Burks v. Bailey (In re Bailey)
| Decision Date | 23 August 2013 |
| Docket Number | Bankruptcy No. 12–02040–TLM.,Adversary No. 12–06057–TLM. |
| Citation | 499 B.R. 873 |
| Parties | In re Barry Todd BAILEY and Anne Margaret Bailey, Debtors. Brian D. Burks, Emerald Asset Management nka Burks Wealth Management, Inc., Plaintiffs, v. Barry Todd Bailey, Defendant. |
| Court | U.S. Bankruptcy Court — District of Idaho |
OPINION TEXT STARTS HERE
Terri R. Pickens, Pickens Law, P.A., Boise, ID, for Plaintiffs.
D. Blair Clark, Boise, ID, for Defendant.
Defendant Barry Todd Bailey filed his chapter 7 bankruptcy petition on August 21, 2012.1 On October 23, 2012, plaintiffs Brian Burks and Emerald Asset Management, Inc. (“EAM”) filed this adversary proceeding, seeking to hold debts owed by Bailey to Plaintiffs nondischargeable under § 523(a)(2)(A) and (a)(6).2 The claims underlying this nondischargeability action were partially litigated in state court before bankruptcy. The Court granted partial summary judgment for Plaintiffs, based on a state court order and principles of issue preclusion, establishing Bailey breached a covenant not to compete. Doc. No. 21. The balance of the adversary proceeding came before the Court for trial on May 29–31, 2013. This Decision constitutes the Court's findings and conclusions pursuant to Rule 7052.
After working as an investment advisor representative (“IAR”), Burks founded his own financial and investment planning firm, Burks Investments, in 2002. Burks Investments functioned as a registered investment advisor (“RIA”).4 Burks Investments also was a licensed insurance agency selling life, health, long-term care and similar types of insurance.
Burks met Bailey through a mutual acquaintance. At that time, Bailey operated a non-RIA financial planning firm, Emerald Financial Advisors, Inc., as well as his own law firm, Bailey Law Office. Bailey also operated as an IAR under Hornor Townsend & Kent's RIA designation.
In December 2004, Bailey and Burks decided to form their own company. Bailey became half-owner of Burks Investments, which continued operating as an RIA. Burks Investments was then incorporated as EAM, and EAM began doing business as Emerald Financial Advisors. See, e.g., Exs. 105–110 (). Bailey acted as an IAR under EAM's RIA license. Bailey continued his separate law practice.5 Confusingly, he also operated Emerald Financial Advisors, Inc. (as a non-RIA firm), which, like EAM, did business as Emerald Financial Advisors.
Burks testified that he became aware of problems involving Bailey in 2010, including discovery that EAM had been named as a co-defendant in a lawsuit brought against Bailey, although he did not testify to any details about this suit. Early in the summer of 2010, Bailey requested Burks buy out his shares of EAM. According to Burks, Bailey told Burks he was insolvent, and therefore could not maintain his requisite licenses for the business.
Bailey originally asked for $270,000 for his shares, but the parties ultimately negotiated a price of $110,000 based on the value of each of the existing client accounts and the economic expectancy to EAM from those clients. Burks' counsel and Bailey jointly drafted the provisions of a Stock Purchase and Redemption Agreement, Ex. 100 (“Stock Purchase Agreement”).
Central to the Stock Purchase Agreement was a three-year covenant not to compete (the “Covenant”), for which EAM paid an additional $2,500.6 The Covenant prohibited Bailey from soliciting EAM clients for investment advice, life insurance or other financial planning services, disrupting the relationship between EAM and its clients, or providing information about EAM clients to any third party for any purpose. The Covenant specifically allowed Bailey to continue providing legal services to parties who were EAM clients at the time of the stock purchase.
Burks testified that he would not have bought out Bailey without the reassurance of the Covenant because EAM's only assets were its clients. 7 Instead, he simply would have closed EAM, then started a new company and competed with Bailey for EAM's clients. Bailey acknowledged the importance of the Covenant, even telling Burks he would risk losing his law license if he violated the Covenant.
The sale closed on September 17, 2010. Bailey was paid with two cashier's checks, one for $85,000 for the stock purchase, Ex. 104, and one for $2,500 for the covenant not to compete, Ex. 103. Burks and his wife also signed a promissory note to Bailey, Ex. 101, for the remaining $25,000 balance of the stock purchase price. The remaining $25,000 was due on September 15, 2011. Ex. 101 at 1. Burks has not made any payments to Bailey on the promissory note.
Burks terminated Bailey as an IAR in October 2010, after the stock purchase closed.8
After the sale of Bailey's interest in EAM to Burks, relations between the two men deteriorated. A dispute arose regarding how to split the data on EAM's server to preserve each party's access to necessary information and files. And confusion arose regarding mail forwarding due to the similarities in the companies' names. These disputes are largely immaterial to the matters at issue in this adversary proceeding, except to illustrate how caustic the relationship between the two men became.
B. Bailey's interactions with Seehawer, Carlson and Concierge
For several years before entering the Stock Purchase Agreement, Bailey knew Aaron Seehawer and Van Carlson, owners of Concierge Legacy Advisors, Concierge Risk Alternatives and Concierge Private Wealth Management.9 Concierge provides financial and investment planning and insurance products, and is an RIA.
In September 2010, even as he was negotiating the Stock Purchase Agreement—including the Covenant—with Burks and Burks' counsel, Bailey was also in the process of joining Concierge as an IAR. See Ex. 154 at 1 (). Aaron Seehawer and Van Carlson both testified that during those talks, Bailey claimed he was going to bring over several of his clients from EAM.
On November 16, 2010, a Uniform Application for Securities Industry Registration or Transfer (“Form U4”) was filed to add Bailey as an IAR under Concierge's RIA designation, so that he could be compensated for his investment work. Ex. 137. Aaron Seehawer testified that the Idaho Department of Finance informed him the Form U4 was unlikely to be approved and strongly suggested Concierge withdraw it. Concierge did so, filing a Form U5 to terminate Bailey's pending IAR registration on April 8, 2011. Ex. 138. As a result of not having an approved Form U4, Bailey was never paid by Concierge for any investment work.
C. EAM clients
Throughout its approximately six years in business, EAM formed relationships with a number of clients, many of whom were referred to Bailey by his father, Darius Bailey. By 2010, EAM managed accounts worth approximately $20 million. The company generally entered into a written investment management agreement with each of its clients. These contracts gave EAM the discretion to manage the client's investment accounts, set forth the management fee for those services, and allowed either party to terminate the agreement at any time with a written cancellation notice.
Evidence presented at trial included investment management agreements with Anne Graham King, Jackie Hutchison, Margaret Schuler, Schulerlane Farms, Jack Huff, and Darius and Donna Bailey. See Exs. 105–110. Burks testified that each were EAM clients on September 17, 2010, the date of the Stock Purchase Agreement.10 Burks' testimony was corroborated by account statements that covered the September 17 date for Anne Graham King, Jackie Hutchison, Margaret Schuler, Schulerlane Farms, Jack Huff, and Darius and Donna Bailey. 11 Exs. 111–115.
Additionally, Burks' testimony revealed Ken Hutchison, David McWilliams, Scott Gardner, Eugene Borman, Victor and Jeanne Yamamoto, Durk Irwin, Donald Lampe, Dahris Seggerman and Burks' parents were also EAM clients on September 17, 2010. Notably, Joseph and Susan Schuler were not personally EAM clients, despite the fact that Joseph Schuler oversaw the accounts for both Margaret Schuler and Schulerlane Farms.
After the Stock Purchase Agreement was completed, Bailey continued providing legal services to Anne Graham King, MargaretSchuler, Jack Huff and other EAM clients, as well as Joseph and Susan Schuler. Though he emphasized that he only contacted them to do legal work, Bailey had Anne Graham King, Joseph Schuler (on his own behalf, and on behalf of Margaret Schuler), Susan Schuler, and Jack Huff each sign a document—captioned as a “non-compete acknowledgment”—stating that he did not solicit them, provide their information to a third-party, or otherwise violate the Covenant. The last full sentence of each document stated, “I initiated the contact with Bailey for the purpose of changing investment advisors or strategies.” Bailey testified that he drafted these documents and presented them to the respective clients to review and sign.
Anne Graham King's testimony calls into question the accuracy of the substance of these forms. In particular, she testified that she did not read the document before she signed it, and that she was merely following Bailey's recommendation when she signed the form and ended her relationship with Burks, whom she liked. However, Joseph Schuler testified that he read the document before he signed it, and verified that he sought to leave EAM.
In addition to attempting to become an IAR for Concierge, Bailey also introduced several EAM clients to Aaron Seehawer and Van Carlson as representatives of Concierge. Testimony revealed that Aaron Seehawer, and sometimes Van Carlson, met Ken and Jackie Hutchison,12 Robert Huff, Joseph Schuler, Anne Graham King and Darius and Donna...
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