision Date23 June 1986
Docket NumberBankruptcy No. 284-02413,Adv. No. 284-0451.
Citation62 BR 494
PartiesIn re B & L LABORATORIES, INC., Debtor. John C. McLEMORE, Trustee and Hickory Specialties, Inc., Plaintiffs, v. Jay OLSON, Glenn Fisher, Pioneer Leasing, a partnership composed of Jay Olson and Glenn Fisher and Olson-Fisher Industrial Equipment Partnership, a partnership composed of Jay Olson and Glenn Fisher and Olson-Fisher Industrial Equipment Partnership, a partnership composed of Jay Olson and Glenn Fisher, Defendants.
CourtU.S. Bankruptcy Court — Middle District of Tennessee

COPYRIGHT MATERIAL OMITTED

Edwin M. Walker, McMackin, Garfinkle & McLemore, Nashville, Tenn., for trustee.

Jay S. Bowen, L. Wearen Hughes, Bass, Berry & Sims, Nashville, Tenn., for Hickory Specialties, Inc.

William T. Conner, Crossville, Tenn., for Jay Olson.

Robert J. Warner, Jr., Marc T. McNamee, Dearborn & Ewing, Nashville, Tenn., for Glenn Fisher, Pioneer Leasing and Olson-Fisher Indus. Equipment Partnership.

MEMORANDUM

KEITH M. LUNDIN, Bankruptcy Judge.

The "veil" of this debtor corporation is appropriately "pierced" to subject the debtor's shareholders to personal liability for the claims against this estate. The debtor was a sham corporation, organized and operated to carry out an illegal scheme. The partnership defendants were controlled by the debtor's shareholders and performed as integral parts of a fraud on creditors. The defendants are liable as partners and as the recipients of an unlawful distribution of B & L's assets. Defendants Olson and Fisher are individually liable for breach of their fiduciary duties as officers, directors and majority shareholders of B & L. The defendants' claims against B & L are subrogated to all other claimholders.

The following constitute findings of fact and conclusions of law.1 Bankr.R. 7052. This is a core proceeding. 28 U.S.C. §§ 157(b)(2)(B), (O) (1982 ed., Supp.II 1984).

FACTS

Hickory Specialties, Inc. ("Hickory Specialties") manufactures and sells an extract of smoke which is used in the flavoring, curing and coloring of meats ("liquid smoke").

Hickory Specialties employed Charles Ledford ("Ledford") as manager of its Crossville, Tennessee plant. Ledford took photographs and measurements, made detailed sketches of the equipment and learned the liquid smoke manufacturing process which Hickory Specialties guarded as a trade secret. Ledford was discharged from Hickory Specialties on June 1, 1978.

Ledford immediately teamed with David Bilbrey ("Bilbrey") to form the debtor corporation, B & L Laboratories, Inc. ("B & L"), to take advantage of Ledford's knowledge of the trade secrets of Hickory Specialties. On June 21, 1978, B & L was chartered with the stated purpose to "engage in the business of producing for wholesale and retail sale liquid smoke products and accessories, general machinery and other products related to the production of liquid smoke." Bylaws were adopted on July 10, 1978. The bylaws in the minute book are incomplete, undated and unsigned. The first minutes were signed by Edwin Lansford ("Lansford"). Lansford is an accountant and attorney who maintained the books and records of B & L and related entities.2

Bilbrey opened a bank account for B & L in July, 1978. Bilbrey deposited $200,000 into the account, but treated these funds as his own. He withdrew $185,000 to purchase a certificate of deposit which was never available to B & L. No stock was issued to Bilbrey.

In June and July of 1978, Ledford planned B & L's business operations. He negotiated for a plant site. He sought customers for B & L's future liquid smoke production. His salary and expenses were paid from B & L's bank account.

On August 1, 1978, Hickory Specialties and Griffith Laboratories, Inc. ("Griffith"),3 filed suit against B & L and Ledford in the Chancery Court for Cumberland County, Tennessee seeking an injunction and damages for usurpation of trade secrets. On October 13, 1978, the Chancellor denied injunctive relief. Hickory Specialties and Griffith appealed. On July 6, 1979, the Tennessee Court of Appeals reversed the Chancellor and entered a comprehensive injunction prohibiting B & L and Ledford from using trade secrets of Hickory Specialties and Griffith.

After commencement of the trade secrets litigation and with knowledge that B & L's right to manufacture and market liquid smoke was under attack,4 defendants Olson and Fisher negotiated with Ledford and Bilbrey for involvement in and, ultimately, control of the B & L enterprise. On February 26, 1979, Olson and Ledford signed the B & L bank signature card as treasurer and president, respectively.5 Olson and Fisher borrowed $22,0006 for the "Purchase of Share of B & L Laboratories." This $22,000 was paid to Bilbrey.

On February 28, 1979, Ledford, Olson and Fisher were elected directors of B & L. Ledford was elected president; Fisher, vice-president; and Olson, secretary/treasurer. Three hundred shares of stock were authorized. Olson and Fisher subscribed for 100 shares each.7 In April of 1979, 100 shares of B & L stock were issued to Ledford for his efforts, knowledge and experience in designing the plant, selecting equipment, and supervising construction and installation.

On March 14, 1979, B & L purchased real estate for a plant in Cumberland County, Tennessee. The purchase price was paid from B & L's bank account and the land was deeded to B & L. The land was listed among B & L's assets in Lansford's working papers, but not formally accounted for on the records of B & L. Also on March 14, 1979, B & L contracted with Jacobs Construction Company ("Jacobs") to construct a "manufacturing building" on the Cumberland County property for $359,000.

At a meeting of shareholders and directors on April 20, 1979, Olson, Fisher and Ledford agreed to strip B & L of its assets and to vest ownership of B & L's assets in Olson and Fisher personally.8 The defendants now insist that they stripped B & L of assets for tax purposes.9 The minutes of April 20, 1979 state that B & L's assets were transferred to Olson and Fisher because they advanced money to the corporation. An unexecuted agreement between B & L, Olson and Fisher prepared by Lansford during 1979 states that the assets were removed from B & L to protect Olson and Fisher: "Olson and Fisher each have considerable personal wealth which may be placed at risk . . . and . . . the parties' personal estates should be protected from loss in so far sic as practical."

On April 25, 1979, B & L deeded its Cumberland County real property to Olson and Fisher. No lease agreement between B & L and Olson and Fisher was executed. No rental payment was agreed upon. B & L continued to pay the real property taxes. B & L continued to use the assets it transferred to Olson and Fisher.10

Also on April 25, 1979, Olson and Fisher executed a deed of trust on the Cumberland County property to secure a construction loan for the plant. B & L paid a $10,000 loan commitment fee to the bank. During 1980 and 1981, interest on this construction loan was paid through B & L accounts.

In late April, 1979, Olson and Fisher opened a bank account in the name of "Olson & Fisher," P.O. Box 768, Crossville, Tennessee. This was the operating account of Olson-Fisher Industrial Equipment Partnership ("OFIP"). OFIP consisted of Olson and Fisher. No written partnership agreement was executed. OFIP claimed to own some or all of the equipment used in the smoke operation. The defendants contended that OFIP leased this equipment to B & L. No lease agreements were executed. OFIP had no office separate from B & L. No lease payments were made or agreed upon. OFIP's 1979 financial records show no rent accrual from B & L. Lansford stated in a letter to Fisher dated March 20, 1980, "rather than fabricate a fictitous rental income on the partnership tax returns, we chose to show the applicable expenses with no income." B & L paid the personal property taxes which were billed to Tennessee Hickory Products ("THP")11 as "owner" of the equipment used by B & L.

In May 1979, the address on B & L's bank account was changed to P.O. Box 768, Crossville. During 1979, B & L opened three other bank accounts in the name "Tennessee Hickory Products, a division of B & L Laboratories, Inc". The addresses on all accounts were P.O. Box 768, Crossville, Tennessee.12

In August, 1979, in violation of the state court injunction, a "LIQUID SMOKE AGREEMENT" was consummated with the Baltimore Spice Company. Ledford signed as president and stockholder and Olson and Fisher signed as stockholders of "Tennessee Hickory Specialties" ("THS").13 In return for an option to purchase 25% of "the Manufacturer," Baltimore Spice agreed to purchase its liquid smoke requirements from THS.

B & L continued construction of its Cumberland County liquid smoke plant after entry of the state court injunction. Jacobs submitted construction invoices to B & L. To this point, B & L had no income. Olson and Fisher simply wrote checks when the corporation needed money. Construction was completed in August or September of 1979 and B & L began producing liquid smoke in violation of the injunction.

On October 14, 1979, Olson, Fisher and Ledford voted to require B & L to forego the proceeds of life insurance policies it maintained on its officers in favor of their spouses. It was also voted that all company assets would be owned equally by Ledford, Fisher and Olson.14

In December, 1979, Olson and Fisher conveyed to Ledford a one-third interest in the Cumberland County real estate. The deed stated that tax bills were to be sent to B & L. Fisher testified that Ledford never acquired any interest in the equipment or in OFIP, the equipment partnership. Fisher also claimed that Ledford had no authority to sign OFIP checks though many checks drawn on the OFIP account were signed by Ledford.

On October 9, 1979, B & L applied for permission to appeal to the Tennessee Supreme Court from the July 6, 1979 injunction of the...

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